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.