Inside the Minds of Barron’s Top Financial Advisors

This is a summary of a panel from the Fiserv Client Conference Spring 2012, which was held in Las Vegas, NV.


Sterling Shea, Managing Director, Head of Advisory & Wealth Management Programs, Barron’s.


Ed Dollinger, Edward Jones, 26 years – manages $500 mm

Theresa Chicopolos, CFP, Wells Fargo, Scottsdale, AZ, 26 years – manages $1.16 bil in Ultra-HNW and Institutional assets, she was the #1 ranked advisor in Arizona in both 2010 and 2011.

John Waldron, CFP, Founder and CEO of Waldron Investments, $2.2 bil AUM, HNW individual and institutional clients, #1 ranked advisor in Pennsylvania.

What functions are you allocating more time to now than you did five years ago?

net new flow of money is concentrated in a small number of advisors, these advisors adapted their methods of communication and internal processes to the evolving consumer needs.

Chicopolos has been steadily reducing the number of client relationships over the past ten years in order to concentrate the firm’s focus on fewer while still increasing the overall AUM. 10 years ago, she had 3,500 clients and it was mostly transactional business. 5 years ago she was down to 280 clients, and today she has just 75. She spends more time now looking at her client’s entire balance sheet and making sure that they execute the plans as they are designed.

Waldron Investments is a consulting firm with 26 employees that has an independent asset management offering that integrates with the other seven financial disciplines. Five years ago they were mostly doing the same things as today, which is understanding the client’s entire balance sheet and implementing financial strategies. What has changed significantly is their client’s psyche, he said. More clients are doing due diligence on them than five years ago.

Previously, Dollinger’s firm focused more on portfolio construction, but now they’re focusing more on strengthening client relationships. Over the past five years they’ve been trying to reduce the number of client relationships and increase the amount of assets at the ones they have, he said.

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Rep as PM: The Inside Scoop – Part 2

This post is a summary of a session from the MMI 2011 Fall Solutions Conference that was held in NYC. It is part 2 of a 2 part series. Click here to read Part 1.

Marc Zeitoun, Managing Director, Head of Distribution, Rydex/SGI

Jay Link,
Managing Director, Managed Solutions Group, Merrill Lynch
Peter Malafronte,
Executive Director, Managed Accounts, UBS
George Raffa, National Sales Manager, Asset Management Division, SVP, Raymond James

I felt that this was one of the most useful sessions at MMI because the panelists all shared lots of information about their firm’s advisory business, including statistics (my favorite) and details about the inner workings of their programs. Also, the moderator did an excellent job moving things along and asked insightful follow-up questions, which gave the panelists a chance to elaborate on some key concepts and helped make the session more interesting.

How do Rep as PM and Rep as Advisor programs work together?

Peter agreed that the two platforms are complimentary and the decision as to which to choose is mainly a client preference issue. It depends on whether or not they want to be involved in the decision making process, he said.

Also, Rep as Advisor is sometimes considered to be a “farm league” for RPM clients, Peter joked. Once a client has worked with an advisor in a non-discretionary program, has developed trust and understands how the advisor thinks about investments, portfolio construction and managing risk, that client is more likely to feel comfortable moving into a Rep as PM program, he asserted.

Marc added that the conventional wisdom says that RPM assets are the stickiest and least litigious. Additionally, they have higher levels of client satisfaction.

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Delivering Advice in Unpredictable Markets

This post is a summary of a session from the MMI’s 2011 Annual Convention.

The moderator for this session was Anthony Rochte, Senior Managing Director, Head of North American Intermediary Business Group, State Street Global Advisors. The panelists were Hans Asoera, Principal, Financial Advisor, Edward Jones, Stephen J. Cucchiaro, Founder and Chief Investment Officer, Windhaven Investment Management and Mary B. Mullin, Managing Director – Investments, Merrill Lynch Wealth Management.

Anthony started off by quoting from an investor survey done by IBM that asked one simple question, ‘Would you recommend your financial advisor to someone else?’ Only 13% would recommend, 50% would not, while 33% didn’t even care!

How Efficient Are Markets?

According to research done by Windhaven Investments, most markets are macro-efficient and micro-inefficient, Stephen reported. There’s so much competition in trading individual companies, that Windhaven decided to invest only at the asset class level. They focus on the world’s top 20 asset classes, all in ETF index form,  since they’re a very tax efficient and a cost efficient way to participate in many asset classes.

Markets are never in equilibrium, they’re always in a state of flux, Stephen noted.  Therefore, Windhaven employs a dynamic asset allocation since prices don’t fluctuate randomly, they often make very wide swings.  They look for opportunities and take advantage of inefficiencies, he said.

“The very notion of ‘market equilibrium’ is phantom,” according to hedge fund manager, Bo Peng, from his blog post, Why the Market Is Never Right.  He continues:

This is arguably the biggest myth perpetuated in financial theory. The market is a chaos system (but with a big dose of intrinsic randomness added), with intrinsic non-linear positive feedback, that never settles down.

Can you build an endowment model for a retail investor?

Merrill Lynch doesn’t use endowment models for retail investors, Mary said.   However, more advisors are using all cap strategies to increase liquidity, she reported.  Correlation theory isn’t working, so advisors are trying to lower risk using ETFs and mutual funds.  But are they getting alpha?  “How are they measuring risk?”, Mary asked.

The head of the Windhaven advisory board “invented” the endowment model when he was at Harvard Management, Stephen responded, and he would be the first to say that it isn’t appropriate for every client. The main problem is liquidity, since endowments often invest in illiquid securities. This became a problem during the downturn in 2007.

The issue of liquidity problems when implementing an endowment model is the main reason why advisors should use caution before recommending an endowment model to investors.  As explained in the book, The Endowment Model of Investing: Return, Risk, and Diversification (Martin L. Leibowitz), advisors should know that:

The modern endowment model is not a magic potion that will smooth returns and lower short term volatility, but rather a strategy for accumulating incremental returns and achieving more divergent outcomes — over the long term.  One critical implication is that the endowment model should continue to be an attractive option for long term investors that are able to ride out periods of significant short term volatility.

How do you measure client satisfaction?

Edward Jones uses a metric called “client service excellence,” Hans explained. Analysis of the results identified three specific movers that improve client satisfaction: 1) Frequency of contact, 2) Clear understanding of fees, 3) The number of transactions.

Advisory accounts have an advantage over brokerage accounts when comparing scores in client service excellence, Hans argued, because 1) more time is available for contacting clients since investment management is outsourced; 2) explaining fees is easy since asset classes don’t have different compensations rates; 3) there are no commissions on transactions.

What is behind Windhaven’s success in the past five months?
Windhaven had about a 60% annual growth rate from 2002 when they had $70mm in assets to 2011 when they have $6 billion, Stephen noted. A lot of this is due to their team and relationships to advisors and brokers, he said. Clients today are more aware of risk. Model portfolio theory, which was invented in the 1960’s, doesn’t get to where the real risk lies. Windhaven’s ability to control risk has helped them generate trust with clients.

Clients don’t want to strike out, Stephen noted.  By staying diversified it’s possible to smooth out your returns.  After experiencing liquidity problems in 2008, investors are looking for safer solutions, Stephen commented. Windhaven’s portfolios are 100% ETFs, Stephen said, but instead of buying from the retail market they go right to manufacturers of the ETFs to get better prices for their clients.

“I don’t have to hit a home run, the occasional double or triple is fine, I just don’t want to strike out,” Stephen joked.

Does your firm use alternative investments?

Edward Jones doesn’t use alternative investments, “we’re too conservative,” Hans stressed.

Merrill Lynch’s research recommends allocations to alternatives at all risk levels and all liquidity levels, Mary commented. However, their lack of transparency, lack of liquidity, and tax reporting issues make them difficult to manage and their fees often can’t be justified. They’ve tried to find AI proxies with mutual funds. While they’re not perfect, they can be used to replicate the space. “We pretty much avoid traditional AI in order to stay liquid,” Mary said.

Some of Windhaven’s growth comes from investors looking for alternative returns. “We’ve been called “the alternative to alternatives,” Stephen claimed.

SMAs That Act Like Alternatives

This post is a summary of a session from the FRA’s 8th Annual Managed Accounts Summit.

While many money managers have been switching client assets into alternatives in their search for better returns, David M. Spungen, Chief Executive Officer of Hillview Capital Advisors, LLC, believes this is a bad idea. For a taxable individual, alternative investments, particularly hedge funds are extremely tax inefficient. They’re also expensive in terms of fee structures versus separately managed accounts.

According to David, Hillview does their own research and tries to locate managers that operate like alternative investments. They must be in separate accounts, with generally very workable minimums and reasonable, flat fees.

For example, Winward Investments (which was purchased in August 2010 by Charles Schwab for $150mm) has been successful in attracting assets from individuals, RIAs and large institutions, David revealed. When Hillview found them back in 2003 they were managing only $200mm.  By the time they were acquired their AUM was $3.9 billion.

What Winward has done is similar to what most fund of hedge funds are pitching, David said. Good risk adjusted returns, with much less volatility, and less exposure to a significant decline in equity markets. They have daily liquidity, a fair amount of tax efficiency, flat fees and total transparency. Winward runs essentially a global, multi-asset class strategy. They were also one of the early adopters of ETFs, which, David suggested, is one of the reasons that Schwab bought them.  (for more info, click here to read an interview with Stephen Cucchiaro, President, Windward Investment Management)

In 2008, Hillview started using a strategy that invests in both fixed income and closed-end funds on a hedge basis. It’s very tax-efficient since the fixed income side is invested munis.

David explained another reason for their tax-efficiency. If closed-end funds go to significant discounts to NAV, a lot of them overpay their dividends. They may go to a managed distribution policy and decide to pay 7% a year, for example. Hillview may earn 3% in dividends and another 2% in realized capital gains, which is basically just returned capital. So a lot of the return they get winds up being returned capital, which is very tax efficient, he explained.

RIA’s Turning to Alternatives

After the financial meltdown of 2008, a “flight to safety” defined the investment landscape in 2009.   But if media headlines are any indication, 2010 may be defined by a boomerang effect, caused by advisors shifting client portfolios away from ultra-conservative holdings into more alternative investments such as hedge funds, currencies, limited partnerships, structured notes, private equity, etc.  The recent period of market calm may also prompt some clients to consider switching advisors, which could put pressure on advisors to increase short-term performance.

Betting on Currency

According to a study from Rider University, which I found in “Betting on Currency” from Financial Advisor Magazine, advisors are adding currencies to their client portfolios to simultaneously reduce risk and improve returns.
The report suggests that financial advisors shouldn’t depend just on foreign stocks or bond funds for currency diversification.  The reason being that foreign stock markets have higher correlations with U.S stocks, while foreign currencies have a lower correlation.
Advisors may also be attracted to foreign currencies due to the looming threat of inflation.  “The U.S. is printing more money than other countries,” states Axel Merk, manager of the Merk Hard Currency and Absolute Return Fund. “The dollar is weak and deteriorating.  A flight to safety will benefit the U.S. dollar less than in the past.  The U.S. dollar will be a loser for the very long term.”

A Hedge Fund Resurgence

After four quarters of net withdrawals, hedge funds recorded net asset inflows in the third quarter of 2009 — adding $1.1 billion in new capital, according to a recent recent survey by Financial Research Corporation.  RIA firms were responsible for some of these asset flows and some have plans to invest more.  In fact, advisors in the RIA channel are more comfortable with alternative investments including hedge funds than their wirehouse counterparts.

According to Ron Fiske, Executive VP at Fidelity Institutional Wealth Services, assets on their alternative products platform grew 50% in 2009. In a study of 200 RIAs, more than half plan to increase their allocation to alternatives, including hedge funds, in 2010.

Advisors Face Knowledge Gap

An article in Financial Advisor Magazine, quotes a report from Cerulli, saying that while many alternative investments did poorly themselves, most still outperformed market benchmarks.
The Cerulli report shows that there is a lot of room to grow since most advisors haven’t used alternatives in clients’ portfolios: Fewer than 10% of advisors surveyed by Cerulli have put client money into hedge funds, limited partnerships, structured notes or private equity.  Slightly more advisors use commodities (15%) and managed futures funds (13%).
Some advisors are increasingly turning to their broker-dealer’s internal research teams through managed account programs that can offer client risk-profiling and incorporate a variety of strategies in one account, Cerulli found.