Tag Archives: financial planning

WSJ is wrong about the future of investment research

Very interesting article yesterday at the Wall Street Journal.  Entitled, “Stock-Research Reform to Die“, the article describes what’s happened in the wake of Eliot Spitzer’s landmark settlement against Wall Street brokers in 2003.

StockResearchUnderusedByRetailBrokerageAccording to the WSJ, this settlement was part of a wider Wall Street wrist-slap against ingrained culture that issued “overly optimistic stock research in order to win investment banking business.”

One of the results of the settlement required major brokerage houses to spend $460+ million on independent stock research for their clients.

The WSJ’s conclusion: six years later and almost no clients are using independent research.

At Credit Suisse, which has mostly institutional clients, the number of times retail clients accessed independent research from the firm’s Web site ranged from 16 during the third year of the settlement to 110 the first year.

At the old Salomon Smith Barney — now part of Morgan Stanley’s Morgan Stanley Smith Barney — its roughly 4 million retail households accessed about 12,000 reports each month. Less than 2% of Goldman Sachs Group Inc.’s Private Wealth Management clients likely downloaded a report each month, according to data from the public reports.

The WSJ mentions 3 reasons why investors haven’t taken up independent research at their broker:

  1. investors rely upon their brokers to act as a screen:  While 11% of brokers consumed independent research at least occasionally, they typically don’t send independent research out to clients.
  2. investors don’t rely as heavily on stock research today as they used to: “In the late 1990s, a positive report from a hot analyst could send a stock soaring. That effect is more muted today.”
  3. structural changes away from brokers to advisors: Commission-based business is old-school.  It’s been replaced by fee-based professionals acting as advisors.  There is less emphasis on trading at the retail level and less need for this type of research.  Combined with chinese walls going up between brokerage and investment banking, banks are cutting back on research teams as research becomes harder to monetize without the tie-in with banking.

Just wanted to chime in with a couple of comments:

  • I agree that full-service brokerage clients rely upon their brokers to act as screens.  That’s why they pay them and why they work with an advisor.  The vast majority of clients do not know how to read research or want to be bothered.  They want a quick synopsis why they should own a particular stock and for that, the broker acts as a type of well-heeled Cliffs Notes.
  • Maybe investors weren’t even aware that independent research was an option?  Do they know why it’s important?  Are investors aware of the biases which still exist in sell-side research?
  • Why depend on the guilt party to distribute the cure to the sickness?  That’s nuts.
  • Totally disagree with the fact that investors don’t rely on research. I would say that it’s more accurate to say that given historical conflicts of interests, investors no longer trust institutional research.  Given the gaping void left by Wall Street and the rise of financial bloggers and aggregation sites like SeekingAlpha,  many investors are actually consuming more research on more companies than ever.  We’re in a Renaissance/Gold Run/Bull Market for investment content — it’s institutional research that’s not finding its footing.
  • It’s hard for brokers today. Without an edge in research or asymmetrical information, it’s hard to push stocks and get paid for it.  That’s why many brokers have become mere wolves-in-sheeps-clothing: they’re still brokers but get paid as advisors.  We’re also seeing the emergence of true financial fiduciaries who work extremely hard for their fees and performance for clients, in up and down markets.   These advisors are doing real research or hiring people who do and they’re the ones consuming the research, not clients.
  • I think we’re seeing the investment field changing so quickly before our eyes.  On one hand, we’re seeing investors go boutique and sign up with independent financial advisors.  This is like more full-service than full-service.  On the other hand, we’re seeing investors retake the reins of their portfolios and managing things on their own — classic DIY investing online.  There is also a middle ground of investors who want more control but also want professional advice to support them along the way.  Regardless of the model, someone is consuming research, whether it’s the client or the advisor.
  • We need new business models to foster more independent research to fill the gap left by Wall St.’s void.  Tools to rate accuracy and trust-worthiness.  Performance.  From individual positions in a portfolio to the dynamics of portfolio management in general.

Interesting to see that most of the firms polled in the WSJ article were not planning on continuing distributing independent research.  Some have jettisoned research while others are bolstering their efforts.  That still leaves a tremendous opportunity out there for anyone who can provide actionable advice to the majority of investors out there.

Additional Resources


E*Trade further blurs lines between full-service and DIY investing

Full(er) Service and DIY Investing: Investor Fork in the Road

There is no doubt we are witnessing a wholesale exodus of assets out of full-service brokers like Merrill Lynch and Smith Barney. These assets seem to be finding two very different types of homes:

  1. boutique investment advisory houses: Built by brokers/advisors who themselves have defected from the large wirehouses, these firms take service and advice very seriously. In some sense, they’re a further move into full-service. They are competing head-on with traditional brokerages by upping the ante on technology, service and investment advice.  Investors who feel slighted by their advisor and want the extra hand-holding find this model really attractive.  It’s interesting to note that many of these firms are being founded/built by traditional brokers evolving to this model.
  2. online brokerages: Firms like E*Trade and Ameritrade are taking the bulk of this business.  In the wake of the financial tsunami, some investors are looking to take back investment decisions and don’t want to pay someone else for underperformance.  Proof of this is in capital flowing to online brokerages.  E*Trade reported that it had net new accounts of almost 30,000 in the first quarter of 2009 with $3.5 billion in net new customer assets.

I’ve written about the emergent trend towards high end investment advisors and how traditional stock brokers are resurrecting themselves and building smaller, nimbler firms with their billion-dollar books of business.  I’ve spent less time discussing how online brokers are luring assets.

Online Advisoretrade_onlineadvisor

I had the opportunity last night to have a guided demo of a recently-launched E*Trade product, Online Advisor, with E*Trade’s Liat Rorer, VP of Investment Products.  Online Advisor, developed as part of E*Trade’s newly-minted Investor Resource Center, is a nifty little financial planner-in-a-box.

In a quick and easy 4-step process, Online Advisor: Continue reading

WSJ: Navigating online personal finance sites

I’m not particularly a fan of these Mainstream Media (MSM) overviews of Internet tools.  I find, more often than not, that they’re typically short on analysis and don’t help investors really navigate what’s really out there, why these tools are important, and how investors are successfully using them.

This short video piece (2:45) ran late last week on the Wall Street Journal’s website (sorry, couldn’t get the video to embed for some reason).  It’s a cursory overview of some sites focused on personal finance (Mint, Wesabe) with the perspective of more people wanting/needing to take control over their finances and investments in light of the recent financial tsunami.  The interviewee is Shelly Banjo, Dow Jones Newswire’s reporter on wealth management.

A couple of sites are mentioned explicitly.  Simplifi, a site that helps investors build their own financial plans, is mentioned as a good resource for do-it-yourself investors.   Covestor, a tool that allows investors to see what others are actually doing with their investment money, is cited as an important site “so you don’t have to take advice from some financial advisor trying to sell you something”.

Frustrating to see MSM’s  quick gloss-over of security and privacy issues.  When asked about security with some of these sites, Banjo responds, “It’s OK.  These sites have to be secure so people will use them.  So, they’re OK.”  In a way, she’s right.  No one would use these systems if there was a likelihood that his entire financial history and net worth made its way online.  Security is an important issue — I don’t think it’s enough to reason-away security issues.  Be sure to check security/privacy policies of any site you may consider using for online investing/personal finance.

Anyway, also check out Banjo’s “The Best Online Tools for Personal Finance” that ran in today’s WSJ.

Two options for future of financial advice according to Investment Advisor’s Clark

Investors reflect

We’re all trying to figure this out.  Individual investors are thinking hard about the entire investment process and the future of their holdings.  Tough questions like expected future returns.  Like can I meet my retirement goals?  Like the value advisors are providing.

Financial advisors are also doing some soul searching

crossroadsAdvisors are doing the same type of soul searching and also asking hard questions.  Am I providing value?  Am I offering the best service to my clients now and how am I positioned to do that in the future?  At least some of them anyway.  Bob Clark at Investment Advisor magazine has always dealt with issues.

In his most recent article, Clark describes the history of financial advice.  According to Clark, advisors enjoyed a golden age of investment advice which was driven by low taxes, negligible inflation, and a booming stock market.

So, in light of what’s occurring before our eyes, Clark asks:

But what happens if the “Golden Age” is coming to an end? The Federal deficit that exploded under Bush and seems to be spiraling out of control under Obama has the potential to choke off our economic recovery for the foreseeable future. If that happens, creating volatile “trading range” markets with little or no overall gains, investment success will shift away from allocated buy-and-hold portfolios that take what the market gives, to stock picking, market timing, commodities, and dare I say, speculation.

I have no idea whether Clark is right but assuming he is, Clark envisions a financial advisory business that needs to step-up and provide real-time advice that takes advantage of the ongoing volatility in the markets.  Not buy-and-hold.  If that’s the case, Clark envisions two options:

    1. hire talent: Since most advisors are more generalists than experts in broad economic issues, Clark suggests that we’d need to hire these types of experts.  It’s a possibility — an expensive one, but certainly, there may be room for more Chief Investment Officers at boutique, independent investment houses.  Ultimately, Clark feels the cost may not support the benefit for such hires.
    2. continue to outsource investment advice: Clark weighs in with this answer. In addition to the savings in “in overhead from not managing client portfolios or dealing with backoffice, trading, confirming, reconciling, reporting, etc. more than offsets the additional expense”, Clark feels this solution further places the advisor on the side of his or her clients by helping to manage this process.

    I heard from Cathy Curtis (check her out on Twitter as well here) who runs a chic, financial planning firm addressing specific needs of women yesterday who said that “My problem with outsourcing portfolio management -another layer of fees for client…how much are they willing to pay?”.  It’s a good point and one that will need to be explored.

    So, where does that leave us?

    • Financial Advisory business:
      • Skillset changes: Will the trends to outsource more actual fund management increase with a demand for more niche, specific skill sets?  Or, will advisors start to bring this competency in-house?  I tend to think that the former (outsourcing) will trump hiring or becoming domain-experts.
      • Value proposition: How do advisors continue to market their value prop?  Is being really down, but not down as much as major indices enough?  How do fees play into this?
    • Investors:
      • Do it yourself: Will there be a larger move to DIY (Do-it-yourself) investing or after the pummeling, will investors turn to professionals to help sort things out?
      • Buy and hold: With the mantra that buy and hold is dead, is this really a good thing for investors?  Indices were way down last year but Citibank was down way more.  Do I really want to be picking my own stuff and get into trouble?

    I am not pretending to know the answers to any of these questions but the financial advisory business seems to be facing a crucial, defining moment right now as pros and individuals alike are reassessing the roles of financial markets.

    Further Reading: Check out an article we’ve written about the future of the investment advisor and where the business for some advisors may lead.

    Don’t forget to sign up to receive free updates from New Rules of Investing.

    Adviser Use of LinkedIn May Violate SEC Rules

    Today’s guest post comes from Bill Winterberg, CFP®, an operations and efficiency specialist to independent financial advisers.  I thought Bill’s perspective important as we continue to explore how financial advisors can use web 2.0 technologies to build their businesses.   Check out more of Bill’s good stuff at www.fppad.com and on Twitter at @BillWinderberg


    I’m going to open up a topic that has the potential to create a bit of controversy.  Here’s my bold statement:

    Investment advisers registered under the SEC who use the “Recommendations” feature of LinkedIn.com may be in violation of Rule 206(4) of the Investment Advisers Act of 1940.

    I’ve discussed this topic with several members of my local financial planning community, including investment adviser litigation defense attorneys.  More recently the topic has come up in discussions with other professionals I have connected with through Twitter, including Susan Weiner, CFA and Kristen Luke.

    Investment Adviser Rules

    Let’s start with Rule 206(4)-1(a)(1).  It says the following:

    a. It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of section 206(4) of the Act for any investment adviser registered or required to be registered under section 203 of the Act, directly or indirectly, to publish, circulate, or distribute any advertisement: (1) Which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by such investment adviser

    This rule explicitly prohibits the use of testimonials of any kind, whether they directly or indirectly refer to the investment adviser.  Testimonials cannot be published, directly or indirectly, by registered advisers.

    LinkedIn Recommendations

    LinkedIn Recommendations allow users of the online social networking website to post recommendations and endorsements that appear on the profile page of other users.  Recommendations are useful for supervisors to provide valuable feedback concerning the performance of an employee, or perhaps business owners to comment on the performance of contractors.

    As LinkedIn becomes increasingly ubiquitous in the social networking space, I see more and more investment advisers that have set up profiles on the site.  A LinkedIn profile not only helps advisers connect with other advisers and colleagues, but it can also attract prospects and potential clients searching for a qualified adviser.

    But what happens when investment advisers registered with the SEC begin to receive recommendations that are posted to their profile?

    Any Testimonial of Any Kind

    We’ve plainly seen in IAA of 1940 that testimonials of any kind are strictly prohibited by Rule 206(4)-1(a)(1).  So what is an adviser to do?

    I believe the answer is that all State and SEC-registered investment advisers must never allow LinkedIn Recommendations to be posted to a public LinkedIn profile.

    Are there any real cases where the State or SEC has fined an adviser or issued a deficiency notice?  I have not heard of any as of the date of this post.

    However, I would prefer that the first public reference to such a case not feature my name in it.  As such, I do not permit any recommendations to be posted to my LinkedIn profile. I recommend that registered investment advisers clear their profile of recommendations as well.

    Financial planning with Cake

    Cake Financial, a leading Investing 2.0 site which I’ve detailed here, is at it again with launch of new functionality.  Cake plugs into your brokerage account and tracks trades and performance data and then in turn, overlays performance and risk data on top (something they have spent a lot of time refining) and then shares this information out with the rest of the Cake community.

    Now, Cake has introduced financial planning tools to investors who use Cake.  Called Investor Quick Check, Cake’s financial planning tool “is a report that gives you a clear picture about how well your investments have performed, your current risk level, and whether or not you’re beating the markets. We then take it a step farther and generate a list of personalized investments.”

    What’s interesting here from a financial planning standpoint is that there are a lot of powerful planning/forecasting tools around.  I assume the Cake tool uses a form of Monte Carlo analysis as well.  Typically, financial planning software churns out some results at the portfolio level to tweak (in finance jargon, to “optimize” portfolios).  Here, Cake’s software not only makes recommendations to the portfolio but these recommendations are based on the meta information Cake has about you and all the other users within Cake.

    So, really, it sounds like you’d receive a very personalized set of results — results that include stocks/ETFs based on your risk profile as well as recommendations culled from other investors’ portfolios that are similar in smell and taste to an investor’s own portfolio.

    This appears to have a lot of smarts in it and from a design perspective looks very easy to use (takes less than 5 minutes) for current or future Cake users.  The fact that the system has access to a lot of your data also catapults the system ahead in its analysis.  When markets are strong, financial planning tends to be underutilized.  Now, in times of distress, many pre-/post-retirement investors are worrying about whether they can “make it”, reach their financial goals.  Cake is helping people get there.

    It’s time for some black swan contingency planning

    As first appeared on the American Express OPEN Forum Blog:

    I believe I have an interesting take on the current financial imbroglio we find ourselves in.  I am both a small business owner and a financial adviser.  So, while the stock market has taken a significant whacking including the largest American bank (WaMu), insurance firm (AIG) and broker (Merrill Lynch) all having tanked, I am feeling the fallout from the current malaise two-fold.  This blog post is based on my insights into helping a small financial advisory make it through the tough slog ahead but applies to any business.

    Black Swan Contingency Planning black swan

    What’s the issue: There is an incredible amount of interdependency we’re witnessing across businesses, sectors and geographies.  When a mortgage bank fails in the US, it has far-reaching consequences felt around the world.  Little events are exacerbated and seemingly discrete events domino into global markets tanking.  While banks like Merrill and Morgan looked as if they should weather this storm OK (albeit with some lumps), Lehman’s demise called into question these firms’ viability overnight.

    What to do:

    1. Always have a “what if everything goes wrong” Black Swan contingency plan: I’m not talking about preparing for a nuclear war or a situation where all money loses its value — if that occurs, quit your business, hock everything and buy some ammo and head to the hills.  I’m talking about that Black Swan type event that could impact your business so acutely that your business may not be the same for years in its wake. Financial partners have their funding means dry up.  Customers push out purchasing decisions indefinitely.  Distribution channels close.  In fact, small businesses are much more nimble than large firms in dealing with these types of changes but lack the staying power that comes from being a larger company.
    2. Is”safe” really safe?: During a black swan type event, things go wrong that we didn’t expect.  Is your banking partner really solid?  Ask him.  What if one of your trading partners goes under?  Can you continue buying/selling?  In my business, core money market accounts are what clients use to park their money.  We’ve read of a few of these types of fund cratering.  What’s going with in your firm’s products?
    3. Backup everything that can be backed up
    4. You can’t be too conservative: Taking risks isn’t going to be rewarded in the short term.  Cash is king in this market and it will pay to preserve your business capital and business processes so that you can take advantage of the situation when the markets rebound.

    Assessing Partner Viability

    What’s the issue: Partner demise can not only create a drag on your business, it can tank it.  We’ve read various reports surfacing that JPMorgan played a role in Lehman’s demise.  JPMorgan financed Lehman’s daily brokerage business and by partnerfreezing Lehman’s account, it looks like Lehman may have entered a death spiral.  The point here is that given our various integrated relationships, it’s important to look at everything, from accountant to lawyer to bank to hosted CRM platform and test how dependent we are on our partners.

    What to do:

    1. Think Global, Act Local: Watching Lehman Brothers’ quick demise and its subsequent spillover to firms like Merrill Lynch and Morgan Stanley, it’s clear that what we’re dealing with is systemic. What may have begun as poor risk management of singular firms has become everyone’s problem given the financial communities various webs of interaction and influence.  Instead of my clients asking “Hey, how’s my portfolio doing?” (they know NOT to ask), they are asking fundamental questions like “Are banks going to make me whole on my CDs?” and “Are my cash and securities safe if you or your financial custodian go under?”  I’ve spent so much time on the FDIC’s website (a branch of the U.S. government called the Federal Deposit Insurance Corporation), that I’m thinking of making it my homepage. After the Depression, the federal government instituted a program to insure bank accounts up to $100k (this has been temporarily expanded to $250k in some cases) to support banks and help protect from future runs on banks.

    I send clients here for a treasure-trove of information like a list of failed banks, what protection consumers really have,  and what role the government is playing in bailouts of such massive banks like WaMu.  What was taken for granted in times of plenty is being called into question.  To extrapolate this further, times of crisis require talking to your trading partners and determining their solvency and their ability to weather the financial storm.  If suspect, changes need to be made to protect your business and your customer base.

    Bolster customer relations

    What’s the issue: During chaotic times, customers frequently feel left out in the cold.  Frequently, in the asset management business, it’s not their poor performance that creates customer dissatisfaction but rather how well they are treated by their hugadviser throughout this process.  Customers understand that there are issues beyond the control of the service provider.  What they really demand, though, is the guidance of the service provider during tough times.  Here is an interesting article about customer churn during tumultuous times in the asset management industry.

    What to do:

    1. Be proactive about working with customers/clients though the crisis: This is extremely germane to the financial advisory business.  While many clients may not actually need to make changes to their portfolios, what clients frequently want to know is that their supplier/service provider is emotionally supportive throughout the crisis.
    2. Call clients: Don’t rely on form letter communication.  Get on the phone and listen.  This simple rule is worth money.
    3. Go out of your way to connect: This works with clients and prospects.  Plan mini-seminars to discuss what’s going on.  People have a lot of questions — become the go-to-guy in your field during times of trouble.


    Crazy times call for crazy measures and require shoring up every aspect of your business.  From customers to suppliers, small business owners must secure distribution and supply lines.  While taking risks should be minimized, by doing good diligence, business owners should not only secure their current business but position themselves for increased business flows when things snap back.  They always do.

    Read more about the issues web workers are dealing with and how to cope with an always-on, always wired existence.