Unlocking Real Value Blog

My Two Cents on the Fiduciary Standard - January 27th, 2011

Since the release of the SECs report on the Fiduciary Standard last weekend, it has been the talk of the industry. I therefore feel compelled to add my two cents on the issue, especially since it will be one of the most discussed and debated issues of the year (and perhaps next year).

But before I speak to that issue, the SEC also released its report on the need for enhanced examination and enforcement resources for investment advisors; both studies were mandated by the Dodd-Frank Act. This study has gotten far less press, but its implication are just as important. To quote from the results “State regulators may not have adequate resources to continue to assume increased regulatory responsibilities, and investor protection could be compromised if such resources are lacking.”

The study made no final recommendations, but my concern is that regardless of how the fiduciary standard issue finally concludes, lack of effective enforcement will significantly decrease its effectiveness. Especially in today’s atmosphere of governmental budget cuts, don’t overlook the importance of how any eventual legislation is supposed to be enforced. Given the spotty recent records of the regulatory agencies, this study should be garnering a lot more the public discussion.

Now, on to the fiduciary standard. To borrow from another commentator, if this were a baseball game, we would probably be in the third inning – this issue will not be settled for a long time. At issue is if brokers should be held to the fiduciary standard that investment advisors are held to today. Under the recommendation, anyone providing personalized investment advice to retail customers would have to adhere to the fiduciary standard.

Part of the rationale given for the recommendation is that client’s do not understand that there are differences in the standards in place today. The SEC argues that harmonizing the regulation of advice providers would increase investor protection (although no specifics are given). The new standard would require that advisors show that any recommendations they make is defensible and that the paperwork is in place to ensure that investors understand exactly the service they are expecting.

A summary of my two cents:

– This issue will not be decided for a long time, and as the publicity continues the arguments are probably going to confuse investors more than anything;

– Instituting a fiduciary standard that is not enforced will not protect investors;

– Just because investment advisors today are held to this standard does not mean that all investors are protected; and just because brokers are not help to this standard does not mean that investors are being harmed;

– The burden continue to fall on the advice giver (broker or investment advisor) to explain how they act in the client’s best interest – to describe their process and how they hold themselves to a fiduciary standard (regardless of whether anyone else does).

At the end of the day, successful advice givers will be able to articulate their value-added proposition and succeed. The rest of this seems to me just to be a lot of noise……..

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Book Review: My Top 10 Thoughts on “Too Big To Fail” - January 21st, 2011

I decided to read “Too Big to Fail: The Inside Story of How Washington and Wall Street Fought to Save the Financial System – and Themselves” by Andrew Ross Sorkin after it was recommended by a friend. Up until now I have avoided reading many of the books on the financial crisis – maybe you can call it overload.

Well – you need to read this book! Not since reading “Barbarians at the Gate” (about RJR Nabisco)  have I enjoyed a business book so much. Yes, there was certainly some gossip in the book which made it all the more intriguing and enjoyable. But there are also many lessons to be learned and I have not been able to stop thinking about its continued relevance.

Here are my top thoughts and observations on this book – please read it and let me know yours. (Note – these are in no particular order.) I also apologize in advance for the length of this blog – but there is so much to think about in this book!

10 – Wow – we were really close to a total meltdown of the entire financial system! I mean really close! I knew this before – but now I know a lot more of the details. And we are very lucky that the solutions ultimately worked (namely the decision to use some TARP money to loan banks money). It’s still hard for many of us free marketers to stomach bailouts – as it was hard for those in power to do at the time – but I am more convinced now than ever that it had to be done.

9 – It could happen again – actually will probably happen again – and it may be quickly. To be honest, I’m not sure that we learned a whole lot from the experience; it doesn’t seem to have greatly affected the behavior of many. This is the scariest thing to me. We continue to create derivatives of derivatives and products like triple-leveraged ETFs and nobody – and I mean – nobody really understands what they are. This leads to my next observation:

8 – Title and position are not necessarily correlated to knowledge. We all know this intuitively, but the fact is that many of the CEOs of the largest banks and financial institutions had no idea what was on their own books. The sophistication of the products at some point greatly surpassed most people’s ability to understand them. Everyone accused the leaders of Wall Street of being greedy; while this is probably true to some extent, part of the crisis was not about greed but more about mis-management. Business schools certainly failed us! Risk management? Didn’t exist!

7 – I have more respect for Tim Geithner than I did before (I don’t want to give too much away here – read the book!)

6 – Conflicts of interest are so rampant that to even pretend that they can be avoided is naive. I didn’t know that Hank Paulson got a special waiver which nullified his agreement not to deal with Goldman Sachs (the firm he used to run) during his tenure as Treasury Secretary, did you? If I had a dime for every time they mentioned GS in this book……

5 – Luck pulled us out of this as much as anything – which is scary for the future. The way the government came up with the $700 million for the TARP program would have made Houdini proud! So scary though – what if they had been a few hundred million shy? What if Paulson had not been Treasury Secretary?

4 – It still doesn’t make sense to me – or most people in the book I think – why Lehman was allowed to fail and others were not. Luck of the draw? Personal vendettas? Dick Fuld’s personality?

3 – So many random decisions were made – many which luckily worked out for the best. But this does not bode well for the future. We continue to allow bubbles to expand without knowing the true implications. I don’t think we learned a whole lot from what happened. Maybe this is human nature. Maybe this is where greed comes in. I’m not sure. Municipal bonds, student loans .. what will cause the next crisis? Will luck pull us through again? And it will have to be luck because I don’t see any evidence that anything has really been put in place as a backstop.

2 – TARP started out as a 3-page bill that was expanded to about 50 pages. Certainly there were not enough details in the original heat-of-the-moment proposal. Last year’s financial services reform (and health care reform) bills were in the thousands of pages, many of which were probably never read – or understand. Maybe we use 100 pages as a goal moving forward? There is something to be said for short and sweet – and clear and understandable!

1 – We the people – us little people – really have no control.  I hate to agree with those that have always claimed that individual investors, for example, are at the mercy of the institutions. In some respects, what has happened over the past few years has verified that the system is really rigged. Maybe that is inevitable in a system that has grown so large and bureaucratic.

I still need to think through this book – I will probably have more thoughts at a later date. In the meantime, please read the book!

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1Q2011 Newsletter – A New Year, a New Congress … - January 17th, 2011

We have published our first quarter newsletter, which features our new White Paper “The 10 Keys to 2011 Marketing Success.”

Click here to see the entire newsletter. Our introductory letter, entitled “A New Year, a New Congress …” talks about the dichotomy between the outlook for the markets and the outlook for the economy as we move into 2011.

While the outlook for the economy is improving somewhat, concerns remain over the speed and magnitude of the recovery. On the other hand, most market participants are more optimistic about the outlook for the stock markets as we enter a very important earnings season. Even though there is a lot of optimism, however, earnings were so good last quarter there is some caution and concern if earnings this quarter will be as good.

Against this backdrop, we all need to run and grow our businesses. Enter our White Paper, which discusses marketing in today’s environment.

Have a great quarter – we would love to hear your feedback on our newsletter and White Paper.

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The 10 Keys to 2011 Marketing Success - January 12th, 2011

We just completed our newest White Paper – The 10 Keys to 2011 Marketing Success.

The White Paper begins:

The economic events of the past two years have brought with them the reality that while referrals are great, and will always be part of growing a business successfully, many practices that have relied on referrals exclusively have more recently needed to supplement these referrals with a more active marketing approach.

For those who have not had to actively market for a number of years, or those who have not been happy with their marketing success – or lack thereof – one of the stark realities is that marketing has changed. Competition has increased, clients have become more discerning and social media has had a dramatic impact on the types of activities that are most effective.

Click on the link above to read the rest of the Paper. It can also, along with the other White Papers referenced in it, be found on the Resources tab of our website.

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Giving Advisors What They Want - January 7th, 2011

I’ve read a number of articles over the past few days analyzing why communications between advisors and wholesalers break down. Many mutual fund companies and investment managers continue to struggle with the best way to earn the trust of advisors, and in turn become one their core investment offerings.

Well – I have a news flash – it really is not all that complicated! The one caveat is that good performance must be there – because if an investment firm is consistently under-performing, it will be very difficult for any wholesaler to establish a long-term relationship with any advisor. Let’s not be naive – this is all about business. The wholesaler wants to help the advisor, but if no business comes his way, this support will inevitably diminish.

I don’t view this as a conflict of interest as much as a reality of life. Top-notch advisors do business with multiple providers of investments, and it’s fine that the level of support and communication is a factor in the decision-making process. After all, they need to provide their clients with information on an on-going basis.

So, what are the keys to success in this advisor/wholesaler relationship?

The first key to success is one that does not have a lot to do with the wholesaler per se. It’s important that the firm that the wholesaler works for communications openly with the home office of the advisor so that the rules of the road are clear and that the priorities of the sponsor become those of the investment provider (and in turn the wholesaler). Advisors do not want to do business with firms that will potentially bring him into conflict with the powers that be at his firm. A strong firm-to-firm relationship makes the job of the wholesaler easier from the start.

Then it is up to the wholesaler. Begin by asking what the advisor wants  – not by telling them what you offer and can do for them. The best salesmen – and wholesalers are after all salesmen – listen more than they talk. While there will be a lot of common answers – like value-added presentations or financial support for seminars (if allowed by the firm) – each advisor will want to get information and communicate with you in his own way.

Make the advisor feel like the services you area providing, and the way that you are providing them, is unique and custom to his needs. Treat him like the client that he is. Ask how often he wants to hear from you and in what form. Ask for permission to contact him in case of “emergencies” that need to be communicated quickly.

In other words, treat the advisor as a partner. Advisors spend a lot of time making sure that their clients are happy – wholesalers should do the same. The most successful wholesalers understand that advisors want this same level of attention given to them in their relationship. See – its not that complicated! But it does go beyond having the best value-added training modules.

Its the relationship, the relationship, the relationship. And communication, communication, communication.

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Top Ten Predictions for 2011 - December 29th, 2010

First, I want to wish everyone a Happy and Healthy New Year and a great 2011. I thought that I would end the year with some predictions about what I see happening next year. No guarantees here – just having some fun before I head out on vacation.

I’ll start with the macroeconomic picture, and then talk about the financial services industry.

10 – Stocks will once again have a better year than the economy as a whole. I am “mildly optimistic” heading into 2011. The one thing that I have learned is that you can’t fight the market’s momentum.

9 – Housing will continue to struggle in 2011 and unemployment will remain stubbornly high. The jobless recovery will continue, but there will not be another recession.

8- The much-talked-about municipal bond crisis may develop, but will not be as bad as the doomsayers predict. Increased municipal failings will not be surprising – but this will not be another crisis of the magnitude of the housing crisis.

7 – The bipartisan spirit of the lame duck Congress will end quickly – particularly over spending – and the gridlock predicted after the election will begin. This is not necessarily a bad thing for the markets – just the reality.

6 – The Federal Reserve will not raise interest rates (that will happen in 2012).

5 – The crisis in the Euro zone will continue and the PIIGS will continue to give us heartburn – but the Germans will lead the EU to the rescue and the crisis will not negatively impact the US (maybe on particular days, but not overall).

As for the financial services industry:

4 – It will be another year of net advisor losses for the wirehouses. The allure of going independent coupled with continued negative press will be the straws that break the camels back and influence advisors to make the change.

3 – UMAs will continue to grow at the expense of SMAs and ETFs will continue to grow at the expense of mutual funds, although ETFs will continue to fight negative press surrounding the plethora of derivative-type ETFs that are being developed.

2 – Fidelity will have at least one reorganization (not hard to predict based on past trends!) and Schwab will continue to grow its managed accounts AUM and surpass at least one, if not two wirehouses.

1 – Consolidation among money management firms and RIAs will continue as firms continue to cut costs and search for synergies to help them distinguish themselves from the pack.

Let me know your thoughts – what you agree with and what you disagree with.

Happy New Year!

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AK Quoted in Article “Industry Gripped By Ambivalence in 2011” - December 22nd, 2010

Published on December 22, 2010 – Ignites – An Information Service of Money-Media, a Financial Times Company- written by Gregory Shulas

Poll: Industry Gripped by Ambivalence in 2011

The mutual fund industry foresees a mix of good and bad for 2011, predicting a rebound in equity funds but major challenges in the municipal bond and money fund markets.

That’s according to the results of an Ignites survey that polled readers on what they see as the most likely events to occur in the coming year. The answer options provided a full range of responses from the optimistic “Investors return to equities en masse” to the pessimistic “A wave of defaults sparks a crisis in the muni market.”

The results suggest a high level of ambivalence in the industry about what the future holds.

Roughly 27%, or 80 voters, said investors will move en masse to equities next year. That made it the top response.

But equity market optimism was largely muted by concerns over credit markets. The second most popular answer with about 20% of the response, or 58 voters, predicts that a wave of defaults will spark a muni bond market crisis next year. Moreover, 16% or 47 voters, believe tighter regulations and thin yields will push most money fund firms to exit that market.

Other potential trends received less support. Roughly 14%, or 41 voters, prognosticate that the Dodd-Frank Act to be overhauled by Congressional Republicans, while 12%, or 36 voters, believe 2011 will be marked by an uptick in M&A. Meanwhile, 9% believe the SEC will adopt 12b-1 reform.

The favorable equity market sentiment comes after bond products attracted massive inflows as part of a larger de-risking trend. The development boosted the profile and flows of the industry’s top bond shops during the past two years.

But signs that the so-called “flight to safety” is reversing have emerged, industry observers say.Pimco‘s Total Return Fund was among the bond funds that saw a decline in assets in the past month as investors sold off Treasurys, Bloomberg has reported. However, Pimco still enjoyed a stellar year for their products through November.

Additionally, Pimco’s Total Return Fund is broadening its investment policy to allow stakes in equity-linked securities. The fund’s portfolio manager, Bill Gross, has said he expects bonds to weaken following Federal Reserve asset purchases.

Bruce Johnston, founder of sales consultancy DBJ Associates, says firms should be asking themselves whether they are prepared for the equity market’s re-emergence.

“The balance sheets of large-cap companies are cleaned up and poised for growth. It is a clear trend,” Johnston says. “But the question is: Are firms prepared to take advantage of what is coming up? If prices for equity firms were cheap, did you take advantage of it? Did all that money saved by cutting jobs go right into the bottom line or did some of it go toward buying equity firms?”

Andy Klausner, founder of asset and wealth management consultancy AK Advisory Partners, says the poll’s mixture of optimism and pessimism is a sign of the times.

“It has been a very good year in the markets – better than in the economy as a whole,” Klausner says. “However, the high percentage of respondents thinking there are problems ahead in the muni bond market represents the part of the industry that realizes that unemployment is too high and the deficit is growing too quickly.”

“I do agree with the general consensus that with the new Republican majority in the House, that there is a chance that Dodd-Frank will face some overhaul. Overall, there is certainly a better chance here given some of the problems that have already emerged in the [Act] as opposed to other major areas of debate like health care,” Klausner says.

Dan Crowley, partner at K&L Gates and previously general counsel to former Speaker of the House Newt Gingrich, also sees the potential for Congress to revisit regulations that were hastily put together following the financial crisis.

“A bipartisan chorus of concern is already emerging about the speed with which the regulators are promulgating proposals that could have a profound impact on the economy and on U.S. competitiveness,” Crowley said in an e-mail message. “House Republicans will be particularly focused on the cost versus the benefit of proposed regulations, and we will almost certainly see corrective legislation to address unintended consequences enacted in stages in the coming Congress.”

As of 3 p.m. Tuesday, nearly 300 Ignites subscribers participated in the survey, which is an unscientific sampling of the publication’s subscribers. Readers voted only once on a voluntary basis. Ignites’s audience consists of financial advisors, money managers and service providers.

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What are Advisors Thinking Today? - December 17th, 2010

IMCA’s latest Research Quarterly contained some interesting results from three surveys that Cerulli Associates conducted with IMCA members. The surveys include data that span a three-year period – 2008-2010 – so the results reflect both pre- and post-crisis attitudes. (While the survey included advisors as well as other industry participants, I’m going to focus on advisors in my comments.)

1) Advisors are increasingly questioning the validity of modern portfolio theory. This has caused many to do two things – a) gravitate more toward tactical asset allocation strategies and b) turn increasingly to alternative investments. The survey results indicate that money has been pulled from sponsor-managed accounts (i.e., SMAs and UMAs) into advisor-managed accounts (i.e., rep as portfolio manager) to increase flexibility and allow for more tactical switches. This trend seems dangerous to me, and could actually benefit advisors that stay the course and don’t try to manage the money themselves (unless part of a team where they are the investment specialist). And while a believer in alternatives in theory, many clients don’t understand them – advisors need to be careful not to move clients into investments that they don’t understand.

2) The percentage of advisors utilizing individual securities increased from 16% in 2008 to 28% in 2010. This trend scares me as well. Again, the previous trend had been for advisors to position themselves as the relationship manager, and leave the management to others – witness the growth of the managed accounts area overall. Increasing an advisor’s role in the investments purely as a response to the markets seems dangerous to me, especially if it signals a change in business philosophy. Are clients better served? Are these advisors in fact opening themselves up to lose clients?

The messages here? For those advisors that are switching their philosophies because of the markets of the past three years – be careful that you don’t disrupt your business models unnecessarily and set your business back. For other advisors – target the clients of those advisors that are making wholesale changes. Emphasize your process, consistency and continue to deliver as you have in the past. I think this latter group of advisors will prove to be the long-term winners.

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Referrals Are Not Free - December 14th, 2010

Well, actually they are free – but you have to ask for them! I am reacting to the headline of a recent article “Satisfied Clients Don’t Make Advisor Referrals: Schwab, Texas Tech Study.” The article referenced the results of the 2010 Economics of Loyalty survey, which surveyed more than 1000 investors.

The good news is that 74% of respondents were “extremely likely” to stay with their current advisor for at least the next year, and 88% had not even “considered switching.” The seeming bad news is that only 29% of clients have referred someone to their advisor in the past year, even though 91% of them said that they are “somewhat or very comfortable providing a referral.”

Why the disconnect? The missing link is pretty simple – you have to ask for the referral – either directly or via a client appreciation event where clients are encouraged to bring someone they know. In spite of the article’s title, the results of the survey are in fact very good for advisors, as the survey shows that overall investors are happy with the service that they are receiving and willing to make the introduction.

Advisors should be encouraged that a large majority of clients are willing and/or comfortable giving referrals. Now it is the job of the advisor to “pay” for that referral. And in this case, paying means quite the opposite – it actually means asking to be “paid back” for all of the great things that they have done. The disconnect is that many advisors never take this next step. Advisors do all of the hard work, spend all of necessary time providing good client service and then they drop the ball. The study uses the phrase that engaged clients = thriving practice. The advisor has to engage the client.

There are many nice and non-threatening ways to ask for referrals. The most successful advisors incorporate these into their operating protocol on a daily basis. A satisfied is client is the ideal referral candidate – if only if you make them so.

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Have You Surveyed Your Clients Lately? - December 9th, 2010

A recent Wells Fargo survey of its clients about retirement yielded some very interesting results – Wells’ clients on average said that they would need $300,000 to retire and that they had only saved $20,000. My first reaction was that these clients are probably bank clients – as opposed to brokerage clients – so the $300,000 number seems low. But what is more noteworthy is how little the average person seems to have saved for retirement – in this case less than 6% of what they think that they will need. While the goal will be significantly higher for wealthier clients, I would venture to guess that most of them are also behind in their retirement savings efforts due to the economic events of the past two years.

I start with this story because it got me thinking about both issues – surveys and retirement. Most people are becoming increasingly worried about retirement. Hardly a day goes by that you don’t see an article about either retirees going back to work, or people extending their working years. There is little question that issues revolving around retirement will be prominent in clients’ minds moving forward.

Now surveys. When is the last time that you surveyed your clients? In many cases, I would guess the answer is never. But surveys are a great way to accomplish a number of goals:

1) Get a feel for how your clients are really feeling

2) Give clients a chance to tell you what they want

3) Make clients feel like you really consider them partners and respect their opinions

Oh yeah, you might get some real good client service and business-building ideas in the process!

Think about developing a client survey on retirement to kick-start your 2011 – at the very least it’s another “touch.” But it also might bring you some added credibility and business in the process. Oh, and make sure to include your prospects in the survey as well!

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