Unlocking Real Value Blog

Retiring Later … If Ever - October 11th, 2010

Not surprisingly, a recent study by Barclays Wealth and Ledbury Research found that high net worth individuals are planning to work longer, with many planning never to retire.

The survey of 2,000 individuals found that 54% of U.S. respondents are among those that plan to never retire. While it appears that the global crisis of the past few years has contributed to this trend, it is not the only reason for the results. This trend had been evident for awhile in part due to rising life expectancies. If someone expects to live 20+ years past the age of 65, it is logical that they will need more money in order to maintain their desired lifestyle throughout their retirement years.

These trends have some important implications for advisors. Longer investment horizons for retirees will impact their asset allocations –  not just as they near retirement but throughout their lifetimes. Investors will in general need more growth than in the past. There will be a trade-off: for example, more conservative investments early in life will result in either a later retirement or a more-conservative lifestyle in retirement. Investors need to know their choices as early in their lives as possible.

Especially with where interest rates are today, this phenomenon bodes well for stocks. With housing down as well, there are few places where investors can today grow their portfolios. The yields on many blue chip stocks are very attractive today.

But the investment implications aside, advisors would be well served to visit the retirement discussion with their clients sooner rather than later. It will sometimes be a difficult discussion – and you may have to tell clients things that they do not want to hear – but that is what a true advisor does. The world has changed over the past few years – you need to make sure that you gauge how your clients have as well.

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What’s Rationale for Picking SMAs over UMAs? - October 5th, 2010

Published on October 5, 2010 – FUNDfire – An Information Service of Money-Media, a Financial Times Company- written by Andrew Klausner, Founder and Principal of AK Advisory Partners LLC.

The debate over whether unified managed accounts (UMAs) are going to replace separately managed accounts (SMAs) has been raging for a number of years. There is no direct resolution to the debate. There are enough differences between the two that there will be room for both types of investment vehicles. Both products will continue to survive and garner the assets of high-net-worth individuals. This entire debate reminds me of the one that began soon after SMAs were introduced, and revolved around whether mutual funds or SMAs were more appropriate for the wealthy. The answer turned out to be that both were, and still are, depending on the individual circumstances being considered.

Below is my perspective on why SMAs and UMAs each have their unique advantages and disadvantages, depending on the specific advisor and client on hand.

For advisors, the decision of which vehicle to use – or whether to use both – in their practices is related to their overall business philosophy. Some advisors consider their role and value-added proposition as selecting the managers to be used in SMA portfolios and then managing both the rebalancing of accounts as well as providing tax-efficient management. They are thus reluctant to abdicate these duties to someone else, such as situations where those duties are outsourced to a sponsor’s UMA team or a third-party overlay manager.

Some advisors also prefer individually managed accounts over mutual funds or exchange-traded funds (ETFs) as a general investment philosophy. These advisors presumably have a client-servicing model that eases any paperwork or coordination issues that maintaining multiple investment vehicles and accounts poses. On the other side, some advisors are attracted to UMAs because the pre-selected models reduce the amount of the work that they must do.

For clients, there are three primary differences between SMAs and UMAs. First, many UMAs have ETFs and mutual funds as part of their portfolio makeup. Thus, in many cases, the investment minimum within each investment sleeve is usually much lower than the standard $100,000 to $250,000 level in the SMA world. As a result, clients with fewer investable assets can invest in UMAs and achieve diversification more easily. Secondly, because all of the different investment sleeves in a UMA are in a single client account, there is less paperwork, both initially and on an ongoing basis. Third, UMAs typically include, or have options for, automatic rebalancing and tax-optimized investing. Therefore, the relationship size and the overall importance of these other issues to a particular client will help the advisor determine which vehicle to recommend.

(I haven’t really discussed managers because while there was reluctance on the part of some managers to participate in UMAs when they were first introduced, a lot of this resistance has disappeared as UMAs have become more common. There are enough quality managers in the universes of both UMAs and SMAs.)

In reality, UMAs and SMAs both have a place in the business. An advisor who utilizes SMAs exclusively, for example, and who has high client minimums, might occasionally have a client with fewer investable assets. In that case, the advisor might opt to use a UMA for that client. Or, some clients might themselves have preferences for one or the other based on previous experiences. They might have used SMAs for decades and feel comfortable with the simplicity and customization that such investment vehicles provide. There are enough different clients and client profiles that neither of these investment vehicles are likely to disappear – in the same way advisors still use mutual funds for their wealthy clients after all of these years.

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Breakaway Trends – Which Way is Up? - October 4th, 2010

Everyone (well it seems like everyone) seems to like to opine on whether the breakaway trend will continue, whether wirehouses will recover their places of prominence, etc. While the topic is interesting, a recent survey which concluded that the breakaway surge is over had what I thought were some much more interesting results that were buried in the fine print.

The study I am referring to is a recent one by Cogent Research, which interviewed 1,560 registered reps and advisors. The study found that advisor satisfaction is up 15% over last year, led by Merrill. The article rightly pointed out that the large retention bonuses paid advisors after the Bank of America merger probably had a lot to do with this – and that these bonuses were unsustainable. Hardly a seeming end to a trend…..

Advisor satisfaction at Merrill is now a whopping 49% – considering that advisor satisfaction at the regionals is 81%, I would hardly be jumping up and down if I was in management at Merrill. As I said above, I don’t personally read a lot into these numbers that indicates the trend to breakaways is over.

But I found a few other things in the article much more interesting:

– For the first time, the majority of revenues of those surveyed which were derived from fees surpassed 50% for the first time – reaching 54% in fact.

– While fee income lagged at banks, which was not surprising, the fact that fees only accounted for 35% of revenue at the regionals did surprise me – I thought the number would be higher. Given the number of large producers that have joined regionals over the past few years (regionals have also benefited at the expense of the wirehouses), I would expect this percentage to increase quickly.

– Finally, the number of advisors forming partnerships leveling off at 22% overall – it was 31% at the wirehouses and 37% at RIAs. Again, I would have expected both a higher percentage and an upward trend.

I will refrain from opining on the breakaway trend lest I become one of those referenced above; however, regardless of where an advisor sits, there seems to be little doubt that the trend toward fee-based income increasing at the expense of commissions is undeniable and irreversible.

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The Un-Business Business Book - September 26th, 2010

Book Review: Rework by Jason Fried and David Heinemeier Hansson (founders of 37Signals)

This book is probably like no other business book you will ever read – and it will probably make the folks at the Harvard Business School cringe. I call it the un-business business book (or perhaps anti-business business book would be more accurate) because it is written from the perspective of two entrepreneurs who have done virtually nothing by the book. In fact, the book is written for entrepreneurs.

That is my only hesitation to recommending reading this book to folks in the financial services industry. We can still be entrepreneurs and have that type of spirit, but unlike a software start-up like 37Signals, we do work in a highly regulated environment. So I say, read this book – but remember the context and keep in mind that you will not be able to do everything that they suggest……but some of the ideas are relevant to us all.

This book will make you laugh at times – and it will probably scare you at others – but I think it is good to read something that is so different from conventional wisdom that it will actually make you think if all of these things that you take for granted really make sense.

For example, the chapter “Learning from mistakes is overrated.” Does the concept of failure being good as a learning lesson really make sense? You know, as I thought about it – it doesn’t! Or, the chapter “Build a product, not a half-assed product.” Do you have to wait to introduce your product until it is the best and has all of the bells and whistles? Or is better to go to market quicker, learn what the market wants and make any necessary adjustments? If nothing else, questions such as this make you think or re-think many of the ideas that us MBAers take for granted.

Rework is a quick enjoyable read – take the time and let us know what you think.

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See AK Quote in Article on Social Media – Want-To-Have or Need-To-Have? - September 23rd, 2010

Published on September  23, 2010 – Ignites – An Information Service of Money-Media, a Financial Times Company- written by Gregory Shulas

Fund companies may benefit from having a social media presence, but they don’t need a Facebook profile to effectively compete. That’s according to Ignites poll respondents.

Roughly 53%, or 147 voters, believe industry firms have no serious need to participate in social media networks such as Facebook and Twitter. That made it the top sentiment expressed in the Ignites survey about whether competing effectively today requires a social media presence.

Of the majority group, 38%, or 106 voters, said a social media profile is nice, but not a necessity today, while 15%, or 41 voters, were more cynical, calling it just a fad.

In contrast, 47%, or 130 voters, said firms must have a social media presence if they want to be competitive in the marketplace. The minority group includes 9%, or 26 voters, who said a social media presence is vital for a firm’s continued success, as well as 38%, or 104 voters, who believe it is “important” for firms to maintain a presence on social networks.

Ignites has reported on how fund companies are increasingly embracing social media strategies as a means to communicate and strengthen relationships with investors. An informal survey conducted by Ignites found that TIAA-Cref has the most popular industry Facebook site, with 13,000 “fans,” a number that exceeds Vanguard’s 9,500 fans.

Despite industry market leaders’ embrace of social media, many professionals remain cautious about adopting such strategies. Dennis Dolego, Optima Group’s director of research, says that while such platforms seem like the “thing to do” for mutual funds, there are some legitimate reasons why firms have reservations about them.

For example, the primary value a fund company offers is performance, which Morningstar provides data on, he says. So industry executives may legitimately question what real value — beyond performance figures — a fund can offer to investors through a Facebook or Twitter posting, Dolego says.

Additionally, fund companies can face problems if negative information about their product is posted online. “They see it as something to do but they don’t feel comfortable doing it; they see some of the problems involved,” Dolego says.

“Overall, social media is almost like Consumer Reports or referral marketing. You want an objective party to say positive things about what they do,” Dolego says. “The goal is to get the support from the consumer that is independent, objective and unsolicited, and then to build a buzz about products and services.” Negative postings can be counterproductive to such marketing campaigns, he adds.

Andy Klausner, founder of strategic consultancy AK Advisory Partners, disagrees with the 15% who said social media is mainly a fad. In his view, the growth of these social networks is part of a larger shift in information distribution. To succeed in this new age, fund families must be active participants in these social networks, he adds.

“Information flow and marketing has unquestionably changed from pull to push. In other words, rather than pull in clients by delivering the message that we want, clients are demanding information on their own terms — you need to push out your information, show your value-added and inform clients on their terms,” Klausner says.

“Because of this overall change, firms that successfully embrace social media are giving people the information that they want, delivered the way that they want it — and that is not a fad but a distinct competitive advantage,” he adds.

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The Recession Has Been Over For a Year … Really? - September 21st, 2010

The National Bureau of Economic Research announced yesterday that the recession which began in December of 2007 officially ended in June of 2009, making it the longest recession since WWII. To quote their release – “The basis for this decision was the length and strength of the recovery to date.”

I guess I have no right to argue with their methodology since they are the official government arbiter of such decisions. But coming on the same day that the President acknowledged that there are no quick fixes for the economy, I guess I have to ask whether we need to redefine the term recession. Everyone talks about the “new normal” caused by the economic downturn of the last few years. Maybe we need to redefine how we look at and describe the country’s overall economic condition.

With foreclosures still on the rise, and more Americans at or below the poverty level than in decades, is there really any other logical response other than “Really?” It doesn’t feel like the recession has ended. If anyone sees any value-added in this announcement will you please let me know?

The only thing this announcement does is officially end any talk of a double-dip recession. Why? Well, officially we are no longer in a recession and have not been since last June. Therefore if we were to once again experience two straight quarters of negative GDP growth we would be in a new recession – not a double-dip recession. It would just be another recession on top of the earlier recession. Other than this little fact, I am still scratching my head over the announcement. Please show me the “length and strength of the economy.” I don’t think many people see it.

A new definition of recession seems apropos……….Or perhaps the government should curtail their message a little if the NBER wants to have any credibility in the future.

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As Referrals Wane, Here Comes Active Marketing - September 19th, 2010

Many advisors and advisory firms have relied primarily on referrals to build their business. While this strategy has been quite effective in the past, the market downturn of the past two years has made clients more skeptical and, as a result, this avenue of growth has slowed. The problem is that many advisors and advisory firms – even some very large and successful ones – have either never actively marketed or have not done so for a long time, and are therefore beginning the process from square one. Yes, they must learn how to market.

This phenomenon was confirmed in a study of almost 700 advisors and wealth management firms conducted for Genworth Financial. Almost three quarters of the respondents plan to spend more time on marketing, and half of respondents more money on marketing; the respondents overwhelmingly acknowledge that active marketing will replace referrals as a key driver of growth.

Interestingly, and reinforcing the above point, only 32% of respondents had an actual marketing plan, and only half of these advisors and firms have actually used their plans. As growth rates have slowed with the markets decline, and referrals have waned, the difficult reality is that advisors and firms must become better and more active marketers.

That raises the interesting dilemma many firms face – recognizing that you need to develop a marketing a plan is one thing; actually figuring out how to do so is another matter! Respondents also recognized that other complementary avenues of future growth will include either acquisitions or hiring addition business development staff. Many organizations are budget-constrained today, therefore so while in theory hiring new business development and marketing employees makes sense, this might be a longer-term strategy, which does little to help replace lost assets today.

Another interesting conclusion from this study is that respondents cited delivering top-notch client service and building and maintaining efficient operations as the two top ways to generate business opportunities moving forward. I agree – happy clients will be more apt to begin giving referrals again in the future. And operating efficiently is always important. But this will take time…..

In the end, many companies are going to have to figure out how to become more active marketers – budget constraints notwithstanding – and quickly if they hope to build their assets back to previous levels.

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Successful Advisors and the 80/20 Rule - September 13th, 2010

Do you know what the Pareto principle is? Named after an Italian Economist of the early 1900s, the Pareto Principle is more commonly referred to as the 80/20 rule – 20% of our efforts will yield 80% of our results.

Why is this worth mentioning? It’s another way of reinforcing the notion that the most successful advisors generally have fewer clients – but the clients that they do have are wealthier. As a recent Investment News article headline read “One key to being a million-dollar producer? Dumping smaller clients….”

While the concept that advisor success is highly correlated to having fewer overall relationships has been around for a long time – and is in fact rather intuitive – a recent study by PriceMetrix Inc. of more than 1.3 million households adds some al meat to the argument:

* On average, small accounts (less than $100,000) make up 52% of an advisors business yet generate only 9% of revenue

* The average advisor makes only $350 a year (commissions and fees) on small accounts

* Only 24% of the book of the average million dollar producer is composed of small accounts

* The average advisor who slashed small accounts by 5% increased revenue by $43,000

Hey advisors – whether you subscribe to the 80/20 theory or not – these last two bullets are actionable items – dissect your book to see where you stand, and at a minimum, slash 5% for a nice bounce to your income!

The other logical conclusion of these numbers is that if you like serving smaller accounts and want to keep them as part of your business, you better make sure that you have the client servicing infrastructure to support it – because it’s going to be a lot of work! (By the way – the study also concluded that small clients are 108% more likely to switch advisors than they are to become $1 million accounts – ouch!)

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Control Your Own Destiny - September 8th, 2010

We sent out a special issue of our quarterly newsletter today entitled “Control Your Own Destiny.”

Now that Labor Day is past, and vacations for the most part are over, the focus turns to reaching 2010 goals during the remaining months of the year and setting goals for next year.

Despite today’s economic uncertainty, and knowing that there are many things none of us can control (for example, will we have a double-dip recession?), this newsletter highlights three aspects of any business that can be controlled:

* Your Brand

* Your Target or End-Markets

* How Efficiency You Run Your Business

Click here to read the newsletter. Make the rest of the year a good and profitable one!

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What’s Holding Back UMA Programs? - August 31st, 2010

Published on August 31, 2010 – FUNDfire – An Information Service of Money-Media, a Financial Times Company- written by Andrew Klausner, Founder and Principal of AK Advisory Partners LLC.

The growth of unified managed account (UMA) programs has been far slower than many industry experts had predicted when the investment vehicles were first introduced. Assets under management in the investment vehicles stood at $79.5 billion at the end of the first quarter, compared to $566.2 billion in separately managed accounts (SMAs) and $317 billion in programs where the advisor acts as the portfolio manager, according to Cerulli Associates. What are the reasons why the UMA has so far failed to live up to its potential?

To start with, a current focus of many UMAs – to provide a model-based investment solution – goes against two important trends:

1) The bias of top-end advisors to migrate away from “packaged products.”

2) The desire for top-end advisors to position themselves at the center of relationships and to provide many of the services that UMAs do – namely rebalancing and tax-advantaged investing.

The events of the last two years have only increased the importance of advisors retaining control of their client relationships. This has only made the road even tougher for UMAs.

I mention top-end advisors because they generally have larger clients and far greater assets under management. In fact, UMAs are more appealing to smaller accounts, where access to a diversified portfolio of individually managed accounts is not available. However, in this space for smaller accounts, UMAs are competing with – and at a cost disadvantage to – emerging exchange-traded-fund programs and established mutual fund wrap programs at most brokerages.

Another reason for the disappointing growth of UMAs is that the industry has not been able to truly make these accounts as all-encompassing as first hoped. For example, alternative investments and other less-liquid investments still do not work in the typical UMA structure. If advisors still have to do their own work to provide comprehensive client-level reporting, a main rationale for investing in UMAs disappears.

A further twist is that what some consider to be the next generation of managed accounts – the unified managed household (UMH) – is really a client-level reporting vehicle rather than an investment vehicle per-se. If, as I believe, this type of total-client reporting and functionality is what top-end advisors really desire, the growth and development of the UMH bodes poorly for the future of UMAs as well.

In order to differentiate themselves and attract larger clients, advisors must be able to demonstrate their value-add on an ongoing basis. Packaged products are a commodity, and while they have their place, successful advisors don’t build their practices on a foundation of such offerings.

In addition, the industry has not done itself any favors by selling UMAs as a primarily model-based solution and by melding their SMA programs into UMAs, as some firms have been doing recently. Pushing UMAs as a by-product of reducing the number of products you offer may increase assets under management in these programs. However, it will not really make the UMA the product the industry has long touted. UMAs seem stuck between SMAs and the next generation UMHs with no place to go.

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