Tags: alternative investments | behavioral finance | Chip Roame | endowments | investment management | practice management | tactical asset allocation | Tiburon

Financial advisors who regard their investment management strategies as a commodity do so at their own peril. Investment management is one of the nine winning tactics of successful financial advisors, according to a new report from Tiburon Strategic Advisors.

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In the third of an occasional series on that report, we spoke with Charles “Chip” Roame, managing partner of Tiburon Strategic Advisors, about the investment management strategies and his thoughts on what the future holds.

By way of background, the second report was Financial Advisors Do a Poor To Average Job At Sales And Marketing: Chip Roame.  The first report examined the topic of target marketing.

A4A: In the report, you say that "investment management strategies" is one of the nine winning tactics for financial advisors? Why is that? Is investment management really a point of differentiation or is it a commodity?  

Roame: One on hand, yes, investment management is becoming a commodity. On the other hand, it is an area of rapid evolution. Strategic asset allocation has been challenged. Tactical asset allocation, behavioral finance, portfolio construction using alternatives using alternatives, and even asset-liability management are all trends in investment management.

A4A: You mention that there is likely to be growth in behavioral finance. Why is that and what do you recommend that advisors do because of that? Become more expert in behavior finance?

Roame: Becoming more expert is probably an overstatement, but yes to some degree. I’d say this, as markets have been more correlated and more volatile, leaving fewer places for conservative investors to hide, financial advisors’ understanding of their client’s needs and related behavioral finance issues is increasingly important.

A4A: According to the report, there is likely to be growth in tactical asset allocation. Why so? And, what should advisors do given that? Become more proficient with this strategy?

Roame: No, it’s the other way around. Financial advisors are leading this trend, not following. Understanding ways to apply tactical allocation is a valid goal; some may want to do it themselves while others will rely on programs such as the ETF Tactical Asset Allocation program at Envestnet PMC.

A4A: According to the report, there is likely to be growth in portfolio construction, alternative investments, and endowments. Why is that? And what should advisors do given that prediction?

Roame: This is driven by the search for non-correlated asset classes. Endowments have long been substantially invested in alternatives. Like almost investment trends (asset allocation, international investing, and index investing), trends start in the endowment world, move to the defined benefit plan world, and ultimately to the financial advisor and consumer world.

The endowment model (use of alternatives) is on this path with growing acceptance at the financial advisor level.

A4A: The report also suggests that there is likely to be growth in risk budgeting, risk parity, risk control, and asset-liability matching model. Again, why so and what should advisors do because of this?

Roame: This is related to the behavioral finance trend. If a consumer needs $x to retire or to live happily ever after, why worry oneself with the return of some index such as the S&P 500? Who cares? What a consumer implicitly cares about is the ability to fund their liabilities (e.g. their summer vacation, kid’s college, vacation house, and retirement, for example). Slowly, slowly, slowly the world is moving this way, where comparing one’s return to some market index is less important.

In the next report, we’ll talk to Roame about the fourth winning tactic, client service strategies.

Tags: account consolidation | Chip Roame | client referrals | client retention | internet marketing | IRA rollovers | LinkedIn | marketing | professional referrals | sales | target marketing | Tiburon Strategic Advisors

Financial advisors will have to do a much better job at sales and marketing if they want to build a successful practice. Or at least so says Charles “Chip” Roame, managing partner of Tiburon Strategic Advisors, whose firm recently released a report outlining the nine winning tactics for financial advisors.

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In the second of an occasional series on that report, we spoke with Roame about the second of the nine winning tactics, sales and marketing. The first report examined the first of the nine winning tactics, target marketing.

A4A: Overall, how would you rate the sales and marketing efforts of fee-only and/or fee-based financial advisors?

Roame: Average to poor, with a few terrific exceptions: Fisher Investments, The Edelman Financial Group (Read A4A’s report on Edelman’s firm), The Mutual Fund Store, Hanson McClain, and Clearly Gull.

A4A: In your report, you say that client retention and client consolidation will be the most critical sales and marketing activities for financial advisors? Why so? Are advisors at risk of losing their clients and share of wallet?

Roame: There are two separate issues. One, client retention needs to be every financial advisor’s first goal all the time. There is no logic to prioritizing chasing the next client if one has a leaky bucket. And, due to recent market volatility and industry stumbles, retention is a bit lower, client movement is a bit higher, so now more than usual, client communication which drive retention are critical. Two, client consolidation is the easiest asset-gathering program and often goes overlooked a bit. Many clients have additional liquidity events, the sale of a house, the cashing in of a retirement plan and the like, and financial advisors need to be focused on capturing each of those sums as their second sales and marketing goal before chasing new clients, which necessarily will take more effort.

A4A: You also mention in the report that client referrals will remain the best marketing method. Do you see that changing over time as the internet (such as LinkedIn and the like) creates the potential to reach one's target market in a cost effective and efficient manner? 

Roame: Yes, beyond client retention and client consolidation, client referrals will remain the best marketing strategy for financial advisors with clients (obviously this is not true for new financial advisors who have no clients from which they seek referrals). I agree that the internet will make sourcing a new client increasingly easier and this will grow in popularity, but it will grow in a related ways, which is this: Prospects my source three or four advisors via the internet and then ask amongst their friends who must use any of them, and this will lead back to client referrals.

A4A: Why do you think professional referrals are so important as a part of the winning sales and marketing tactic? 

Roame: I am not sure I think that professional referrals are as successful as others claim. I think many financial advisors overemphasize this relatively passive marketing strategy. When done correctly, financial advisors would be asking each of their clients for the names of their CPA, lawyer, insurance agents and the like, and asking those clients to connect them. That would be an aggressive and likely successful strategy but few financial advisors take to it to such an extent.

A4A: You in the report also mention that firms using target marketing will be the most successful. Is there one target market that you think will prove more successful than another, say IRA rollovers or inheritance? 

Roame: The key to target marketing is to find a segment that has both a publication and a meeting. In the publication, a financial advisor should seek to get quoted, write an article, and/or advertise. At the meeting, financial advisors should seek to speak, to exhibit, and/or attend. Nearly any market segment that gathers its members through a publication and meeting can be successful – Microsoft employee, doctors, auto dealer owners, country club members, and the like.

Q: A4A: In the report, you write that the “moderately affluent” may provide the best opportunities for financial advisors. Why so? Is it that the “affluent market” is well mined and no one is pursuing the moderately affluent? Do you think that serving that market could prove challenging given that it's costly to service?

Roame: Yes, the ultra-affluent market is small in numbers and they do not exactly run around looking for new financial advisors. The affluent market is desired by every financial services firm and is competed for aggressively by thousands of wirehouse brokers. THE more moderate affluent households are often ignored by many, sometimes even fall below account minimums for many. Note that Fisher Investments, Edelman Financial Group, The Mutual Fund Store and Hanson McClain all target moderate net worth households, not the super affluent. Technology and outsourcing (e.g. turnkey asset management programs or TAMPS) can still allow such a firm to be extremely profitable.

Tags: advisor industry people | fiduciaries | integrity | marketing | sec | securities fraud

Bill Ramsay, a frequent commenter on A4A, tersely ripped into me today and yesterday for a post I penned criticizing the SEC for not doing a better of regulating mutual fund sales practices on Wall Street. The exchange got me thinking about how you can make life more meaningful by doing things that matter, doing what's real.

Ramsay and I first met on a Morningstar Advisor-sponsored cruise to the Caribbean in 1997 or ‘98. While Ramsay’s real expertise is in wealth management, he also knows how to write code. In 1998, when I was first learning about what would become Web-based portfolio management software, Ramsay taught me a lot about databases and practice management. He built an integrated workstation before most advisors appreciated what that meant. His contribution to A4A is always intelligent, honest, and well-intended.

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“

Andy, what planet are you living on!!!!!” Ramsay wrote in a comment about a recent story I wrote entitled,

“JP Morgan Chase Murtual Fund Sales Scandal Shows SEC Is A Joke At Investor Protection: RIAs Should Rise Up Against The SEC And Be Advocates For Investors.”

Some financial advisors use winning tactics. Some not so much. But if you want you want to be a winner, you might consider adopting, if you haven’t already, one or more of the nine tactical keys to success, as identified in recent research by Tiburon Strategic Advisors.

In the first in an occasional series, we’ll examine the nine keys to success, and we’ll also look ahead to what the future keys to success might be, again as identified by Tiburon.

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By way of background, Tiburon says the winning tactics first emerged in 1980s and were further highlighted in Bob Veres’ paper The Future of the Financial Advisory Business published in 2010.

According to Tiburon, the tactics fall into the following categories: target marketing, sales and marketing strategies, investment management strategies, client service strategies, staffing and compensation strategies, firm cultures, technology and outsourcing, industry networking, and mergers and acquisitions.

And the success of firms that employ one or more of the winning tactics can be measured in one or more of the following ways: clients, spending, revenue and net profits.

According to Tiburon, the firms that employ winning tactics have witnessed the number of clients grow in total from 3.1 million in 2007, to 3.4 million in 2010. In addition, net profit has risen from $800 million in 2007 to $1 billion in 2010.

Four Key Benefits to Target Marketing

The first of the nine keys to success, according to Tiburon, is what they call target marketing. There are, says Tiburon, four key benefits to target marketing:

1.       Increased prospecting results. “Target marketing will lead to improved prospecting results due to an increase in real and perceived value. One’s reputation spreads much faster in niche markets than in broad markets. Having a niche will positively affect public relations. Able to better use time and money. Become known as the expert. Present your knowledge of detailed specific issues.”

2.       Increased reputation and public relations. “One’s reputation spreads much faster in niche markets than in broad markets. Having a niche will positively affect public relations.”

3.       Increased time and financial efficiency. “Able to better use time and money.”

4.       Decreased competition. “Competition decreases as advisors establish themselves as experts in a particular niche.”

(For the record, we posted last week a story about the need to develop a niche for your practice. Read Advisors Must Develop A Niche To Survive and Thrive.)

According to Tiburon, one way to consider target marketing is by segmenting households in America by investable assets:

1.       Middle America has less than $100,000 in investable assets.  According to Tiburon, there are nearly 80 million households in America that fall into this segment, many of which are un-served by the financial services industry. Advisors who pursue this segment need to watch profitability closely so as not to “over-serve” clients. In fact, Tiburon research suggests that this segment is the “fools market.” With everyone focusing on “the high net worth market, there may be some significant opportunities in the mass market, but profitability is questionable.”

2.       There are nearly 24 million households with investable assets between $100,000 and $1 million. Tiburon labels this segment “moderate net worth” and it’s growing rapidly. Despite that growth, Tiburon warns that “the mass affluent will probably offer some opportunities, but the cost to serve this market is sizably greater.”

3.       The high net worth segment, which totals 4.3 million households, has investable assets of $1 million to $5 million. The segment, says Tiburon, is being courted by many full-service brokers, most bank trust departments, and many fee-only advisors. This segment tends to want institutional products such as separate account wraps and alternative asset classes. It also needs wealth management services.

4.       The ultra-high net worth segment, which totals 253,000 households, has investable assets of more than $5 million. According to Tiburon, it’s increasingly difficult to anticipate the needs of this market. Among other things, advisors need expertise in specialized investments such as hedge funds, art, and the like. Plus, advisors serving this market or attempting to service this market need to attain “higher designations to gain creditability.”

Six Methods To Segment Potential Customers

In its report, Tiburon noted that financial advisors can use at least six methods to segment potential consumers based on age, investable assets, other financial factors, occupations (such as corporate executives, small- and medium-sized business owners, or professional occupations), sources of wealth (such as new money or IRA rollovers), and a variety of other factors (such as gender, ethnicity, or marital status, for instance). But no matter the method or methods, Tiburon says firms using target market marketing will be the most successful.

Aged-based segments would include, for instance, the World War II generation (born prior to 1946), baby boomers (born between 1946 and 1964 and for which there are extensive opportunities), generation x (born between 1965 and 1980), and generation Y (born since 1980).

As for investable assets, Tiburon notes that households in the U.S. had in total $23 trillion in assets in 2008, and that the median net worth of households age 65 and older is $140,000. Tiburon says the moderately affluent may provide the best opportunity.

As for occupations, Tiburon says fee-only financial advisors report that 32% of their clients are small- and medium-sized business owners, 27% are corporate executives, and 23% are in professional occupations. And advisors who serve corporate executives would be served to learn the ins and outs of working with corporate executives who own their company’s stock. That target has at least 31% of their investable assets in company stock.

When you examine the sources of wealth among affluent Americans, Tiburon’s report notes that much of their money comes from their job and stock options (47%). Business ownership accounts for 26%; inheritance, 16%; and investing, 11%.

One interesting tidbit from the report has to do with baby boomers and their intentions post-retirement. One in five plan to stop working altogether. Some three in 10 plan to work part time for interest or enjoyment; 25% plan to work for income; 15% plan to start their own business; 7% plan to begin a new career; and 3% have other plans.

According to Tiburon, numerous occupational, ethnic, and other segments also provide terrific opportunities. For instance, by 2050, there will be 33 million Asian Americans, 103 million Hispanics, 62 million African-Americans, and 210 million Caucasians.