Archive for May, 2013

AK In The News: Industry Cautiously Optimistic On 2013 Pay

Wednesday, May 29th, 2013

I was asked to comment on the results of a recent Ignites (A Financial Times Service) poll on 2013 compensation. Overall, respondents were optimistic about their pay prospects, but hardly euphoric. 36% believed that their pay would be slightly higher this year, while 10% believed that their pay would be much higher. In contrast, only 11% of respondents believed that their pay would go down, and 4% felt that their pay would be much lower.

The results are not surprising, given how the markets have been doing this year. Presumably, anyone paid on commission or with bonuses tied to firm performance would expect their pay to increase. That only makes sense. But what is more encouraging to me is that the optimism, while there, seems guarded.

I think that this shows the dose of realism that the last financial meltdown left on the industry, and is positive in that hopefully it points to the industry not making the same types of mistakes in the future that it has made in the past. To quote from the article:

“Given the positive performance of equity markets this year, it is not hard to see why nearly 50% of respondents believe their employers will be more generous with pay come bonus time, says Andrew Klausner, founder of strategic consultancy AK Advisory Partners.

Klausner believes that today’s upbeat forecast for pay, as expressed in Tuesday’s Ignites poll, is much more sustainable when compared to the excessively cheerful outlook seen before the financial crisis.

“The magnitude of the latest crash has made everyone a little more realistic. Yes, hiring and pay have picked up, but probably at a much lower rate than previously, which is a good thing,” he says. “Wall Street has always over-hired and overpaid during good times and then slashed during bad times.””

A more stable and realistic Wall Street is good for the markets and the people that work in the industry.


AK In The News: LPL Compliance Makeover Spotlights Manager Risk Controls

Tuesday, May 28th, 2013

I  was quoted in an article in today’s GatekeeperIQ (A Financial Times Service) about the implications of some of the problems that LPL has been having on the compliance side recently – not the kind of news they want!

Some LPL advisors have come under scrutiny with some state regulators for selling non-traded REITs inappropriately, and the firm itself was recently sited for a huge compliance failure on its monitoring of emails.

What are the ramifications for LPL moving forward? First, they obviously need to fix these compliance deficiencies and demonstrate to both the outside world – the regulators – that they have their act together – and then the inside world – their own advisor groups – that this public relations nightmare will be put successfully behind them.

Easier said that done. LPL can fix the compliance issues and increase its communications and education to advisor groups. But they walk a fine line between satisfying the needs of the regulators and ensuring that they are following all applicable laws (as are their advisors) on one hand, and overreacting and making these compliance changes so burdensome that they lose a lot of advisors on the other.

Unlike traditional B/Ds that can mandate strict compliance to their advisors from the top down, LPL, as an independent, is in a little bitter of a tougher position. I think it’s fair to say that advisors at an LPL, most having likely already moved from a wirehouse or other independent, would be more likely to switch firms if things become untenable more quickly than traditional B/D advisors (who are more used to that type of compliance world.)

To quote from the article: “That culture also puts LPL in “a very tough position” in disseminating the home-office driven compliance overhaul, according to Andrew Klausner, founder and principal of AK Advisory Partners. “While on the one hand they do have to clean up their compliance procedures, they have to do so without over-burdening their advisors,” he says. While advisors at wirehouses and regional firms may be accustomed to product and procedure mandates passed down from headquarters, at an independent shop, such dictates can threaten retention. “If LPL were to try such tactics, I would imagine that they would see a large exodus of advisor groups to other independent sponsors.””

What do you think?

What Is An Alternative Investment?

Tuesday, May 21st, 2013

Hardly a day goes by that another firm doesn’t either enter into the retail alternative investment space, or expand their offerings; Fidelity and Schwab just announced major initiatives. Becoming more common as well, however, are firms closing retail alternative investment products; two firms recently shuttered their alternative (long/short) investment ETF offerings.

As investors seek higher yield in today’s low return environment, they naturally are turning to alternative investments and the hope and promise of higher and often uncorrelated returns. This trend scares me – almost a  much as today’s stock market, which is fueled by the Fed’s free money policy more so than by economic fundamentals. The complexity of many alternative investments have necessitated that they have historically been for institutional or very high net worth investors only – has anything really changed to fuel today’s growth in the retail marketplace?

I caution advisors to tread carefully if they are exploring or increasing their clients’ exposure to alternative investments. At least make the commitment to educate your clients fully on the inherent risks of these types of investments. You don’t want to be one of the last to jump on the bandwagon just before …

Back to my question: What Is An Alternative Investment? The answer is quite complicated, because the category spans everything from private equity to mutual funds to ETFs – from liquid types of investments to illiquid types of investments – from those that require investors be qualified (meeting certain income and net worth requirements) to those that don’t. In fact, investing in timber is considered by many to be an alternative investment.

My point? Advisors need to be extra careful in ensuring that before clients venture into any alternative investments that the investment is appropriate for their investment profile and asset allocation and that they fully understand the risks involved as well as any liquidity restraints. Is the additional risk being taken worth it?

I am not opposed to alternative investments – when and where they fit. I just fear that they are becoming the latest bubble in the industry, and that clients who are still struggling from the losses incurred since 2008 are about to make another mistake. Advisors – it’s your job to help your clients avoid such mistakes as opposed to helping them chase return.

Characteristics of High Net Worth Clients

Wednesday, May 8th, 2013

PriceMetrix just released a report on the characteristics of high net worth clients (defined by them as people having a net worth of at least $2 million). There are a few very interesting pieces of information that advisors should consider in their ongoing planning processes.

(The breadth of the client database at PriceMetrix – 7 million retail investors and 500 million transactions – always gives me confidence in the validity of their reports.)

1) The most interesting aspect of this report to me is that the study found that just 3% of households with less than $500,000 when a relationship began, became high net worth clients over the subsequent five years. I can’t say it any better than the Doug Trott, the CEO of PriceMetrix: “The number of times small households become high net worth clients is simply too few to merit an advisor’s attention. Advisors should concentrate on finding, not manufacturing big clients. Seventy five percent of high net worth clients were high net worth from the very beginning of their relationship with their advisor.”

Other than family relationships, where you are trying to cultivate future relationships, I agree that it makes little sense to target smaller investors with the hope that they will become larger. Advisors should consider raising their account minimums if they have been targeting prospects with lower net worths.

2) The study confirmed that high net worth investors tend to spread their investments among account types and advisors. This argues for advisors adopting a business model where they accept this fact, and rather than try to convince clients to consolidate their assets with them (at least initially), they develop the ability to be the primary advisor – the one who can provide complete account performance (even for assets held away) and multiple services so that they can be the “go to” person.

3) While high net worth clients typically pay lower fees, the range of fees found was significant account to dispel the rumor that fees drive relationships. To quote Mr. Trott again: “They (advisors) shouldn’t deeply discount their prices because it won’t help and they should limit their number of small households because large numbers will impair their ability to appropriately service high net worth clients.”

4) Finally, the study validated the well known fact that high net worth clients tend to have more in fee-based accounts and migrate away from mutual funds as their net worth grows. Fifty one percent of high net worth clients have fee-based accounts, while only 36% of households with between $250,000 and $500,000 in assets have fee-based accounts.

Some good information to help advisors plan for the future.