Independent Advisors Consider Traditional Alternatives

[mdiamond]

Why are we suddenly hearing about all of these independent advisors joining wirehouses and other traditional firms?

With recruiting packages being offered by traditional firms at an all time high, and many independent advisors feeling weighed down by the heavy lifting of running a business, the time is right for these folks to consider lucrative alternatives.

[mdiamond]

What are alternatives for principals of independent practices to consider if they are weary from managing the day to day minutia of running the business? What if these folks want to remain independent but give up the heavy lifting?


There are a lot of interesting alternatives that have been borne in the last 2 years. Happy to discuss.

[Bob H]

I guess after 20 yrs of running my own practice as well as managing the staff, I don't find myself "weary" or concerned over "heavy lifting."

I hired quality folk. Give them proper training and direction and away we go.


Delegate delegate delegate.


Bob

[Bradly T.]

Success as an advisor takes only two skill sets - sales/consulting/confidence transfer/people and craft/planning/portfolio construction. Independance requires three - add business development/management. It's a rare bird that masters all three. Technologies, out sourcing, and staffing must be combined to allow the practitioner to do what only they can do and what they most love to do. Small or large, it's seldom pretty or easy. But I've had the "support" of brands and ivory towers and flavor of the month clubs and dagger-in-the-back managers.....you have to be very desperate or inexperienced to put your future in someone else's hands. Small is beautiful.

[mdiamond]

I completely agree with Bradley T. The skill set required to be a successful FA is much more limited than what it takes to be a successful business owner. And, it definitely doesn't always mean that if you are successful as an advisor that you will be a successful entrepreneur. As a result of all of the consolidations in the wirehouse world and the tremendous disappointment and frustration that their advisors have felt over the past eighteen months, we have watched more advisors go independent than ever before. As we have fast forwarded 18 months, many of these folks have found themselves with a new set of problems; ie: they have gotten away from " "support" of brands and ivory towers and flavor of the month clubs and dagger-in-the-back managers," but they are not growing as they had hoped because they are bogged down with the minutia of running a business. That is why so many interesting alternatives have been borne to offer a solution to these folks. Firms like HighTower Advisors, Concert Global and Spire Investment Partners allow advisors to be independent or quasi independent while offloading the middle and back office "stuff" to their firm. These models have garnered huge interest in the last year or so. To Bob H I would say that you sound like you were born with entrepreneurial DNA and you are sparked by being a business owner. That is why you are not weary. Lucky you! But, there are plenty of advisors with very different makeup and goals than you, and they are struggling for sure!

[fundinvestguru]

Look at this from the clients' perspective. They need the assurance of a positive return over the next troubled decade as our nation struggles to recover and the government is burdened with a very troubled portfolio of over-valued assets.


About 18 months ago, Personal Wealth Magazine, reported that 70% of high net worth investors were planning to take all their money from "brand-name" advisors; 80% reported they would tell their friends to do the same thing.



While I am sure that they fully intended to shift to independent investment advisors but it is probably hard to find an independent advisor willing to give advice that is different that the brand-name advisors.



What I would do is get in touch with a community of high net worth investors; start with the Young President's association or something like that. Ask they what they are looking for in investment performance.



I think that they will be surprised to know that it only takes 7.2% (Rule of 72) to double your money in a decade. If you subscribe to Morningstar Principia Separate Accounts and Mutual Funds and search for funds that have a 10-year track record of earning more than 7.2%. Now look at the 3-year standard deviation (try 10% or below) and use them as a measure of the downside risk of the managed account. Now you have a reasonable list of potential advisors to work with. Be patient and do your research. A good indicator would be a Morningstar 5-star, high-return and low-risk ratings. Make your research objective and you will have a good sales story.



Avoid any brand-name advisors like the plague because you are trying to help the high-net-worth advisors who have been let down with surprisingly high risk investments, the most conservative of which lost them half of the money they had at the end of 1999.



Now build your financial plans on the basis of investments that are likely to produce low-risk high-return world-class returns.



There are three kind of mutual funds or managed accounts to choose from: (1) so-called "actively-managed" or "index funds" which only promise what KIND of investments they are allowed to invest in -- there is no targeted return or any real proof that their "investment objectives" have any chance to ever be achieved (how many growth funds haven't grown over the past decade, value funds added no value and income funds are likely to lose money in a rising interest rate market?) (2) absolute return funds such as those being introduced by Putnam (these set a targeted return, say 300 BP over Treasury bill returns over a two-year period). Unfortunately, most do not have a very long track record. (3) what I call "forever" funds or funds which are proactively-managed to respond gradually to actual changes in the financial markets to first protect the principal and then attempt to earn the highest returns consistent with risk management. These are what you are looking for.



Once you have selected a line of investments to offer which gives you an attractive alternative investment to offer, then discuss the arrangements for compensation keeping in mind the SEC is considering reducing 12b1 plans to 25 BP, so you will have to add wrap fees or advisor fees to make up some of the differences. The word will get around that you are helping people to earn tax-shelter profits and not losses and doing it with experienced proactive advisors.



Sound reasonable?

[mdiamond]

Reasonable indeed. Thanks for sharing the great intel.

[Bradly T.]

Another interesting survey (I don't like them or trust them but hey, they keep coming) would indicate RIA is suicide and dual registration will rule (does already in my humble opinion) and supports Bill's info above is: HNW are increasingly disillusioned and disappointed by managed account platform...especially if no true planning or full spectrum wealth management is integrated in relationship. Pure money managers - on the retail level and especially for the wealthy - are being marginalized competitively. Not to mention, a weak model in this environment for account level AUM growth by market performance, especially when distribution rates of 3-5% are applied to model. That fee looks GIGANTIC on a flat, declining, or distributing portfolio. To be relavent and competitive we better have more than one platform solution. This is especially true if, like me, your primary market is middle working class America. There are more and more dual registration BD/RIA service providers every year - independent, no inventory, no proprietary, great research, fixed income desks, compliance, technology, etc. - full spectrum solution sources for the true professional. Wirehouses and RIA-only platforms are wounded and in decline in the retail space!!

[fundinvestguru]

The surveys together can reveal trends. Taking the action on this dissatisfaction with brand-name advice assumes there is an alternative easily available -- that could not be further from the truth.
What I am suggesting is that if you study what kind of investments succeeded over the past trying decade should be analyzed to see why.

The market experienced two bear market, country stock ETFs in commodities-driven economies (Brazil, Canada, Australia and Russia for the most part) were making the greatest profits, were the most highly-correlated with the US market declines and rallied strongest and first, and the slow decline of long-term bond interest rates as the bulk of the risky tarnished collateralized mortgage obligations were "Rescued" by the federal government and are now resting in the US Treasury's portfolio.

Any strategy that produced high-return low-risk world-class returns over that period had to adapt its portfolio to prevailing market trends and/or go 100% to cash. They aren't the only answers but we certainly know the question should be asked and that the data base is readily available to do the search.

I have been a long-term subscriber to both Morningstar Principia Mutual Fund and Separate Account data bases. I subscribed to make sure that I was not missing sector investments (we use sector rotation strategies in some of our portfolio) that we both liquid and reflected opportunities ignored by traditional fund families. There are about 70 unique sectors covered by traditional mutual funds and today about 800+ sectors available through ETFs. If you were going to study the performance of competitors who could manage asset allocation managed account portfolio where they could but not surprisingly don't use more proactive and objective reallocation as markets evolve, then the separate account data bases should be helpful. It IS ironic to note that while there are more separate accounts than unique mutual funds and possibly more assets, Morningstar advisors manage about $100 billion of separate accounts of ETFs and funds -- NONE of which are disclosed for comparison in their OWN data base.

The data bases offer the chance to do multiple “sorts” or “screens” on defend criteria As most of our competition would have to have over 8% 10-year average annual returns with standard deviations less than 7%, that is where we look. Surprisingly, the few accounts which out-perform our standards on a risk-adjusted basis have significantly higher standard deviations and those with lower risks earn lower returns than our portfolios. But if you look at the data bases you can reach your own conclusions.

The only major new threat likely to be addressed by American investors in the next decade that was a surprising safe harbour in the past decade is the threat of the bond fund boom bursting. The risk is so dramatic and devastating to near-retirement investors that guessing the timing is less important than acknowledging the risk.



If we suggest that the financial advisor is responsible for choosing the "suitablility" of the investment for his clients and/or operating in the "best interests of the client," may I ask. Would a ten-year track record of returns capable of doubling client assets (7.2% or higher) with a standard deviation under 8% do the job for any of your clients? If so, you may have discovered a great sales ptich and a product that should satisfy your clients' need for long-term positive returns.



Remember that funds are not required by the SEC to achieve their investment objectives. A long-term Treasury bond fund that is highly-exposed to rising rate risks but which states it is an income investment might be both suitable and irresponsible.



Investing in a fund, ETF or separate account which has not been tested for the full investment cycle (in this case ten years or so) should give you less comfort than you may want to accept.






My best wishes.