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Friday, May 27, 2016

In Pursuit of Happiness

Daniel Kahneman, renowned behavioral economist, describes the difference between happiness and well-being better than I can (TED talk, article). Basically: well-being describes ability to meet needs; happiness is the more profound, personal joy that we all seek.

Financial advisors help clients find a balance between happiness and well-being.

Happiness is a messy, personal and difficult-to-define goal, but it’s critical for every client. Well-being is tidy, calculable and clear. Investors love it, because it’s easy to automate. 10,000 steps = fitness. Show a counter.

As automation fever seizes wealth management, it’s silly and irresponsible for advisors to cede the conversation about the future of the business to robo-entrepreneurs, their cheerleaders and financiers. They have a fiduciary responsibility to shareholders that's more easily satisfied pursuing well-being than happiness. Well being is great. Cost effective S&P exposure is great. Inexpensive car insurance is great. However, we advisors have a fiduciary responsibility to real people with real dreams. We promised the right balance of well being and happiness, and that is awfully tough to automate. Consequently, it's important that we drive the discussion about the future of wealth management rather than wait for solutions. Otherwise we may find ourselves unable to deliver the service to which we have dedicated so much of our lives.

Isn’t well-being enough?

Not even close. The numbers bear it out. Purpose-specific, "validator," advice ("Can I really afford this house?") has grown to about 48% of the market. And you know what lost share? Not full-service advice. Self-serve: Robo. The "disruptors" managed to ride a massive, long term downdraft in spite of noisy commercials fueled by piles of "smart" money.

If well-being were enough, that self-serve share dominate. It’s shrinking because people are looking for more.

Market Share
People seeking advice for single issues without (necessarily) a long-term advisory relationship
Online services to pick an appropriate ETF
Traditional client-advisor relationships
National Financial: Advice 2.0: Reinventing the broker-dealer advice model Here Come the Validators

10,000 steps each day won’t fight off a Big Mac--or even a big soda. "Can I really afford this house?" isn’t a request for an online budgeting app. A person who’s already done some research but remains concerned is asking, "Can I feel happy about buying this house?" There is a good reason that more self-directed advisors are seeking advice, even as the self-directed tools improve.

Advisors know this.

So why is everyone talking about a "robo" future?

It’s easy to grasp. Just put in your numbers, and it tells you the answer. Finance is just numbers, right? Once you've pulled distilled, simple product from the nuanced service, it's easy for everyone to build a website. Enter the carnival barkers. It's all a commodity anyway. We've all played Pit, right? Of course there’s a lot of noise.

For automation to address the more complex issues, it requires participation from people who understand those issues. That’s us. Otherwise, all we’re going to get is better asset allocation machines.

Why should I care?

Our clients care. The new tools look cool. They perform some really useful, wellness-oriented tasks in compelling ways. But in some cases, they’re creating their own skewed versions of reality that damage the entire industry.

First, asset managers are asset managers. If they improve their user interfaces and drop their prices, we all win. That’s great. So frankly, kudos to BlackRock, Vanguard, and others like them for their great robo products.

Second, custodial platforms are platforms. They provide whatever product we, and our clients, demand. So again, kudos to Pershing, Schwab, Fidelity for their contributions to the robo cannon.

So far so good.

But the folks who liken investment management to objective financial advice are selling snake oil to sick people. Betterment’s Director of Behavioral Finance and Investing provides a battle cry for this movement in his post Good Design Beats Investor Education. Investor education, he asserts, is "usually unproductive," because in spite of the industry’s best efforts, "The average investor still underperforms the S&P 500."

In other words, because the market is a market--with winners, losers, averages and costs--regular people are too stupid to learn about their own finances.

He then lashes out at advisors comparing them to "a (grumpy) driver" navigating from dead reckoning.

No data or logic, just straight ad hominem dope. Retail investors are idiots. Advisors, who might take umbrage, are dinosaurs. So who will save us all?

His product defies analysis or question. Data that describe his product would blow customers' tiny, angry minds. ETF performance numbers are, "a perfect example of investor education...hurting more than it helps." Handy.

It's old fashioned, cynical disdain for the customer. It might appear shiny, new and revolutionary to its peddlers, but every generation brings a new generation of brokers. These guys are why many of us became advisors.

The good news!

We have an opportunity to win, not just survive.

  • Real advice-- the service we created-- that transformed the industry in just two decades. We can continue that revolution.
  • Generations X and Y have told us (to the tune of nearly ⅔) that they want advice, not algos, when they’re messing with happiness.
  • Regulatory changes support independent advice--not just product sales. 

In short, we can seize this opportunity to do well by doing good, and the steps are simple:

1) Work together.

Independence and competition are great. They demand excellence. However, independence and competition are a mirage if we all sell Kraft Singles. It's still Pasteurized Prepared Cheese Product. That’s what’s happening.

Why are we suddenly acting like we cannot serve smaller, upwardly mobile customers? Why are we suddenly acting as if all financial knowledge begins and ends with the S&P 500 and Treasury ladders? Why are we racing to the bottom on fees? Why do we value our time so cheaply?

Regulation isn’t an excuse to disregard the look in a client’s eye. It's not an excuse to sell short our own futures. It’s a catalyst to demand more for ourselves and our clients. "Independent" doesn’t mean "alone." Altogether, we’re a massive force to be reckoned with. They’ve got the guns, but we’ve got the numbers.

2) Change the game… again.

We did it once. In the 1990’s, we left the wirehouses and commissions behind, and built fee-based, independent advice. We grew it from a blip to over 60% market share. Now we need to listen to our clients and keep innovating. People still want advice, not product. Now they want to buy it differently. Transportation, entertainment, hospitality--virtually every other industry has learned this. We must too. We need to weave ourselves into clients’ and prospects’ lives as they live them today. We need to answer questions when and where they need us.

There are people who are working to help us achieve these goals. Market76 certainly is. Even many of the big financial institutions are game. The demand is huge, and businesses want to make money! However, we need to prove our ability to adapt to change and espouse a compelling vision of the future. We need to provide our unique, subjective, messy synthesis of happiness and well-being when, where and how people want it. We owe it to our clients to drive the conversation.

For those of you who skipped to the end:

We advisors have an amazing opportunity. Regulation demands objective advice. $30T of wealth is about to pass to generations that demand objective advice. Technology enables independent service providers to band together to provide better service, for better prices, in a model that consumers love. And we have worked and sacrificed to position our businesses to flourish in this event. We were right. We did right.

We also have an amazing responsibility. We have to use our strength to deliver the value we promised our clients. We promised to protect them. We promised to protect their children. We promised to help them use their money to pursue happiness, not just survival.

We can do it. We just need to work together and keep innovating. We’ve dedicated our careers to this. We aren’t going to quit with the finish line in sight.

I’m going to be meeting with advisors all across the country this summer-- sharing their stories and their visions for shaping the wealth management industry to benefit the customers— and incorporating the best ideas. In a couple months we will release new software that helps advisors provide sophisticated, legally and ethically responsible advice to all types of clients. We are going to help automate the process of getting people to great advisors and advice rather than throwing wads of money at another effort to replace complex thought with beautiful packaging wrapped around Pasteurized Prepared Financial Product.

If you’d like to chat or just follow along, subscribe to our newsletter or shoot me a note.

Friday, May 20, 2016

People without assets still need financial advice

That isn’t to say that providing general financial information isn’t useful, it’s just important to recognize that it’s really not enough. Resources abound for how to pick the best credit card and which which ETF-selection software has the best tax-loss harvesting, but talking about a bunch of individual issues like that isn't as helpful for someone trying to take stock of their broader financial situation, particular when problems arise.

The following two stories are of real people who had real issues and really wanted advice. Unfortunately, it wasn't so easy to get. (Names have been changed for sake of anonymity).

First, a growing family with some out-of-the-blue financial stress:
John and Sally ran their main credit card to the limit because a pothole trashed their car on the same day the old water heater in their basement finally gave in to its age. They had a mortgage payment due in a couple weeks and were still saving for a family vacation later this summer. Their kids will finally be big enough to go on the teacup ride at Disneyland (everyone’s very excited about this).
They earn enough to support their family and make regular contributions to retirement and college funds, but now they’re in a bind. There isn’t a financial planning calculator widget in the world that can tell them how to make sure little Jimmy gets to ride the teacups without having to dismantle their savings plan or take on perpetual credit card debt.
They don’t have a financial advisor because they were once told that to wait a few years because the overhead would make it impractical. Their story is still unfolding, but they ended up opening a new (slightly lower, but similar rate) credit card, and know they've basically just kicked the can down the road.
Now a story about a practical student who was turned away:
Samantha grew up in a quiet middle-class suburb in the Bay Area and went to an Ivy League college. She then worked for her congressperson for two years before going to law school. She has some student loan debt from college, a credit card to keep in check, and a lot more upcoming debt to pay for law school--all in all, nothing terribly out of the ordinary.

Ever the pragmatist, Samantha wanted a plan to start saving constructively while still paying down her loan debt on a reasonable timeline. After a lot of online research, she had what she thought was a good plan, but still wanted some validation and didn’t know how to execute it.
She scheduled an appointment to talk with someone at the local branch of her bank, but left disappointed after essentially being told that she needed to have more money before they could provide her with much advice.
Even if that particular case was a fluke and another agent or bank might have been more helpful, we know that the underlying problem is real. People like Samantha don't have many options when it comes to getting sound financial advice.

This basically boils down to two main problems:

It needs to be easier for people to get sound, personalized financial advice.
Not just an optimized portfolio or projected plan, but an honest-to-goodness recommendation from a professional advisor about a single person’s unique situation at a particular point in time.
There are a lot of barriers--both real and perceived--around getting financial advice that keep people from getting it. Advice columns on the topic alienate a lot of people with simulations that “Assume $100,000 initial deposit” or budget planning modeled on a $125,000/yr salary. Most people don’t have $100,000 or $125,000 in annual income, let alone investable cash. Some of them may in the future, but they all need advice now.

It needs to be easier for advisors to provide lightweight services while maintaining profitability for their businesses.
Some people will never have enough assets to carry a traditional advisory fee or enough transactional business to earn much from commission, but there are a lot of people in their 20s and 30s who probably will in the future. Either way, they need advice now and it needs to be cost effective for advisors to provide it.

If you’re an advisor reading this, what are you doing to ensure your business has a steady stream of new assets through the generations? There are literally millions of millennials who need advice and can become great clients for you in the long run. How are you helping them today?

At Market76, we’re focused on solving those problems and making it easier to give and receive sound advice. If you want to learn more, get in touch through our website or follow us on social media @Market76.

Friday, May 13, 2016

Thursday, May 12, 2016

NextGen Wealth Management: Building Relationships With the Next Generation

First, good advisors provide way more than asset allocation.

Second, the commercials feel cheesy.

Third, clients pay advisors to take the long view.

Lurking in the background--never voiced but too often felt--is a more nerve-wracking vibe. The kid in the commercial looks like a heap of millennial stereotypes.

Get the salts! $30T of wealth is about to flow into people who prefer Snapchat to the Smith Barney guy! The industry has valued robo-advisors at nearly $1 of market cap for every $1 in AUM! Advisors are dinosaurs, about to go the way of the travel agent and the buggy whip!

Fortunately, this is not true. Over the last 5 years, self-directed investors have dropped in number relative to "validators," people who pay for help addressing specific issues. The rise of the "robo" industry has coincided with increased advisor use. Generations X and Y are about 60% more likely to be validators than "self directed." In fact, young people want advice. What they don't want is to be patronized or taken for granted.

The Schwab commercial lays bare a fundamentally silly and easily correctable error that some advisors seem intent on making. They don't build good relationships with their clients' children.

Sure, they talk to the kids. They take the family out to dinner. They ask about the Masters thesis (kids love 529 plans!). They roll out a robo-advisor solution that some asset manager sponsors (kids love Internets!). They cut a check every month to help subsidize Brooklyn rent (kids love Girls!). They send article links through social media (kids love being surveilled!). So the relationship many advisors build with the next generation is that of a generic, nearly-modern corporation. No wonder the kid in Schwab's commercial is willing to dump his father's two decade relationship for the call center worker-du jour.

OK- that's not you. Except, about 2/3 of advisors lose a family's assets when the wealth transfers. So why not become the kids' sage advisor? You have a competitive advantage in providing a service they want-- advice, expertise, help navigating an uncertain world. Great advisors are more than asset allocation machines attached to KYC questionnaires, and great advisors get to grow their businesses generation to generation.

There are lots of ways to accomplish this. Financial planning. Helping with the first car lease, renters' insurance, the first mortgage without mom and dad. People--of every age--like to feel independent.

A huge, and really easy, way to help is working on student loans. You know what the kids are searching for on Google these days? Loans. It's the #2 most expensive keyword. It's helping Bernie get an awful lot of votes. And all you have to do is help them get a good rate. Sure, parents want kids to learn the value of their education by sharing the financial load. That doesn't mean kids should pay exorbitant rates. You can show them the value of an advisor by pointing them in the right direction and helping them fill out the application. It will take 15 minutes. And it might save you millions in AUM and practice value in a few years.

Market76 members get good deals for their customers (and we provide administrative support) when working with SoFi. But there are tons of great resources.

Schwab's commercial is off base. However, advisors who hope their clients will sell the next generation on their services are off base too. Interest compounds. Rising generations want and need help--often more than their parents. And Millennials are the most brand-loyal generation. Smart advisors don't get angry. Smart advisors see an opportunity to provide a better service than the big financial institutions, just like independent advisors always have.


Monday, June 22, 2015

How Tesla fits into the average portfolio

Tesla (NASDAQ: TSLA) has consistently outperformed the S&P, yielding strong returns since its IPO in June of 2010. It has been called the ultimate growth stock, a long term value play, overpriced by Goldman Sachs and Barclays, and underpriced by Stifel Nicolaus. Even Elon Musk, CEO of Tesla Motors, was quoted saying the stock may be overvalued in September of 2014. Most recently, Musk has stated that he believes Tesla can grow by 2,700% in the next ten years, putting it on par with Apple Inc.'s (NASDAQ: AAPL) $700B market cap.

Whether you hold Tesla for its anticipated growth or long-term value, putting it in the context of other securities is helpful. To get an idea of how investors, financial advisors, and money managers classify Tesla, let’s look at securities most frequently paired with Tesla.

Unsurprisingly, 65% of advisors that hold Tesla also hold Apple. There are striking similarities in their innovative approach and sleek  product aesthetic. Apple dominates the tech market in consumer goods with products like the iPhone and iPod. Tesla is in a great position to leverage its already strong foothold, break into mainstream consumer markets, and significantly impact the motor vehicle industry.

The next two securities Facebook (NASDAQ: FB) and Google (NASDAQ: GOOG) are both strong contenders in the NASDAQ. Both of these companies are similarly regarded for their forward thinking, and innovative spirit. Looking at the top 3 securities paired with Tesla makes a reasonable case for Tesla's strategic growth positioning.

As we go down the list we notice a handful of blue chips added to the mix, indicating Tesla’s association with large value companies. A market cap of $31B puts Tesla on the smaller end of large caps, but that doesn’t stop investors from utilizing the potential long-term value of this position.

Overall, it's impossible to predict how the company will grow, but taking a look at how it is strategically placed among peers can give us an idea of investor outlook.

Monday, June 8, 2015

Taking a Look at Asset Manager Brand Loyalty

Wallet share, allocation penetration and fund diversity are critical metrics for asset managers. Increasing the percentage of assets from pre-existing advisor relationships can dramatically cut marketing and distribution costs. These metrics give insight into a firm's success at creating brand loyalty among their advisor clients.

Three simple metrics we looked at to give a snapshot of a firm's success at creating brand loyalty:
  • Wallet Share - the percentage of assets and advisor allocates to an issuer
  • Unique Products - the number of products an advisor has of an issuer
  • Account Coverage - the percentage of accounts an advisor allocates a product of an issuer

Wallet share is a strong success metric of an advisor's comfort with an issuer.

American Funds and DFA demonstrate success in building significant wallet share with their advisor clients. Affiliated distribution channels and dedicated client service are two factors that may influence their success.

An issuer's utility is reflected in part by the spectrum of products an advisor holds.

Joining the usual suspects, ETF providers dominate the list. Versatile product suites coupled with lower costs appeal to advisors by making it easy to meet additional portfolio needs with an issuer they already know and trust.

Account coverage demonstrates an issuer’s ability to penetrate an advisor's book.

Behringer, Oppenheimer and SA Funds are successful at penetrating allocations across an advisor’s book, putting them in a strong position to capitalize on their broad coverage.

Overall, American Funds and Dimensional Fund Advisors have a strong hold on all three metrics. Ingenuity and persistence places them in a favorable position, while brand loyalty creates the trust to carry them through turbulent conditions.

Monday, June 1, 2015

The World's Most Sophisticated Investors Still Seek Active Management

As the retail asset management industry (and "technology innovators") drive investors into the passive management philosophy, the world's most respected managers are still seeking to outperform the market.

From Yale's 2014 endowment report: "Investment management involves as much art as science...Despite recognizing that the U.S. equity market is highly efficient, Yale elects to pursue active management strategies, aspiring to outperform the of fees..."

There are plenty of explanations for why each party does what they do. After all, professional investors are just that- professionals. But as the bull market rages on and top institutional investors continue to position themselves less and less aggressively, one wonders how the average SPY-holding american will react when the next down market comes around.

Certainly, we are in the time in a cycle when investors are "greedy" and indexing might be the best way to express that emotion these days. The real test awaits the indexing movement- when the market turns. Will investors seek safer assets at just the wrong time or will we see a decidedly more educated investor- willing to wait out the bottom?