Archive for June, 2014

Retail Alternative Investments – The Next Bubble?

Tuesday, June 17th, 2014

I have been concerned for a long time that the rapid growth (number and type) of liquid alternative investment products being developed for the retail marketplace represents a potential problem. Many clients – and in fact advisors – don’t understand what these investments are, how they work and why they should invest in them – other than they are the flavor of the day.

A number of recent studies confirm my fears:

– Jackson National Life Insurance conducted a study of more than 300 investors who work with advisors and have more than $200,000 in investible assets. 43% admitted that they have no idea what  the term alternative investments means. A larger study of almost 600 investors including those who work with advisors and those who don’t, yielded similar results.

– Invesco conducted a survey last year with Cogent Research which found that only 23% of 429 investors with at least $250,000 in investible assets and working with an advisor were familiar with the term “alternative investment.” 5% of the survey respondents thought that money market funds were alternative investments.

Yet the money keeps pouring in … As of May 31, net flows in five our of seven Morningstar alternative categories are up, led by nontraditional bonds.

I see two major problems. One is that there is really no industrywide consensus of what an alternative investment is. People often confuse an alternative investment with an asset class. This leads to the second problem – these surveys confirm that the education surrounding these investments has not kept up with their growth.

And this is where bubbles start. People feel like they have to invest in something so that they don’t get left out. They don’t really know what they have and they don’t even know why they have them in their portfolios. Do I have a long/short mutual fund in my portfolio because it diversifies risk or because it enhances return, or both?

Education has to start with the sponsors of these investments educating the distributors and their advisors – and providing the education materials in turn for advisors to educate their clients. I would have hoped the industry would have advanced further in this task by now; it should have.

But the education also has to incorporate the notion that liquid alternative investments are not for all investors and you can be successful without them in your portfolio. Even some sophisticated institutional investors shun alternatives for lack of a thorough understanding.

We can prevent the next bubble if we are smart about it. Lets hope the industry is! Given past history, however, I have my doubts. What about you?

AK In The News: US Managers Win World Cup Of Marketing

Thursday, June 12th, 2014

Today’s Fundfire (A Financial Times Service) has an article on how U.S. asset managers rank first (and U.K. firms second) in effective marketing – both defending their home turf from foreign competitors and competing abroad – according to a new survey by FS Associates; I was asked to comment on these results.

The results are not surprising, given the maturity of the pension markets in the two countries. To quote from the article: “The marketing domination by U.S. and U.K. firms should be expected, says Andy Klausner, principal and founder of AK Advisory Partners.

“It’s a size issue,” he says. Both the U.S. and U.K. are home to the world’s largest asset managers, and have more developed institutional investor markets, he says. “It’s the bigger players that go overseas,” he says. Available resources are important for strong marketing.”

The article also discussed how managers could grow their businesses abroad. Again, quoting from the article: “But marketing for institutional investors is inherently different than for retail investors, says Klausner. “You’re marketing yourself to that consultant,” as opposed to directly to a client, he says. Institutional managers need to focus on building their brand through relationships with consultants, particularly the large, global consultants.

If a manager can have a strong relationship with a consultant in the U.S., it’s likely that the consultant will also look at the manager for its institutional clients in other countries as well, says Klausner.

“It’s very rare that a manager would be brought into [an institutional] relationship not through a consultant,” says Klausner. But, asset managers can still focus on building brand awareness with institutions. While a consultant may drive a manager selection process, institutional clients may still request the consideration of certain managers they’re familiar with, says Klausner.”

AK In The News: Advisors Use Preferred Lists, Don’t Admit It To Clients

Wednesday, June 11th, 2014

I was asked to comment on a poll which asked Ignites (a Financial Times Service) readers on the impact that the Preferred Lists provided by their firms has on their investment selection process. More than half (57%) said that they regularly use them but don’t admit it to clients. 20% said that they were highly influential in their selection process.

Now, lets be honest, when you answer a poll question you have to pick the one that is closest to your thoughts. I chuckled when I heard the results because of that extra line “but don’t admit it.” I don’t think this answer is quite as scandalous as the headline might indicate. The reason is that there is often no reason to tell the clients that you do rely somewhat on the advice of your firm – as long as you do something above and beyond just taking their recommendations.

In fact, in my mind, that is what differentiates the better advisors from their peers – they take the available information and then add some layer of their own work above and beyond it. To quote from the article: “But the extent of that influence varies by channel and advisor type.

Advisors with investment expertise — as opposed to financial planning and client service specialists — are more likely to forgo consulting recommended lists and instead pick funds based on past experiences with certain products and managers, consultants say.

Even so, such advisors remain likely to at least evaluate these firm-approved products as a starting point for their own analyses. Whether advisors look beyond the preferred list likely hinges on their comfort level with technical investment concepts, says Andy Klausner, partner at AK Advisory Partners.

“It depends on the advisor’s sophistication, their experience and the size [of their book]. It’s the newer, younger, less experienced advisors that rely more on recommended lists and model portfolios,” Klausner says. “The more experienced people want to say, ‘I pick my own manager and do my own research.’

“It’s always a good selling point to address what you do above and beyond what the firm does.”

Certain segments of the industry are also more likely than others to balk at buying products prescribed by a central research unit. Both Klausner and Fronczke say that reliance on recommended fund lists appears highest in the wirehouse and regional broker-dealer channels and least prevalent in the independent RIA space.”

AK In The News: Platform Pumps Up SMA Menu, Crafts Models, Adds New Clients

Wednesday, June 11th, 2014

Today’s Fundfire (A Financial Times Service) featured an article on FolioDynamix adding a new client in the bank trust department space. I was asked to comment on whether or not this signals a new trend – banks turning more toward third-party providers of investment platforms rather than developing them on their own – and what effect this has on SMA managers.

I don’t think that this signals the beginning of a new trend, because in fact, their has been growth in outsourcing for many years. It may be new for FolioDynamix, and signal a new direction for their business, but banks that have expanded into the fee-based business arena have for many years faced the issue of building it v. buying it.

And frankly, if you don’t have the expertise, personnel or resources in-house, it is easier to buy it. While ultimately the end fees to clients may be higher because you are paying a third party, it has been a way for banks to get up and running faster and quicker.

As to the question of what this means for SMA managers, to quote from the article:

“As the shift away from proprietary offerings toward more open architecture continues, turnkey platforms, like FolioDynamix can pose an opportunity for model SMA managers to expand their distribution without having to deal directly with small bank research teams, explains Andrew Klausner, founder and principal of consultancy AK Advisory Partners.

“If a bank or trust is new to the business they’re not used to managers having to come through,” Klausner says. “From a marketing point of view it’s easier to get in with these [turnkey] firms that will showcase you.”

“It’s definitely a way that you can reach a lot of bank trusts through a single platform, as long as you’ve got the product that they want,” he says. “Getting on a platform like FolioDynamix will help, but [managers] have some work to do on their own to differentiate themselves and make their options valuable for a bank trust.”

For banks, “it makes sense to hire these third party TAMPs [turnkey asset management platform] that offer models as well,” says Klausner, the consultant. “The easiest thing to do is go out and buy the whole bundle.””