Independent Insight

Do You Love Me Just For My Money?

2012-01-24T13:32:00.000-08:00

Editor’s Note: BlogOnWealth and Independent Insight are now one. As of this post, Sanctuary’s two blogs will appear under BlogOnWealth. www.blogonwealth.com

We will continue covering the topics that both blogs have taken on in the past. Thank for your interest and we welcome your continued comments.

Large Wall Street firms have tossed independent advisors yet another great opportunity.

Recently, management at many of the wirehouses informed their financial advisors that they wouldn’t get paid on accounts with a balance of less than $250,000. These clients are being shipped off to a call center because, in so many words, they can’t be profitably serviced by a “full service” financial advisor.

This decision is a frank admission that the cost structure at big firms is still too high. Large firms in the Dodd-Frank era are feeling the squeeze. The result is predictable: Wall Street again put self-preservation ahead of advisors and clients.

Is that any way to treat people, let alone someone who may become a worthy client one day? The opposite is also true: Aren’t these big firms really saying that if you have enough money, we will love you?

Short-Term Thinking

This bloodless view of the world is not particularly nice, nor is it necessarily good business practice.

The fact is not everyone is born a 1 percenter. Clients with smaller accounts often grow into much larger ones. Here in Northern California, engineers and many entrepreneurs are just one IPO away from fabulous wealth.

The problem with packing smaller accounts off to a Siberian call center is that you never know who becomes the next Mark Zuckerberg. If clients are mistreated before they hit the home run, there’s virtually no chance they’ll ever come back.

Opportunity For Independents

The good news is that a large firm’s cast-offs can be good business for independent advisors. Because independents have far less overhead, they have lower costs and can incubate smaller clients profitably. The key is having the right business model.

There’s another opportunity, too, for independents: The freedom to run a business as advisors see fit.

Most accomplished advisors don’t want corporate bureaucrats dictating how they serve clients or operate their business. A large firm’s management decisions are particularly irritating because they not only deprive advisors of income, but also create the embarrassment of having to tell clients that the firm believes they’re no longer worth the time.

Wealth management can’t be all about the money. Just like in any relationship, if someone happens to have money, that’s fine. But that’s not the reason you love someone.

As an independent advisor, you don’t have to be all about the money. One of the greatest advantages of being independent is the freedom to do the right thing by your business and your conscience. That always feels good.

The Arab Spring Comes to Wall Street

2011-12-21T06:10:00.000-08:00

One of the most heartening developments of 2011 has been the Arab Spring.

A year ago, people fed up with oppression began challenging dictators in Tunisia and Egypt. Inspired by their success, popular uprisings spread across the Middle East, taking down strongmen like Mubarak and Ghaddfi. After decades of suffering, tens of millions of people now have the promise of a better way of life.

Many factors contributed to the downfall of authoritarian regimes, but one cause that will certainly loom large in history is the power of information.

Information flowing across the Internet and via social media enabled repressed people to share new ideas and collaborate in ways that simply weren’t possible in prior decades. They were empowered when they realized that many other people shared their opinions.

Demonstrations were organized over Facebook. Firsthand accounts of government crackdowns traveled the world by Twitter. Mobile phones transmitted shocking video that triggered outraged in people everywhere.

That the hero of the Egyptian revolution was an executive of Google – the nexus for sharing ideas and information around the globe – is the perfect metaphor for the Arab Spring. Google embodies the liberating force of information, which ultimately outgunned soldiers, tanks and secret police.

Wall Street Feels The Breeze Of Liberty

For investors and advisors, a similar sense of liberation is occurring for the same reason: Information is breaking through Wall Street’s facade of omnipotence.

One of the positive outcomes of the financial crisis is that the veil has been pulled back on Wall Street business practices. The post-mortems on the financial meltdown have revealed the naked self-interest of Wall Street’s conflicted business model.

Many investors have come to realize that Wall Street frequently acts first in its own self-interest. After that comes investors.

Advisors have also gotten fed up with Wall Street. The dictatorial style management that intimidates advisors with a “just-buy-this-we-know-best” approach has prompted many advisors to break away so they can do right by their clients.

The Unstoppable Tide of Human Aspiration

As hopeful as the Arab awakening has been, it will no doubt be messy as countries lurch toward democracy and free markets after being under the yoke of tyranny for so long.

The same can be said about Wall Street and its business practices. As information sheds light on Wall Street, more will choose the freedom and choice offered by an independent advisor. But it would be unwise to underestimate Wall Street’s staying power. This will not happen overnight.

The good news is that it’s become impossible to turn back the clock on progress. The free flow of information cannot be thwarted thanks to the Internet and social media. Information will remain the jet fuel for the unstoppable tide of human aspiration.

Happy Holidays from the team at Sanctuary Wealth Services.

Loss of Confidence

2011-11-28T05:32:00.000-08:00

There’s a striking similarity between the current state of affairs in government and our financial system: Both are paralyzed by gridlock and in desperate need of regaining credibility. Voters and investors are losing confidence.

The Congressional supercommittee’s inability to address government spending is only the latest failing by our nation’s leaders. Likewise, the financial system’s refusal to remake itself after the trust-busting financial crisis is equally disheartening.

On Wall Street, it’s exasperating that it’s still business as usual. Big banks and wirehouses continue to create wealth management programs that place asset gathering and the firm’s profitability ahead of the interests of clients.

They’re still missing the boat on the most fundamental tenent of wealth management: If it is good for your client, it will be good for your business. Meanwhile, Wall Street is trying to actively torpedo any reform by dismantling Dodd-Frank and other protections for taxpayers and investors.

It’s no wonder the Occupy Wall Street movement still has oxygen left.

A Better Way

In the spirit of extricating the industry from a crisis of investor confidence, we’re proposing a modest agenda of reform:

Be honest. The wealth management industry has positioned itself as an omnipotent, all-knowing purveyor of financial security. What has been lacking is honesty. Investors need to be told the truth about risk and reward, even if they don’t want to hear it. The good news is that unconflicted advisors who don’t have to peddle opaque products or be held hostage to their large firm’s profitability targets are beginning to have an honest dialogue with clients.

Acknowledge mistakes. Large institutions attribute the financial mess to a once-in-a-lifetime debacle, as opposed to any systemic defect in their business models. The rationalization is that no one could have seen the crisis coming. If you’re an unconflicted, independent advisor, you still may not have seen the flood coming. However, you could have responded faster in heading for higher ground. You wouldn’t have been locked in by Wall Street’s investment products that stifle flexibility.

Establish new standards. Advisors need to re-educate investors about performance. It’s not simply about high returns, but rather about performance versus established risk parameters. Particularly for high net worth clients who have already hit the home run, wealth preservation and definable risk management are often a higher priority. Using risk as your primary performance benchmark might not be as “marketable” as cocktail party worthy high returns, but taking the easy route rarely works.

Independent wealth advisors should play a particularly valuable role in advancing this agenda. They can be a catalyst because they don’t need to buy into the Wall Street mirage that “we are smarter and have all the answers.” They can tell the truth, and investors will reward them with the biggest prize: their business and their trust.

At the end of the day, voters and investors are actually looking for the same thing – an alternative to sclerotic party politics or an anachronistic financial services business model. Whoever steps up and tells the truth – and delivers a credible solution – will win the hearts and minds of both for the long run.

I'm Sorry

2011-10-19T12:37:00.000-07:00

Time For Wall Street To Apologize

Each day, the Wall Street protests grow. Over the weekend, demonstrations spread to dozens of U.S. cities and three continents, with scores of arrests and increasing violence. Sympathizers in Rome went on a rampage that caused more than $1 million in damage.

The revolt against Wall Street is about many things: Disgust with the broader economy, anger at government gridlock and policy failures, revulsion over bank bailouts, resentment about the growing gap between rich and poor, and generalized rage at the machine. There is also legitimate fury for Wall Street’s role in the misery many are experiencing.

Everyone Needs To Fess Up

The Wall Street establishment clearly needs to do something. After all, the “Occupy Wall Street” movement has its name on it.

What should be done? First, Wall Street needs to atone for the sins that got us into this mess. A mea culpa is due because Wall Street’s multi-billion dollar propaganda machine effectively peddled the worst kind of fantasy – that individuals and institutions who invest with them can achieve superior returns using their newly created “AAA” investments.

Unfortunately, the only people who made money were those who took the other side of the trade. Given that investing remains a zero sum game, not even Wall Street could change the laws of finance.

Wall Street firms need to start with an apology to anyone who ever purchased these new investment products and opened an investment or retirement account with dreams of a predictable financial future.

Advisors Share The Blame

Second, an apology is due from advisors. They believed their bosses who prodded them to sell the delusion that Wall Street’s best and brightest had figured out a way to squeeze addition return out of AAA-rated securities.

Brokers and advisors didn’t need much convincing to get them to go along. To address the fee compression caused by new regulations, wealth professionals looked for additional revenue opportunities by selling these opaque but “safe” investment vehicles.

So Do Clients

Third, clients themselves need to make amends. Their own demands for a safe but outsized return fueled the mania. Investors had come to expect outsized returns during the 20+ year bull market and had established a lifestyle to assume the good times would continue forever.

Clients relentlessly requested high returns and threatened their advisors that they would pull their accounts if their demands weren’t met.

The Way Forward

Once the apologies are made, Wall Street needs to tell it straight.

For starters, Wall Street needs to explain that the new normal for equity returns is likely to be 6% to 8%. That’s a sharp departure from the 10% to 12% growth that led some to believe their wealth would double every seven to 10 years.

In the short term, even the 6% to 8% growth is suspect. Those kinds of returns should be viewed as an intermediate term goal, if we’re lucky. As The Economist noted this week in its cover story, Nowhere to Hide, there aren’t many places to invest these days. The perils include the foundering U.S. economy, still-deteriorating housing market, European crisis, and the slowdown in emerging economies.

In addition to systematically lowering expectations, Wall Street also has an obligation to be more transparent. It desperately needs to fix its broken business model and return to a business that charges a disclosed fee for advice and raising capital.

If Wall Street doesn’t make it right, it will only accelerate the independent advisor movement. That may be the sliver lining after all. We believe strongly that leaving Wall Street is the best option for both investors and advisors.

For their part, clients need to find an advisor at a firm whose business model they can trust for the long term. Parking money in cash is only a short-term solution.

More truthfulness and an apology will be a good start in repairing the damage. Coming clean will also show protesters – and the rest of the America – that Wall Street acknowledges that it must do better.

Sallie Krawcheck’s Departure: The End Of The Experiment

2011-09-07T20:40:00.001-07:00

This week, history repeated itself. Bank of America ditched its top wealth management executive in favor of a banKer whose assignment is to increase profitability by “encouraging” the 16,000 members of Merrill Lynch’s thundering herd to cross-sell bank products.

On Tuesday, Sallie Krawcheck was fired. I suffered the same fate not that long ago under very similar circumstances. After Bank of America took over Montgomery Securities and asked my management team to integrate our group into The Private Bank, I was fired and replaced by a banKer.

We wrote about this in our blog on September 25, 2008 – the most widely read and commented piece we’ve ever penned. What we said then is happening all over again – to the detriment of brokers and THEIR clients.

Wielding The Axe

Why are brokers and their managers inevitably sacrificed when banKers take over?

For two reasons. First, both Sallie and I weren’t willing to accept the bank’s demands to place a higher priority on cross-selling bank products. Brokers got into the business because they have a passion for helping clients manage their wealth, not selling checking accounts, home equity lines of credit, or toasters.

Second, we both refused to sell out our brokers on comp. We understood that the brokers’ compensation plan needed to be different than their “Bank of America teammates” who are paid salary plus bonus.

That an old-line NationsBank banKer since 1979 will now head wealth management definitively signals the end of the grand experiment between Bank of America and Merrill Lynch.

BofA CEO Brian Moynihan has given this no-nonsense banKer explicit marching orders: Deliver “our entire franchise to all OUR (our emphasis) customers," to quote a BofA press release. Translation for brokers: You're a banker now.

For someone who has lived through this before, I’m astonished BofA is still drinking the same Kool-Aid. Namely, that BofA believes the bank – and not the individual broker – owns the customer relationship. The conceit is breathtaking.

What Happens Next?

First, YOUR clients will start to ask when you are leaving. Clients read the news, too. They understand what’s coming, allegedly in the name of additional benefits.

Second, the bank will begin to monitor brokers’ daily interaction with clients. They want to quickly find out who is with them and who is against them. The oversight is designed to hopefully control when brokers leave. As one BofA banKer once told me: “We want to make sure brokers leave on our terms, not theirs.”

Third, some brokers will get fired. In fact, that's exactly what happened to us. Some of our top producing brokers got fired because they were looking for a new job. The term used by Bank of America’s legal department to describe their job-hunting was “skullduggery.” In essence, the bank tried to act preemptively to out the brokers who were looking, allowing the bank to gain a timing advantage when trying to retain “their” clients. Of course, everyone knows that clients are loyal to people, not companies.

The Bottom Line

The capitulation to the banKers isn’t surprising. BofA knows that selling bank products is ultimately more profitable than the brokerage business. The profit margin on brokerage is in the low teens. For banking products and services, it’s 30%+. If there is one thing banKers know, it’s math.

Because the banking business model is so much more profitable than the brokerage model, two things will happen: 1) The banKers will remain in control; 2) Brokers (and THEIR clients) will be on the short end of the equation. Read another way, brokers will face lower comp and their clients will be subject to statement stuffers promoting bank products. Each month. Not even the powers that be at BofA can suspend the laws of economics over time.

For clients at big banks, prepare for the onslaught – and forgive your broker if he or she is a little cranky. If you’re a broker, there’s no better time to learn what skullduggery means and to gain the timing advantage by breaking away on your terms.

Fighting Back Against A Common Nemesis: Insecurity

2011-08-09T19:54:00.000-07:00

What accounts for the mediocre performance of so many companies and individuals? If you look beneath the surface, insecurity is often the common culprit.

Seth Grodin called insecurity the work of our lizard brain, the pre-historic lump of gray matter responsible for fear and rage. The lizard brain holds you back when you want to go forward. It reflexively fears the unknown.

Steven Pressfield refers to insecurity as the resistance. The resistance is the voice in our heads whispering caution, to go slow, to compromise. It is also the impulse that makes us drag our feet or keeps us from finishing what we started. Worse, the resistance, seems to get stronger the closer you are to making a necessary change.

Not Pretty

Call it whatever you want, but we are all dogged by fear of change.

For individuals, insecurity appears in the need to be liked by everyone. We all know that never works, and it often backfires. For politicians, insecurity rears its ugly head in the overpowering drive for election or re-election. History is littered with examples of well-meaning pols who sold out their principles to keep their elected office.

For corporations, insecurity breeds incrementalism. An executive may know that to succeed in the long term there may be significant short-term pain to change a business model, kill a product or invest in an unproven solution. But the fear of losing one’s job frequently quashes a leader’s better instincts to take a bold step.

Wealth advisors are not immune to insecurity, either. Like corporate executives, many advisors realize that their firm has serious shortcomings, for both themselves and their clients. But advisors may be just comfortable enough, so they stay put – even if they know a better future is very possible.

The Solution

How do you vanquish insecurity? One of the most effective ways is to mimic Silicon Valley. The whole ecosystem in the Valley is focused on isolating things that can be done better. Then, the doers charge ahead. The bumper sticker version is “No Fear.”

Silicon Valley is all about disruptive ideas and technology. Many ideas are tried and failed, but many others produce spectacular results.

Google is a perfect example of a Silicon Valley company who gets it. Google gives employees something known as Google Time. Employees can devote 20% of their time to developing something new and original of their own making. Gmail and Google + are among the innovations born from Google Time. Google has managed to institutionalize the better angels of our entrepreneurial spirit.

Living and working in San Francisco and Northern California, one gradually sees risk-taking as part of the natural landscape. Striking out on one’s own is what people do, and it’s invigorating. With so many other risk-takers in close proximity, there is security in the number of people who are confronting their own insecurity.

I was recently reminded of that by the principal of an advisor team who recently hired Sanctuary. “You take for granted just how entrepreneurial people are here. It's just not like this everywhere.”

The Unstoppable Tide of Human Aspiration

At the end of the day, the only real cure for insecurity is action. The self-confidence that comes from taking the initiative can overwhelm the reptilian corner of your brain. Conversely, the positive experience of successful change is a great motivator. It also has the corollary benefit of tapping that other instinct in us: the human drive for greatness.

For advisors who are thinking about breaking away, client uncertainty shouldn’t be the reason to hold back. In our experience, a large majority of clients who work with independent advisors are themselves entrepreneurs and serial risk takers. They appreciate advisors who have the gravitas to make a move that is all long-term gain.

Tame the lizard. Go out and make it happen today.

Win-Win

2011-07-01T09:26:00.000-07:00

The burning question for many advisors each day is: “How do I monetize my business?”

The conventional answer is: “I’ll sell my business some day at a lofty premium to an unwitting bank, wirehouse or roll-up firm and ride it out until retirement.”

Many independent advisors will be relying on the greater fool theory to strike a rich deal. Independents know that larger institutions and roll-ups routinely overpay for an advisor’s book of business. The word on the street is that buyers frequently overestimate how much advisors can cross-sell and grow their business.

For their part, buyers believe their brand is the magic elixir. A new advisor’s book of business, they believe, hasn’t been more profitable because the advisor didn’t have Brand X’s killer portfolio of products and services and management expertise.

The High Road

Is a sale based on the greater fool theory really the best approach for advisors and clients? The short answer is no.

Clients don’t commit to an advisor thinking the advisor will sell the business. Clients engage advisors because they trust their advisor and they believe the advisor is competent. And, just like no one gets married thinking they’re going to get divorced, clients believe they’ll be with an advisor and the advisor's firm for the long term when they hire the advisor.

Independent advisors often think that because their unconflicted model has more integrity than a big bank’s or brokerage’s that they may be more enlightened in considering how a sale impact clients. In fact, money corrupts. An advisor has to make an active choice to take the high road.

Looking For A Fool

The greater fool theory has currency because as long as institutions have been buying books of business, they’ve been overpaying. A premium is typically paid when an acquirer overestimates the value of any one of these three variables:

1. The retention of the advisor's current clientele.

2. The ability of the advisors to continue to grow their business.

3. The strength of the acquiring firm’s brand to generate more fees from the advisor's current clients.

To earn the full purchase price, advisors must commit to generating more revenue. For clients, that’s almost always trouble. The bargain that advisors make with their new employers translates into more client solicitations and sales pressure to buy additional products and services. This is the approach especially championed by banks. Or, it could mean raising client fees. Sometimes, it is both.

On balance, the transaction is negative for clients, even if clients gain access to additional investment solutions. For advisors, there may be an upfront, short-term gain, but they forfeit the longer-term payday that comes from building and maintaining an independent firm.

A Better Way

What’s a better approach?

For both advisors and clients, the solution is remaining an independent firm and continuing to grow the business, even after the founder has retired. By having an orderly succession plan and grooming a successor, there is no need to sell.

There are two key benefits in this approach.

First, clients will fare better. Clients will transition to a new advisor who is apprenticed by their current over a two- to three-year period. The new advisor will continue to use the same products and services that the client enjoys.

Second, the retiring advisor can actually make more over time. The profitability and ownership formulas common today will pay the retiring partner on a sliding scale over a number of years even after they retire.

To achieve this objective, there must be a defined succession plan that gives the junior partner an opportunity to buy an ownership interest using contractual metrics over a defined time period. All parties must have a willingness to take the long view of the franchise for the benefit of all.

An independent wealth management firm that sells to a big bank or roll-up firm is no different than a broker who takes a big recruiting check from a wirehouse. The good news is that by remaining independent, an advisor can do right by clients and by themselves creating a win-win scenario consistent with their independent mantra of always acting in the best interests of the client.

LPL Success?

2011-06-01T13:37:00.000-07:00

LPL’s successful IPO has set the standard that most private wealth advisory firms in the roll up space such as United Capital, Focus Financial and HighTower, are hoping to achieve. As these private firms consider their strategic options, a big question remains: “Is LPL’s huge success replicable?”

LPL Successes

LPL has grown its advisor base from 3,500 advisors in 2000 to over 12,000. That growth is the result of acquisitions and from a forced exodus of lower-producing wirehouse stockbrokers. A $200,000 - $300,000-a-year producer is not profitable in the high cost Wall Street business model. However, they are very profitable for LPL. The company doesn’t have expensive investment bankers, research analysts and multimillion-dollar proprietary traders. LPL makes money two ways: 1) From a revenue share with its independent contractor brokers; 2) From transaction fees, asset-based fees and net interest margin that it earns through its broker-dealer. This combined revenue stream allows LPL to profitably support a $300,000-a-year broker that has a business mix of 70% commissions and 30% fees. It also allows LPL to offer the broker a much higher payout than Wall Street.

Here is how LPL describes its business in the S-1 filing for its November 2010 IPO: “Our singular focus is to support our advisors with the front, middle and back-office support they need to serve the large and growing market for independent investment advice, particularly in the mass affluent market, which we define as investors with $100,000 — $1,000,000 in investable assets." [Emphasis ours]

Red Flag

It all sounds very good, but consider this: Near the end of the 180-day IPO lock-up, Ron Carson, LPL’s top producing broker and largest broker shareholder, announced that after a 22 year relationship with LPL he was going to set up his own independent RIA.

Isn’t he already independent with LPL? In fact, not independent enough, in Mr. Carson’s opinion. As his business has grown to the impressive level of $3 billion in AUA, he realized that the LPL service offering – built to serve mass affluent clients – was not sufficient to address the needs of his clients with greater than $1,000,000 in investable assets. While Carson will continue to use LPL for his mass affluent clients, the asset management solutions for his larger clients will be sourced by his new firm and held at Schwab or TD Ameritrade.

While one advisor’s departure will not have a material impact on LPL’s current business, I’m sure it has caught the attention of senior management, LPL’s private equity investors and other top producing LPL brokers.

The Rainmaker’s Dilemma

Rainmakers typically leave large organizations to start their own firms so they can increase their compensation and assert greater control over the strategic direction of their business. LPL’s independent contractor model has successfully addressed the higher compensation needs for the $300,000 producer. This group of producers constitutes the largest in number of brokers, but the top producers (rainmakers) still remain on Wall Street or in trust banks, and LPL has not been able to attract them. That’s not to mention the reality that most top producers – because of their egos – don’t want to be associated with a firm that focuses on mass affluent clients. LPL might not want the rainmaker broker, but after three years of Wall Street’s salesforce rationalization the forced breakaway trend appears to have run its course. That could force LPL to join the ranks of HighTower, Dynasty and Sanctuary in trying to attract rainmaker advisors in order to meet the growth expectation of their new public shareholders.

Position of Strength

LPL has several assets that could make it a formidable competitor if it chooses to pursue the rainmaker advisors. With a cash position of over $500 million and a market capitalization of over $3.8 billion, LPL has ample cash and a potent balance sheet it can use to buy market share. And LPL’s biggest asset could be its private equity partners, Hellman & Friedman and TPG. These organizations understand the high-end client and the high-end wealth management business very well.

The $3.8 billion question for LPL management? Do they believe that the economics of addressing the high-end market segment are as attractive as the economics of selling to the mass affluent? And are these two versions of the same business, or do they need separate business units with separate management teams and separate client service philosophies?

Stay tuned.

Climbing The Wall Of Worry

2011-05-13T09:50:00.000-07:00

Bull markets, as the adage goes, “climb the wall of worry.” That has never been more applicable than during the 95%+ move the market has experienced since the March 2009 lows. Clients who listened to their advisors, overcame their fears, and remained invested have experienced rewarding gains. Diversified portfolios are finally at or even through breakeven, and clients are breathing a sigh of relief. They’re also starting to consider what they should do now that they survived a near-death experience.

Right now, advisors need to worry. The reason: many clients may be looking to leave their current advisor and simultaneously make ill-considered investment decisions that can and should be avoided.

Life is NOT fair

Top advisors provide value by successfully advising their clients against making behavioral miscues at market extremes. Selling or panicking at the market lows and failing to rebalance at market tops are the classic mistakes advisors can help prevent. For advisors, the current risk is that clients may now be eager to sell and part company because they are FINALLY back to breakeven. Now that a client’s portfolio is not down, the thinking goes, it’s time to bail out because the advisor’s failed strategy is what got clients into trouble in the first place. But wait a second. Wasn’t it an advisor who prevented a client from selling at the bottom? The client’s what-have-you-done-for-me-lately attitude is simply not fair.

In fact, the client’s tax consequences and psychological hurdles of selling at breakeven are negligible. As a result, advisors need to emphasize that this “easy” decision can be just as big of an error as running scared and liquidating at market extremes.

High Cost

Advisors live in constant fear of losing one of their big clients. The cost of losing a top client is exacerbated by the 80/20 rule of sales. If you do the math, one client lost can reduce production by at least 16%. Seems like a good reason to worry!

Retention and Growth Strategy

But worrying won’t prevent lost revenue. Advisors need to address potential client defections with a proactive and innovative approach. What is that? In short, it’s owning up to previous shortcomings. Most notably, too many advisors put clients in illiquid investments, and they and the money managers they selected took too much risk in client portfolios. To retain clients still smarting from those decisions, communicating what went wrong and what has changed may be the surest way to keep unhappy clients.

The good news is that the same forthright approach can be applied to attract new clients. Everyone knows that something went terribly awry during the financial crisis. Acknowledging the lessons learned is what every good professional does to improve his or her game. This more open and human style is likely to resonate with younger wealth creators too, who don’t appreciate the value of advisors or discount their value entirely. Moreover, if advisors communicate their improved approach to GenXers and GenYers through social media – blogs, Facebook, Twitter, among others platforms – that sends a powerful and innovative message about how you do business in the post-meltdown world.

The Lady Doth Protest

Sallie Krawcheck is worried, too. You would never know that from her recent interviews and speeches, in which she says very few Merrill Lynch brokers have left to go independent. Her repeated proclamations about the independent channel remind me of the line from Hamlet, “The lady doth protest too much, methinks.”

Domino Effect

While advisors should worry about losing their clients and the disproportionate impact it will have on their businesses, wirehouse management constantly worries about losing their largest clients too: their advisors. The recent article on the travails of law firms in The Economist shows how vulnerable services firms are when they lose their top talent. The wirehouses and large captive wealth managers face the same challenge: when the top advisors start to leave, it can sink the entire ship.

Ironically, the unconflicted independent wealth management business model may provide the best solution for clients, advisors and even Sallie.

Sleep tight.

Merrill Lynch: Wolf in Sheep's Clothing?

2011-04-19T10:44:00.000-07:00

I did a double take when I read the news that Merrill Lynch was going to spend $20 million on an ad campaign entitled “The Power of the Right Advisor.”While I wholeheartedly agree that the right advisor is essential, I was shocked to read how Merrill was defining what the “Right Advisor” does for its clients. The definition sounded eerily similar to the independent, fee-based advisor. Has Sallie Krawcheck changed her mind about the threat from the independent wealth manager?

In fact, it doesn’t appear that Ms. Krawcheck has changed her mind about the movement toward independent advisors. She is just making a shrewd decision and following the money. Specifically, brokerage assets and revenues are declining and fee-based revenues and assets are increasing. Clients want advice, not brokerage product sales, and are voting with their assets. A recent study of over 15,000 brokers by PriceMetrix examines this reality in greater detail. The blow-away statistic that caught my attention was that 81% of the new fee-based clients did not have a legacy brokerage account with the firm.

Wake-Up Call

Merrill’s ad campaign should be a wake-up call for independent advisors who have been major beneficiaries over the last few years of the wirehouses’ conflicted business models. Sanctuary’s recent white paper encouraged independent advisors and brokers to take a page from the other professional’s playbook. We didn’t anticipate that Merrill would take our advice so quickly!

Irrespective of whatever garb Merrill and other wirehouses may don, independent advisors need to make business development a core part of the job. Partners at the fastest-growing independent advisory firms devoted more than 40% of their time to new client acquisition, according to Moss Adams.

Strong marketing represents another golden opportunity to grow assets for independents.

Most independents spend their time on wealth management and client service – two critical functions. But marketing is often an afterthought. A PowerPoint, static website or ill-conceived mass mailings are the extent of the marketing for many independents.

Effective marketing starts with better messaging. Many independents need to clearly differentiate their message from other independents. And, they can gain an advantage by drawing the key distinction between their unconflicted approach to wealth management and Wall Street’s conflicted model.

In today’s marketplace, using social networking platforms also sends a strong message all by itself, especially to younger wealth creators. Independents that use Facebook, Twitter or write a blog have the upper hand because wirehouses either block or severely limit social networking over concern about potential compliance issues. This approach also doesn’t cost $20 million.

The bottom line: Tell your story aggressively and warn prospects that “The Power of the Right Advisor” campaign could be a wolf in sheep’s clothing.

Welcome to Independent Insight - The Straight Scoop on Independent Wealth Management

2011-04-07T14:04:00.000-07:00

Independent wealth management firms are the fastest growing segment of the financial services industry. Yet, a considerable amount of confusion exists about how successful advisors can leave Wall Street’s conflicted business model for greener pastures and a better night’s sleep.

Independent Insight was created to demystify independent wealth management and explain the benefits of going independent for both brokers and their clients.

Written by veteran wealth management executives, top producing Wall Street brokers and advisors who have broken away, Independent Insight will tell it like it is. We’re going to cut through the clutter and obfuscation to deliver fact based analysis and opinions.

We’re going to tackle the topics everyone in the industry is talking about, even if they are taboo at Wall Street firms or even some established independent firms. And, we’re going to focus on the issues advisors care about most: taking care of clients, growing their book of business, having more control of your time, and securing your financial future.

As with Sanctuary’s BlogOnWealth, which focuses on strategies and insight for investors, we want to know what you think. Please feel free to comment either by name or anonymously. We want a robust dialogue, so we all can benefit from our collective insights.

Growing Assets In Difficult Conditions

In kicking off Independent Insight, we decided to highlight one of the central and timely issues facing both independents and wirehouse brokers: How to grow your business in the post-Madoff, post-financial crisis era.

In our nine-page white paper on the subject, to be released Tuesday, April 12, we detail how independent advisors and wirehouse brokers face three formidable challenges in growing their business:

1. “New normal” market returns of 4% to 6% annually, instead of 8% to 10%

2. A big drop in valuable referrals from CPAs and attorneys

3. Significant difficulties in attracting new wealth creators, GenXers and GenYers, who think most advisors over 40 are out of touch or the firm the advisor works for is untrustworthy.

In offering solutions, the paper takes an unorthodox approach. What Can Independent Advisors And Wirehouse Brokers Learn from One Another? explains how independents and brokers can a take page out of the other’s playbook to succeed. Most of the time, these are warring camps, but in today’s environment, you can’t be blind to what works.

Among other observations, the white paper details what strategies and tactics independents should borrow from wirehouse brokers to improve sales and marketing. It also shows why brokers need to be more like independent advisors if they want to rebuild trust and capture a larger share of a client’s assets.

Welcome to Independent Insight!