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Advisors Discuss What They Want

By Lee Kowarski

In our most recent FA Vision benchmarking survey, one of the 100+ data points we gathered from 3,162 financial intermediaries were their opinions on the types of support they want from product manufacturers they are not currently receiving. While the answers ran the gamut from "lower fees" to "golf balls", a number of valuable themes emerged that should inform asset managers' distribution efforts, including a desire for the following:

• Clear and Concise Marketing Materials - Many advisors commented on the fact that literature is often too complicated for their clients to understand, and on many occasions it is too confusing for the advisor as well.
• More Detailed Data/Analysis - Advisors requested better attribution analysis, analytics on how funds fit into portfolios, competitive analysis, etc.
• Ideas & Insights - Advisors desire not only insights into what is going on in the markets, but also how other advisors are gaining and retaining business, marketing their services, and building portfolios.
• Financial Support for Client Events - While advisors recognize the tight budgets most wholesalers have to work with, many continue to express a desire for additional financial support for client events.
• Personal Support without Significant Business - A number of advisors feel that while they are not a top producer for a given asset manager, they still want and deserve personal support from that firm (whether it be in person or over the phone).

If you are interested in learning more about advisors behaviors and preferences, as well as getting specific feedback on your company's efforts, let me know at favision@kasina.com.

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Declining Margin Trends Signal Maturing Industry

By Eric Daugherty

In prior blog pieces (see here) we have looked at quarterly margins and seen that they are largely driven by movement in the markets. However, over longer periods, it becomes clear that our industry, like other maturing industries, is experiencing margin compression.

Using the earnings results of publicly-traded asset managers, we examined the operating margins (operating income/revenues) and net margins (net income/revenue) since 2000. While the firm-to-firm margins vary wildly over these spans, industry margins have come down. Note that at both the beginning and end of this period the broad market Wilshire 5000 has been near the same level. However, industry operating margins have decreased from 39% to 29%, and net margins have declined from about 27% to 20%.

This compression is exactly what we would expect to see in a maturing industry. Competition and a shift from easy growth of the market, to fighting for a share of a slower-growing pie, mandate shrinking margins. It happens in all industries eventually and will continue in the U.S. financial services industry.

So, what can/should firms do about it? There are a few options:

Prop up margins by:

a.) Focusing on higher revenue products, geographies, or segments

• Differentiated products with believable alpha stories that sustain higher fees


• Go international, into less mature markets with less price competition


• Focus on market segments where the firm has a competitive advantage (e.g. retirement, where no one is an acknowledged leader)

b.) Cutting costs at a given level of revenue, like using the Web to drive efficiencies

Live with decreasing margins, and make money on volume (we've been talking about scale a lot)
a.) Compete on price on commodity-like beta products
b.) Get scale via acquisitions and organic growth of core funds

Long-term, there will be a shakeout, as stronger firms survive and thrive, while others wither. This may not happen for ten years, as making 30% operating and 20% net margins is still fairly attractive. Short-term, we expect firms to fight to maintain margins by ramping up marketing and striving for organic growth. However, the tea leaves are clear - margin compression has begun.

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kasina Study Highlights Compensation as Strategic Management Tool

By Steven Miyao & Aylin Von Meer

Next week, kasina will release "Compensation as a Strategic Management Tool: Aligning Sales & National Accounts with Company Objectives". While a number of asset managers have made potentially productive adjustments to their compensation plans as a result of the current economic crisis, many compensation systems as a whole fail to align compensation strategy with company objectives. Firms should therefore use sales compensation as a strategic management tool to accomplish four fundamental goals of compensation:

We are encouraged to see signs that firms are adopting practices which we have been writing about for some time. The market has enabled firms to moderate the expectations of internal and external wholesalers to keep compensation essentially flat from 2009 to 2010 (see below). Composition of compensation for these positions has altered slightly to increase the proportion of base compensation and reduce variable compensation.

Moreover, to recognize their strategic importance, firms have increased pay for Heads of National Accounts, as well as for Internal Wholesaling Managers and National Sales Managers, acknowledging the importance of having a strong internal team and a seasoned National Sales Manager able to recruit and retain talent. Similarly, Hybrid Wholesalers got a bump in recognition of their value to meeting objectives of the firm.

Despite that, all firms struggle to balance competing objectives. In particular, firms are challenged to:

• Keep their best, most experienced performers motivated with appropriate rewards
• Stabilize pay in all markets with adjustments to compensation components
• Manage sales costs by using net sales or proxies

The report makes several recommendations to better align the compensation strategy with company objectives and optimize the compensation structure:

• Reward intelligently to ensure reasonable pay and keep top performers motivated
• Incent productive activities as well as results
• Tie sales to profitability
• Manage change responsibly

In an ever more competitive marketplace, firms need to embrace sales compensation as a strategic management tool to attract and retain great sales people and focus on building profitable relationships by selling a full array of products. A combination of the four recommendations above will help firms to achieve a tighter integration of the sales team to the firm's overall corporate strategy and nurture loyalty among the sales force and a desire to participate in the firm's successful future.

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Industry Margins Retreat a Bit as Market Bounces Up and Back

By Eric Daugherty

Second quarter operating margins for the publicly traded asset managers retreated just a bit to 28.1%, from 28.6% in the 1st quarter. Average AUM for these firms shrank 2.5% in the quarter, as the equity markets measured by the Wilshire 5000 advanced 5% in the first quarter, then rose another 3% in the second before falling 18%. Positive cash flows cushioned the AUM decline. Revenues for these firms gained 4%, but expenses rose 5% from the prior quarter, compressing margins slightly.

Source: Yahoo! Finance

Firms continue to be clustered in a pack, with a few margin stars popping out of the top of the cluster and a few firms still struggling to get back into the pack.

Given the decline in markets over the course of the 2nd quarter, we should see narrower margins again in the 3rd quarter as average quarterly AUM declines (unless, of course, we get a big market surge).

As you'll read about in a blog piece coming soon, even more interesting than the quarterly meanderings of margins is the slow erosion of them over time. We extended our analysis back to 2000 and found evidence of a maturing market with margin compression, which holds significant implications for asset managers.

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Dealing with Teams of Advisors

by Lee Kowarski

According to our most recent FA Vision Benchmarking Survey, the average advisor now works on a team with three other investment professionals and two support staff. With over half (53.3%) of advisors working on a team with at least one other advisor, asset managers must adjust how they track and support financial intermediaries.

Most asset managers are not currently set up to be able to effectively support teams:

• Most firms' systems track individual advisors separately from their team, leading to duplicate and inaccurate entries for customer relationship management and sales reporting
• Most firms' Web sites do not allow an advisor to easily share content with another advisor on their team
• Most firms' metrics for wholesalers do not take teams into consideration (e.g. wholesalers are asked to identify their "Top 200" advisors and incented to build business with those individuals)
• Most firms' Web sites do not easily allow a sales assistant to access information about a team's book of business or specific materials for specific advisors on a team

The trend towards teams has only accelerated over the past decade and all asset management firms should look at how they market, sell, and service advisors to see how this can be improved to better support teams. This will require changes to CRM and sales reporting systems, enhancements to Web sites, additional training for wholesalers, and more.

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Quality of Asset Manager Online Capabilities Impacts Advisors' Product Decisions

by Eric Daugherty

The fact that quality matters would not be a revelation in most arenas, but when it comes to asset managers' online capabilities, for some reason it is a surprising finding. Some firms have approached the Web with a "check the box" mentality, but not with the commitment and gusto necessary to differentiate the firm. However, it turns out that a top-notch Web presence is more than just a pretty face for the firm; it can help to drive business.

Recently, kasina released What Advisors Do Online (WADO) 2010. We found that many of the trends identified in past versions of the WADO series were confirmed: advisors are spending even more time online, gravitate to firm intranets first, are increasingly using mobile devices to communicate, access, and share content, and are warming up quickly to social media.

Most notable was this: 71.1% of advisors say that the quality of a firm's Web site impacts their usage of the firm's products. Put simply, a good Web site translates into revenue. This reinforces the need to continue to tie e-Business team output to business metrics as we talked about in our Optimizing the Role of e-Business report.

Key Findings from the What Advisors Do Online 2010 report include:

• 94% of advisors visit firm intranets


• Over 90% of advisors visit asset manager public or advisor sites


• Wholesalers who discuss firm Web sites with advisors impact use of those sites


• 75% of advisors use some form of social media, and 22% do so daily


• A majority of advisors uses mobile devices to access work content


• More than two-thirds of advisors share content with clients

Significant recommendations for improving online quality of asset managers emerge from the report. Among these are:

• Be everywhere advisors are online (intranets, industry and social sites) with content they want


• Make content portable and shareable


• Rationalize e-mail strategy to insure relevance and interaction

Advisors have spoken. Online capabilities are more than table stakes - they can be a differentiator. Advisors are more likely to buy products from firms with great online presences. The next move is up to asset managers.

We will not have to wait long to find out which firms' sites are the best, as our annual Top 10 Web Sites for Financial Intermediaries is coming up in September.

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Competing on Advisor Services in the Small Retirement Plan Market

By Rubesh Jacobs

Companies such as Bank of America Merrill Lynch, ING, Mass Mutual, ADP, American Funds, and John Hancock, are fierce competitors in the small (less than $5 million in assets) and medium (less that $20 million in assets) retirement plan space.* (Lemann, M.)

Some of these firms (e.g., Bank of America Merrill Lynch, ING, and Mass Mutual) are also significant players in the large (greater than $20 million in assets) market. In the larger plan space, as a result of the scale, where they compete on the level of their services to woo top retirement advisors, top advisors receive customized, high-touch attention.

Most of the very same top advisors also serve clients in the small and medium plan space as well. As a result, firms focused on the smaller plan market are compelled to compete on the quality of their services in order to woo business from top advisors.

So, the question is: how can firms focusing on the smaller plan segment cost-effectively compete with larger firms, providing higher levels of services to advisors?

Our research and experience in the small retirement plan space suggests the following steps:

• Segment advisors: Top advisors deserve the best services the company can offer. Not-so-top advisors deserve not-so-top services. So, analyze your book of business to understand who your top and bottom performing advisors are. Once established, create the platinum, gold, and silver service packages. Use these packages as a recruiting tool as well as a carrot that encourages higher performance.
• Provide an integrated online and offline service experience: Integrate your backend systems and processes so that from an Advisor's perspective, your services are consistent whether they call or go online. A service rep should have an intimate knowledge of the advisor and his/her plans to be able to provide customized, high-touch service. The Web site should mirror the same level of information, accuracy, and consistency.
• Use a performance dashboard: Develop a small, but insightful set of metrics that reveal performance of advisors, quality of service, and the economics. The metrics should be used judiciously with each segment of advisors to improve growing relationships, mend those with high potential, and end unproductive ones. Conversely, firms can also use the dashboard to "promote" advisors to Gold, Silver, and Platinum. Most firms are adept at measuring the quality of service using internal metrics. Operational metrics notwithstanding, the quality of service is truly determined by the recipients. So ask advisors, sponsors, and participants. Last, but not least, observe the financial performance metrics over a few quarters to account for seasonal patterns before digging deeper to capture the value from the new services platform.

Bibliography:
*Lemann, M. (2010, June 16). Ignites. Retrieved 07 22, 2010, from http://www.ignites.com/c/114643/10983/vanguard_fidelity_bofa_brands_score_market

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Ivy, JPMorgan, & MFS Lead Critical Categories in the Q2 FA Vision Benchmarking Survey

by Lee Kowarski

While I always caution asset management firms not to simply copy what they see competitors doing, it is always important to understand best practices. Managers can certainly learn from efforts that resonate in the minds of advisors. To that end, kasina's 2nd Quarter FA Vision benchmarking survey gathered responses from 3,162 financial intermediaries between April 29th and June 11th, 2010. As we do twice per year, we asked intermediaries about their investment behavior and asset allocation, as well as firm-specific topics, such as wholesaler effectiveness and brand perception.

Among many other findings, some of the firms that scored the highest in the Q2 survey were:

• Most Advocates for the Firm (highest % of intermediaries that would strongly recommend the firm to a colleague): Ivy Funds
• Most Advocates for the Firm's External Wholesalers (highest % of intermediaries that would strongly recommend the firm's externals to a colleague): MFS Investment Management
• Most Advocates for the Firm's Internal Wholesalers (highest % of intermediaries that would strongly recommend the firm's internals to a colleague): JPMorgan Asset Management
• Best Sales Literature: American Funds
• Best Sales/Building-Building Ideas: MainStay Funds

If you think that your firm belongs among the leaders, send me an email to discuss being included in the next survey. And if you haven't already, you should subscribe to the FA Vision "Nugget of the Week" newsletter, to receive weekly insights on what advisors think about your competitors and the asset management industry as a whole.

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Big Themes from Morningstar's Advisor Conference

By Deb Wetherbee

The Morningstar conference last week was a great place to observe wholesalers with advisors, see what products and vehicles advisors are looking for from asset managers, and glimpse a bit into the future. There were a number of good speakers, including some industry celebrities - although none of the post-speaker lines were quite as long as last year's wait for a Bill Gross photo. As I listened to the different analysts, portfolio managers and CEO's, a few things stood out for me:

• The panel of Morningstar analysts suggested that they would soon be segmented by passive vs. active instead of ETF, Fixed Income, Equity, and Global.


• The flows to fixed income are becoming an ever increasing industry concern.


• ETF's - Vanguard rolling out low-cost index ETF's and Grail, at the other end of the spectrum, rolling out a few more active, sub-advised ETF's.

There was a great deal of talk about advisors as fiduciaries, and the fact that investing is becoming more complicated (particularly with retirement income needs increasing). While I do believe this is all very true, it is interesting that the individual product structures are getting less complicated and assets are continuing to go to passive products. Interesting...

Many sessions addressed diversification and rebalancing due to the continued inflows to fixed income products. With the markets of 2008 still fresh in investor's minds and the increasing number of boomers reaching retirement, fixed income was bound to benefit. But, at this point, investors have missed out on equity markets. As one portfolio manager put it, the volatility seems worse because we are in the middle of it. When you step back and look at the Ibbotson charts over decades, the volatility doesn't appear so intense. It is critical to keep to your diversified portfolio and rebalance it, therefore making your advisor extremely valuable.

And ETF's were everywhere, from exhibit hall booths to sessions, to press announcements during the event. It seems as though the vehicle no longer matters, you can now get almost every investment strategy in almost every vehicle.

Perhaps it is difficult to manage your money. While the individual products have become simpler and the fees more transparent, designing, monitoring and maintaining the appropriate portfolio mix is that much more complicated. Add in the need to plan withdrawals during retirement and it is easy to understand why the majority of flows in our industry come through the intermediary channel.

Again, the conference is a great place to understand what advisors are looking for, or at least how they interact with your sales staff, get access to a few gatekeepers and take in trends on the investment management side. I look forward to watching further product development and education to get investors diversified and, of course, to see if Morningstar restructures the analysts by active vs. passive disciplines going forward.

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Helping Investors Measure Progress and Stick to Goals

By Eric Daugherty

Asset management firms currently have a huge opportunity to help investors help themselves. In the process, the firms stand to win the loyalty of customers long-term.

As anyone who's tried to lose weight, train for a marathon, or reach an audacious goal knows, one way to motivate yourself is to publicly proclaim the goal. Then, the real or perceived power of peer pressure and a supportive community come into play. When I ran one of my first marathons, I proclaimed my time goal to friends and family very broadly. When I was suffering during the race, the thought of my support group tracking my progress online, and the fear of letting them down, was powerful motivation.

However, support only helps when we are willing to reveal our current situation and our goals. This motivator never comes into play when it comes to finance, because we keep our situation so closely guarded.

I ran across this interesting article that highlights a NetworthIQ, a site that encourages sharing one's net worth with others; one goal of that comparing with others may spur more positive saving and investing behavior. The notion of baring our income, net worth, or lack thereof with others seems so radical. But, with American savings rates so low over the last few decades, and millions unprepared for setbacks and/or retirement, I can't help thinking that we would be better off with more comparisons, support, and information.

Perhaps asset management firms could and should play a role here. We already trust them with information regarding our finances. My primary financial institution knows a lot about my earnings, my wife's, our net worth, savings habits, and how we compare to others "like us" (age, income, family size, etc.).

As a financial planner, I know that the best financial advice most people need is "Save More". Yet, motivation for saving more, thus far, needs to be intrinsic to the individual. Tools such as stickk.com, Quicken, and mint.com, help one create and monitor goals, help to make goals visible and trackable, but they still rely on "self-reporting".

Most people know they need to save more, yet they don't do it. In How We Decide, by Jonah Lehrer, the author gives many examples where our emotional brain frequently overrides the rational brain. To make more rational financial decisions, we need more information, motivation, and support. Asset managers could be doing a better job providing all of these to their clients. If Amazon can tell me what books I'm apt to like, why aren't my asset managers telling me how my portfolio or savings rate compares to others like me?

While I do not think we will see everyone disclosing his or her net worth online anytime soon, I do hope that we will see burgeoning communities to support good saving and investing behavior, and I hope we will see asset managers supporting clients with more tools for comparing their behaviors to those of the broader public.

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