Archive for February, 2013

Does Going It Alone Increase Risk?

Tuesday, February 26th, 2013

We have talked in the past about the growing trend of investors deciding to “go it alone” – forgoing developing relationships with financial advisors to invest directly through intermediaries like Fidelity and Schwab. In all likelihood, investors likely to fall into this category probably have under $10 million to invest; those with more – considered by many to by ultra high net worth investors, are probably more likely to seek advice due to the complexity of their finances.

In many cases, the meager returns of the past ten years have frustrated investors who have been paying a fee. Intermediaries have responded by offering more investment options. Unfortunately, and what makes me nervous is that the increasing complexity of some of these investments make it hard for many investors to truly understand them – and the associated risks.

Many investors are seeking more income – and many funds have for example increased their allocations to equites to try and accommodate these needs. Many firms have also entered the alternative investment spaces, either by developing their own products or by partnering with hedge fund providers. One example is the large increase in long-short mutual funds over the past few years.

Firms expanding recently in the “retail” alternatives space include Janus, BlackRock and Franklin Templeton.

But do investors really understand the inherent risks associated with these investments? In most cases, I would argue that they don’t. Additionally, many of these new products have substantially higher fees than traditional mutual funds – are investors aware of this fact? Probably not. Interestingly, the SEC just announced the increasing use of alternative and hedge fund strategies by mutual funds, ETFs and variable annuities as a new and emerging risk.

This disturbing trend has a positive side in that it presents an opportunity of advisors to educate clients – and to promote educational materials that they produce to perhaps sway some of these “go it aloners” to come speak with them and allow them the opportunity to show them that partnering with a financial advisor may well be a sound risk-reducing strategy.

AK In The News: Challenges Facing The Mutual Fund Industry

Wednesday, February 20th, 2013

Ignites (a Financial Times Service) asked me to comment on the results of a poll that they just conducted on what industry participants feel is the biggest challenges facing the mutual fund industry. Respondents believe that the two biggest challenges are market volatility and overall economic uncertainty; competition from ETFs was also a popular answer.

While I agree that these are large concerns, I was surprised that two other choices – regulation and equity flows – were not ranked higher.

To quote from the article: ‘Yet, market volatility and ETFs should not be the only concerns on mutual fund professionals’ minds, according to Andy Klausner, founder and principal of AK Advisory Partners. Though he is not surprised that overall market uncertainty and competition from ETFs lead the list of concerns in the Ignites poll results because of the amount of press both issues have received, he says he is surprised that regulation and flows into equity products are not bigger concerns.

“Especially after last week when Elizabeth Warren made her first appearance on the Banking Committee, there is growing concern within the industry that regulatory issues will once again take center stage. While the first target may be banks, the fear is that other financial institutions will eventually be targeted as well,” he writes in an e-mail response to questions.

“As to equity flows in general, with bond yields so low, and the long-term return on stocks having been stagnant, more attention has been given to alternative investments,” Klausner continues. “I think that they, [like] ETFs, pose a threat to the mutual fund industry.””

What do you think?

Winning the Rollover Game

Tuesday, February 12th, 2013

More than $300 billion in rollover assets migrate from old DC plans every year, and a recent study by Cerulli Associates projects that annual RIA rollovers will reach $450 billion by 2017, thanks in large part to baby boomer retirements. A few thoughts on how to compete for these assets:

1) According to a recent report by Cogent Research, the most important factor is a participant’s decision of whether or not to move his/her account is brand recognition – more so than even performance and fees. Among the larger firms, Fidelity, Vanguard, Charles Schwab, T. Rowe Price and USAA have been gaining market share through increased advertising, educational information on their websites and other direct selling efforts to clients.

Fidelity has ranked first in Cogent’s report for each of the past three years. They have been successful in part because they attempt to talk to each client about all of their available options, including leaving the assets in place. This non-threatening approach – focused on client education – makes a lot of sense.

2) But let’s say you don’t have the advertising dollars available, or are a smaller firm. You can still compete for these assets. According to Cogent’s study, 71% of investors leave their assets in place for at least five years. This seeming lack of urgency in movement gives current providers a lot of time to talk to clients and get them comfortable with a move.

Any size firm can do a few things during this transition period – regardless of its length – to increase the odds that they can win the battle for the assets:

  • Offer clients consolidated reporting on all assets – including these assets that you do not hold. Even if you don’t get paid on them now, you can consult with the client on their total asset allocation and financial situation. Firms that provide this type of service tend to win when clients who utilize multiple advisors and/or keep assets in multiple locations, decide to consolidate; and
  • Make it easy for clients to move the assets when they are ready. Nothing will hurt your business more than making the transition process more cumbersome than it needs to be. Develop a system, train your staff, explain it to clients and implement it consistently.

AK In The News: Merrill Lynch, Fidelity Have Best Brands

Friday, February 8th, 2013

I was asked to comment on a Fundfire (a Financial Times Service) article about which financial services firms have the best brands. Readers were polled, and the firms that came out on top as having the best brand reputation were Merrill Lynch and Fidelity; BNY Mellon came in last. I was asked to comment on two things – why BNY Mellon did so poorly, and if I thought these results among financial services professionals would be the same if high net worth individuals were asked the same question.

On the BNY Mellon question, I honestly think that since most of the respondents were probably either RIAs or B/D brokers, they probably didn’t know that much about BNY, more of a boutique firm. I don’t think it reflects any problems with the firm itself; while being associated with a bank might hurt its standing, it certainly didn’t seem to affect Merrill Lynch’s standing.

The second question was more interesting, because I do think that if high net worth individuals would have been polled, they would have had a different answer. To quote from the article:

“Experts offer differing opinions on whether firms’ reputations within the wealth management industry differ from their reputations among the client population – high-net-worth and ultra-high-net-worth investors.

Klausner sees a potential difference in public image and industry image, particularly in light of the bad press that some types of firm have received since the 2008 financial crisis. “Especially with the term ‘too big to fail’ mentioned so often, it seems logical that any financial services firm associated with a bank – like UBS or Merrill Lynch – will probably have a worse image with the public than with people in the industry who know how these firms really operate and what their relative advantages and disadvantages are,” he says.

“I would imagine that Fidelity and Schwab have good images with investors as they have escaped a lot of the bad press,” he notes.”

I would be interested to see which side you agree with!