Monday, April 14, 2014

Don't Be Controlled By The Calendar


As Tax Day approaches, we are reminded of the power of the calendar. 

April 15 is a date all responsible citizens are required to respect.  However, all too often, wealth advisors become slaves to the calendar and allow vital elements of their business to be ruled by it.

It’s a question worth examining because there’s no real reason for it.

In truth, the calendar is a convenient organizing principle, but it is in no way the optimal one for taking care of wealth management clients in the 21st century.

Three Areas Where the Calendar Currently Rules

Through their investment consulting, wealth advisors add value for clients in three ways. All of these have been under the thumb of the calendar.

The first is rebalancing a client’s investment portfolio. Most wealth advisors wait until the end of the year. That’s the way it’s always been done. However, some do take up the task more frequently, usually at quarter-end. 

With the recent volatility in the markets , intra-quarter portfolio rebalancing driven by a rules based system based on the client’s IPS is a better approach. Why should clients have to wait for the calendar to initiate something that should be done when it’s needed?


The second area dictated by the calendar is tax-loss harvesting. This also has been a year-end ritual. However, one of the best wealth managers we know has been implementing tax loss harvesting throughout the year  – whenever the opportunity presents itself. That’s absolutely the right approach. It’s also proven very successful for his clients.

The third area where the calendar has disproportionate influence is in selecting money managers based on 3, 5, 7 or 10-year investment performance.

Recently, five-year manager performance has caused a buzz because the negative returns from the financial crisis are now rolling off. It’s a new day for investment managers who were hammered by the events of March 2008.

Relying on any calendar time frame for picking managers is particularly perilous. A manager can go from a poor performer to a top performer in just one day.  We all know that’s not right, but those are the vagaries of the calendar.

In fact, money manager diligence should be more qualitative than quantitative. Qualitative due diligence needs to be an operational core competency of a wealth management firm – one that never ceases.

The Breakaway Calendar

The calendar has also controlled when breakaway brokers move from wirehouse to wirehouse. Historically, wirehouse brokers would move on a three-day weekend, which offers the maximize time to get organized and inform clients.

That may soon change.

The Wealth Consigliere believes that FINRA’s recent recommendation that brokers disclose the recruiting checks they receive when switching firms is likely to slow down the movement between Wall Street firms. The SEC will almost certainly make FINRA’s recommendation the law of the land.

* * *

There’s an old saying that a stock doesn’t know you own it. That might be expanded to say the calendar doesn’t know anything about wealth management.

But you do. 

Reminder - pay your taxes.

Friday, March 28, 2014

When I Was Your Age


My late grandfather, who was born in 1910, loved to reminisce about the good old days.

“When I was your age,” he would say, “I used to walk to school with all of my brothers. Didn’t matter what the weather was.  While we were trudging along, in sometimes freezing conditions, we always had a good time horsing around.”

We clearly got the point: The good old days seemed so much better.

We all knew they were much harder, too.


Today, people don’t walk anywhere. In fact, those fortunate enough to work in Silicon Valley ride in air-conditioned buses, with Wifi and lattes available for all. No three-mile walk in the snow for them.

American Heros

TV journalist Tom Brokaw defined my grandfather’s cohorts as The Greatest Generation.

Their greatness was the result of their worth ethic, their thrift and humility, and the incredible bond they formed in their personal relationships. This generation survived the Great Depression and World War II; very few complained.

The next generation, the Baby Boomers, did like many others before them: They set out to define themselves differently than their parents.

That meant not being satisfied with the frugality of my grandfather’s generation. Tight purse strings drove Baby Boomers crazy. As a result, they were motivated to make money and then enjoy spending it.


As post-War prosperity flourished, Baby Boomers sought out professionals to manage their newly created wealth. They chose reputable financial institutions to advise them on how to invest in the financial markets.

My Way Wasn’t Better

Today, we know the Baby Boomers didn’t get the wealth management equation right.  

As it turns out, their preference for brand name firms with big advertising budgets didn’t serve them well. The financial crisis is just the most recent example of a model that serves institutions better than clients.

The good news is that many Baby Boomers learned from the experience and they are not as brand-dependent as they once were.  They are either managing money on their own with the help of the Internet. Or, they are working with an independent wealth manager.


The Millennials: We Can Do Even Better

The current generation, Millennials, looked at their parents and said we, too, can do things better.

This generation has defined itself by fully integrating technology into their lives in the name of speed and efficiency. With social media and email, it’s easier and faster than ever to communicate and to base your self-worth on Facebook friends and Twitter followers.

That’s good, up to a point.  What’s not so good is that real face-to-face or even voice-to-voice interaction has gone missing.


Chickening Out

As actor Kevin Bacon said in this video, technology is robbing Millennials of at least one character-building experience that would make the Greatest Generation proud – the agony and ecstasy of dating.

As recently as the 1980s, you actually had to talk to the opposite sex if you wanted to ask them out.  No texting or email. You had to find courage, talk to the parents who answered the phone, and ask the question while your heart was racing.

In their quest for efficiency, Millennials rarely go old-school when it comes to forming relationships.


We Need To Keep It Real

Today, wealth management is a lot like dating. It’s about relationships and trust.

True, technology can enhance those relationships, but it cannot solve the biggest challenge: Finding out what makes a person tick. What are the real dreams and fears of individuals who are entrusting you with their life’s savings? Why is money important to them?

No questionnaire is going to elicit that information.  Questionnaires can’t ask follow-up questions based on what someone just said. Likewise, trust isn’t built in 140-character bursts. Rather, it happens when people talk and experience the challenges that present themselves in our daily lives.

Technology can free up time to spend with each other. That may be one of the most important benefits of technology.  Unfortunately, the Wealth Consigliere believes the lack of face-time is a huge failing of the Millennial generation and a weakness of technology-based wealth management firms.

As always in life, the pendulum can swing too far. The Greatest Generation took hardship as a badge of honor, but their lives were not necessarily fun-filled. And, they missed out on the joy of spending time with their family.

Wouldn’t it be nice if the next generation could meet us somewhere in the middle?


Thursday, February 27, 2014

Income Inequality And The $19 Billion WhatsApp Deal


The recent news cycle has been dominated by two very different stories that fascinate us: Facebook’s eye-popping, $19 billion deal for WhatsApp and the Obama administration’s growing concern about income inequality.

How can these seemingly disparate points-of-view reconcile each other?


Through the Pareto Efficiency Criteria, a well-respected economic theory about optimal economic growth.


A Rising Tide
The Pareto Efficiency Criteria states that as long as economic growth happens without hurting others, it’s good for an economy.

In the San Francisco Bay Area, in particular, this concept is a hot topic. The explosion of IPO-driven wealth largely from tech entrepreneurs is creating an economic boom in the region.

Some, though, argue there’s a downside. Prices for everything are higher. No doubt, there’s some truth to that, but there’s also the undeniable fact that when money is flowing, people spend more – a lot more. That does help everyone.

To continue to be the land of opportunity, our country needs to recognize the tremendous economic and societal benefits that flow from entrepreneurial individuals and companies.


Avoiding The Dark Side
Most people are not bothered by entrepreneurs who create things like WhatsApp or Facebook. Nor are they miffed by professional athletes or entertainers who come into wealth and fame because of their talent.

What bothers the President – and many other Americans – is the following:
·         Wealth created by corporate executives through outsized pay packages, especially when compared to the stagnant wages of the average corporate employee.

·         Wealth generated by Wall Street professionals who were rewarded for taking risks that caused the financial crisis.

Where Do We Go From Here
So how do we continue to promote the benefits of entrepreneurship without exacerbating income inequality?

First, let’s not throw the baby out with the bath water. America’s entrepreneurial spirit is the source of its success and is the envy of the world. Innovation will continue to improve our standard of living and propel economic growth.

Second, we need sensible government regulation.  Implemented correctly, Dodd-Frank can help prevent the excesses that led to the financial crisis.  

Third, while regulations are needed in the financial services industry, we need to limit the regulations on small business.  The JOBS Act was a great start, but we can do more.

For its part, the wealth management industry needs to focus on the innovators and entrepreneurial wealth creators. 

The industry should also think carefully about pursuing corporate chieftains and financial services professionals. Their earnings might be in long-term jeopardy because of regulatory scrutiny and public disapproval.

One of the oldest and wisest investing strategies is, “Don’t fight the Fed.” In the same vein, it’s probably smart not to fight the Oval Office when it comes to income inequality.

Thursday, January 30, 2014

RIA Rankings: Should We Care?

It’s rankings season, and we’re not dreaming of March Madness just around the corner and our chance to win a billion dollars.

We’re talking about the wealth management industry’s plethora of benchmarks: Barron’s Top 1000 Advisors, InvestmentNews’ Top RIAs, Financial-Planning’s Top 50 Fee-Only Advisors. The list goes on.

Since Wall Street’s instinct is that bigger is better, there’s glamor for both individual advisors and RIAs for topping these lists.

But do the rankings really matter?

After a career on Wall Street and now working with successful independent advisors, I see three points-of-view: 1) Rankings do matter; they reinforce the clients choice to hire an advisory firm; 2) Rankings are a distraction and don’t reveal anything meaningful; 3) Both points-of-view are valid. You can argue both sides of the argument.

Why Rankings Matter

With money mangers, it’s easy: Measure them by risk adjusted performance. For wealth managers, there is nothing so clear-cut, so we are already on a slippery slope.  Client assets indicate a vote of confident in an advisory firm’s services, but how much have the firms had to cut their fees to attract the assets?

Asset size is also beneficial for wealth advisors because it reduces services fees at the custodians and at reporting firms.  Many firms pass this benefit on to their clients, but some do not and pocket the fee reductions to increase their profitability.  Adding asset growth to the equation would enhance the surveys in our opinion.

Why They Don’t Matter

Is there a tipping point for money managers and wealth advisors when size becomes a detriment?  Numerous academic studies have been written that prove the importance of asset size when evaluating money managers. 

For wealth managers, we believe the advisor-to-client ratio is a better metric than asset size.  A larger client load can overwhelm the advisor and their service team, sacrificing client service.  When asked, wealthy clients consistently rank service at the top of their priority list.  I’ve never seen asset size top a client survey.

The Bottom Line

As much as anything, the rankings can be a Rorschach test. They can reflect your own thinking, rather than being objective. It’s useful, though, to consider the other side of the argument. Are we measuring the right thing? It is even possible to measure the things we really know matter – trust, service and knowledge?


You decide.

Friday, January 3, 2014

Disintermediate Yourself

The history of disintermediation has been very painful for industries and professionals of all kinds.

Most never see the dislocation coming. In the information age, we’re savvy enough to realize that continual innovation will change the way we do our job.


Counter-Intuitive
As we set our goals for 2014, here’s a counter-intuitive idea to consider: Start disintermediating yourself now.  The Internet will render obsolete at least part of your value proposition over the next 10 to 15 years.

The Three Stages of Disintermediation
In the spirit of seeing around the corner, here’s the arc of distintermediation.

Stage 1 is when early adopters embrace a new technology, product and service. These individuals are enamored with technology and how it creates opportunities to be better, smarter and faster. These people are early adopters by choice.

Stage 2 is when a disruptive idea gains widespread awareness. Like all tech-inspired upheaval, establishment players remain in denial until the pain gets too great, and they are forced to change.

Stage 3 is full marketplace acceptance. If you wait until Stage 3 to innovate, you will be disintermediated.

Where We Are Today
In our view, we’re in the early part of Stage 2.

The early adopters are already gravitating toward sites like Financial Engines, Wealthfront, Betterment and other online wealth advisory firms that have sprung up over the past two years.

None of these has gained full acceptance – yet. However, if you look at the next wave of wealth creators – Millennials – don’t be surprised if they go big for online solutions rather than traditional wealth advisors.

The reason: Younger adults feel much more comfortable with the Internet. Googling is in their DNA. They like to research, be informed and to be in control; they feel more self-confident online than their Baby Boomer parents. Plus, Millennials think that Mom’s or Dad’s  “old-school” wealth advisor’s firm can’t be trusted.

One Approach
One wealth advisory firm we know isn’t waiting for Stage 3 to act.

This forward-thinking group has already started the self-disintermediation process. They are urging Millennial clients to use one of the increasingly popular advisory sites to manage their core portfolio. In essence, these advisors have outsourced one of their traditional roles – creating a portfolio of liquid stocks and bonds.

Freed of this task, advisors in the firm are focused on high value-added advice and counsel. That means bringing clients unique investment opportunities, such as private equity, venture capital, or a wide range of other alternative investment opportunities.

These are the kinds of opportunities that require a level of sophistication difficult to replicate: The ability to source deals, evaluate complex strategies, and incorporate the investment into a portfolio consistent with the client’s objectives and risk tolerance. This is the firm’s competitive advantage.

What To Do
One could argue that giving money to an online competitor is letting the fox in the hen house. But is there an alternative? Millennials, particularly ultra high net worth investors, are embracing online platforms faster than most realize.

Remember when an alternative to low interest-bearing deposits was inconceivable? Then came the CMA and money market accounts, and the world changed.


We all need to keep thinking about disintermediation. It will keep us sharp.

Tuesday, November 26, 2013

What's Your Time Worth?


Simple questions can be deceptive, but they also can be enlightening.

When it comes to personal happiness and financial freedom, I've found an introspective approach to be helpful when considering these important questions:

No. 1: Who’s going to manage your money?

No. 2: What services should others perform for you?

No. 3: What makes you happy?

Managing Money: DIY or Professional?
The first and possibly most important decision in money management is deciding whether you’re going to do it yourself – or engage an advisor.  

The Do-It-Yourself (DIY) approach begs the question, What is my time really worth?  

Could I pick the best money managers and succeed as a wealth advisor? Perhaps. But is that what you’d like to do? Or are good at? And, what is the trade-off?

If you calculate what your time is worth versus paying a fee to someone, you can approach the issue of cost from a more holistic perspective.

A friend of mind had another point-of-view on DIY money management: She believes Wall Street has become too sophisticated for even the above-average DIYer. Given the recent chicanery in the financial markets, she’s convinced she needs someone who understands the game as the big hitters do. “I’m playing to win. I need an All-Pro team on my side.”


What To Outsource?
Outsourcing is a straightforward equation for successful businesses: Do you build it or buy?  Which core competencies need to be in-house?  And, which can be provided by third parties?

The same can be applied to our personal lives.

The benefit of outsourcing is that it saves you time and adds outside expertise – whether you’re an individual or a business.

The big mistake is assuming we can be terrific at everything. As much as we’d like to think so, it is unrealistic to believe we’re omnipotent and have unlimited time. Smart people pay good people to complement their skill sets and save time.

What Makes Me Happy?
A lot of research has examined the source of happiness. After we get above a certain level of wealth, research shows that more money doesn't make us happier. More time does. Time to spend with people we love and do the things we want to do.

If you want to pursue your passions, isn't spending some money to hire a helper an effective way to preserve your precious time – whether it’s cooking or running errands? Or other messy tasks that complicate your day?

Personal outsourcing can be a tough concept for people in the middle of wealth accumulation. It feels a bit pretentious. But the alternative is not so good, either. If you wait until you reach your magic number, you could be too late.

How Many Hours Left?
If you die at 80, you will have lived 31,025 days. At 50, you have already lived 18,250 days. That means you have only 306,600 hours left – or 12,755 days.


We all can make better decisions if we honestly answer what our time is worth, especially when choosing service providers. The process requires humility, but the results are guaranteed to be enlightening.

Friday, October 25, 2013

The Elephant In The Room

This September, a landmark research study of institutional investment consultants was released that continues to have big implications for both institutional and retail investors.

Three University of Oxford professors found that investment consultant recommendations really aren’t making the grade. Over a 13-year period, consultant recommendations under-performed passive investment strategies by 80 to 100 basis points.

It’s not easy to write-off this research. The academics studied the performance of the top investment consultants who control 82% of the institutional market. These institutional pension funds and endowments manage trillions of dollars in assets.

The Smoking Gun
The study confirmed what everyone always suspected, namely that investment consultants don't consistently find money managers who beat the market. Equally as damning, though, is that the research found institutional investors happily followed their bad advice.

The question is why?

Like the corporate maxim that no one was ever fired for buying IBM, institutional portfolio managers know they can insulate themselves from criticism if they follow the advice of the brand name consultants. To use a non-technical term, this is “CYA” in the classic sense.

The Implications for Wealth Advisors
Many independent wealth advisors have designed their firms to emulate the institutional consulting model because it makes them look smart.

Wealth advisors also rely on investment consultants such as Fortigent, Envestnet, the major custodians, or they have their own  internal research group for money manager selection. Advisors then follow those recommendations to implement  their clients’ investment plan.

With empirical proof that due diligence by third parties is flawed, the real question is whether wealth advisors should continue to embrace that model for their clients.

In fact, the investment consultant model may still work in a board-dominated, institutional investment world, but for wealth advisors responsible for the welfare and asset preservation of individuals and their families, it probably doesn't.

Perhaps, then, it’s time for advisors to recognize that picking money managers that beat the market is next to impossible – and adjust their business model accordingly.

A Different Focus
Rather than spend the time on selecting money managers, maybe a wealth advisor’s effort is better deployed on the other things that are also important to clients: Financial planning, tax strategy, asset allocation, behavioral support and wealth transfer, as well as exceptional service.

In fact, the Oxford researchers noted that “soft factors,” such as the quality of service, asset liability modelling and “handholding” during difficult markets, were important to institutional money managers too.


Eat Your Own Cooking
For wealth advisors, there’s a virtue in accepting the reality that it’s practically impossible to consistently pick money managers who will beat the market.  

Most wealth managers have come to that realization personally and invest their own assets in passive strategies sprinkled with a few hedge funds or private investments where the managers truly eat their own cooking.

Which leads to the next key issue. How authentic can you be to your clients if you’re managing your money using a different strategy than you are recommending?

It’s a very slippery slope to recommend one strategy for your clients, and follow another with your own money.  You too need to eat your own cooking.

At the end of the day, wealth advisory firms need to make sure they can deliver on their firm’s value proposition, but MOST importantly they need to believe it!