Archive for August, 2012

Financial Services Pros Still Don’t Get Social Media

Wednesday, August 29th, 2012

Well, I do … but it seems that despite some gains, financial services professionals remain reluctant to incorporate social media into their business models. A recent poll in FundFire (A Financial Times Service) among financial services professionals found that 60% found that social media had either no impact or was risky, 30% found that it was moderately helpful and only 11% felt that it provided a boost to their businesses.

Surprising is that 11% is down from 17% in a similar poll taken last year by the same organization. Now, we all know that voluntary polls like this are not too scientific, but it is surprising that this number went down given the same potential audience of respondents, especially since a number of sponsor firms, Morgan Stanley Smith Barney for one, have expanded their efforts in this area.

I believe that the most rational explanation for these results is that some of my fellow “Type A” financial services professionals are just not being patient enough to see results. It takes time! Additionally, while everyone would love to get new business from their social media efforts, and eventually this may come, the more immediate impacts are harder to quantify and gauge, namely greater brand awareness and client servicing.

I understand that many in the industry cite compliance reasons for not participating in social media, but advances in understanding and software have alleviated many of these concerns. Granted, if you work for a firm that does not allow or limits social media, there is not much you can do. But if you are the decision-maker, or can influence the decision, remember to take a longer-term perspective.

Social media allows people to get to know you on their terms – which is how people want it these days.

Fitting Fee-Based Business Into Your Practice

Wednesday, August 22nd, 2012

Last week I blogged about a new report from PriceMetrix which highlighted that advisors who are aggressively transitioning to fee-based business performed better over the past three years, and grew their businesses faster, than slower-converting peers. Now I want to highlight a few more interesting findings from the report, which shed light on how fee-based business can fit into any advisor’s practice.

The trend toward fee-based business continues, but transaction business is not going away. Over the past three years, as reported by PriceMetrix, the percentage of industry assets in fee-based accounts has increased from 21% to 28%. While 91% of advisors have at least one fee-based account in their book of business, the still remaining overall high percentage of transactional business illustrates that fee-based business has a very long way to go.

In fact, only one percent of advisors have 90% or more of their client’s assets in fee-based accounts. The important point here is that while transitioning makes sense, and as PriceMetrix points out faster may be better, it would be a mistake for advisors to try to move all of their clients into fee-based business – don’t force business where it doesn’t fit. Having hybrid households (where clients have at least one transactional account in addition to one fee-based account) is becoming more the norm than the exception, and that’s okay.

The report also found that a large percentage of the increase in fee-based accounts came from new relationships, about two thirds. The implication here is that advisors might be wise to adopt a two-pronged transition strategy – one for current accounts, which might again result in more new hybrid relationships, and one for new relationships where there is no preconceived notion or expectations.

Finally, the report concluded that clients between the ages of 40 and 64 have the highest propensity to use fee-based accounts, and less experienced advisors tended to be more enthusiastic about fee-based accounts. This tells me that next year’s report might find younger clients migrating more to fee-based accounts, not only because their presumably younger advisors are advocating it, but also because of the proliferation of new model-based managed accounts, which has resulted in the lowering of account minimums in many programs, thereby making them more affordable to a younger demographic.

Advisors: More Fee-Based Business = More Success

Wednesday, August 15th, 2012

PriceMetrix released a new report today that found that advisors moving clients more aggressively into fee-based accounts saw revenue growth of 47% over the past three years compared to an average growth rate of 21%; these advisors also had above-average growth in assets under management as well as return on assets.

(PriceMetrix is a well-respected practice management solution provider. The validity of the report partially rests on the size of the study, which represented data covering 3.2 million investors, 500 million transactions, 1 million fee-based accounts, 4 million transactional accounts and over $900 billion in assets as of May 2012.)

Some other results from the study which support fee-based accounts include:

  • The average fee-based account is 46% larger than the average transactional account;
  • The average fee-based account generates three times as much revenue – $2,900 per account v. $870; and
  • Households with at least one fee-based account generate a return on assets that is 40% -70% higher than households that are purely transactional.

There is a lot more in this study, but for now it suffices to say that advisors who have been considering the move into fee-based business should take note. For years, there has been a debate in the industry less about “if,” but more about “how fast” an advisor should convert this/her book (or at least a portion of it), from transactional business to fee-based business, recognizing that your income may initially go down.

The flip side is that while this reduction in income phenomenon may be true in the short-run, switching your business mix toward fee-based business will leverage your time, thus allowing more time to grow your business while also giving the peace of mind that on January 1st of each year you have already “guaranteed” a large portion of your income with more sticky assets.

A final statistic about the subset of advisors who grew their fee-based business by at least 25% during the three-year period studied: the average advisor in this group saw a 49% increase in assets under management and a 41% increase in recurring revenue. They also almost doubled the number of households in their book which generated more than $5,000 or more in revenue each year while significantly reducing those clients that generated less than $500.

Definitely some food for thought! The question on advisors minds should not be if they should convert part of their book, but how fast!


Is There An Optimal Size for Asset Managers?

Wednesday, August 8th, 2012

Casey Quirk, the U.S. Institute and McLagan just released a survey which indicated that larger asset management firms are having a harder time rebounding from the financial crisis than their smaller counterparts. (Larger firms are defined in the survey as managing more than $250 billion, medium-sized firms between $50 billion and $250 billion and smaller firms under $50 billion.)

The survey included 96 managers with more than $21 trillion under management, and concluded that revenues at larger firms are down 24% since 2007, compared to down only 4% at medium-sized firms and down 5% at smaller firms.

Coincidence or reality? Probably a little of both I think. There is definitely something to be said about the law/rule of large numbers – as in managing a large mutual fund, as your size grows it does become more difficult to perform well, as you are somewhat beholden to the whims of your investors/clients. And many larger firms offer multiple products, so at any one time some of these styles will be out of favor and inevitably experience outflows. Additionally, they may be hurt if they see clients going to lower-fee products – equity to fixed income, for example.

On the flip side, however, a smaller firm, which only has one or maybe a few strategies, has a viability problem if this style goes out of favor. What has favored many of these smaller firms lately is that that many are in “specialized’ areas such as alternatives and global products, which have been in greater demand as investors seek greater returns in a low-return environment.

Some might argue that medium-sized firms are in the best position, especially if they offer a diversified style mix. These firms would therefore not have the risk of going out of business because they are too dependent on one style that may be out of favor, yet they are more nimble than their larger counterparts and can react more quickly to any market “noise.”

At the end of the day, however, I think it’s too simplistic to say one size is better than another. You can have well run and profitable firms of any size, and you can have poorly run firms of any size. But it would behoove investors and fiduciaries to consider, among other things in their analysis, the size and asset mix of any firms that they are considering investing with so that they can determine for themselves if the firm is well positioned for future success.


AK In The News: Bond, Index Funds Big Flow Winners In First Half

Friday, August 3rd, 2012

I was asked to comment on an article that appeared in today’s Ignites (A Financial Times Service) about the fact that bond and index funds were the top five asset gathers for the first half of the year.

These results are not surprising to me, as this reflects investors’ “overall negative mood on equities and aversion to risk. Investors in equities have not been rewarded over the past decade, and the gyrations of the past few years — where the calendar years have started out great and then fizzled — have not helped this confidence. Record amounts of money have been kept on the sidelines, and given that there is little optimism that the equity markets are going to perform very well until all of the political uncertainty here and abroad subsides, those individual investors who choose to leave cash are looking for safety. Institutional investors continue to dominate the marketplace.”

While there are risks to investing in bonds and bond funds, of course, is it typically less than investing in stocks.

The above explanation covers investing in bond funds, but why index funds as well? To quote from the article again: “The growing concern that institutions “have and will continue to have the advantage over individuals” is also partially responsible for making index funds the “vehicle of choice” for investors willing to take on the inherent risk in the stock market, according to Klausner. We all know that the stock market is a market of individual stocks, and it is becoming harder and harder for individuals to manage their own portfolios. Index funds are a good alternative,” he says.”

Do you agree?