Unlocking Real Value Blog

Speaking To Clients About Our New President - February 2nd, 2017

Now that Donald Trump has become president, and now that we have seen him in action for a number of months – both before and briefly since the inauguration – you are sure to continue to get client questions about what a Trump presidency means for the stock market and their portfolios.

If you aren’t getting these questions, you may want to bring up these issues yourself. Why? Because it’s inevitable, market fundamentals aside, that the president and his actions are going to have a significant impact on the financial markets this year and into the future. Better to get ahead of the discussion than have to answer unexpected telephone calls.

Politics aside, I think it’s fair to say most people would agree Donald Trump is going to be an unconventional president. Whether it be his focus on “the deal,” his seeming willingness to break with long-standing traditions (such as speaking by telephone with the President of Taiwan) or his tweeting at all hours of the day and night, the contrasts in style with former presidents are easy to see.

What is not so easy to determine yet is how successful he will be in implementing his agenda and how the markets will react. In the few days he has been in office he has begun to make good on a number of his campaign promises, and has met with a number of business and union leaders emphasizing his “business first” approach. Yet at the same time, unexpected reactions to issues such as the size of the crowd at the inauguration and potential voter fraud may have some people shaking their heads.

As such, I think you should prepare clients for a volatile 2017. The highs might be higher – as they were a few weeks ago with all of the major indices reaching records and more recently this week with the Nasdaq and S&P 500 reaching new highs – but the lows may also be lower.

Take for example the effect Trump has already had on an entire sector – biotechnology stocks – when he tweeted that drug prices were too high and on individual companies – Boeing and Lockheed Martin – when he tweeted that their government contracts were too expensive.

It seems inevitable that Trump’s tendency to challenge the status quo and stir the pot will have similar effects on the entire market.

Fundamentals will of course have a large role in how the market does as well. Will corporate profits continue to rebound? Will the price of oil stabilize?

How successful the new administration is in passing some of its legislative priorities, such as a large infrastructure spending bill, corporate tax reform and changes to Obamacare will also be important.

Taken together, you can see that a very long bull market (the second longest in history) has many obstacles facing it – both known and unknown. And we haven’t even talked about the global forces that might impact the markets, including Brexit and the rise of nationalist parties in Europe, or the threat of global terrorism.

So what are the bottom line implications of a Trump presidency for your clients? Should they change their investment strategies? Should they exit the market and wait and see what happens?

The answers to the last two questions are of course no, and it’s your job as an advisor to provide reassurance and levelheadedness. While some of the challenges facing the market may be new, the fact is there is always uncertainty facing the market. And history has shown that what works is a diversified portfolio individually customized for each client’s long-term wealth management goals.

In addition, it has been proven time and again that time in the market is more important than timing the markets. If clients ask you if they should get out of the market and sit things out until the outlook is clearer, ask them how they will know when to get back into the market. Because, in fact, the outlook will never be crystal clear and there will probably never be a time that screams “get back into the market.”

Let’s not forget the market began last year in a month-long free-fall that was reversed before the end of the first quarter.

2017 is shaping up to be an interesting and volatile year for sure. As long as clients are prepared for this volatility and recognize that it is being caused by short-term events rather than longer-term seismic shifts in the fundamentals underpinning the market, they should be able to sleep better and you will have done your job.

Top 10 Predictions For 2017 - December 13th, 2016

Time again to take out my crystal ball (or magic eight-ball) and have a little fun predicting what will happen next year. These predictions are in no particular order (and please remember that these are predictions of what I think will happen, not necessarily what I want to happen; click here to see how I did with my 2016 Top 10 Predictions):

10 – President Obama will not leave office quietly, issuing a number of Executive Orders and controversial pardons during his last few weeks in office (but not Hillary Clinton or Edward Snowden). While the Executive Orders may be quickly reversed once the President-Elect takes office, the pardons will anger Republicans and set a more negative tone as the political transition takes place. In addition, Democrats, still angry over how they feel Republicans have treated President Obama over the past eight years, particularly their obstructionism over filling the current Supreme Court opening, will try to make the confirmation of some of the more controversial Cabinet selections more difficult than is customarily the case.

9 – Whether because of (10) above, or because of the fight Democrats are sure to put up when then President Trump nominates his choice to fill the current Supreme Court vacancy, the Republicans will finish what Harry Reid started – the nuclear option – and legislate away the need for 60 votes for Cabinet and judicial appointments, including the Supreme Court.

8 – As to foreign policy, given the hawkish nature of the proposed military side of the Cabinet, the Trump Administration will be more proactive in working to fight ISIS (whether with our allies or going it alone), but will not send in a large number of ground troops. This will be a subtle change and in many senses a continuation of the current policy. However, rather than give in to Putin as many fear, Trump will actually work better with Putin, particularly as it comes to fighting ISIS in the Middle East, and this partnership will be more effective than the current alliance. Unfortunately, this partnership will not extend to Syria, and Assad will remain in power.

7 – As ISIS continues to lose ground in the Middle East (particularly in Iraq), they will continue to export violence to the West. There will be at least one major terrorist attack in Europe, and a continuation of lone wolf attacks around the world, including  in the U.S. Domestic non-ISIS terror will also become more common on both the left and the right in an increasingly divided U.S.

6 – Political turmoil will continue in Europe. We may see another economic crisis in Greece, a slew of bank rescues in Italy to avoid a complete banking collapse and at least one far right party attaining power. Tensions between Turkey and the U.S. and EU will continue to grow as the post-coup arrests and crackdowns continue; the EU will end talks with Turkey over membership. The Turkish Lira will continue its downward spiral, turning Turkey to the East and stronger Sino-Russian ties.

5 – Despite rejecting TPP (which Trump will do), relations with Japan and China will stabilize and there will not be a trade war. Trump will talk and negotiate tough, but stop short of doing anything to really escalate tensions. Relations with Taiwan will remain as is. Asian economic growth will eclipse that seen in Europe once again, and the trajectory of the militarization in the South China Sea will flatten out. Actions by the Philippines government will embolden China.

4 – The U.S. economy will grow slightly quicker than it has the past few years, and inflation will remain tame but rise slightly. The stock market will gain between  5% – 7%, continuing the current bull market, but there will be increased volatility which will follow the ups and the downs of the Trump Administration. The Fed will only raise interest rates two times during the year (25 basis points each time) as slowing growth in Europe and Asia, and perhaps some global destabilizing events, will offset some of the optimism in the U.S. The Fed will retain its overall dovish stance. The new administration will begin to realize the impact of rising interest rates on the national debt and will try to exert pressure on the Fed. Yellen will finish out her term and not resign during the year.

3 – The new administration will be able to enact an infrastructure spending bill and some tax reform, including repatriation of money back to the U.S., but the bills will be smaller than President-Elect Trump wants, and will be harder to enact due to resistance from both parties. The Republican Party will remain fractured, but has a vested interest in seeing Trump succeed. There will be changes made to Obamacare, but there will not be a full repeal, as Republicans need to make good on their promise to not have people lose existing coverage or the coverage of pre-existing conditions. There will be a major cyber event as well as an attack on the nation’s electric grid, resulting in increased spending to prevent such attacks in the future.

For the financial services industry:

2 – The Fiduciary Rule will not be repealed and the first part of the law will go into effect in April. This issue has not even been on Trump’s mind or agenda. There will, however, likely be changes made to the law throughout the year, somewhat softening the law before its final implementation in January of 2018. There will be increasing talk of repealing Glass-Steagall, but nothing definitive will happen in 2017.

Because of increased volatility in the market, active management will regain some momentum in its on-going public relations battle with passive management. ETF growth will slow, and I give a 50% chance of some kind of flash crash caused by ETF trading. Mergers and acquisitions among B/Ds and money managers will be slightly above average, and the overall movement of advisors and RIAs will be below average because of uncertainty over the Trump Presidency.

1 – Finally, some sports predictions: The doping scandal surrounding Russia will continue to increase, but FIFA will not move the 2018 World Cup which is scheduled to be held there. Alabama will repeat as National College Champions, beating Clemson (who will upset Ohio State in the semi-finals), the Dallas Cowboys will beat the Kansas City Chiefs in the Super Bowl, Kentucky will win the NCAA tournament, the New York Rangers will win the Stanley Cup, the Golden State Warriors will reclaim the NBA Championship and the Boston Red Sox will upset the Chicago Cubs in the World Series.

How Did I Do? A Review Of My Top Ten Predictions For 2016 - December 5th, 2016

Time to review my Top 10 predictions for 2016. It was an interesting and unpredictable year, and my picks kind of followed that pattern – some good, some not so good. Analysis follows each prediction.

10 – Hillary Clinton will be elected to be the next President of the United States, beating Republican nominee Marco Rubio. She will be able to withstand the continued scrutiny over her e-mails, and despite the fact that many people will not be excited voting for her, the Republicans will have alienated too much of the electorate with their emphasis on social issues and overturning Obamacare. (Trump will not run as a third party candidate. At some point, he will get frustrated and quit, and justify it by saying he can make more money in the private sector!) I can’t imagine too many people got this one right. Even up until a few weeks ago I felt pretty confident about being half right. I was not the only person to underestimate the anger and division within the country. Clinton compounded the problem by running an uninspired campaign. 

9 – The Republicans will retain a majority in the House of Representatives, but the Democrats will retake the Senate, though fall far short of the 60 seats needed to enjoy a super majority. The result will be more gridlock, but that is a 2017 issue. There will still be gridlock because the Republicans don’t have a veto proof majority of 60 in the Senate, but I do think if the Democrats become obstructionists, the Republicans may do what the Democrats did a few years ago and legislate that rule out too. 

8 – President Obama will continue to go around the Congress with a number of Executive Orders, but the Supreme Court will uphold the illegality of his Order on immigration. He will also not be able to successfully close Guantanamo Bay before his term in office is over. Got this one right! I think Trump will reverse many of his Executive Orders in short order.

7 – ISIS will continue to wreak havoc in the Middle East and the world, despite increased bombing by the U.S. and its allies, and the U.S. will get drawn further into the battle. ISIS may lose land, but their global influence will increase, as will terrorist activities outside of the Middle East, including here in the U.S. There will be no leadership change in Syria. Got this one kinda right, as ISIS has exported its terror to the West. Still a lot of uncertainty of how this will all end up as the Iraqi army has done better than expected. Yup, still dealing with Assad.

6 – Russia’s global influence will continue to grow, as Putin aggressively props up the Assad regime and works to counteract the U.S. and its allies in the fight against ISIS. Tensions with NATO and Turkey in particular will increase, but Putin will stop short of provoking any military confrontations. Three in a row! Putin is probably pretty sad to see Obama go, as he has definitely expanded his influence over the past eight years. 

5 – The U.S. economy will continue to grow at a modest rate – in the 2% to 3% range, and inflation will remain tame. This modest growth will allow the Fed to tighten 3 times, but these will be small 0.25% increases and the Feds’s overall stance will remain dovish. The economy did grow about as I expected, but the Fed held tight on interest rates, mostly because of volatility at the beginning of the year and then global uncertainty as the year wore on. The Fed certainly remained dovish!

4 – The continued strength of the U.S. dollar (as European and Asian Central banks remain accommodative in their monetary policies), and the continued weakness in the price of oil, aided by new supply from Iran coming on the market, will continue to hurt profits of U.S. companies and will put a cap on the stock market. The market will be down 2% – 3% for the year. Missed this one. Despite the dollar and oil, the market behaved better than expected, certainly after the first six weeks of the year. U.S. companies also become more productive, so corporate profits are on rebound again.

For the financial services industry:

3 – ETFs will continue to come under increased scrutiny, following a tough 2015. Because we will be in a flat market, active management and stock picking will outperform, and I would not be surprised to see another ETF-induced selling panic, followed by a lot of negative press over the growing influence of ETFs. ETSs did come under some scrutiny, but things were not as bad as I thought that they would be. The active v. passive debate remains in full force, yet to be decided!

2 – Consolidation in the asset management industry, which was slow throughout most of 2015 before picking up at the end of the year, will continue and actually accelerate. There may also be a few large deals among the B/Ds as overall industry consolidation increases in the face of a second straight tough year in the stock market. There was consolidated among money managers, but less so among B/Ds, as the market rally continued. Fears and costs of the proposed Fiduciary Rule did have some impact (more on that to come this year.)

1 – And of course, some sports predictions: The Rio Olympics will be plagued by problems, in part a result of the political and economic turmoil plaguing the Brazilians. It will go down as the most poorly run and executed olympics in history. The Patriots will make it two in a row, overcoming all of their injuries and beating the Cardinals in the Super Bowl. Golden State will easily repeat as the champions of the NBA, and Alabama will beat Oklahoma for the college football national championship. The Rio Olympics went off better than I expected, and the biggest debacle was actually Ryan Lochte and friends! Kudos to the Brazilians, although the contrast between the Olympic venues and the abject poverty in the country did shine a light on whether the Olympics are really worth the expenditure. Missed the Super Bowl – didn’t see the Broncos coming; although things might have been different if the Pats hadn’t “thrown” the game in Miami and lost home field advantage. Alabama did win the National Championship (over a different opponent), and I could not be happy that I was wrong about the NBA. GO CAVS! You can take the boy out of Cleveland, but you can’t take the Cleveland out of the boy.

Will AUM-Based Fees Or Retainers Rule The Day? - September 29th, 2016

With the Department of Labor’s (DOL) new Fiduciary Rule set to begin in April, there is a debate brewing over whether the more traditional asset under management (AUM) based fees or retainers will win the day moving forward. Clearly, under the best interests rule for retirement, advisers will be moving away from charging commissions and gravitate toward fees. The question is, what is the fairest and most defensible way to charge clients?

Historically, and still today, an AUM-based fee is the most popular. Clients are charged a fee based on an annual percentage of their assets under management – often declining as asset levels increase. A big selling point to this type of fee has always been that it puts the advisor on the same side of the table as the client, with everyone having an incentive to see the assets grow.

Retainers, however, are starting to become more popular, and some industry experts are beginning to champion them as being fairer to clients, and easier to defend. Retainers are often determined by a client’s net worth and income. Advocates argue that there are fewer potential conflicts of interest with retainers, and that it will become increasingly more difficult to show that a recommendation is in the client’s best interest when the advisor’s fee will depend on whether it is acted upon or not.

For example, let’s say that a client asks an advisor whether or not they should roll over their 401(k) into an IRA managed by the advisor when they get a new job, or leave it at as is. Obviously, the advisor will not earn any compensation if the funds stay at the employer, so they are put in a position where they have to demonstrate that moving it is in the client’s best interest – easier said than done! There is no such conflict under a retainer agreement, however, as the advisor is agnostic where the assets are actually managed.

On the flip side, retainers might be hard to justify for client’s with fewer assets, as they would pay much more under a typical retainer relationship than they would under an asset-based fee.

The argument is just beginning, and will continue for the foreseeable future. One thing for sure is that asset based fees are not going away, as they do qualify for the “level-fee” exemption under the fiduciary rule as long as certain fiduciary disclosures are made.

It will be important for advisors to clearly articulate to clients and prospects what their fee is, how it is calculated and why they have chosen that particular method. Some advisors might choose to offer clients a choice. Regardless, going on the offensive and being proactive in discussing fees will become more important than ever. If you don’t discuss the issue thoroughly, you will be at risk of losing clients.

Who’s Managing The Money? - September 8th, 2016

The growth of Unified Managed Accounts (UMA) has been well documented, just as the death of Separately Managed Accounts (SMA) has been greatly exaggerated. There continues to be room for both among the many advisory options available at most firms.

But often overlooked in the UMA v SMA fight is what I’ll call the staggering growth of Rep-as-PM programs. In fact, as you can see from the table below, these programs now exceed SMA advisory assets and are quickly about to replace mutual fund advisory assets as the largest in the group. ETF advisory programs are relatively new, but they will continue to grow – most likely at the expense of mutual funds.


Frankly, this large growth in Rep-as-PM assets scares me. I know many advisors who are true managers – they have research and portfolio management experience, dedicated staff to the process, etc. – and in many cases they add significant value to their clients.

I worry about others, however. As downward pressure continue on fees, how many advisors have made the decision to go this route so that they can keep more of the fee as opposed to “giving” it up to outside managers? How many have taken the time to truly master the art of portfolio management in what is a very difficult investment environment?

I have often argued that it is difficult for advisors (or advisor teams or RIAs) to do many things well. It is hard for example to market, and grow your business, if you are truly acting as a money manager (unless you have hired staff to assist you). Many successful advisors see themselves as relationship managers first, and are happy to delegate the management to outside firms (even if they get a smaller fee).

In addition, let’s not forget what happens in bad markets, and when you underperform – because at some point, you will! In the Rep-as-Pm scenario, the client has only person to blame and potentially fire – you. If you use outside managers, or even funds, you can often times convince the client to change managers rather than get rid of you. Finally, what will happen to these programs and advisors under new fiduciary standards?

At the end of the day, advisors would be well served to make sure that whatever advisory programs they use serve clients the best while fitting into their own business model. I hope my concern over the grow of these programs is unfounded; only time will tell.

Are Your Referrals Slowing? - July 19th, 2016

If your answer is yes, you’re probably not alone. In its most recent annual benchmarking study, InvestmentNews found that as advisory firms grow, business development (prospecting and marketing) becomes increasingly important for the most profitable firms – often times, as depicted below, at the same time that referrals take a lesser role.


Another conclusion reached by the study is that many firms begin by growing through referrals, but the most successful ones then master how to continue their grow through business development. But interestingly, the study also show that the most profitable firms at all stages of growth are those that rely less on referrals than their counterparts. Finally, the study showed that the top performing firms spend 50% more on their business development efforts than their peers.

This study is consistent with other studies that I have seen lately which show that high net worth individuals are becoming more reluctant to make referrals.

The bottom line lesson here is that reliance on referrals only – while maybe an acceptable practice in the past – is becoming increasingly difficult. It’s 2017 business planning time – consider taking the time to clearly define your target markets, make any necessary adjustments to them and develop a marketing plan that focuses on more proactive client acquisition.

Don’t stop asking for referrals; just stop counting on them.

AK In The News: Brexit And Hiring On Wall Street - July 5th, 2016

I was asked to write an opinion piece for efinancialcareers.com on how the U.K.’s vote to leave the EU would impact global hiring in the financial services industry. As with most major international events, there will be winners and losers within the financial services industry as things shake out. However, employers do not like uncertainty, and there is a lot of uncertainty at the moment, so hiring for now will slow as employers take a wait and see attitude.

In fact, neither the shorter- or longer-term implications of the Brexit are known at this time, as the process has not even begun and could take more than 2 years. British politics is in turmoil, as it looks like the leaders of all three major parties will be replaced, and the British Pound has dropped to a 30-year low versus the U.S. dollar.

While world stock markets have recovered from their initial shock, expect continued volatility through the usually slow summer and into the lead-up to the U.S. election in November – which itself is shaping up to be another wild card.

Click here to read the entire article and potential financial services winners and losers from the Brexit.

Robo-Advisors: Threat Or Opportunity? - April 20th, 2016

Over the past few years, billions of dollars have been invested through Robo-Advisors, a relatively new type of internet-based investment intermediary. These automated systems offer investment management (and in some cases financial planning) at dramatically reduced fees by cutting out the middle man – the traditional broker/advisor.

Should the multi-trillion dollar advisory industry view robos as a business threat? Or should advisors view their emergence as an opportunity? We believe that rather than fight the robo-advisor trend, advisors will be better served by incorporating the philosophy into their business as they see appropriate.

In our estimation, the early growth and success of robo-advisors is evidence that they are here to stay. Advisors can fight them and stick with the line that nothing can replace personalized and individualized advice, or advisors can ask themselves the question, how can I utilize the emergence of robo-advisors and their technology to my advantage? Here are three ways:

  • Assist in client segmentation
  • Attract family members of clients
  • Attract millenials

Want more details? Click here to see the entire White Paper.

AK In The News: Active v. Passive Investing - March 24th, 2016

I was asked to comment for an Ignites (a FinancialTimes Service) article on active versus passive inviting. Fidelity and American Funds recently put out research showing active management outperforms passive management. Like all studies on this topic, however, these results were achieved by implementing a screening on the large universe of available funds.

In the American Funds study for example, the firm screened for funds in  the lowest-quartile for net expenses and highest-quartile for management ownership. Had they picked different screens, of course, the results would have been different.

What was done here was no different that how one can manipulate performance by choosing a particular period of time over another. The process is extremely subjective and often produces the desired results.

So what is the lesson here? The lesson is that the argument of which is better – active or passive management – will continue into the future. Active management has taken a hit during the bull market because until recently there have been few down periods when active managers have been able to show their real value added – down market protection.

In reality, there are positives and negatives to both types of management. Passive, for example, has started to take a hit with recent questions about ETFs and their proliferation and their role in last summer’s mini-crash. Many investors choose to combine active and passive funds in their portfolios.

The issue gets thornier for many of the sponsor firms, since they offer both active and passive funds, and must walk a fine line between “bashing” some of their own funds. They can do this, however, by showing the relative advantages of each and the rationale for having both types of investments in a diversified portfolio.

For advisors, this argument illustrates the need for a solid due diligence process – to be able to select from the many thousands in each category – those that are more apt to outperform and to be able to articulate to clients why they are choosing particular funds for them. They also must illustrate why the combination of the two might be more effective than a portfolio of one or the other.

The arguments will go on ……..

Why Do Clients Leave Their Advisors? - March 10th, 2016

So much is written these days about the “war” between independent broker-dealers and wirehouses – mostly biased toward the “indies” winning – an article I recently read, which indicated that indie advisors have a much higher rate of client attrition, caught my attention. As it turns out, the discussion should be more about how an advisor has structured his/her business than what type of firm they are with.

Why do clients leave their advisors? According to a survey by Cerulli Associates (and quoted in InvestmentNews), many clients leave their advisors because of high fees, and at a greater rate at the indies. For example, again according to Cerulli, only 5% of wirehouse clients left their advisors over high fees last year, while 16% left independent broker-dealers and 20% left dually-registered advisors.

One explanation offered by Cerulli for this phenomenon is account size. Brokers at Morgan Stanley, Bank of America, UBS and Wells Fargo had about 24% of their business focused on customers with more than $5 million in investable assets last year, while just 3% of independent broker-dealers and 9% of advisors registered with both the SEC and Finra focused on accounts of more than $5 million.

To quote Cerulli: “Niche specialization helps advisors tell a more compelling story that demonstrates to the client how they receive value in exchange for the fees they pay. Clients who are not able to see this value will naturally be more sensitive to fees.”

So, what is the lesson here?

  • While to Cerulli the link seems to be between fees and account size, I think that the real issue is the link between fees and how clients are educated/serviced. Successful brokers/advisors have a value proposition that resonates with their clients from their first interaction. This should be the case for small as well as large accounts.
  • Client acquisition is expensive, so brokers/advisors should only work with clients that fit into their value proposition – clients that they and their organization are able to service effectively. Even if a practice targets smaller clients, which many do, client attrition should not be so high. This indicates to me a lack of front-end client education.
  • Even smaller clients should fit into a “niche specialization,” so again I don’t think account size should be the excuse for higher client attrition.
  • This survey has few implications in the indie v. warehouse tug of war because brokers/advisors have proven to be successful at a variety of firms.

At the end of the day, the Cerulli survey confirms the importance of advisors having a rational business plan in place and having a well-defined value proposition. Armed with these, fees or account size shouldn’t matter or be an excuse for client attrition.