Unlocking Real Value Blog

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.

Top Three Strategic Mistakes FAs Made In 2015 - December 29th, 2015

2015 has been a difficult year for many wealth managers, with stock markets flat, global uncertainty increasing, and speculation about rising interest rates dominating the news. August volatility spurred one of the toughest quarters in five years, and the proposed Fiduciary Rule has raised an increasing number of questions about the types of products advisors can use with clients.

Given this environment, and with the benefit of hindsight, what were the biggest mistakes that wealth managers made this year?

Riding the bull market rather than educating and preparing clients for tougher markets

While 2015 has been tough, 2016 looks to be even more challenging. We are not necessarily at the end of the bull market, but certainly entering a different phase of it.

Wealth managers who did not educate and prepare their clients are probably now having to endure many questions from clients. In these cases, the advisor will have to learn the important lesson that if the client has to ask about it, it’s probably too late.

On the positive side, wealth managers do have another opportunity to be proactive as we prepare for a rising interest rate environment. It is not too late to position themselves (and their clients) for a smoother 2016. There is no time like the present.

Buying into the theory that active management is dead

As the market environment gets tougher, stock picking and sector selection become more important. Wealth managers who have continued to offer a combination of active and passive strategies to their clients are best positioned to succeed. Some active strategies are showing signs of promise. For example, in excess of 55% of active large- and small-cap growth equity funds outperformed their benchmarks in the six months trailing June 30, compared to 53% of mid-cap growth funds that did so, according to S&P Dow Jones Indices.

Fighting (or ignoring) the growth of robo-advisors

The growth of robo-advisors was probably the biggest story of 2015. Consulting firm A.T. Kearney predicts assets controlled by robo-advisors will increase by 68% annually to roughly $2.2 trillion by 2020, as Bloomberg has reported. About half of the allocation will be new money, with the remainder stemming from already invested assets.

Rather than view robo-advisors as threats, however, wealth managers should instead determine how the concept can fit into their businesses.

Wealth managers can partner with robo-advisors – either by developing their own software or working with a third-party vendor. With this technology, advisors can handle a larger number of smaller accounts (as opposed to rejecting them) and help attract Millennials who are beginning to save and invest.

Advisors who ignore these trends and fail to take action will face amplified business and investment risks in 2016. But wealth managers that give these topics some new attention should be better positioned to provide greater value to clients, while reinforcing their relevance.

Top 10 Predictions For 2016 - December 22nd, 2015

Time again to take out my crystal ball and have a little fun guessing what will happen next year. Here we go – 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!):

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!)

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.

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.

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.

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.

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.

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.

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.

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.

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.

How Did I Do? A Review Of My Top 10 Predictions For 2014 - December 16th, 2015

I will unveil my Top 10 Predictions for 2016 next week, but for now, lets see how I did this year. Original text is following by my comments in bold.

10 – Hillary Clinton will announce her candidacy for the Presidency at long last. I am still not convinced that she really wants to run, but at this point I think the momentum is taking on a life of its own. However, I think she will be challenged by someone from the left of the party and her path to the nomination will not be easy as people thought a few short months ago. She will have to come-up with some new fresh ideas, and improve the effectiveness of her campaigning significantly. Partially right on this one. Hillary is indeed running, and she is being challenged from the left (see next paragraph). She does look energized recently, but she will need to come up with some new ideas to improve her image and prevent her from being cast as more of the same.

Last week, I would have said that the challenge from the left would not have come from Elizabeth Warren. Now I am not so sure. Since I can’t stay on the fence, I predict that Elizabeth Warren will indeed eventually challenge Hillary. However, your politics aside, she has one glaring strike against her – she will be compared to Obama – a Senator with less than one term under her belt. Another candidate may emerge as well. I was wrong on Warren, but another surprising candidate did emerge in Bernie Sanders. Obama remains a problem for Clinton – especially on her role in his foreign policy.

9 – Sticking with politics, but turning to the Republicans, I am surprised that Jeb has set-up an exploratory committee, but I would still not be surprised if he doesn’t actually run. As for the other Republicans, Christie will give it a shot, but he has an awful lot of baggage that will haunt him. Luckily, since the election is not next year, I don’t have to make the prediction of who will win yet. Bush did in fact run, but I’m not so sure at this point that he is glad that he did. Christie is giving it a go, but still weighed down by Bridgegate. Who could have predicted Trump and Carson?

8 – Political gridlock will continue in Congress to some extent, but I do believe that the Republicans will try for lots of small victories along the way as opposed to going for major pieces of legislation. The President has signaled a desire to fight since the mid-term elections, so I think the atmosphere will be bitter. But if the Republicans have any hope of winning back the White House they have to show that they can govern better than the last Congress. There is still gridlock, and the President’s use of Executive Orders has made relations with Congress rocky at best. There were some small legislative victories – but not enough to turn around public opinion on either Congress or the President.

7 – The President will actually continue to work better with the Republicans than the liberal wing of his own party. Bill Clinton faced similar changes and was able to rescue the last two years of his Presidency. However, I still think that given the President’s penchant for executive orders, these will all be minor victories as well and his status as a lame duck will be solidified in short order. The left has been disappointed by Obama until recently, but he has been making attempts to please them lately (on climate issues for example). He hasn’t worked especially well with the Republicans this year either as mentioned above. He is pretty much going it alone. 

6 – The economy will continue to chug along with moderate growth, nothing spectacular but nothing terrible. The U.S. economy will continue to outperform the rest of the world. Europe will fall into a very short and shallow recession, and I think Japan will rebound now that the elections are behind them. Watch out for problems in the developing economies, in large part due to the drop in oil prices that we have seen. This prediction was pretty accurate, although the Japanese economy has been slowing. The U.S. economy continues to muddle through.

5 – The biggest wildcard for the year is Russia – where the economic situation is deteriorating rapidly and sanctions are having a very major impact. The Ruble is in free fall, and the drop in oil prices is having a significant and negative impact. Continued turmoil in Russia could have a huge boil over effect in not only the rest of Europe, but the rest of the world as well. No one really knows how Putin will react and if these economic woes will make him more bellicose. But if any one thing can send the worlds markets and economies into chaos, it is Russia. Developments are worth keeping a close eye on. Russia was a wild card, but for different reasons than I thought. Putin is showing his military might and, especially in the Middle East, is filling voids left by Obama’s less-than-clear foreign policy. Forbes names him the most powerful person in the World (Obama was third). Enough said.

4 – The Fed will raise interest rates by July of next year, but I think that they will do so in a measured way an more slowly than many currently believe – in part because of economic weakness around the world. Inflation remains under control, with the only thing that can really throw us a curve here is if wage growth picks up significantly (which I don’t see happening). The market will react negatively when rates do go up, but will rebound and regain all of the initial losses within six months (as is usually the case after Fed interest rate hikes). OK – not July – insert December. But the trajectory of increases will be measured and inflation is still under control. Hey, who can really guess what this Fed is going to do?

3 – The stock market will have a below average year – and may in fact end down a little bit. There will probably be at least one 10% – 20% correction, either before or right after the interest rate increase. But corporate profits are still strong, and other economic positives will act as a floor on the market. But I see now compelling reason for a lot of upside in 2015. Pretty on target here – it hasn’t been a great year, we may end up down and there was a correction in the Fall. Only thing I missed here was strong corporate profits – as those have been weakening.

For financial services specifically:

2 – Pundits will continue to focus on the growth of the RIA and independent channels, at the expense of the wirehouses and other traditional broker/dealers. But I see the continuation of the rebounds that the wirehouses have seen, and I think they will once again hold their own. There may be a few large mergers among the larger RIAs and perhaps one or two among the regional brokerage firms. There wasn’t a lot of merger activity – and I think all of the channels held their own during the year. All in all, a pretty uneventful year.

1 – The aforementioned Elizabeth Warren will continue to be a thorn in the side of banks and other financial services companies, and she will continue to fight anything or anyone that has a connection to Wall Street. While this may propel her into a run for President, I don’t see her having much impact on legislation, especially since the Republicans now control both houses of Congress. Warren is still a popular figure on the left, and she is still the enemy of Wall Street. She has definitely had more of an effect in turning Hillary to the left than in impacting legislation.

Finally, a little sports. I see Alabama over Oregon in the National Championship Game and the Patriots over the Seahawks in the Super Bowl. One out of two is not too bad here. Glad I got the Pats right!

Feel free to share your own thoughts!