Financial Advisor Marketing & Technology

Marketing & Technology For Independent Financial Advisors

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Archive for March, 2009

Custodian Succeeding With Small RIAs

Amid the gloomy landscape stands an oasis: Shareholder Services Group.

About a year after Peter Mangan left TD Waterhouse Institutional in 2002, he along with Barry Boyte and a few other veterans of the RIA custody business started Shareholder Services Group (SSG). (See my April 2003 article.)

Initially, I had my doubts. Could a custodian focusing on small advisors compete? It was the middle of a bear market, and the established custodians were still struggling in the aftermath of 9/11. I feared they'd fall flat on their faces. Boy was I wrong.

SSG is now a custodian to 480 RIA firms and it is experiencing a boom amid the economic bust. While the $1.7 billion amount of assets SSG custodies for RIAs is dwarfed by the big-name custodians—Fidelity, Pershing, Schwab, and TD Ameritrade, SSG has built a profitable business around smaller RIAs that the larger custodians don’t value as much.

According to Boyte, since the market meltdown about 15 to 20 new RIA firms have been signing on with SSG each month.

About 75% of the new RIAs are registered reps coming from BDs, Boyte says, and the vast majority are dropping their securities licenses. With a new regulatory regime likely (see previous post), these registered reps seem anxious to move to a fee-only or fee-based business-model now rather than wait.

These advisors are probably moving now because they have less to lose. The stock market meltdown has eroded the value of their 12b-1 fees, making it easier to walk away from them.

Other custodians are saying they’re seeing an influx of new assets, too, but the details of SSG’s growth tell a compelling story.

“It’s a good business model,” says Boyte. “Peter Mangan laid it out in a business plan in 2002 and we’ve adhered to it very closely because it works. First and foremost, it’s about giving good quality service.”

How is SSG succeeding? Nothing fancy, no unbelievable tech story, no huge discounts. Just good service.

Boyte says SSG pricing is competitive versus other custodians, but what separates the firm is the deep experience of its principals and staff, and SSG’s sole focus the RIA custody business. In contrast, Fidelity, Schwab, TD Ameritrade, and Pershing are financial services behemoths with an RIA division.

Boyte says the firm is not trying to bring in more advisors because it fears service issues. SSG, he says, is able to maintain a high service level because it only hired personnel experienced in working with RIAs. “Everyone on staff here now worked with us at Jack White and TD Waterhouse,” says Boyte. “When we need a new person, we know where to go and who to speak to.”

Any advisor who is discouraged because of tough business conditions should take comfort from SSG’s story. If you’re smart enough to stay focused on your business model and on doing the right thing for people in this business, you, too, will probably be doing back-flips in a few years.

Schapiro: “Harmonize” RIA And B/D Obligations

Testifying before the Senate Committee on Banking, Housing And Urban Affairs Thursday, SEC Chairman Mary Schapiro submitted documents saying the agency anticipates “harmonizing investment adviser/broker dealer obligations.”

“We are studying whether to recommend legislation to break down the statutory barriers that require a different regulatory regime for investment advisers and broker-dealers, even though the services they provide often are virtually identical from the investor's perspective,” Schapiro said in prepared testimony. “Some of our rules regulating financial intermediaries need to be modernized, and the Commission is considering what, if any, legislation to ask for from the Committee.”

Along with her prepared remarks addressing the SEC’s priorities and possible reforms for restoring investor confidence, Schapiro submitted an appendix to her testimony to provide “an overview of the major functions of the SEC, a summary of recent activity, and the resources allocated to each function.” The document says that “anticipated 2009 activities” of the SEC’s Division of Investment Management and Division of Trading And Markets, which regulate RIAs and B/Ds respectively, included “harmonizing investment adviser/broker dealer obligations.”

In 2008, according to the appendix submitted by Shapiro, the SEC, using risk-based targeting, conducted examinations of 1,521 investment advisors (14% of registered universe of 11,300 registered investment advisors). During the same period, the agency conducted examinations of 720 broker/dealer firms (together with FINRA, 55% of universe of 5,500 registered broker/dealers examined).

Schapiro, who served as CEO of Financial Industry Regulatory Authority, the self-regulatory organization for broker/dealers, was appointed by President Barack Obama on January 20 and was confirmed unanimously by the Senate and sworn in as SEC chairman on January 27, becoming the first woman to serve in the post.

With her strong ties to FINRA, many RIAs have speculated that Schapiro would act to bring regulation of RIAs into alignment with brokers, a development most RIAs do not welcome and most B/Ds cheer. RIAs managing more than $25 million are regulated by the SEC while those with less than $25 million under management are regulated by state securities bureaus. Brokers are licensed by FINRA and supervised by broker/dealers.

Compliance regimes imposed by most B/Ds on registered reps are generally far more invasive and bureaucratic than the compliance system faced by RIAs. However, B/Ds have a long history of violating rules governing sales to retail investors, while instances of abuses by RIAs been comparatively rare.

The $65 billion Ponzi scheme by Bernard Madoff has created an environment in which investors and legislators are demanding change to the regulatory framework, which is widely considered to have been outmoded in recent years by the growing use of complex derivatives, unregistered hedge funds, and private equity partnerships, and the conflicts of interests at credit rating agencies responsible for passing judgment on debt issues that pay huge fees to the rating giants. In her prepared remarks, Schapiro’s promised to address a number of these issues.

While Schapiro offered no details about how she might bring BD and RIA regulation into closer alignment, her remarks make it clear that a review of the regulatory framework faced by RIAs is high on her list of priorities for 2009. An area affecting RIAs that she offered some details about are instances in which an RIA takes custody of assets. While few RIAs accept custody of client assets, the Madoff fraud would likely have been discovered sooner if stricter rules had been in effect governing instances in which RIAs take custody of client assets.

“I have asked the staff to prepare a proposal for Commission consideration that would require investment advisers with custody of client assets to undergo an annual third-party audit, on an unannounced basis, to confirm the safekeeping of those assets,” Schapiro said. “I also expect the staff to recommend proposing a rule that would require certain advisers to have third-party compliance audits to review their compliance with the law. And to ensure that all broker-dealers and investment advisers with custody of investor funds carefully review controls for the safekeeping of those assets, I expect the staff to recommend that the Commission consider requiring a senior officer from each firm to attest to the sufficiency of the controls they have in place to protect client assets.”

Schapiro said the list of certifying firms would be publicly available on the SEC's website so that investors can check on their own financial intermediary. In addition, the name of any auditor of the firm would be listed, which would provide both investors and regulators with information to then evaluate the auditors.

Advisors Not Using Web 2.0

Financial advisors have not adopted most Web 2.0 technologies, but they say their websites are little more than brochure-ware and acknowledge that they could save money by posting portfolio performance reports online and enabling clients to input their own financial and demographic data.

These were the results of an online survey of a small group of advisors this past week. While the survey results are based on a small sample of just 37 advisors, I’ve conducted many similar surveys of advisors like this before and have always found that, once such 35 advisors respond, overall survey findings remain about the same whether 35, 350, or 1,350 advisors respond.

It’s clear from the results that few advisors are blogging, hosting webinars, or using XML data feeds to integrate their applications. It’s also clear that advisors are intrigued by Web 2.0 technology that can increase efficiency.

A large majority of advisors (73%), say they can save money by allowing their clients to input financial planning questionnaires and basic demographic data. However, with 82% of the respondents saying they have no easy way to track tasks they assign to clients, such as filling in forms or getting tax information from their accountants, it seems likely that adoption of Web 2.0 systems will accelerate in coming months as advisory firms struggle to become more efficient to counter the revenue shortfall they’re experiencing due to the stock market meltdown.

To learn more about how advisory firms can increase efficiency and deepen client relationships by adopting Web 2.0 technology, please view a presentation I gave yesterday at a webinar hosted by ByAllAccounts.

Advisor Products has developed an interface with ByAllAccounts, a leading account aggregation firm, that allows advisors to provide clients with a single view of all their assets. ByAllAccounts enables advisors to discover their clients’ held-away assets that are self-directed or managed by other advisors.

Marketing On Linkedin

If you accept that social networks are the new cigar bars, then you also understand that Linkedin is the new locker-room. An hour or two on Facebook can be as productive for prospecting as a cocktail party, and Twitter may be a better place to find prospects than networking at a charity event.

Advisors are definitely intrigued by social networking.

According to our survey of advisors, 85% of independent financial advisors have now joined Facebook, Plaxo, Linkedin, or some other social networking site. Moreover, 86% of those polled and who have joined Linkedin said they had joined to build relationships, with 71% saying they joined to find new clients.

At a time when investors are going to be looking for new advisors, connecting with prospects on social networking websites makes sense.

No wonder this Friday’s session of the Financial Crisis Webinar Series, “Hand-Picking Prospects Using Linkedin,” has already attracted more than 300 registrants.

Yet most advisors have little experience with social networking.

Nearly half of the advisors we polled said they have 20 or fewer connections on the network they are most active on, and 58% said they log in to their networks only once or week or less.

In addition, this new marketing medium raises serious compliance questions.

For instance, Linkedin allows advisors to solicit recommendations from their connections and display them on their profiles. Displaying a recommendation from a client could be deemed a violation of rules prohibiting RIAs from using testimonials in marketing.

John Comer, our guest speaker for this week’s webinar about Linkedin, says that until regulators directly address this recommendation issue, an Investment Adviser Representative would be wise not to show recommendations from clients on his Linkedin profile. Clients can choose to display a recommendation of you on their profiles, however, Comer says.

Comer, founder of a financial services marketing consulting firm, recently completed in-depth research into how advisors can utilize Linkedin. This week’s session is the first of two featuring Comer.

This Friday’s session focuses on how an advisor can use his network to look for people likely to make good clients. On Friday, May 1 at 4 p.m. EST, Comer will return to speak about how advisors can market their practice on Linkedin to attract new clients.

Because of advisors’ growing interest in this topic, we’ve added a presentation to address compliance issues of social networking. Brian Hamburger, an attorney and founder of MarketCounsel, a compliance consulting firm to advisors nationwide, speaks Friday, April 3, at 4 p.m. about Compliance Challenges Of Blogs and Social Networking.

The Elephant Wrecking Your Revenues

What did you do today? Did you email your clients links to a blog post written by an economist analyzing the Fed's plans for spending $1 trillion? Did you post a new article on your website about the crisis? Did you snail mail prospective clients a handwritten-note attached to your latest newsletter? Did you schedule an online meeting with a client, prospect, or referral source to go over new opportunities likely to emerge in a recovery?
Every minute you passively watch your firm’s revenue shrink is another moment in which you failed to find a way to grow out of the economic maelstrom.

There's an elephant in the room. It’s the global financial crisis.

If your firm's website looks exactly the same as it did before the crisis, then you're acting like there is no elephant.

When a prospect comes to your site, he's going to wonder why you're acting like there's no elephant in the room.

If you’re not constantly addressing the massive shifts in the economy with clients, prospects, and referral sources, then you're blowing the chance to bring in new clients and recoup losses on your asset-management fees.

If you're not actively communicating with people now about events in the global economy, then you're missing opportunities.

If you are not moving toward a more transparent relationship with clients, then you are not changing with the times and will be left behind. You will be crushed by the elephant.

At Advisor Products, where we make websites, newsletters, brochures and other marketing materials, we’ve seen larger RIAs spend more on custom marketing websites since the crisis exploded in October. We’re setting up one or two firms each week on our Client Portal system, the most advanced system available to help advisors communicate with clients.

It's generally larger RIAs that are upgrading to more sophistciated products, and Advisor Products has experienced strong sales growth since the crisis began. Independent advisory firms that were strong before the crisis seem likely to emerge as even stronger competitors after the crisis.

Advisor Products is seeing a big increase in adoption of our vault for advisor clients. AdvisorVault is built on a Microsoft SharePoint platform and allows advisors and clients to drag and drop documents from their desktop to a virtual drive. It offers many features that, as far as I know, are unavailable on any other vault for advisor clients, and AdvisorVault is integrated with the two leading desktop software applications. It makes client relationships "stickier," something advisors need right now.

While Advisor Products has experienced growth in the adoption of email newsletters as well as high website tools, we’re also seeing some advisory fims discontinue subscriptions on hard-copy newsletters. I think discontinuing any form of client communication right now is a bad idea. Sending fewer messages to clients right now sends a bad message. This is a time to increase–not cut–client communications if you hope to quickly reverse damage done to your bottom line by the market meltdown.

To once again thrive after the economy stabilizes, advisory firms must change their marketing message to target prospective clients who are more fearful than they were ever before. These are people who will be much less trusting and you must direclty address the new mindset.

Another big change in the way you market and communicate with clients is that educating people is much more important.

In the bull markets of the past 30 years, when 10% annual retuns were normal, advisors were told by some "experts" that clients did not want to be educated. These experts said clients wanted you to handle all the details and would be bored any effort to try to explain strategies and educate them about what you are doing with their money. That was condescending nonsense then and it is clearly nonsense now.

In the new era we have just entered, educating clients is more more important than ever. Clients will insist on understanding every detail of what you are doing with their money.

You're going to need financial content that explains the details about your strategies to attract prospects and show your transparent style of comunication. To see what I'm talking about, take a look at four of the 17 articles Advisor Products made available for use on advisor websites and newsletters since March 1.

With the giant Wall Street firms mortally and morally wounded, now is the time for independent advisors to seize the opportunity. Merrill Lynch, Goldman Sachs, Smith Barney and the other giants of Wall Street ruined by losses on the mortgage debt crisis have demonstrated to the world that they cannot manage their own money. So why will people trust them with theirs?

Investors have been too shell-shocked to move from the brokerage giants that have always dominated delivery of personal financial services. But as the economy continues to stabilize in coming months, money will be in motion. Research shows that the vast majority of investors are planning to move their money and find new advisors. If you don't get your message out, you will miss the opportunity of your lifetime to expand your client base.

Tomorrow, Friday, March 20, at 4 p.m. EST, Jerry Lezynski, the Director of Marketing SEI Investments, which manages more than $25 billion in turnkey asset management solutions used by 6,500 independent advisors, speaks at the Financial Crisis Webinar Series about how you can market your advisory firm to make the most of the situation. Join us.

Fed Attacks Recession With Shock And Awe

With growing outrage over AIG bonuses casting doubt on Congressional support for further government spending to stimulate the economy, and with no room left to lower short-term interest rates that are already at zero and the recent success of the Bank of England's long-term bond repurchase program, the Federal Reserve Bank launched a shock and awe attack on the recession today by announcing plans to buy up to $300 billion of long-term U.S. Treasury securities in the next few months and to increase the ceiling on purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac from $500 billion to $1.25 trillion.


It’s the largest effort ever to use monetary policy to influence the world’s largest economy.

Today’s Federal Open Market Committee’s press release had been expected to be a benign announcement about maintaining a zero Fed Funds rate. But instead the Fed dropped the monetary policy bombshell and caused a surge in prices for long-term bonds.

The dramatic Fed announcement is a direct effort to drive down mortgage rates and reawaken the housing market, while also promoting lending to corporate borrowers and consumers.

It precipitated the largest one-day drop in Treasury yields since the 1987 market crash, with the yield on 10-year Treasury notes plunging to 2.53% from above 3% just a day before. The rate on a 30-year fixed-rate mortgage for credit-worthy borrowers fell to about 4.75%.

The risk of the Fed action is that it could weaken in the dollar at a time when America needs foreigners to invest in Government bonds to finance the stimulus packages. The dollar today declined by 3% against euro and gold surged 6.6%. The dynamics are explained in the video by FT columnist John Authers.

Best Computer Ever

I love my computer. It’s the best computer I ever had.

No, I’m not pulling your leg. I mean it. I really do have a computer that works well.

Sure once in awhile it crashes or can’t stop processing. But I’ve had this Sony Vaio Z690 for about a month now and it’s the fastest, lightest, most reliable laptop I’ve ever owned. Of the seven laptops I’ve owned in the last decade and 10 or 15 that we’ve bought for employees of Advisor Products, this machine is by far the best.

The key is that this machine has a 256 gigabyte solid state hard drive. While conventional hard drives that spin often develop mechanical problems, the solid state drive is like one big piece of flash memory. It has no mechanical parts and doesn’t spin. So it runs much cooler and faster.

Booting up my last computer, which had a 2.2 GHz Core 2 Duo processor took about 3 or 4 minutes. This machine, which has a 2.66 GHz Core 2 Duo Processor boots up in under 90 seconds.

Another factor in its speed is that it is using Windows Vista Ultimate, which is the 64-bit version of the program. All other versions of Vista are 32 bit. In fact, the 64-bit version of Vista has gotten a bum rap. I had no problems finding 64-bit device drivers for any of my hardware. Maybe I just got lucky.

I bashed Vista in a column about six months ago after colleagues who bought and installed it on new computers had problems. As a result of my experience, I hereby retract, renounce, and rescind my fatwa against Windows Vista. The operating system surely remains a sore spot for many, but if you buy a speedy machine—at least a 2.4 GHz Core 2 Duo with at least 4 gigabytes of RAM—the operating system works better than XP.

This is my fourth Sony Vaio. I switched from Dell laptops about five years ago after repeated hard drive failures. I’ve also had some problems with the Vaio laptops’ hard drives, but they’ve been more reliable than the Dells or Gateways I used to own. Vaios are more expensive than other laptops, but they are worth it.

The Z690’s keyboard is similar to the MacBook Pro. The keys are raised. Unfortunately, it is not backlit. But the keyboard is far more solid than any other laptop I’ve had. The others can’t even be compare to this.

The size and weight of this machine is also great. It’s a widescreen with 1600 by 900 resolution on a 13.1 inch screen, and it weighs about 4 pounds with the extended life battery, which can last up to about eight hours.

The only problem is the cost of this laptop. After adding two docking stations (for home and the office), the extended life battery, Office Professional 2007, Vista Ultimate 64-bit, and a three-year onsite service contract, the list price was more than $4600. Fortunately, it was on sale and the Sony sales person gave me a good deal. So I saved about $800. But it was still expensive.

Still, the time I’ve saved being able to boot up fast, not waiting for my hard drive to stop spinning, and being able to pop up all applications immediately has been well worth the extra money. I love this computer.

Your House Is On Fire!

Many independent investment advisors are doing a poor job of due diligence on alternative investments, according to a survey taken this week by Advisor Products.

A majority of respondents to the survey, 63%, say they have no formally documented due diligence process, and 54% say they do not have a consistent “standard” list of documentation that they collect from alternative investment managers before investing to support their due diligence process.

Astonishingly, 76% of the advisors surveyed say they are not confident that they possess the necessary skills to fully vet all the risks associated with allocating to alternative investments (AI).

The survey is not scientific. Only 67 firms responded. However, in similar surveys conducted by Advisor Products over the last decade, the survey results change little whether 67, 167, or 1670 advisors respond. Once 35 advisors respond to such surveys, overall results generally remain consistent as the number of respondents grows.

News that advisors poorly handle due diligence of AI could not have come at a more poignant moment. Bernard Madoff today pleaded guilty to 11 counts of fraud, money laundering, perjury, and theft in federal District Court in lower Manhattan, admitting to crimes carrying maximum terms totaling 150 years. (Click picture above for 1m:46sec video.)

Madoff, who ran a BD and hedge fund, who bilked investors out of tens of billions of dollars over 20 years in the biggest Ponzi scheme ever, thus becomes the biggest swindler in history. At a time when Main Street resents Wall Street more than ever in American history, Madoff has caused lasting damage to the notion that financial advisors are trusted counselors.

Moreover, the data suggesting that advisors are not adequately performing due diligence on AI comes just as Schwab Institutional, the nation’s largest custodian of RIA assets, has announced that it would soon require the 5,500 advisors that custody assets on its platform to transfer all alternative investments off its system to another custodian.

Schwab Institutional on February 18 had announced that it would immediately on that same day stop accepting any new offshore and domestic AI assets, and after April 30, would no longer accept additional investments in AI deals currently held at Schwab. The announcement provoked an uproar by advisors, which apparently convinced Schwab to modify course today. A Schwab spokesperson says that advisors will now have months before it will must stop making additional investments in AI deals currently held at Schwab–provided that the AI assets meet new “acceptance criteria.” Schwab says the acceptance criteria are not yet worked out.

Schwab's new policy says advisors won’t have to move any of their AI assets until later this year, after Schwab has built an interface to a sub-custodian. For now, it is referring RIAs to two sub-custodians, Pensco Trust Company of San Francisco and Sterling Trust Company of Waco, Texas. Once the interface is complete, allowing advisors to download data about holdings at the sub-custodian to present a consolidated statement to their clients, a Schwab spokesperson says, Schwab will follow through on its plans to require that all AI investments be moved off its system.

Tom Anderson, president, CEO, and founder of Pensco, agreed to participate in a previously scheduled webinar Friday sponsored by Advisor Products about AI due diligence. The webinar, part of the Financial Crisis Webinar Series, will be held at 4 p.m. EST Friday and advisors can register for the free session here. Jason Scharfman, a due diligence consutlant and author of Hedge Fund Operational Due Diligence, is the featured speaker at the session.

With the regulators becoming much tougher as a result of the subprime mortgage crisis and string of frauds now coming to light as a result of the sudden, steep drop in asset values, Schwab had little choice but to find a specialist custodian for RIA AI assets. Other big custodians do not hold AI assets because of the operational and investment risk they entail and the complicated service model they require.

“We have a platform we’ve built for 20 years that has been designed around AI and not around traded assets, “ says Anderson, who says he previously owned a B/D and had been a top executive at Bank of America’s trust company. “When you trade shares of IBM on Schwab’s system, it passes straight through to Schwab without touching human hands. That is totally different from AI.

"It’s all hand-done on our platform," says Anderson. "It requires different personnel, controls, and systems, and none of the B/Ds can match our systems, and they can’t just throw money at it to patch it on to a large enterprise."

Capital requirements imposed on B/Ds holding AI assets are different from custodial banks, making his firm more attractive to hold the assets. In addition, regulators are pressuring institutions to find ways to ensure AI assets are handled in ways that can lower the risk of Madoff-like disasters in the future. The SEC and FINRA are not set up to monitor AI or hedge funds, and state banking authorities that monitor trust companies are more familiar with ensuring controls and procedures are in place to custody two acres in Idaho held in a trust account. Schwab is likely acting to head off actions by regulators who are expected to clamp down on AI in the months ahead.

Schwab advisors should expect custody fees to rise on their AI assets. Smaller trust companies that specialize in AI custody, like Pensco ($3.3 billion) and Sterling ($4.8 billion), are likely to charge more for their services than Schwab. Moreover, Schwab was able to afford to take a loss or make no money on custody of AI assets and hold the assets as an accommodation to an RIA. Since the largest RIAs are the ones most likely to hold AI positions, Schwab could bury higher costs associated with administering AI positions in the total fee paid by an advisory firm for custody. With its mutual fund supermarket platform for advisors being the source of huge profits, Schwab could afford to run the AI custody business as a loss leader.

Schwab’s February announcement was clearly a major mistake that angered many of its biggest and most valuable RIAs. Its timing—which would have forced awkward calls to clients to explain a sudden change in custodians—could not have been worse. At a time when Madoff is being tossed into jail and investors in AI are already nervous about their holdings, forcing such a sudden transfer from Schwab to an osbcure custodian that they never heard of before would have only heightened fear among RIA clients and increased pressure on advisors already strained by the worst economic calamity since The Great Depression.

Despite its clumsy handling of the AI issue, Schwab should be applauded for seeing its error and changing its course. That’s a lot more than you can say for RIAs who may be exposing their firms to great risks by failing to fulfill their obligations as fiduciary to do proper due diligence–even as Madoff is sent to jail and other hedge funds blow up each week.

As an observer of advisors, I'm concerned about how AI due diligence is being handled by RIAs.

The picture to the right is your house, Mr. and Mrs. RIA. It’s burned down.

Sadly, I’m seeing some advisors so caught up in their own pain that they are wallowing in self pity or, worse still, acting lazily.

Yes, you’re looking at taking a massive hit to your income. Your house is torn asunder. But do yourself a favor and don’t spend even a minute of your precious time feeling sorry for yourself. It’s done. Move on.

Either you adjust to changes in the economy, accept your responsibilities, and manage your firm strategically now, or you risk being swept up in the turbulence and spit out by it. And who knows where you’ll land?

Independent advisors are incredibly lucky, despite the fee slashing they’re taking right now. You are where the puck is going. Wall Street’s behemoths have no credibility. Most IA’s say they are bringing in more new clients than they’re losing.

Either you are going to get on top of the due diligence issue and create systems and processes and address due diligence on these assets, or you will leave yourself open to lawsuits if AI assets in which you invested client money turn bad. The danger is that many AI deals that started out as legitimate have become Ponzi schemes as losses have mounted. That's why acting now to perform due diligence is so critical.

If the survey we took is close to accurate and many advisors don’t even have documented processes for conducting due diligence, then their exposure could be great. At least if your RIA performs basic due diligence and documents it, the firm will have a defense if an AI holding blows up. By doing no due diligence, a firm ignores its responsibility as a fiduciary and is subject to greater exposure and liability.

Last week, the Financial Crisis Webinar Series featured business coach Sharon Hoover in a great session. The webinar invitation drew advisors by promising that Hoover would speak about how advisors can better manage the stressors they are now facing. About 500 advisors registered to attend. This week, we only have about 150 registrants so far. That's sad.

Seems like advisors are more interested in whining and wallowing and not so interested in learning how to correct the due diligence problem. That’s scary.

Closing A Door On Madoff Opens A New Era

With Bernard Madoff scheduled to plead guilty tomorrow in U.S. District Court in Manhattan to charges of bilking 4,800 clients of $64.8 billion, a new era for investment advisors begins.

It’s an era of mistrust, where there is no such thing as a client who is a friend. It’s an era in which trust is founded on undisputable proof presented at repeated regular intervals. Advisory firms must proactively adjust their behavior and business processes to succeed in this fearful new world.

Madoff stole from friends and friends of friends—most of them part of the Jewish equivalent to a Good Ol’ Boy Network. In doing so, he violated a cultural compact in a way that affects most advisors.

The social contract that binds Jews, WASPs, Catholics, other ethnic or religious groups into a network is a deeply ingrained tradition in America, where our melting pot causes many of us to rely, trust, and favor those with whom we have shared values, traditions and a cultural connection.

In shattering that socal contract, Madoff made it impossible for you to expect people to trust you because you’re a Good Ol’ Boy, a member of their club. Advisors now must prove—even to members of their own social network—that they can be trusted.

Advisors should not wait for an investor to ask for such proof. In passively waiting for such an awkward moment, you risk creating doubt and worry in a client’s mind, and you may even lose the client. Instead, do whatever it takes to prove you are ethical, honest, and competent. And insist on the same proof from investment firms with which you work.

This Friday, Jason Scharfman, an expert in performing due diligence on the most complex and private investments, hedge funds, speaks at the Financial Crisis Webinar Series.

Scharfman, who has spent most his his career in due diligence, a year ago had the good sense to start writing a book about how to avoid frauds when selecting a hedge fund. Hedge Fund Operational Due Diligence was released in December 2008, just as the bear market forced out into the open a string of investment advisor Ponzi schemes.

Scharfman, founder of Corgentum Consulting, will speak about how an RIA can assure investors of its own legitimacy as well as how an RIA should perform due diligence on hedge funds.

Since many RIAs already invest in hedge funds, and most others are considering it, hearing how a due diligence professional does the job is valuable. (We all know that doing the most basic due diligence on Madoff's fund would have revealed that his audit firm was a two-person operation working out of a tiny room in a small town in upstate New York — and was certainly not what you'd get with a hedge fund managing billions.)

With investments in stocks now cut nearly in half from their peak values by the nation's economic collapse, many advisors will feel pressure in coming months to find ways to help clients recover. Hedge funds, despite their scandals and troubles of late, will remain a viable vehicle over the long run. However, as Madoff’s guilty plea illustrates, performing proper due diligence before investing in a hedge fund is not just prudent, but expected. And that investor protection process must now become part of your communciation strategy.

Join us for Scharfman’s presentation.

Six Marketing Ideas From A Guru

I recently called marketing genius, Harry Beckwith, to find out what he thinks advisors should be doing to respond to the terrible market drubbing.

Beckwith has authored several marketing classics, including “Selling The Invisible,” “The Invisible Touch,“ and “What Clients Love.” I’ve interviewed Beckwith before and he can be depended upon for common sense fundamentals. While brilliant, he admits that there are no cure-alls, no panaceas, no instant answers to succeeding in these tough times. But he does have sound advice for coping with the economic maelstrom.

1. Tell Your Story. Send clients articles written by third-party sources that explain there is no escaping the damage to your portfolio. “Take the opportunity to educate clients so they know there just has not been a safe asset class,” says Beckwith. “It’s all been battered.”

2. Publish. This is an important time to reinforce your status as an expert with clients. Write an article about the financial crisis for a trade publication, local business publication, or the local newspaper. Then distribute the clip to clients. Sure, you’re not a professional writer. But if you can get one article published every few months, It will enhance your credibility. Beckwith and I both agree that books by William Zinsser are the best primers written on writing. He suggests “Writing To Learn.” Beckwith also recommends contacting the local journalism school to find a student who can write articles for you.

3. Note This. Beckwith says sending a personal note to clients is a smart touch. If you’re mailing statements, articles, or newsletters to client, attach a handwritten note. Adding personal touches to client communications now is important.

4. Never Eat Lunch Alone. “This is a business where you need to be face to face with people,” says Beckwith, invoking the title of a successful book. “Ultimately, people are buying you.”

5. Set Expectations. Clients don’t expect you to pull off unnatural feats. “As long as you set realistic expectations about what you can do, people will be satisfied,” says Beckwith. Don’t promise too much. But deliver what you say you will.

6. Seize The Moment. Independent advisors are in an unusually strong position to capitalize on the crisis. “The biggest brands in financial services have been sullied,” says Beckwith. To take advantage of your competitive strengths, Beckwith says advisors must emphasize the personal nature of their relationships and their personal service.

Beckwith says he remains optimistic despite all the bad economic and financial news. “This is a historic confluence of unique factors that will require more work to dig out of,” says Beckwith. “We got out of Hooverville and we’ll get out of this."

Beckwith’s most recent book, "You, Inc.", was published in 2007. He is now writing his fifth book, which is about positioning and due for release in 18 months.

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