Archive for April, 2014

AK In The News: Baird Dumps Wilshire, Hauls Fund Selection In-House

Tuesday, April 29th, 2014

I was asked to comment on an article which appeared in today’s GatekeeperIQ (A Financial Times Service) on Baird bringing research on mutual funds in-house (and terminating its relationship with consultant Wilshire).

There can be many reasons why a B/D hires an outside firm to conduct due diligence and also why they would end such a relationship. Often times, as it seems to be in this case, it has more to do with the client’s ability to conduct the research  in-house, perhaps because of growth of staff or maturation of its programs, than it is dissatisfaction with the consultant.

To quote from the article: “The decision of whether to outsource some aspects of manager research is often a question of staffing and numbers, says Andrew Klausner founder and principal of consultancy AK Advisory Partners.“When you’re building a platform or expanding a platform, it’s easier to hire an outside research shop,” Klausner says. “As you mature, add staffing and add assets, it becomes easier to justify bringing it in-house.” Taking greater control over the process provides the home office greater say over the timing of research and the ability to decide whether to include affiliated products, he says. “You have a little more control over how things get done,” Klausner says.”

A sensitive topic is affiliated managers/funds. Hiring an outside firm to conduct due diligence on these products – even if you have the ability to conduct it in-house – is often a smart move to remove any potential (or perceived) conflicts of interest. I am a firm believer that adding this level of third-party oversight, especially on affiliated mangers/funds, sends a great signal to advisors and clients that you are serious about having only the best products available.

Wealth Management Trends – The Good, The Bad & The Ugly

Wednesday, April 23rd, 2014

2013 was a mixed year for the retail wealth management business, with positive highlights – such as increases in assets under management, revenues and production – hiding some disturbing underlying trends. The results provide a good baseline for individual advisors, advisor groups and their firms to evaluate their businesses and plan accordingly for the future.

(The study being referenced is PriceMetrix’s Fourth Annual State of Retail Wealth Management Report. I give a lot of credence to these reports because of the firm’s reputation as well as the size of its database, which encompasses 40,000 advisors. seven million retail investors, 500 million individual transactions and $3.5 trillion in investment assets.)

First, the good headlines news – assets under management increased 12% for the average financial advisor last year and average production grew 5%. Average household revenue increased 11%. These gains signal the continuation of an uptrend in these categories that has been in place since 2009. The average financial advisor managed $90.2 million  and had revenue of $578,000 last year. Average household revenue was $3,670 per household.

But given that the market was up close to 30%, is this growth really that impressive? Here comes the bad news! Much of the growth came from market appreciation rather than growth in new clients. In fact, 6% of the growth came from existing clients and only 5% from new clients. Client retention dropped as well, with departing clients providing a 5% negative drag on growth. The average client retention rate decreased 2% to 90% in 2013, deteriorating in every size of household category. This statistic counters the often heard argument that advisors are only getting rid of smaller less profitable clients. (Bigger households actually left at a fast pace than smaller households.)

Wait – it gets worse.  Average return on assets (ROA) dropped for the second year in a row, down to 0.68% from 0.72% in 2011. While part of this was due to the continuing trend of advisor’s increasing the percentage of fee-based business in their overall businesses, advisors need to grow assets faster if they are going to transaction to lower margin business. And the average age of clients is older for the second year in a row, growing faster than the overall North American population.

The overall results of the survey were well summarized by Doug Trott, President and CEO of PriceMetrix: “Advisors and their firms have a lot to consider. A key challenge, however, remains how to create, articulate and deliver a value proposition that helps to attract and keep desirable wealth management clients. Another challenge is how to create a sustainable book that is not overly reliant on aging clients.”

Growth is only good if it is the right growth.

AK In The News: Baird Ramps Up Northwest Exposure, Snags $10B Wealth Shop

Friday, April 11th, 2014

I was asked to comment on an article in today’s Fundfire (a Financial Times Service) about Baird’s acquisition of Seattle-based B/D McAdams Wright Ragen (MWR). To me, the deal makes a great deal of sense. It extends Baird’s footprint in the Nortwest, and the employee owned boutique-firm seems to have a similar culture and operating philosophy.

But mergers are never easy – no matter how good the fit. There will inevitably be growing and consolidation pains; even the best merger partners experience some pain when they integrate operations, and any change is always traumatic on clients and in turn financial advisors. Having said that, the long-term gains from a successful merger do outweigh the pain. And in this case, I think the similarities in the firm’s cultures will keep the pain to a minimum – if they get the rest of the stuff right.

Contrast this to a merger between a B/D and a bank, or a regional B/D and a wirehouse, where in both cases the cultures are quite different and the odds of trouble in a merger are greater. The results of a merger are never perfect or easy to predict, but from what I can tell, I feel positive about this one.

To quote from the article: “”It seems like culturally the firms are a good fit – two regional players. This will help Baird increase its footprint in the Pacific Northwest. Baird has a reputation as a good regional firm and this step seems logical as they continue to expand,” says Andy Klausner, principal and founder of AK Advisory Partners. “Certainly the merger of two regional brokerage firms – from both a cultural and operational point of view – would be easier than the merging of a regional firm with either a bank or a larger brokerage firm. While Baird is larger and the acquirer, it is more a merger of equals than you see in many other mergers.””

AK In The News: Industry Split On Greater Allianz Scrutiny Of Pimco

Wednesday, April 9th, 2014

I was asked to comment on an article in today’s Ignites (A Financial Times Service) about the industry’s reaction to reports that Allianz, the parent of Pimco, is going to increase its oversight and be more hands on with the subsidiary because of the continuing bad publicity the firm is getting in the wake of Mohammed El-Erian’s resignation in January. El-Erian was the heir apparent to CEO Bill Gross, and his departure has raised questions about the culture of the firm, among other things.

The article detailed results of a reader poll in which 43% of participants said that increased oversight would hurt Pimco (26% of these respondents felt that the negative effects would be significant). 38% of respondents believed that increased oversight would benefit the firm. 20% said such action would have no impact.

Parent companies in the asset management business traditionally give their subsidiaries large amounts of autonomy. In fact, Allianz increased Pimco’s autonomy in January 2012 when it gave Pimco control of its worldwide distribution. The overall fear is that micro-management of subsidies, in an industry where people are so important, could potentially lead to mass defections.

My belief is that if Allianz does become publicly involved, it is more of a way to shore-up public confidence in Pimco then to actually get in there and make significant changes. Perception is reality, and the perception in the industry today is that Pimco is broken. If Allianz can help shore-up confidence, and get the firm out of the media spotlight, perhaps it can help the firm turnaround.

To quote from the article: “Overall, the perception of damage has already taken its toll on Pimco, experts say. Andy Klausner, founder of strategic consultancy AK Advisory Partners, expects any Allianz involvement in fixing Pimco to be enacted more for public relations reasons than any other purpose, particularly due to doubts that Allianz has the appetite to restructure Pimco’s culture. With immense media coverage of Pimco recently, the real issue is that the firm’s reputation has suffered, he says. “Whether Pimco is right or wrong in the debate about their future, it does not matter,” Klausner says. “The perception of their culture being broken is important to note and it cannot be ignored.””

What do you think?