Unlocking Real Value Blog

AK In The News: For Advisors, Regional B/Ds Are The Goldilocks Model - January 30th, 2015

I was asked to write an opinion piece for Financial Advisor IQ (A Financial Times Service) on the relative merits of regional broker/dealers versus the competition – larger B/Ds as well as the independent or quasi-independents. Contact me if you would like a copy of the entire piece.

To summarize though, overall. regional B/Ds have done quite well since the financial crisis, helped by cheaper technology which has allowed them to compete with fewer resources.

To quote from the piece: “Key ways in which regional brokerages are positioning themselves as a happy medium between the wirehouse and RIA models include:

  • Access. Advisors who are large or even moderately large producers will probably have the ear of the decision-makers in the home office. They will be more important to these people than if they were large producers at a wirehouse or at an RIA using Charles Schwab’s or Fidelity’s investment platforms. They will have access to people when they need them and be on a first-name basis with key executives. They’ll also have better access to support staff. And advisors with friends in the back often receive service that has a personal touch.
  • Influence. As a result of their access, advisors can influence product and platform decisions. For example, large producers will likely be invited to serve on an advisory council, where their opinions will count more than those of their peers.
  • Freedom. Regional brokerages generally have fewer proprietary products than their larger counterparts do. Therefore, advisors are under less pressure to offer in-house products to clients, who often perceive a conflict of interest in such sales. This independence appeals to advisors attracted to the objectivity and fiduciary status associated with RIAs. Additionally, regional brokerages are not associated with banks, which reduces the pressure to cross-sell bank products.”

1Q15 Newsletter – Protecting Clients From Themselves – Is Now Available! - January 7th, 2015

Our first quarter Unlocking Real Value newsletter is now available!

The bull market in stocks continued its impressive run almost unabated last year, surprising many market pundits, while the economy showed relatively good strength. Weakness in the economies of the rest of the world, however, along with geopolitical uncertainty in Russia and the Middle East are warning signs for 2015.

Volatility has already begun to increase, and the year is off to a shaky start in the markets. The problem is not the volatility itself, but how people react to it. Many investors use volatility as an excuse to exit the market. The problem, however, is they have no clear plan on how or when to re-enter.

We have updated one of our most popular White Papers – Protecting Clients From Themselves. This is a great piece to show clients to keep them calm and invested as volatility increases.

Click here to see the newsletter. Click here to download the White Paper.

Please let us know if you have any questions. Have a great quarter!

AK In The News: F-Squared Settles Fraudulent Advertising Charge With SEC - December 23rd, 2014

I was asked to comment on an article in today’s Fundfire (A Financial Times Service) about F-Squared Investment’s settlement with the SEC. The firm, a very large exchange traded fund (ETF) strategist, agreed to pay $35 million and admitted wrongdoing in the case concerning false performance advertising.

The firm advertised real performance which was in fact hypothetical back-tested data. They also made a performance calculation which inflated performance by 350%, and the former CEO has also been charged with making false and misleading statements to investors.

I was asked how this would affect the firm’s distribution. Simply, I think it will be fatal. This is not simply a case where the SEC has alleged something, which may or may not be true. The firm has admitted that it has done what it has been accused of. From a due diligence point of view, and considering fiduciary responsibility, how can a sponsor firm, who is after all making recommendations to its advisors, who is in turn making them to investors, allow this firm to remain on their platform?

Many firms put the firm on “Watch” when the allegations surfaced – the correct move – and did not allow assets to be added. But now, the only correct move is to terminate F-Squared and help clients move the assets elsewhere. The firm obviously lied in the due diligence process, so this seems like a very clear case of sponsor’s being better off moving on. I personally can not see any rationale for not terminating this relationship.

To quote from the article: “The result of the investigation, and the fact that F-Squared admitted wrongdoing, could have serious consequences for the firm’s distribution prospects, says Andrew Klausner, a strategic consultant with AK Advisory Partners.

It could be “a kiss of death in terms of distribution through broker-dealers and RIAs,” Klausner says. Since the firm admitted wrongdoing, “I don’t know how [broker-dealers and RIAs] could justify keeping them on their platform.””

The firm does have new management,and in time, they should be allowed to present their case, but I would be hard pressed if I was in charge of a sponsor’s due diligence to allow them in now. I would much rather be competing against a sponsor who continues to use the firm than to be that firm!


Top 10 Predictions for 2015 - December 16th, 2014

Time again to take out my crystal ball and have a little fun trying to guess what will happen next year. Here we go – these predictions are in no particular order:

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.

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.

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.

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.

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.

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.

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.

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).

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.

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.

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.

Finally, a little sports. I see Alabama over Oregon in the National Championship Game and the Patriots over the Seahawks in the Super Bowl.

Feel free to share your own thoughts!

How Did I Do? A Review Of My Top 10 Predictions For 2014 - December 9th, 2014

I will unveil my Top 10 Predictions for 2015 next week, but for now, lets see how I did this year. Original text is following by my comments in bold.

10 – The Republicans will keep the House of Representatives but fall short of capturing a majority in the Senate (although they will pick up net seats). The Republicans should be able to pick-up enough seats to take control of the Senate, but self inflicted primary wounds, led by Tea Party challenges, will hurt them once again. I was half right here, as the Republicans actually did pick-up the Senate because they avoided the pitfall of having extreme candidates. I guess I should be a pollster in my next life, as they didn’t do much better!

9 – Riding off of the momentum of the budget agreement, there will be no threats of government shutdown next year, there will be a small increase in bipartisan cooperation, but given that it is an election year, there will be no far reaching immigration reform or gun control legislation passed. The only progress I see next year, and it would be in the Republicans best interest to pursue this course, would be some smaller pieces of immigration legislation. On the gun control side, momentum only seems to be on the side of an overall of the mental health system. The debt limit discussions will be contentious, but will be solved without the US defaulting. I was pretty on target here except that even small pieces of legislation were not passed on immigration or gun control. The President has taken executive action on immigration, the impact of which we will feel next year – you’ll see my take on it next week.

8 – The problems with the Obamacare website rollout will seem minor next year as the reality of the totality of the massive law and its implementation move forward. The benefits of the program will be outweighed by younger people not signing up, choosing instead to pay the penalty, growing anger at not being able to keep doctors, and as the year progresses, the reality that costs will go up in 2015 as insurance companies lose lots of money. I was pretty on base here. Rates have increased for 2015 and the website has been a non-issue. The Supreme Court has some decisions to make next year, and it is still not clear how many people opted to pay the penalty. We will have to stay tuned for the conclusion of this number!

7 – The Federal Reserve will begin to taper in the first quarter, although I don’t think the taper will be significant early on. The overall path of the Fed will remain the same under Chairperson Yellon. (It is a little dangerous making this prediction now since there is a chance that the Fed will begin the taper this week, but I fall in the camp that says they will wait – they may announce something, however.) The Fed remains dovish and the quantitative easing program ended in October. While the US economy is relatively strong, the rest of the world continues to be mired in slow growth, with Europe and perhaps Japan set to potentially go back into recession. This will limit the range of actions available to the Fed.

6 – The stock market will have an average year. I think the markets have, to a large extent, priced the taper in already, so I don’t think Fed actions will significantly impact the market. Coming off of a banner 2013 (which I did not predict), it is only natural that the market revert to more normal returns. There will be a natural bull market correction during the year, and by next December I see the S&P 500 up a modest 7% – 10% for the year. I was right here – a relatively good year for the market with only that minor almost 7% correction during the first two weeks of October. Volatility was tame most of the year, but re-emerged in the fourth quarter.

5 – Europe will continue to grow modestly and I don’t foresee any large crises within the EU or the Euro bloc. The worst seems to be behind most of these countries from an economic standpoint. No countries will exit the Euro – there won’t even be much or any talk about that anymore. The Euro was really a non-issue with no talk of countries leaving the currency. There was however a crisis that I missed – as do most other people – the Russian interference in The Ukraine/Crimea. And to say moderate growth would be generous – the threat of a triple dip recession in 2015 is very real.

4 – Hillary Clinton will finally signal that she will run for President in 2016. While it is too soon to make any predictions about how that will go, I think her record as Secretary of State will come under increased scrutiny, and while she will remain the front runner, my only preview of my thoughts on the actual election is that the campaign will be a lot tougher than people think. There is no certainty that she will actually get elected. Kind of right. She has done just about everything but declare already, and her book tour, which was meant to be a pre-cursor to her campaign did not go as smoothly as she would have hoped. The reality here is that she is not the world’s best campaigner…..More to come on Hillary next week!

For Financial Services:

3 – Elizabeth Warren will continue to raise her public profile and try to “stick it” to banks and other industry participants. This will be part of the Democratic election strategy – along with helping the middle class – that will be utilized to overcome the Republican’s continued slamming of Obamacare. Actual progress on new legislation will be slow. I was right here as in the aftermath of the election Elizabeth Warren was elevated into the Democratic leadership and she has continued to bash Wall Street. The strategy did not help the Democrats in the election – nothing really did – but her elevation makes it pretty certain that these issues will be front and center in the run-up to the Presidential election.

2 – It will be a good year for the wirehouses as they continue their comeback from 2008. There will be less negative news about them in the press. The RIA and independent markets will continue to grow – but there is room enough for both! I think this was true – I saw more positive stories about the wirehouses than negative ones, and the industry as a whole had a good year. 

1 – ETFs and retail alternative investments will start to get some negative press. As first ETFs and then alternative investment mutual funds have grown, they have received generally favorable press. I have been leery of both, particularly retail alternatives, and I think the press will finally start to raise some questions. I think this is also true, although not to a significant extent. People are beginning to questions retail alternative investments more than ETFs, but they do remain popular. Stay tuned on this issue as well – I see more happening in 2015!

Finally – sports. (I usually go over 10!). Florida State will win the collegiate national championship, ending the dream season of Auburn. The Seattle Seahawks will beat the Denver Broncos in the Super Bowl – yes, Payton and his pals will choke again. I nailed these! And choke the Broncos did in the Super Bowl – actually put a large damper on my Super Bowl Party. And as of this writing, Florida State has still not lost a game! We’ll see about the first college playoff series though …..

AK In The News: Consultants Tighten Grip on Inst’l Manager Selection - November 10th, 2014

I was asked to comment in an article published in today’s Fundfire (A Financial Times Service) about the increasing presence of consultants in the institutional asset management business. According to Cerulli Associates, in 2013 consultant-intermediated new business jumped to 68.4% of the total, an increase of almost 10% from the year before.

There are a number of reasons for this jump, increasing product proliferation and complexity and cost.

We continue to see a large increase in the number of products being offered – and their complexity – in the face of the reality that it is getting increasingly difficult to “beat” the market in the traditional asset classes (large cap, mid cap, growth, value, etc.). In the constant race to beat the market (or in a goals-based scenario meet your funding goals), institutional investors have increasingly turned to alternative investments to supplement their asset allocation strategies.

There are a wide range of alternative investments, however, and finding qualified analysts to evaluate them is difficult. Let’s not forget that a traditional stock analyst is in most cases not qualified to analyze REITs, commodities, etc. Firms must hire new staff – which takes resources and brings us to the discussion of cost.

But first – plan sponsors have the fiduciary responsibility under ERISA that requires them to meet an expert threshold. You either have to build an organization that can stand up to regulatory scrutiny or outsource to a consulting firm that has such expertise. As the number of available products increases, so does the cost of building it yourself. The reality today is that you have to be very large to even think about having your own in-house capabilities if you want to consider investing in the plethora of new products.

To quote from the article: “The trend is probably reflective of how expensive it is to do it yourself,” says Andy Klausner, principal at AK Advisory Partners. “It’s much cheaper to hire a consultant and rely on them to help fulfill your fiduciary responsibility. You have to be relatively large to be able to afford the same level of resources in-house.”

Build it or buy it – which do you think is better?

The V-Word Is Back - October 7th, 2014

This the name of our 4th quarter newsletter. The V-Word is of course volatility. After a long hiatus we are back to seeing +/- 100 moves in the DJIA on a daily basis. But this is not necessarily a bad thing, as perhaps the market is finally acknowledging that is all not well in the world.

The newsletter also contains an article on “Creating A Buzz To Grow Your Business.” It talks about ways that you can act as your own publicist to grow your business.

Click here to see the entire newsletter.

AK In The News: Gross’ PIMCO Exit Throws Door Open For Institutional Competition - September 29th, 2014

I was asked to comment on an article in today’s Fundfire (A Financial Times Service) about the departure of Bill Gross from PIMCO last Friday (he left the firm to go to Janus Capital).

Frankly, I was not surprised by this move and think that it is a longer-term positive for both firms. Ever since PIMCO’s former CEO Mohamed El-Erian left in March, the firm has been in turmoil and Gross’ future there has been in question. Stories have emerged of erratic behavior, mistreatment of employees and most recently a threatened exodus if Gross stayed.

While we will never know the true inner workings of the firm, perception is reality as they say, and it had become increasingly clear that if Gross stayed so would the turmoil. His abrupt departure reinforced the animosity between the parties and the untenable nature of the relationship. From that perspective, it is good for PIMCO to get this negative attention behind them and focus on the future. They have moved swiftly to name replacements and try to begin anew.

The negative for PIMCO is that Gross’ departure will trigger automatic mandate reviews by institutional investors, and analysts expect the firm to lose billions of dollars. But this increased scrutiny (being put on “Watch” lists) was already increasing with El-Erian’s departure and underperformance. At least the departure of Gross allows the firm to position that all of the changes are over and allows it to look to the future. Already the California Public Employee’s Retirement System (CalPERS) has announced that it has no plans to move the approximate $1 billion they have invested through PIMCO.

For Gross, the move is one which allows him to try and save his reputation, which has been hurt by not only the turmoil and negative press that has been coming out, but also by the recent underperformance of his Total Return fund. There can be no question that the unraveling situation had to be affecting his ability to manage effectively. While he is leaving to manage a much smaller fund, he does have the opportunity to reestablish himself at Janus Capital and grow his influence at the firm over time.

To quote from the article: ““There’s been such a negative cast on Gross since El-Erian left the firm, [with] people blaming him,” says Andy Klausner, principal at AK Advisory Partners. “It was becoming harder and harder for him to stay,” he says, adding he wasn’t surprised to hear Gross was leaving. “All in all, it’s probably positive for PIMCO,” says Klausner. And the move isn’t bad for Gross either, as he can still ride his strong reputation as a fixed income expert, says Klausner. “It’s a good PR move for [Janus],” he says. Gross’s name will lend himself well to be a spokesperson for the firm.”

AK In The News: The Wirehouse Cost-Cuttting Conundrum - August 28th, 2014

I was asked to write an opinion piece on recent announcements by UBS and Morgan Stanley that they were undertaking measures to reduce costs. UBS chose to lay-off a small number of client service and support staff, while Morgan Stanley chose to pass along some additional costs to its advisors. So, is one way of cutting costs better than the other? The piece was published in today’s FundFire (A Financial Times Service).

In reality, I don’t think that one method of cost cutting is better than the other. The fear these and other sponsor firms always have is that they are going to “piss off” their advisors with such moves and that this may result in defections. The reality is that when you look closely at these cuts, they effect only a small number of advisors -generally  those at the lower end.

Management has an obligation to shareholders to run efficiently and smartly; they also need to foster a positive environment for their employees. Attempts to become more efficient can keep everyone happy. Often times it is the headlines that make the cost cutting efforts seem “bad” and far-reaching when in reality they are minor.

UBS, for example, laid off 75 client service associates. This is out of thousands of such associates at the firm, and you can bet it did not impact their top producers. One can argue that cuts aimed at the lower end help weed out lower producing advisors who are probably not adding much if anything to the bottom line. The financial crisis helped firms see that being the biggest is not necessarily a goal they need or want to pursue. They rather have the most efficient advisors.

And Morgan Stanley, while passing along more costs to advisors, in fact gave their top producers a pay out increase at the beginning of the year, so net-net, the effects are not that great.

All firms must cut costs at certain times. It just seems that everyone still likes to forecast the demise of the wirehouses, when in fact they have made great strides in becoming more competitive over the past few years.

Contact me if you would like me to send you a copy of the article.


AK In The News: Managed Acct. Platform Mergers Crucial To Wealth Success - July 29th, 2014

I was asked to comment on a poll conducted by FundFire (a Financial Times Service) in which 80% of the respondents felt that sponsor firms (broker/dealers) must consolidate their managed account platforms in order to remain competitive. Merrill Lynch has just undergone such a consolidation, and the person who helped them do this was hired away by another firm to do it for them.

I am in total agreement that there are just too many fee-based program offerings at many firms today – it makes it confusing to understand for the advisor as well as the client, and expensive for the sponsor because of the operational and research duplication. I have advocated for more transparent pricing and easier program-to-program comparisons for a long time; technological advances have now made this a possibility for more firms.

To quote from the article:”For strategic consultant Andrew Klausner, the poll is a reminder of how, “sometimes, too much choice is not a good thing.” Overall, the proliferation of managed account products on separately managed account (SMA) and unified managed account (UMA) platforms makes it more difficult for advisors to make investment decisions, says Klausner, founder and principal of AK Advisory Partners. Unnecessary duplication and too many different platforms add to the confusion while creating inefficiency and higher expenses, he adds.”

Smaller sponsors, many of the independents for example, might be at a resources disadvantage here, and this could lead to further consolidation in the industry over the longer-term.

Any thoughts?