MEDIA REVIEWS – April 8-15, 2017

April-2017-InvestmentAdvisorThere are some pretty good articles in this month’s issue of Investment Advisor magazine, but I don’t include the cover article among them.  As you’ll see if you scroll down to my writeup, the article expresses wondrous admiration for Envestnet, but never actually tells us much about the company or how its many initiatives actually work to benefit the advisory firm.  Better to read consultant Matt Lynch’s advice to founding advisors on setting up (better late than never) a succession plan at their firms.  Angie Herbers and Mark Tibergien offer very similar advice about creating the kind of firm people would want to work for, which will be important as the scarcity of capacity becomes increasingly painful. And Tom Giachetti offers some advice on how to navigate new rules around solicitors, which might still be around despite persistent efforts to kill the DOL rule.

Articles that received a “high” relevancy rating:

“Advisors’ Enduring Struggle”
by Matt Lynch
Investment Advisor, April 2017
http://www.thinkadvisor.com/2017/04/03/when-youre-gone-will-your-firm-endure
Relevance: high

There are many founding advisors who achieved great success with their solo firms, but may not be able to transfer their businesses to a new generation.  Lynch, a consultant to advisors and broker-dealers, says that the key transition is from business owner to long-term strategic business thinker, one who has the ability to look at the business objectively and formulate a strategic plan for its continuity in the future.

The core problem is that many advisors are accidental entrepreneurs, who never realized that they had the opportunity to build a transferable business.  An outside buyer, today, can probably build their own practice, the way they want it, for less cash than it would take to buy an existing practice with a lot of legacy systems and staff baked into the price.  The key to success is developing a new generation of leaders, which means developing internal career paths that will move the next generation into leadership and governance roles.  Meanwhile, there are still too few graduates from the college programs to fill the requirements of the profession.  And then there’s time; it takes 10 years after the hire of a successor to groom that person to run the firm.

The suggestion is to let that successor, or successors, update the business the way they would want to buy it, which means you have to reinvest in the business and share equity as the transformation unfolds.  You want them to create a consistent client service experience, a systematic method for generating new business and a well-defined business model with sustainable margins.  You want career paths like what you see in the CPA world.  You want to teach them how to develop new business.

And you need scale to keep up with the competing challenges of growth, compliance and ever-evolving technology.  Lynch recommends that you start sooner rather than later, by focusing on how to lure in the next generation of talent.  Meanwhile, ask your clients what kind of services they value, and how you could build the business to better serve them.  Finally, lay out a clearly defined career path and staff development plan.  As your peers how they approached these challenges.  Good luck!  (p. 26)

“Aspire to Be the Employer of Choice”
by Mark Tibergien
Investment Advisor, April 2017
http://www.thinkadvisor.com/2017/04/03/aspire-to-be-the-employer-of-choice
Relevance: high

Many advisory firms are experiencing a slowing growth rate, because they’re reaching the physical limits of how many client relationships they can manage.  The bottleneck is attracting younger talent; there is an oversupply of potential clients and an undersupply of people to serve them.  Today’s younger advisors need to feel fulfilled, and you should regard persistent turnover as a sign that your firm isn’t providing fulfillment.  Do you have an ineffective culture or leadership style? 

Your human capital plan starts with defining the work that needs to be done.  That means not only a job description, but how you would define excellence in that job, and how that job connects with the grander scheme of the business.

Then you want to match each employee to jobs that address that work requirement.  Does this person love detail and analysis, or does she prefer engaging with people or thinking in big conceptual terms.  Think in terms of the optimal characteristics of the individual you seek for the job, and how you will continue to challenge that person as you help him or her develop.

You then create an environment in which motivated people can succeed.  The best advice here is: hire a professional manager, or develop management skills yourself.  (p. 31)

“Win the Talent War by Aligning Values With Growth Objectives”
by Angie Herbers
Investment Advisor, April 2017
http://www.thinkadvisor.com/2017/04/03/win-the-talent-war-by-aligning-values-with-growth
Relevance: high

Herbers starts by advising advisors to pay competitive salaries—with good benefits and annual bonuses tied to the success of the firm—but no more, because you don’t want employees who are just chasing the money.  You want people who are motivated by job satisfaction and making a difference.

From there, build an attractive firm culture.  Start by focusing on benefiting peoples’ lives—and most advisory firms are already there.  Then articulate your vision of how everyone in the firm should act, from the owner to the receptionist.  Define the firm’s core values by creating four lists: core values for the owner, for employees, for the firm and for working with clients.  This will define how the owner and employees are expected to behave toward each other, in their performance of their jobs, and in their interactions with firm clients.  This defines the owner’s vision of what it should be like to work in the firm and be a client of it.

Organize these value lists into groups: integrity, teamwork, client contact, work habits, etc.  This helps you see overlaps and admissions.  Get employee input as you go, and implement these values in the worklife of the firm.  Periodically review these values to make sure you’re living up to them.  If you do, then people will be attracted to your firm.  (p. 37)

“Is Microsoft Office 365 Right for Your Firm?”
by Dan Skiles
Investment Advisor, April 2017
http://www.thinkadvisor.com/2017/04/03/is-microsoft-office-365-right-for-your-firm
Relevance: high

Office 365 lets you work anywhere, exchange information seamlessly and on multiple devices—under one user or subscription license.  If you have employees in multiple locations, this can be a benefit.  You also get online cloud file storage, online conferencing, email, instant messaging, calendars and online scheduling.  The software automatically updates itself, and there are security, data protection and user controls built in.  Skiles says you should also consider Google’s G Suite, which offers many similar applications and services.  Just make sure you back up your Office 365 files before making the switch.  (p. 43)

“Solicitor Arrangements: An Overlooked Casualty of DOL Fiduciary Rule”
by Tom Giachetti
Investment Advisor, April 2017
http://www.thinkadvisor.com/2017/04/03/solicitor-arrangements-an-overlooked-casualty-of-d
Relevance: high

In the past, solicitors were not considered fiduciaries, because they were receiving fees in exchange for referrals, and were not rendering investment advice.  But under the DOL’s fiduciary rule, solicitors would be considered fiduciaries for any recommendations made in connection with ERISA-covered plans and IRAs.  Referral compensation would be a prohibited transaction.  There would be voluminous disclosures. 

What to do?  Consider a “co-advisor” relationship.  The solicitor would have duties for the client, like participating in joint meetings and servicing the client relationship.  As long as the roles were distinctly delegated to each party, and each party’s separate compensation was reasonable in light of the services provided, the arrangement would satisfy DOL obligations.

You can also have the solicitor file a Form U-4 and become an associated person or investment advisor representative of the firm.  That means the solicitor would simply be earning compensation through an employment arrangement; the client is only paying one firm, and the firm is paying an employee to bring in business.    (p. 44)

The rest of the articles:

“DOL Fiduciary Rule Winners and Losers”
by Melanie Waddell
Investment Advisor, April 2017
http://www.thinkadvisor.com/2017/04/03/dol-fiduciary-rule-winners-and-losers
Relevance: moderate

Despite the delay in the rule, the fiduciary concept has finally started to penetrate with the general public.  Expect more consolidation of independent broker-dealers and less money diverted into higher-cost share classes and 12b-1 fees, and less money going into equity-indexed annuities and variable annuities.  But…  A new “T” mutual fund share class offers a uniform front-end load and 12b-1 structure, which is designed specifically to allow the commission salespeople to fit in under the BICE guidelines.  Brokerage firms might move to a digital advice platform.  Meanwhile, Dale Brown of the Financial Services Institute (the BD sales organizations) has vowed to work through the legal process to repeal and replace the rule.  (p. 11)

“Building Infrastructure for Liquid Alternatives”
by Noah Hamman
Investment Advisor, April 2017
http://www.thinkadvisor.com/2017/04/03/building-infrastructure-for-liquid-alternatives
Relevance: low

Morningstar now has a style box that tracks correlation of liquid alt strategies to global equities.  The key is equity volatility and risk to investors.  The author decries “myopic risk aversion.”  He’s also a liquid alt guy.   (p. 14)

“A Real Estate Play That Seeks ‘Sticky’ Tenants”
by Matt Osborne
Investment Advisor, April 2017
http://www.thinkadvisor.com/2017/04/03/a-real-estate-play-that-seeks-sticky-tenants
Relevance: low

Macy’s, JCPenney and Sears are closing hundreds of stores this year.  What does that mean for REITs, who are collectively about 20% invested in the retail space?

But Burland East, who has spent more than 30 years investing in commercial real estate, has a secret sauce for real estate investing: he likes to invest in properties where you can charge the tenant higher rent.  Like dentists, who hate to move all their equipment.  Or data centers or cell phone tower companies.  Simple, right?  Oh, and he also invests in mall operators who don’t rent space to Macy’s, JCPenney or Sears.  (Beware the fund, REIT or investor who claims to have it all totally figured out.)  (p. 16)

“All for One”
by Jamie Green
Investment Advisor, April 2017
http://www.thinkadvisor.com/2017/04/03/envestnet-wants-to-help-advisors-beat-robos-at-the
Relevance: low

Every once in a while, Green steps down from his editor’s perch and writes a puff-piece so extravagant and laudatory that you have trouble actually seeing the company amid the glowing prose.  Such, alas, is this month’s cover story.

Where to start?  This is about Envestnet, which is “confidently striding down the less-traveled path toward a near future where a new model of advice prevails.”  The company will “provide to clients cutting-edge apps… that will make attainment of their goals much more likely.”  This, we are told, will beat the robos at their own game.  Envestnet is not, we are told, just a software provider or investment management company.  Its “killer app” is the integration of the two.

Wow!  So how, exactly, does that work?  Well, the company acquired FinanceLogix and Yodlee with the idea of totally addressing the lifecycle of advice.  All these investments “bring all that together now in an environment that is still very much focused on the financial advisor and the institution they work for, without losing focus on what the investor needs.”  Judd Bergman, CEO, is not just a visionary, we are told; he is “interested in achieving visions that have a basis in cold, hard facts.”

Okay, but how does all this work?  The company aims to let advisors be “freed up to do the things that really add value, producing better outcomes for the end client, the advisor and the enterprise—better lives for everyone.”  Wallet share for advisors who use Envestnet is twice as high as for their peers.  They get better retention of existing clients.  Yodlee gives clients “all the financial information necessary to have a holistic view of [their] overall financial lives.”  The package “includes statistical analysis and machine learning that can be both predictive and prescriptive.”

Wow!  So how does that work?  The analytics “helps derive key insights that the advisor can use to help end clients.”  There are “dozens of wellness applications” which “make sense of the data, increasingly using AI.”  The company also helps advisors and institutions improve their own businesses, we are told.  Something called “Wheelhouse” “will give Envestnet clients the ability to benchmark on a variety of metrics, including a determination of which clients are most likely to leave an advisory firm.”

Wow!  How does that work?  Alas, the article ends with the next paragraph.  There’s nothing but glow here, emanating from this really keen wonderful amazing thing called Envestnet that you are never actually able to see.  No substance, just a long expression of admiration.  (p. 20)

“Ex-Enforcement Chief Suggests Priorities of a Jay Clayton SEC”
by Melanie Waddell
Investment Advisor, April 2017
http://www.thinkadvisor.com/2017/04/03/ex-enforcement-chief-suggests-priorities-of-a-jay
Relevance: moderate

Robert Khuzami, former head of the SEC’s enforcement division (2009-2013), speculates that the SEC may be cut back beyond the federal hiring freeze.  The new Administration believes that is too much regulation and too much enforcement.  Delegated authority granted to senior officials to open formal investigations and issue subpoenas has already been pulled back.  It will take more time to open cases.  Meanwhile, Rep. Jeb Hensarling’s Financial Choice Act would require all whistle-blowers to report in-house first before going to the SEC, in order to give companies the opportunity to investigate themselves and take corrective action.  It would also prohibit any individuals who had any hand in the wrongdoing from collecting a whistleblower award.  (p. 33)

“Active Share II: A More Powerful Tool for Identifying Defensible Actively Managed Funds”
by Bob Clark
Investment Advisor, April 2017
http://www.thinkadvisor.com/2017/04/03/active-share-ii-a-more-powerful-tool-for-identifyi
Relevance: moderate

A new Active Fee calculation is performed by Martijn Cremers at the University of Notre Dame.  He has written a paper which shows that the combination of high fees and low active share is toxic for mutual funds.  Active Fee is a measure of the fund’s fee compared with the percentage of the portfolio that is not invested in index-hugging holdings.  If 51% of a fund’s holdings are also in the fund’s benchmark, then you should roughly double the fund’s expense ratio, to determine how much you’re paying for the actual active investment decisions.  Is the fund outperforming double its expense ratio on a regular basis?

Cremers’ research shows that only high active share funds with long holding periods are outperforming their peers on a regular basis.  (p. 35)

“Future Retirees Could Be More Reliant on Social Security”
by Emily Zulz
Investment Advisor, April 2017
http://www.thinkadvisor.com/2017/04/03/future-retirees-could-be-more-reliant-on-social-se
Relevance: low

The Center for Retirement Research says that the replacement rate, future income to pre-retirement earnings, has declined to 33.8% for the average American.    (p. 39)

“DOL Delay Leads to Some Regroupings at BDs”
by Janet Levaux
Investment Advisor, April 2017
http://www.thinkadvisor.com/2017/04/03/dol-delay-leads-to-some-regrouping-at-bds
Relevance: low

Merrill Lynch has backtracked from a fee-only approach to retirement accounts as a result of the delay of the DOL rule, perhaps because rival firms Morgan Stanley and Wells Fargo Advisors were using their continuing commission approach as a way to recruit away Merrill sales agents.  The rest of the article talks about teams that have left Merrill to go to Raymond James and HighTower, and the firm itself saying that it is “steadfast in its commitment to provide investment advice in our clients’ best interests, particularly with respect to their retirement accounts.”   (p. 41)

“Millennials’ Financial Education Needs Not Much Different From Boomers’”
by Danielle Andrus
Investment Advisor, April 2017
http://www.thinkadvisor.com/2017/04/03/millennials-financial-education-needs-not-much-dif
Relevance: low

Veena Khanna of Key Private Bank tells the author that millennials want to learn the same things that other clients want to know about finances.  But they have a different value system; they are concerned about their communities, they are do-gooders and they want to incorporate values into their wealth management.  They also rely on peers to help them make decisions.

Firms should higher younger advisors to work with these clients, and also talk with the children of baby boom clients about money.   (p. 48)

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