Tag Archives: ThinkAdvisor

Advisors Must Evolve or Risk Becoming Obsolete

Schwab recently released their latest Independent Advisor Outlook Study (IAOS), and as ThinkAdvisor points out, the report contains both good news and a warning for advisors.

The good is that RIAs report growth in new clients, compensation and wallet share since the onset of the bull market. 93% of 629 RIAs surveyed believe our industry is on a “continued growth trajectory,” while 53% stated that the industry will continue to grow at a faster rate than the market. According to ThinkAdvisor, “Respondents reported high employee retention rates, hiring plans and technology investments to maintain their growth, with their top talent acquisition priority being adding staff in operational and support roles.”

Bernie Clark, the head of Schwab Advisor Services, believes that these findings indicate a shift from RIAs “being entrepreneurs with practices” to “enterprises.” Clark went on to say that RIAs are “trying to make sure they’re scaling” these enterprises to make them “be more efficient exponentially.” However, in spite of all the good news, Clark warns advisors to beware of complacency. In his view, RIAs can either “evolve or die.” Key for a successful evolution is participating in “the next wave of technology.”

Clark further points out that the big wirehouses no longer have the allure they once did. Advisors can choose now whether they want to remain tied to the older traditional model of doing things, or break away and become the “new next model.” Says Clark, in the near future “even Uber will look like an old model.” New technology ushering in the new generation of advisors includes automated investment technologies (read robo-advisors) like Schwab’s Institutional Intelligent Portfolios which was released earlier this week.

Adhesion has been ahead of the curve with a personalized UMA platform that is scaleable and bolsters the advisor’s control over their unique value proposition. It allows advisors to segment their businesses and deliver customized investments and services to different segments. Helping advisors dynamically evolve into a new model of RIA firm is what Adhesion has been about all along.

Check out our short video to learn more.

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The Perils of Hindsight, the Power of Client Regret and What Really Matters to Clients

Sometimes perfectly intelligent clients do very stupid things. So says ThinkAdvisor in an article honoring Daniel Kahneman as part of its 2015 IA 35 for 35. Since 2007, Kahneman has been the Eugene Higgins Professor of Psychology Emeritus and Professor of Psychology and Public Affairs Emeritus at Princeton University. Known as the “father of behavioral finance,” he received the Nobel Prize in 2002 for economics. Kahneman continues to work with advisors. At the IMCA New York Consultants Conference in February, he told attendees that clients are “more sensitive to loss than gain,” and that “people aren’t concerned about their level of wealth, but about changes in their wealth.” He also pointed out that “people don’t like giving up things,” even if they’ve only had them for a short time.

As an example, Kahneman discussed an experiment he conducted with behavioral economist Richard Thaler where one group of people was given mugs and the other some money. Those with the mugs wanted on average $7 to sell their mugs, but the other group was only willing to pay an average of $3. This is what is known as the endowment effect, where “people often demand much more to give up an object than they would be willing to pay to acquire.”

Adhesion implements behavioral finance throughout its UMA solution. Through the use of behavioral-driven profiling tools, advisors can determine their clients’ degree of engagement, risk tolerance and emotional pre-disposition. By understanding their clients’ behavioral traits advisors can then design output specifically for an individual client. Advisors can also take advantage of Adhesion’s behavioral-driven proposals. These are templated proposals designed to de-emphasize relative performance and emphasize the benefits of total solution. You can incorporate a description of your firm’s Philosophy and describe your firm’s service model. Adhesion also offers behavioral appropriate models. A pre-configured investment program can take away the emotional aspect from investing and guard against emotional investment behavior. Finally, Adhesion provides behavioral-driven client management. Advisors can setup their client portal with data access that reinforces a client’s specific behavior type.

Check out our webinar, “An RIA’s Guide to Behavioral Investing,” to learn more.

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Advisors: Embrace the Client’s 1040

There’s no question that taxes and tax policy are front of mind for many of your clients – many have just experienced their highest capital gains distributions in years. This is a prime time to demonstrate your value to clients by adding after tax value to their investments.

Many advisors are hesitant to discuss a client’s tax return. Get over it! At this point you might be asking yourself: doesn’t my client already have a CPA? While this is likely the case, as ThinkAdvisor points out you as the financial advisor may have the stronger value proposition that appeals to the higher- net worth client. At the very least you can play the role of quarterback and coordinate the team of advisors assisting your client; provided you can identify the appropriate tax benefits and problems.

According to this ThinkAdvisor article, a great way to do it is by reviewing your clients’ tax returns and suggesting changes. Here are some of the relevant tax issues that ThinkAdvisor recommends going over with your clients.

Line 8a: Taxable Interest

If the client has a large amount of taxable interest and/or is in a high tax bracket, consider replacing some of their taxable investments with tax-exempt vehicles.

Line 9b: Qualified Dividends

Remember that ordinary dividends are taxed as ordinary income, while qualified dividends are taxed at your client’s capital gains rate (20%, 15% or 0%).

Line 13: Capital Gains

If your client has a substantial amount of capital gains and/or any capital loss carryforwards, they may be able to use the losses to offset their capital gains for the current year. If there are no capital gains, or there are capital loss carryforwards remaining after eliminating all capital gains for the year, up to $3,000 of the carryforward can be used to offset ordinary income.

Line 15: IRA Distributions (and other retirement plans)

Line 15a includes the portion of the IRA distribution that is not subject to income tax. Line 15b is the portion that is taxable. If the distribution as a percentage of the total IRA is too high, it could cause your client to prematurely exhaust their IRA. You might want to advise them to consider a Roth conversion; especially if they don’t have to have the income.

Line 20: Social Security Benefits

Line 20a contains the total amount of Social Security received. Line 20b is the amount that is subject to income tax. The amount that is taxable is determined by the taxpayer’s filing status and modified adjusted gross income (MAGI).

Tax Alpha isn’t just about income tax returns. Enter the Adhesion Advantage. The Adhesion Advantage lets high-performing advisory firms save time and resources by automating key tax aware strategies. The tax-aware investing process becomes a lot more efficient when incorporated with Adhesion’s technology and overlay managers. The Adhesion Advantage significantly augments advisors’ ability to add tax alpha and show clients real value.

Check out this short video to learn more.

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Why are TAMPs a Hot Topic at TD Ameritrade Institutional National LINC 2015?

2015 is the year of the next generation TAMP.  There’s a reason why advisors are packing the room at the TDA national conference to learn what these TAMPS have to offer.  A recent article in Think Advisor, Scott Martin poses the question: will TAMPs take the upper hand in 2015?  According to Martin, 87% of all large-cap equity managers lagged behind the benchmark in 2014.  And while some best-of-class managers are still “squeezing alpha out of a tired bull,” the cheaper route might be to simply hand off these pure index products to a specialist; the kinds of specialists that can be found populating TAMPs.

As Martin points out, on paper a TAMP sounds perfect.  With advisors looking for ways to outsource investments and asset managers eager to sell their expertise, TAMPs offer an attractive solution for all parties involved.  However, with so many options out there it can be hard for advisors to cut through the noise and find the outsourcing partner that’s right for them.  Says Martin: “The old question of ‘why’ to outsource the portfolio has been answered.  The big question now is ‘who’ advisors want to partner with.”  So far, outside of the huge all-in-one platform providers, the field is wide open.  Recognizing that not every advisor is ready to outsource everything all at once, they are even allowing for account-by-account conversions.  So what do advisors have to lose?

The sticking point for many advisors can be delegating the selection of securities.  Advisors, Martin says, need to let go. “With the right program, even the due diligence is built in, so there’s not even any need to pick the right managers.”  And this is a key point: outsourcing to a third party can free up advisors to become relationship managers who focus on client-facing and business building activities.  This union is quite a bit more profound than simply adding on additional technology.  As Paul Ahern of Winslow Capital puts it, “…they are committing to an equivalent of a restructuring of their wealth management business model.  If a TAMP is only ‘bolted on’ to an existing advisor product set and just another product among many, then all the advisor has achieved in increased complexity and cost.”

There is still a window open for advisors who haven’t outsourced some or all of their investment management to do so and still gain a competitive edge.  With multiple TAMPs still battling it out, RIAs have both ample selection and a buyer’s market.  Consider what a provider like Adhesion Wealth has to offer.

Adhesion allows advisors to focus on their clients and business development and outsource the investment management nuts and bolts.  With a varied selection of world class investment strategists and asset managers, Adhesion gives clients the benefit of best in class investment expertise and powerful resources to fit any investment approach.

Check out our Adhesion Portfolio Solutions video to learn more.

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10 Things RIAs Can Do to Get an Edge on the Competition

A recent ThinkAdvisor article, “10 Ways Wealth Management Firms Can Beat Rivals: Mercer,” lists 10 ways firms can compete in today’s ultra-competitive market.   Says Cara Williams, senior partner and the global of Mercer Investments’ Wealth Management business and Global Technology Solutions: “There are three sets of challenges that we find are common to wealth management firms competing in today’s environment.  These are strategies to improve investment results in a low-return environment, strategies to reduce risk, and strategies to contain costs.”  Below are Mercer’s 10 recommendations based on these three overarching strategies.

1. Position portfolios for growth in a low-growth environment
2. Determine if alternative investment strategies are appropriate for a broader group of clients
3. Consider impact and socially aware investing as part of portfolio design
4. Adopt a client communication technology strategy

#4 addresses a common frustration among clients when they are not receiving frequent communications from their advisor or direct access to their portfolio information.  Mercer recommends that RIAs address this issue and enhance client satisfaction by adopting smart technology.  “Staying up to date with technology will require investments to remain ahead of the competition.”

5. Review the resources required to deliver value to clients and resolve the “build versus buy” question

#5 speaks to the importance of deciding when to outsource versus when to stay in-house.  According to Mercer, “To survive, thrive and best serve the needs and interests of their clients, wealth managers need to review the core skills that provide them with a competitive advantage, and evaluate which resources are best sourced internally versus through an external partner, consultant or other vendor.”

6. Conduct investment and operational product risk assessments
7. Beware rear view product risk assessments
8. Evaluate the firm’s governance process
9. Discuss fee budgets with your clients, and ensure they get what they pay for
10. Remember that fees always matter

Mercer suggests that firms remember the importance of fees to clients.  “Evaluate business models, services, and enhancements that allow you to deliver exceptional service and products while continuing to reduce the cost to your clients.”  In other words, adding Alpha while increasing efficiency and cost-effectiveness.

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Right Now, Clients are Looking for Financial Planning, Not Investment Managers

“Firms that are willing to expend the time and effort to move away from an investment management approach focused on past performance toward a financial-planning-centered one that meets current clients’ broader needs will be rewarded.”

So says a recent white paper released by CEB TowerGroup and cited in a September ThinkAdvisor article. The paper, “Shifting to the Center: Financial Planning is the Hub of Wealth Management,” makes a very important and timely point:  with many clients lacking a comprehensive financial plan, there is a huge potential opportunity for advisors.

In other words, the firms that continue to see success and gain new market share will be the ones focusing on adding Alpha through front-office activities and strengthening client relationships so as to help their clients achieve long-term goals.  It’s about setting up trusts, managing estates and college funds, and guiding clients through turbulent times in the markets.  This is what real wealth management looks like.  What we are seeing is a hole where clients who want this kind of total package wealth management experience simply aren’t getting it.

The white paper found that 68% of high-net worth clients do not have a formal financial plan in place to reach their long-term goals.  As ThinkAdvisor points out, this certainly does not mean affluent clients aren’t interested, since financial planning is “the most selected service chosen by clients of wealth management firms.”  Scott Parry, an executive vice president at SunGard, said in the article, “the financial plan now becomes the benchmark upon which future account performance is measured.”  The report also found that 97% of clients who rated their planning experience as excellent were highly unlikely to switch to a new firm in the next 12 months.

The article makes another key point that advisors would be well-served to pay attention to: the CEB TowerGroup report showed that 78% of advisors considered financial planning technology important, but only 50% said the technology they were using was effective.  The report stated: “Not only do advisors need more effective financial planning tools…they also require support in presenting, posting and accessing the planning output.”  Clearly, there is a large segment of advisors who have some work to do in order to be positioned to capture this opportunity.  As for us, we think 68% of high- net worth clients not having a formal plan is more than an opportunity: it’s a windfall.  This comes at a time when robo-advisors and their online investment offerings are putting significant downward pressure on advisor fees.  Advisors who want to retain current clients and expand their business would be well-served to offer a comprehensive wealth management experience that enables clients to achieve long-term goals- something clients still can’t get anywhere else.

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Why Outsourcing May Make More Sense Than You Think

As stocks continue to ride high, some RIAs are finding that this enduring bull market can be a double-edged sword.   While staying busy is a good problem to have, advisors across the board are also reporting increased levels of stress. We often hear advisor feedback to the effect that it feels like there just aren’t enough hours in the day to get everything done, particularly when it comes to managing the back-office.  Ultimately, what many in the industry seem to be searching for is a way to get the job done while making more time for their clients and families. This dilemma is causing many RIAs to consider some kind of outsourcing solution.

Two Main Points to Consider Regarding the Decision to Outsource

In a July 28th ThinkAdvisor article entitled “When Outsourcing Investment Management Makes Sense,” Mike Patton (President of Integrity Wealth Management) discusses why outsourcing began to make sense for him and his business.  As he points out, there are two main points to consider regarding the decision to outsource.  First, to quote Patton, “it will free up your time so you can concentrate on marketing, financial planning or whatever else you choose to do.”  However, there is also the issue of cost.  Patton points out that the outsourcing fee will come out of the advisor’s revenue unless it’s offset by raising client fees.

Patton says a key factor in his decision to outsource was the discovery that he could actually keep his revenue while reducing the fees his clients pay.  How?  Here’s how he explains it.

“In their SMA (separately managed account), they will invest in individual stocks and bonds. When you consider the fee they charge for their SMA (0.50%) and include the basis points levied by my custodian (0.05% to 0.25%), the client will be paying less compared to this company’s retail mutual fund which has an expense ratio of just over 1%. Plus, the custodial fee in the SMA includes all transaction costs. Hence, I will earn the same revenue and the client will pay less. It’s a win for everyone involved.”

Another advantage to outsourcing, according to Patton, is the back-up factor.  He argues that outsourcing portfolio management can actually increase the value of your practice since it doesn’t all rely on you alone.  It can also give your clients a sense of security, knowing there are multiple layers of management overseeing their assets.

Patton’s story is a great example of how, for many RIAs and particularly smaller firms, outsourcing can bring the best of both worlds: the opportunity to add more client Alpha and the ability to leverage the power of a TAMP.

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Most Advisors Now Adding Outsourcing: Clients Approve and Businesses Grow

A recent article in ThinkAdvisor discussed a newly released study conducted by Northern Trust on advisors and outsourcing investment management.  The results might surprise you.

Northern Trust found that 92% of clients reacted positively when told by their advisor that the investment management part of their services would be outsourced.  In terms of retention, 80% of advisors said they lost no clients when they switched to outsourcing.  And perhaps most compelling of all, 70% of advisors saw their business grow after they began outsourcing their investment management services.

This is great news for advisors and outsourcing providers.  It’s not just clients responding positively to outsourcing; Northern Trust also found that throughout their study 90% of advisors remained satisfied with their outsourcing solution.  Combine that with the fact that advisors are retaining clients and growing their business, and we are seeing overwhelming acceptance and appreciation of outsourcing across the boards.

On the flip side, among those advisors not outsourcing, 56% said it was because their in-house investment management is a part of their value proposition.

It is important to remember that investment management alone is no longer a meaningful differentiator for RIAs.  While outsourcing is ultimately still the right answer, advisors need to be asking additional questions.  Instead of simply asking how I can improve my investment management, advisors should be asking how can I utilize an outsourcing solution to help me focus on client-facing activities and boost my Alpha through sophisticated investment tools and monitoring.

One thing we know for sure: outsourcing isn’t going anywhere.

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