Archive for August, 2010

What’s Holding Back UMA Programs?

Tuesday, August 31st, 2010

Published on August 31, 2010 – FUNDfire – An Information Service of Money-Media, a Financial Times Company- written by Andrew Klausner, Founder and Principal of AK Advisory Partners LLC.

The growth of unified managed account (UMA) programs has been far slower than many industry experts had predicted when the investment vehicles were first introduced. Assets under management in the investment vehicles stood at $79.5 billion at the end of the first quarter, compared to $566.2 billion in separately managed accounts (SMAs) and $317 billion in programs where the advisor acts as the portfolio manager, according to Cerulli Associates. What are the reasons why the UMA has so far failed to live up to its potential?

To start with, a current focus of many UMAs – to provide a model-based investment solution – goes against two important trends:

1) The bias of top-end advisors to migrate away from “packaged products.”

2) The desire for top-end advisors to position themselves at the center of relationships and to provide many of the services that UMAs do – namely rebalancing and tax-advantaged investing.

The events of the last two years have only increased the importance of advisors retaining control of their client relationships. This has only made the road even tougher for UMAs.

I mention top-end advisors because they generally have larger clients and far greater assets under management. In fact, UMAs are more appealing to smaller accounts, where access to a diversified portfolio of individually managed accounts is not available. However, in this space for smaller accounts, UMAs are competing with – and at a cost disadvantage to – emerging exchange-traded-fund programs and established mutual fund wrap programs at most brokerages.

Another reason for the disappointing growth of UMAs is that the industry has not been able to truly make these accounts as all-encompassing as first hoped. For example, alternative investments and other less-liquid investments still do not work in the typical UMA structure. If advisors still have to do their own work to provide comprehensive client-level reporting, a main rationale for investing in UMAs disappears.

A further twist is that what some consider to be the next generation of managed accounts – the unified managed household (UMH) – is really a client-level reporting vehicle rather than an investment vehicle per-se. If, as I believe, this type of total-client reporting and functionality is what top-end advisors really desire, the growth and development of the UMH bodes poorly for the future of UMAs as well.

In order to differentiate themselves and attract larger clients, advisors must be able to demonstrate their value-add on an ongoing basis. Packaged products are a commodity, and while they have their place, successful advisors don’t build their practices on a foundation of such offerings.

In addition, the industry has not done itself any favors by selling UMAs as a primarily model-based solution and by melding their SMA programs into UMAs, as some firms have been doing recently. Pushing UMAs as a by-product of reducing the number of products you offer may increase assets under management in these programs. However, it will not really make the UMA the product the industry has long touted. UMAs seem stuck between SMAs and the next generation UMHs with no place to go.

What Makes For a Good Financial Services Website?

Friday, August 27th, 2010

A recent report by Dalbar (a well-respected research firm in the financial services industry), which ranked the websites of top mutual fund companies, has some interesting implications for the entire industry. (I believe that the findings are germane to all segments of the industry – sponsor firms, investment managers, RIAs, etc. So take notice!)

Let’s start with the overall conclusion – it’s critical that websites are easy to navigate and that content is easy to find. In addition, continuity among the different features being offered is important; for example, the use of social media should complement the functionality of the website and fit naturally.

Poor functionality will lead to frustration on the part of the user and any value-added contained in additional content will be lost. An effective website must have good design (which includes the look as well as the functionality) as well as good content. One without the other is not enough. To quote an executive at a large fund family, “It’s all about getting the right content to the right person at the right time.”

In designing your website, make sure that you dedicate the necessary resources to both design and content!

There were a few other interesting findings in the report as well. The use of mobile, social media and interactive features is increasing. Again, while this is not surprising, it’s important to reiterate that the most effective sites allow clients as well as prospects to utilize the information and access the resources of the company the way that they want to – it’s all about the user! Make it user-friendly!

Finally, the “viral” component – the ability for readers to share the information with others – is growing significantly (the phenomenon is called social sharing.) People want to share content that they find useful, especially when it comes to their finances, and making it easy for them to do so helps spread your brand further – and faster!

Why Supporting 12b-1 Reform Will Pay Off

Monday, August 23rd, 2010

Published on August  23, 2010 – Ignites – An Information Service of Money-Media, a Financial Times Company- written by Andrew Klausner, Founder and Principal of AK Advisory Partners LLC.

The recently announced SEC proposal to revamp 12b-1 fees has already — not surprisingly — resulted in a public fight between those who advocate that the fee should be changed and those who do not. The general argument of defenders of 12b-1 fees is that they are a way to cover the expense of providing ongoing service to clients. Opponents of the fee argue that they are a needless drag on performance. They say that the ongoing nature of the fee goes against the reason they were developed in the first place: to cover initial marketing costs.

What’s getting less press is the fact that most investors don’t even know what 12b-1 fees are. This lack of investor knowledge about fees is not limited to 12b-1 fees; they just happen to be the fees that are getting the most press today. The problem is not 12b-1 fees per se, but the need for even more transparency in mutual fund pricing, as well as stronger disclosure rules.

Ironically, this debate comes at a time when the following has occurred:

*The popularity of institutional mutual fund shares and exchange-traded funds (ETFs) has also cut into sales of funds carrying 12b-1 fees.

*The SEC will be spending most of its attention and time deciding the much larger issue of determining whether advisors at broker-dealers are fiduciaries. This initiative will no doubt result in more scrutiny of compensation arrangements between funds and intermediaries.

So, cutting through the noise surrounding the current debate, I believe it’s clear that industry professionals can only gain by stopping any strong lobbying against 12b-1 reform. This is because if the SEC implements changes that simplify and increase mutual fund disclosure as it relates to fees, then investors win. Therefore, it would be dangerous for anyone to be perceived as arguing against simplifying fee structures and increasing disclosure. Those investment companies or intermediaries could be painted in a very anti-consumer light by those framing the debate in pro-investor terms, putting the former groups at a competitive disadvantage. Lobbying should concentrate on making sure that the changes do not result in unintended consequences. After all, there is always such a danger when new legislation/regulations are enacted.

Ultimately, the current proposal, though costly to implement, is the right thing to do despite the potential objection of some sponsor firms. (The proposed rule would require that mutual fund companies disclose marketing and service fees as well as continuing sales charges in every prospectus, shareholder report and investor transaction.)

I believe the proposed change to move the setting of pricing terms from the fund companies to the broker-dealers will increase competition, which is a positive thing. The argument that such a move will commoditize the industry and result in price wars fails to recognize the value that the advisor brings to the table. It also runs contrary to the above-mentioned fact that the industry has been evolving away from funds with 12b-1 fees in any case.

However, caution is still needed. There are some elements of the proposal that need further discussion. For example, currently more than 40% of retirement plans charge more than 0.25% to cover their administrative costs. Any changes to 12b-1 fees should not result in higher overall prices for retirement plan participants. Another problem is that the current proposal does not cover revenue sharing, such as when a fund pays a percentage of its fees to a broker as part of the sales agreement. If 12b-1 fees are capped, then revenue-sharing agreements might be used to offset the difference. The idea of making fees more transparent would be negatively impacted — another possible unintended effect.

In the end, change is always difficult, and this debate is sure to continue for at least the next couple months, if not longer. But the goal should be clear: Any changes to 12b-1 fees should increase competition, reduce unnecessary regulation, and, above all else, simplify fee structures so that investors can understand exactly what their fees are and therefore make rational decisions based on complete information.

Who Controls the Client Experience?

Friday, August 20th, 2010

I wasn’t surprised to see that Raymond James just announced that it was hiring a Director of Client Experience. What was surprising is that the design of this position is to communicate directly with clients. The firm acknowledged the slippery slope that it is now embarking on – how to directly interact with clients without upsetting its advisors.

This should be an interesting “experiment.” Personally, I like the idea of hiring a Director of Client Experience, but would rather have this person work with the training department to help provide advisors the resources to enhance and promote the activities that they do to make their individual client experience unique – this is part of each advisors unique value proposition and is a point of differentiation between them and their competitors.

Especially scary is the analogy the new Director made to Starbucks and how they have been able to institutionalize the client experience. (The article mentions that Starbucks is famous for bringing fast, fun friendly service to customers on a highly consistent basis.) Most sophisticated clients choose their advisors for the services they provide first and the hope that they will become long-term partners; the firm they work for, or the broker/dealer they are associated with is usually far less important. Given that fact, I for one do not see the value-added of the firm engaging in this new enterprise, and in fact see it doing potentially a lot more harm than good if it alienates enough advisors.

Call me an old dog – and I may be proved wrong – but institutionalizing client service deemphasizes the importance of the individual advisor and is more of a strategy aimed at the mass market – successful advisors today are reducing the number of client relationships that they have, concentrating on fewer larger relationships where they can make a difference. I am not sure how this new strategy can help top advisors.

Am I missing something?

New Account Fees – Are You Kidding Me?

Wednesday, August 11th, 2010

My mouth is still open in amazement after just reading that Ameriprise Financial is imposing a new annual account fee on accounts between $100,000 and $500,000. ARE THEY KIDDING? The fees will be between $40 and $80  per account each year and oh, the good news – household fees will be capped at $200 per year. I ask again – ARE THEY KIDDING?

Many firms including Ameriprise charge smaller accounts (generally under $25,000) an annual fee; and honestly, such accounts are often times inactive and unprofitable. But to impose this new fee on accounts of up to $500,000, especially now, seems incredibly short-sighted (I’m almost at a loss for words for once!). I’mm sure that our friends at E-Trade and the like are salivating!

Yes, it is likely that advisors will “eat” these fees for their top clients and pay the fees themselves. In these cases, instead of unhappy clients you will have unhappy advisors. And lets not forget recruits – this is going to go over like a lead balloon with them! And while I don’t subscribe to the whole main street v. wall street rhetoric, I have to imagine that there will be negative press associated with this move.

Ameriprise is certainly making it easier for other advisors to compete against them; I would certainly use it to sell against them!

The only winner from this – if you want to call them a winner – is presumably the company itself, as they certainly will be collecting some new fees. But I certainly hope their revenue forecast considered losing some combination of clients and recruits for sure, and potentially some advisors.

Can you say – short-sighted ill-timed move?

Top 10 Observations on The Future of SMAs

Monday, August 9th, 2010

Hilliard Lyons (a Louisville, KY-based regional brokerage firm) announced last week that it was migrating its entire book of SMAs (separately managed accounts) onto its UMA (unified managed accounts) platform. While when UMAs were introduced many, including myself, felt that they would be extremely popular, their relative growth has been disappointing at many firms. Does this move by Hilliard signal that other firms will follow and that the long-forecast death of SMAs is near? Here are my top ten thoughts on this topic:

10 – I’ll start with the conclusion – no, we are not near the death of SMAs. The relatively small size of Hilliard’s managed accounts business ($100 million) makes such a change easier for them than it would be for larger firms;

9 – Other regionals will try to emulate Hilliard, and again, because of their relatively manageable size, they may be able to accomplish this task;

8 – Hilliard is keeping its dual-contract program – so while its “packaged” version of SMAs is going away, they are not abandoning the idea of separately managed accounts altogether;

7 – While I am a fan of UMAs, high-end advisors (especially on the institutional side of the business) religiously undertake the two main benefits of UMAs to clients manually – rebalancing and tax optimization – and will not be willing to give up these responsibilities;

6 – Money managers will continue to fight UMAs – not only because they get paid less but because they lose control over the trading of the accounts – and to many, while the jury is still out, the potential impact on performance worries them;

5 – The push to model portfolio-driven programs (like at Merrill) is not the same as the push to UMAs. Top advisors are still averse to programs where they lose control over making the asset allocation/investment decisions;

4 – If firms do consolidate their programs under fewer umbrellas, a single sleeve UMA is equal to an SMA. If the drive is to decrease the number of products, then perhaps the SMA as we know it today may fade – but the concept will not;

3 – When the growth of SMAs began, we saw money managers making the distinct choice of whether or not they wanted to be in that market. I think we will see the same again, with some managers deciding that it is not the place they want to be, while others will embrace the fact that they are relieved of administrative responsibilities;

2 – Any wholesale shift on the part of sponsors that will entail inconveniencing clients (and advisors) will be met with stiff resistance, especially in this environment; and

1 – You can’t force advisors to do what they don’t want to do! Or you can, but don’t be surprised if the results are not what you want.

I think the bottom line is that there will always be a place for SMAs. Top advisors thrive on differentiating themselves from others in the services that they provide. If a platform becomes too “product-like,” they will not use it. While automatic rebalancing and tax optimization sound nice, many advisors recognize that part of their value-added comes in providing these services themselves. Don’t expect them to give up that freedom without a fight.

Top Ten Reasons to Read “Switch – How to Change Things When Change is Hard”

Tuesday, August 3rd, 2010

Great book! We all know that change is difficult. This book by Chip Heath and Dan Heath helps frame change in a manageable way, so that much of the mystery of how to make change work for you and your business is revealed. In their terminology – which you will only understand when you read the book – Direct the Rider, Motivate the Elephant and Shape the Path!

This book gives you actionable ideas and helps you:

10 – Deal with the rational mind which wants change and the emotional mind that likes the comfort of the existing routine.

9 – Direct the person in charge while motivating the one expected to follow directions.

8 – Shape the path – change must be defined and attainable – the more specific the better.

7 – Make change manageable – investigate what is working and clone it.

6 – Script the critical moves and point to the destination.

5 – Make people feel something – knowing change is not enough to change behavior.

4 – Tweak the environment – when the situation changes, behavior changes.

3 – Build habits – when behavior is habitual it is free and not apt to change.

2 – Rally the herd – behavior is contagious – help it spread.

1 – This book is the opposite of TBU (true but useless) ideas – read it to improve the quality of your life and your business.