Following the semiannual Tiburon CEO Summit in New York City on April 23, five attendees sat down for a panel discussion about the state of the advisory business and their takeaways from the meeting. The discussion immediately followed Tiburon's last session, which is always a consumer panel. The executives included Steve Atkinson, executive vice president and head of advisor relations, Loring Ward; James Carney, chief executive officer, ByAllAccounts; Stephen Langlois, chief administrative officer, National Financial; Matt Lynch, principal, Tiburon Strategic Advisors; and Janine Wertheim, president, Securities America Advisors. Financial Advisor Editor-in-Chief Evan Simonoff moderated the panel.

FA: Most executives of financial services companies feel a sense of cautious optimism today, but there continues to be unease beneath the surface, and that's reflected in consumers. Even if their portfolios have come back, they often feel burned. Janine, is there a disconnect between the financial services businesses and their clients?  

Wertheim: Reflecting on what we heard at the Tiburon CEO Summit and listening to feedback and insights from consumers as well as our executives at Securities America, we think we're doing a pretty good job of understanding the dynamics of the consumer. Many have been scarred and scared and have some skepticism about the financial services industry in general. However, most of our advisors stay very connected to their clients and take a holistic view to helping them navigate and focus on what they can control. I think our capital is being deployed in the right ways, such as newer technologies that make it easier for advisors to do business and identify the needs of their clients as well as comprehensive tools that help advisors better manage their clients' income distribution needs during retirement, taking their risk tolerance into consideration.

Lynch: The consumer and the client (where the case is that the advisor is your firm's client) have both permanently changed expectations. As an industry, I agree we are making an effort to better meet client expectations, but we're way behind the curve. Most clients may be content to stay where they are, but they are not satisfied. If we look at the data, I don't think there is any greater degree of client turnover or asset loss among successful advisors than there was a decade ago. But it's not due to an overwhelming satisfaction level among their clients; rather, it's a fear of the unknown. They don't know where to go.

Carney: There's a huge sea change that's going to happen and it's not due to technology-that's the easy part. It's a change that's needed in the advisor's behavior and type of relationship that they have with their client. We can throw all the technology at investors, whiz-bang reports etc., but real change that is needed is with the fundamental approach with how advisors communicate, as well as the role they play with clients.

Langlois: What we heard on the panel is that consumers want to be more engaged in the activities of the advisor. It's not, "Do it for me," anymore but it's "Do it with me."  Clients will require significant dialogue and interaction with the advisor he works with. We also saw somewhat of a generational change or difference on the panel. The older participants seemed to share a more traditional view of how to work with an advisor, right?  Theirs was a perspective that the advisor is going to give me answers. But the younger generation is very comfortable with seeking and gathering information and leveraging technology to get that information, whether it's about a restaurant or about their investments. This younger investor is going to be more involved with the advisor.

Atkinson: As an industry, we're moving away from focusing on products. Something we learned a few years ago through our work with behavioral finance professors is that people make decisions with their emotional "right side brain," yet this is an analytical, "left brain" dominated industry. We want to throw out facts, figures, returns and standard deviations all the time, and that's what clients are used to hearing even though most of them don't really understand those things. Clients make decisions primarily based on emotions.

When consumers panicked in 2008, or last August when the market fell, the real question the advisors needed to ask their clients was, "So let me get this straight; you're concerned that the plan we put together is no longer on track?" This takes the focus off of the Dow Jones dropping 19% and on to "Am I on track?"

Wertheim: I would agree with the panelist who said, "Advice is dependent upon where I am in my life stage." That's why you got different answers from the women who were more accomplished, further along in their careers with larger asset levels, with affluent husbands, compared to the younger men. The way consumers view advice and advisors has a lot to do with their experience. I believe you can still have young consumers from the Gen X and Gen Y that want to totally delegate to an advisor at some particular time in their life. It's the experiences that they have along the way that determine whether or not they are willing to trust that advisor or not.

Atkinson: There's so much noise out there, and people don't know what's good information and what's bad information. When people talk about the lost decade, they're talking about the S&P 500 or the U.S. large-cap stock market. The U.S. is just one of 45 countries tracked by MSCI. We were one of the worst performing of the last ten years. Most international markets actually had positive, if not double-digit, rates of return. So a well-diversified, well-advised portfolio during the lost decade probably had a return of maybe 5% or 6%.

Langlois: Near-retirees are anxious. We've done some work with consumers and they're anxious because they've seen how fast the world can change. Many of these folks, maybe half of them if you look at the data, have some form of defined benefits plan. I recently heard a consumer say, "You know I don't know whether my advisor is going to do much better than I, because given what I just went through, we didn't seem to be doing so well." What we saw with the younger two people on the panel was a sense that they have a longer runway, right?  They had an attitude of, "I'm not really going to worry about this now. I'm going to get my business going."

Lynch: Generally what we see is the fear. The behavioral change we are observing is that people are putting off retirement, as they're not sure that the nest egg they built up is adequate. There's a flight toward more conservative investments. There's a desire for yield income that the industry is trying to keep up with through new products. But there's less of a willingness to take risk with the retirement assets and a recognition that the nest egg needs to be a whole lot larger if it's going to last 20 years into retirement.

Carney: What I was referring to [is] a behavioral change. It's not just about the numbers, it's about advising them. It's not just about the financial piece, and it doesn't mean you are going to be a psychologist, but it's the basic things that anybody will go through when they're going to think about retirement.

Wertheim: Our feedback from advisors is that when they tell their clients about their process for generating income during retirement and lay out a plan for the client, it alleviates a lot of fears. We have been educating our advisors about using a time-segmented income distribution strategy, and we've been really focused on this since 2009. We have a comprehensive platform that includes education and coaching, marketing, an integrated platform for managing retirement income streams with an internal retirement income desk for support. Clients want to know how they are going to get there and what do they need to do to generate a lifetime income check during retirement.

FA: One thing you may have seen as a result of the financial crisis is a growing interest in alternative investments-they're going mainstream now. Traditionalists question this. Do you see it as a long-term viable trend?

Atkinson: I think people are going to sell the heck out of it. It's a sexy story. Do I think most clients need it in their portfolios?  No, probably not. A few of them will. If you have a diversified portfolio and you plan properly, you don't need to add speculative alternatives. You're not really buying investments there. You know they are adding this asset class, but we want to stick to our knitting for clients and educate them about investing. The issue I have with alternatives and managed futures is that you really can't predict what the return is going to be because there is no income. You're simply speculating on price.

Lynch: We are seeing the mainstreaming of alternatives and the demand is coming down market, driven in part by advisor knowledge and, more importantly, lack of knowledge. Broker-dealers generally, and other industry partners that advisors have, are not equipped to meet advisor demand currently with respect to alternatives, whether it's managed futures or REITs or whatever. There's not sufficient knowledge at the product due diligence level among distribution organizations in our industry to meet this emerging advisor demand. We've done some studies that show that two-thirds of advisors indicate they are going to use/sell more alternatives in their recommendations this coming year, right? However, the E&O carriers are really not eager to cover it.

FA: What are you seeing on your platforms, James?

Carney: We have data and it's based on RIAs, wealth managers, private banks and family offices. Our client base consists of well over 1,500 firms, some large and some small. The alternative investments are growing at a 30% increase over last year. The difference may be due to the fact that RIAs understand what they are investing in because they do their own due diligence. Often, it's a very specific need for the allocation-for example,
REITs for meeting a real estate allocation need.  Some [non-traded] REITs now have offerings with a daily NAV. Advisors are clearly increasing the use of REITs as part of their strategic allocation.   

FA: Stephen, what are you seeing in terms of alternatives?

Langlois: There's a lot of interest. But I also think that end investors don't quite know what to do with them. The interest comes more from the advisor than from the consumer. For advisors registered with broker-dealers, probably it's dependent on the position the broker-dealer takes with regard to whether they allow their registered reps to have access to alternatives. I think probably the biggest area of interest is REITs because of the yields.

Lynch: And of course, the growth of the hybrid firms, where they're having to deal with both the broker-dealer compliance and regulatory structure and the RIA, I think we're seeing a desire for growth there in terms of alternatives, and they are trying to keep up with that demand, in part, relying on the due diligence often of the broker-dealer. And so they're still trying to catch up.

Langlois: I'd like to clarify; I mean actually real estate is an asset class. It's an investment. That's the trouble because the alternatives are so big and vague. I'm talking about commodities.

FA: A lot of people are saying "buy and hold" is dead or passé. Do you think that's valid?

Atkinson: It depends what you're buying and holding, right?  Just buying a mutual fund that owns like 30 securities and hoping those are the right 30 is not a good strategy. When I think of buy and hold, I go back to MPT and Dr. Markowitz's thesis that you have to have a balanced allocation between equities, fixed income and cash. And you think about that allocation mix-even in 2008, fixed income and cash were flat or positive. Now, most people's fixed income was negative because their managers were chasing yield or mortgage backed security type stuff and went out on the risk curve and got clobbered. But short-term fixed income, high-quality fixed income was positive; it was like 5% or 6% that year, and it all goes back to what are you putting into the client's portfolio. It's like building a house made of straw versus brick.

FA: Janine, I'm sure you have advisors who have clients calling them up, saying, "Buy gold. Buy gold." What's your view on that?

Wertheim: On the consumer panel today, when asked, "How would you define transparency?" they said that transparency to them means simplicity. If the advisor doesn't understand the investment inside out, it's hard for that advisor to invest the client's money in it. And you have to ensure the client understands the investment. We aren't hearing from our advisors that their clients are begging for gold. We're a pretty conservative shop, from an advisor perspective. While some advisors may utilize a more tactical approach to money management, the majority uses a more strategic core with some tactical overlay.

Carney: We have over $500 billion of account data we aggregate every night, and when you look at alternatives, REITs, hedge funds and private equity are the vast majority in dollar volume as well as units. Commodities are not even a fraction of a percent. It doesn't even show up; but the real estate does show up and hedge funds show up.

FA: Let's turn the questions back to something we touched on earlier-retirement income. Money market funds are hardly a great proposition, and that's really affected a generation of retirees who thought they had done everything right. Janine, are there any particular options your clients are favoring now?

Wertheim: Based on feedback from our advisors, they are mostly using a diversified group of fixed-income mutual funds including some high-yield bonds and variable annuities. In a recent survey of our advisors, there was considerable interest in exploring publicly traded REITs, ETFs and structured products. With interest rates so low in the fixed annuity space, the yield generators our advisors are using most are diversified portfolios of bond funds.

Atkinson: We never viewed fixed income as the way to actually generate an income stream. It's just a dangerous game to allocate so much into fixed income just to live off the yield, so we've always professed a total return strategy. What we've done from a total return portfolio strategy is establish a dedicated cash allocation in the portfolio, which is going to be in any of their portfolios, but from a reporting standpoint we help the advisor educate the client on its proper function. So really nothing has changed from a portfolio construction perspective. What's changed is the reporting, the transparency.

FA: James and Stephen, you probably know your clients' ages. Are you seeing declining balances among people over 65 or 70?

Langlois: They work more and delay their retirement. If you talk to advisors about what in the past five years people have done, they change the time horizon they have for when they retire as much as try to pull money out of the portfolio because they can control that. I think the profound impact that the market crisis brought with consumers is that they realized that they couldn't control things. They can control-but for health issues-how long they work and those sorts of things, and that's how they have been generating incremental income-but [they are] working more or finding, as we talked about, other forms of employment to get the health insurance, to get your income to cover your costs.

Wertheim: They are classifying the new boomers and the old boomers now. Thank goodness I'm a new boomer, but you know one of the things advisors say is really the biggest problem with clients is their spending behaviors, overspending. And so I think you're exactly right, they would rather delay retirement than reduce spending, and that's just kind of unbelievable.

FA: One thing that I've heard from some advisors is you don't have to lecture clients nearly as much about overspending.

Wertheim: I think that lasted for a little while. Unfortunately, many people have gone back to their ways. At least, that is what we hear from advisors.

Carney: I can't tell age by our data. But a couple of things I can see. One, there has not been a tremendous shift in allocation, other than one big shift: the increase in real estate investments. The one thing I hear in talking to a number of our advisors is that what they've started doing is applying more focus on goal-based planning.

FA: Tiburon Strategic Advisors has seen a pretty big increase in clients looking to the Schwabs, the Fidelitys, the people that help self-directed investors. But when you look at the earnings out of a Schwab or TD, it doesn't seem like they're making a lot of money. Is a lot of it going into money market funds where they're earning nothing?  

Lynch: I think one, throughout the industry, whether it's broker-dealers or custodians, they are experiencing significant margin compression. I mean, there is virtually no margin when we compare to just a few years ago. Even if you are accumulating more assets as a custodian or a broker-dealer, it's really tough with no margin on the money market assets. There are very few places to make that up, but they are gaining market share and the do-it-yourselfers, maybe the assets are moving from one bucket to the other, so maybe it's advisor-directed to do-it-yourselfers, but the net assets aren't producing increased margins. What we are seeing is this share of wallet changing, [but] I don't know that consumers fit neatly into one bucket or the other.

FA: What do you think is driving it?

Lynch: I think it's the trust gap. It's the perception that was mentioned at the conference, that there's a significant population of consumers who believe that the entire industry looks like Bernie Madoff. They hear about the Goldman issues and other things, and they just believe that the table is tilted against them. The odds are not in their favor. Take the argument over the fiduciary standard; I think that there is a certain segment of clients who believe, "Look, I'm not sure I'm getting the best advice. I'm not sure I'm getting the best deal."  And they might even say, "I trust my advisor, but I'm not sure I trust the institutions behind him and the lack of transparency." I think we've got a long way to go to win back that trust.

Langlois: The value advisors deliver is not just the returns. It's the communication, it's keeping clients informed, it's understanding their needs and listening, it's not all about the numbers. As an industry, we need to enable advisors to do more of that and make them aware. It's broader.

FA: Well, thank you all very much. I'm happy to have done this.