The Advent Purchase Of Black Diamond: Implications For Financial Advisors
The recent announcement that Advent Software Inc. will purchase Black Diamond Performance Reporting LLC for about $73 million has created a buzz throughout the industry.

The rationale for the acquisition, Advent President Peter Hess said in a phone conversation, was to plug a gap in Advent's product line. Its Geneva portfolio management solution serves hedge funds, asset managers, family offices, fund administrators and prime brokers. Its Advent Portfolio Exchange (APX) portfolio management technology serves both asset managers and advisors.

"The advisor market and the asset manager market have become more distinctive," says Hess, adding that Advent needed a product and a team focused mainly on independent financial advisors. Hence, the decision to acquire Black Diamond.

After the deal is completed, Black Diamond and its existing management team will lead the advisory strategy for Advent and operate as an independent business group within the company. This would appear to be good news for advisors because Black Diamond has a reputation for innovation and service within the industry.

But some have voiced concerns that Advent might dismantle Black Diamond as they did with TechFi after its 2002 takeover. "If I was a Black Diamond client I'd be concerned," says Dennis Suppe, CTO at Trade PMR. "If I was an Advent client I'd be happy."

Eric Clarke, president of Orion Advisor Services, is also skeptical. "I think this will end up being another TechFi," he says. "History has a way of repeating itself. Reed Colley [Black Diamond's founder] and his team at Black Diamond have been good, friendly competitors and innovators. We wish them well."

Hess dismisses the notion the Black Diamond deal will be a version of TechFi 2.0. "TechFi was a different time, a different management team, and a different Advent," he says. "The existing team is sincerely committed to serving the RIA community. We know we will have to prove it by our actions, and we will."

Many observers believe the outcome of the Black Diamond transaction will differ from the TechFi acquisition because this combination makes strategic sense. The RIA market is growing, and Advent has recently been pressured by more nimble, innovative competitors, particularly with regard to dynamic reporting. The combined firm should have the know-how and the scale to compete more effectively.

Both Advent and Black Diamond are represented on the Fidelity WealthCentral platform, and more than 350 firms use APX or Black Diamond through WealthCentral. Some people have suggested that Fidelity might try to steer advisors to one product or the other in the future, but Ed O' Brien, senior vice president at Fidelity, says that's not so.

"The agreements are different," he notes. "With Advent, we are a distributor, so we set the price. With Black Diamond, there is a negotiated discount, but they set the price. We want the advisor to choose the product that best meets their needs based upon price and functionality. We provide the same deep level of integration and service for both products, and we will continue to do so. WealthCentral now offers two distinct platforms from a single owner. We expect the increased scale of the merged firm will benefit our clients."

Expect advisors to greet the merged firm with a healthy dose of skepticism, but if the firm sticks to the roadmap laid out in the press release of letting Colley and his team manage the advisor segment of the business, early odds are that the merger will be a success.
-Joel Bruckenstein

Two Takes On RIA M&A Activity
According to Schwab Advisor Services, 2010 was a record year for mergers and acquisitions among RIAs. According to a report from Pershing Advisor Solutions and FA Insight, last year's number of M&A deals involving RIA firms was the lowest since 2006. What gives?

Schwab tabulated 109 deals involving $156 billion in assets last year. But the "Real Deals 2010" report from Pershing and FA Insight reports 41 deals involving $96 billion in assets. Both camps stand behind their numbers. David DeVoe, managing director of strategic business development for Schwab Advisor Services, says Schwab tracks all sellers who have an RIA affiliated with their firm. Dan Inveen, principal and research director at FA Insight, says his company's deal-tracking entails only those transactions involving independent RIAs. These firms must have at least $100 million in AUM or $500,000 in revenue.

"We track this data on an ongoing basis because M&A activity is really important to our clients," DeVoe says. "We look at the data at least once a month, and we tap into our sales force of 150 people who work with 6,000 advisors in the industry, which might help us see deals that others don't."

Nonetheless, both sides see similar M&A trends in that activity took a hit during the recession but is picking up again for various reasons: Firms have a desire to create scale and reduce fixed costs; they want to create succession plans; they have seen improved valuations as assets and revenue rebound; and RIAs have more time to work on deals.

"Buyers and sellers are less preoccupied with putting out fires," Inveen says. "With markets more stabilized, advisors have more time to think strategically and look into mergers and acquisitions."

Among the findings in the "Real Deals" report is that RIAs themselves have become the chief initiators of deals within the space (a conclusion also reached by Schwab). Those deals involving serial buyers--for whom multiple transactions are central to their business strategy--have dropped from nearly one-third of the total in 2008 to fewer than one-quarter last year.

The report notes that some serial buyers have left the game completely while others, such as Wealth Trust LLC and Boston Private Wealth Management Group, have sold RIA firms they acquired back to the managers. It also says that United Capital has been the most "synergistic" serial buyer in the past two years, while Focus Financial Partners has maintained a presence in the deal-making space.

Both Schwab and Pershing/FA Insight say banks have effectively become non-players in RIA acquisitions. The "Real Deals" report suggests that this might be a short-term trend-that banks in coming years might be motivated to diversify away from interest-related businesses by acquiring wealth managers.

Either way, neither Inveen nor DeVoe expect a pell-mell return to the merger frenzy among RIAs seen before the market crash. FA Insight's findings suggest, says Inveen, that "it will be a while before we see a peak year like 2007, which was a frothy period. I think a lot of deals were done without a lot of study and thought as to their viability, and people went into them with rose-colored glasses."

DeVoe, meanwhile, thinks that the record M&A pace witnessed by Schwab could have been a short-term bump suggesting that negotiations put on the back burner in 2009 were simply consummated later in 2010.

Forum Gives First Ever Innovation Award To Putnam
The Innovation and Growth Forum named Putnam Investments the inaugural recipient of its Innovation Award for its successful launch of its series of absolute return funds. Putnam introduced the four funds in early 2009 as an alternative to traditional retirement investments, and since they debuted the funds have attracted about $3.3 billion in assets.

"We are honored to be the initial recipient of this prestigious award, which reflects the commitment to innovation that has characterized Putnam Investments during the past three years," Putnam Chairman and CEO Robert Reynolds said. The funds "seek to address an array of investment needs, including the dampening of market volatility, generating more dependable returns and helping to mitigate potential inflation and longevity risks, all of which are paramount to the confidence of financial advisors and investors."

Putnam had been using the absolute return funds for institutional clients for several decades. When Reynolds arrived at Putnam in early 2008, these institutional vehicles were among the few top performers in the mutual fund complex's product lineup.

The timing of the launch in the middle of the financial crisis in early 2009 proved to be propitious, since many investors were fleeing the equity markets and interest rates were at a historic low. In an interview in late 2009, Reynolds told Financial Advisor that he was convinced absolute return funds would become mainstream alternatives for the future wave of retirees and that, as a result, people wouldn't have to invest a large chunk of their assets in cash.

The forum was jointly organized and co-sponsored by Spectrem Group and Financial Advisor magazine in early 2009 to provide an idea exchange for the financial services industry as it tried to reinvent itself in the wake of the financial crisis. It received 41 nominations for the award, and 25 nominees were asked to provide more information. Members  ultimately voted on 11 of 25 nominations that met the deadline for submission and chose Putnam.

SEC Seeks Higher Limits For Charging Performance Fees
The Securities and Exchange Commission plans to adjust two tests that registered investment advisors must use to determine if they can charge performance-based fees. The changes would result in about 195,000 households no longer being considered "qualified clients."

Current SEC rule 205-3 under the Investment Advisers Act of 1940 requires that clients must have at least $750,000 under management or a net worth of more than $1.5 million if they are to be charged performance-based fees. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that by July 21--and every five years thereafter--the SEC adjust for inflation these dollar-amount tests. The current standards were set in 1998.

The SEC plans to amend the rule by raising the assets-under-management test to $1 million and the net-worth test to $2 million. The revised dollar amounts reflect inflation as of the end of last year. The amendment would specify that the PCE Index will be the inflation index used to calculate future inflation adjustments.

Also, the SEC proposes to adjust the net-worth standard for a "qualified client" to exclude the value of a person's primary residence and debt secured by the property that is no greater than the property's current market value. If the outstanding debt exceeds the market value of the residence, the amount of the excess would be considered a liability in calculating net worth.

The agency also wants to modify the rule so that the changes would not be retroactive-RIAs would not be required to renegotiate terms of arrangements that were permissible when the parties entered into them.

"This won't have any impact on advisors with higher end clients because they weren't trying to squeeze people into that type of fee arrangement," says Patrick Burns, president of Advanced Regulatory Compliance Inc. in Beverly Hills, Calif. "But this could impact other advisors who were trying to be more creative by including people whose house was a major part of their wealth."

The SEC is requesting comments on these amendments to rule 205-3 by July 11. Comments can be made by using the SEC's Internet comment form (www.sec.gov/rules/proposed.shtml); by sending e-mail to [email protected] with "File Number S7-17-11" on the subject line; or by using the Federal eRulemaking Portal (www.regulations.gov).

Life Imitating Art
When Harvard-educated International Monetary Fund economist Rex Ghosh shopped around his novel about financial terrorists causing a global financial crash, publishers took a pass because they found the premise implausible. After the 2008 financial crisis, Ghosh's book Nineteenth Street NW didn't seem so far-fetched after all. Ghosh eventually found an American publisher (Greenleaf Book Group Press), and his novel has garnered praise from the likes of former Federal Reserve Chairman Paul Volcker. Ghosh says the U.S. financial system nearly ruined itself, and it still has lessons to learn to prevent another crash.

FA: How would you describe the current culture of the U.S. financial sector?

RG: For starters, these are my own views, not those of the IMF. The U.S. financial sector has forgotten its basic purpose, which is to intermediate real savings for real investment. There's too much churning and making money on highly leveraged, very exotic financial instruments that frankly neither the purchasers or sellers understand how they'll behave. We really need to get back to basics. My message is we can take away lessons from the crisis, which I broadly categorize as lessons for the Fed, banks and regulators.

FA: What lessons are there for the Fed?

RG: Central banks such as the Fed need to look at asset prices, such as the stock market and housing sectors, when assessing inflation. It also needs to be more mindful of lending and credit booms, especially in the face of weakening credit standards. That's what paved the road to hell three years ago. Traditional monetary policy tools, like the Fed's interest rate, may need to be bolstered by countercyclical capital requirements such as requiring banks to hold more capital in boom times.

FA: What lessons can be learned by the banks?

RG: Banks used to know who they were lending to, but the proliferation of packaged securities made it hard for banks to know who their ultimate borrower is. In turn, that meant they had to rely on the credit rating agencies. The more banks have gotten away from traditional lending, the more risk we have.
FA: Should there be more regulation of the financial sector?

RG:I wouldn't call it more regulation as much as less reliance on self-regulation. Basel I capital requirements were simple and straightforward. Basel II relied more on internal ratings by banks, which were very complex mathematical models on the riskiness of their portfolios, which set their capital requirements. With Basel III, we're realizing we can't rely on these banks' complex models. But banks have gotten much bigger since the crisis deepened, meaning that if they were too big to fail before, they're way too big to fail now.

FA: It seems volatility is here to stay, which could create more financial crises.

RG: We need better safeguards in the form of regulatory and supervisory safety nets. I'm confident of our ability to do that. Whether we'll have the political will--both nationally and globally--is the question because memories are short. 

FA: Your book seemed to be a case of life imitating art.

RG: I spent much of my career working on financial crises in emerging market countries. I wrote the book as a way of reaching a broader audience about financial crises and how they happen. To make the story more exciting, I had the idea that terrorists could use the financial system as a way to strike a blow against a way of life. Turns out we didn't need terrorists, because our own greed and stupidity were enough.

Improved Health: The Best Health Care Plan
Can't afford health care? Better start exercising and eating right, then. According to a recent survey from Sun Life Financial Inc., 53% of respondents said concerns over future health-care costs are motivating them to adopt healthier lifestyles through improved diet and more exercise, quitting smoking and reducing stress. Of that group, 12% said they have made major changes. The survey found these aren't all late-in-life converts to clean living--45% of thirtysomethings surveyed said they made health and lifestyle changes to reduce future long-term health care expenses.

Evidently, these folks have only an abstract notion about the future costs of health care because the survey found 92% of respondents either don't have a clue about what their health care costs will be in retirement or greatly underestimate those costs. Among them, 40% said they had "no idea" how much health care will cost, and just 8% estimated their costs at $200,000 or more, which Sun Life says is close to--but still under--industry estimates of roughly $260,000.

Moreover, 43% of respondents said they were "not at all confident" about meeting health care costs in retirement, and only 9% said they were "very confident." Consequently, it's not surprising that 74% of survey participants said they don't have specific plans to cover retirement health care costs.

And a small number of people (9%) said they've had to withdraw money from retirement savings, sell assets or borrow money to pay for a serious illness or medical procedure, and 51% of them don't think they'll ever replace what they spent.

The online survey of 1,525 respondents was conducted in March.

Cause Marketing Might Cause Hit To Charitable Donations
Buying products from companies that funnel a portion of sales proceeds to a good cause is nice, but it could result in less charitable giving by consumers, according to a recent study by Aradhna Krishna, a marketing professor at the University of Michigan's Ross School of Business.

In studies involving 300 students at the university, Krishna found that cause marketing not only drains resources that might otherwise go to a charity or social cause, it might drain some of the satisfaction that comes from philanthropic giving. That's because the act of buying something associated with cause marketing--despite its do-gooder connotation--is a selfish act. In other words, cause marketing is shopping in disguise, and it may be "costless" to consumers if they would have bought the product anyway even if it weren't linked to a good cause.

Pure charitable giving with nothing expected in return (except perhaps a tax deduction) is more altruistic, which engenders warm fuzzies among givers. The study's findings indicate that people appear to realize their motives for participating in cause marketing are more selfish than with charitable giving, thus reducing their subsequent happiness. But this doesn't prevent them from thinking their purchase is a charitable act, which in turn can decrease subsequent charitable acts.

Krishna acknowledges the small sample size of her study has limitations and requires more studies.

Opening Up About Closed-End Funds
Closed-end funds take a back seat in many portfolios--if they get a seat at all--because they're more complicated than open-end mutual funds and generally don't get a lot of ink (The Wall Street Journal, for example, publishes its performance table just once a week, on Monday). Throw in hefty sales loads on IPOs, market prices that are often at substantial discounts to underlying asset values, the lack of research on funds and the ownership disconnect that often exists between management and investors, and there's little wonder why these funds don't get a lot of attention.

But interest in closed-end funds is growing, according to speakers at a Capital Link-sponsored investment forum last month in Manhattan. Jonathan Isaac, director of product management at Eaton Vance Investment Managers, cited the rising issuance of IPOs in closed-end funds. The trailing 12-month period through April saw 18 new closed-end fund offerings that raised more than $9 billion in the primary markets. That compares to $7.6 billion raised during all of 2010. Two-thirds of the new funds were bank loan, high-yield and short-duration funds, as well as master limited partnership, resource and commodity funds. Isaac said this indicates that investors want protection against anticipated inflation and rising interest rates.

Isaac also noted that leverage-a key feature of closed-end funds that boost yields-is returning. Closed-end fund managers got whacked when leverage turned against them and exaggerated losses during the financial crisis. In addition, the funds weren't able to refinance leverage after credit shut down. But Isaac said he's seeing leverage return to pre-crisis levels, thanks to renewed access to credit and investor demand for higher-yield products. This can be a good thing in a positive investment environment, but could turn ugly if interest rates shoot up and security prices start falling.

During the depths of the financial crisis, many institutional investors waded into closed-end funds, enticed by the deep discounts of their market price to the underlying asset value. Most of those discounts have corrected substantially. Marc Loughlin, head of U.S. closed-end fund sales at Canaccord Genuity, said that today these types of investors are much more focused on fundamentals and they are asking questions about a fund's management, structure and degree of leverage. In short, "all the questions that weren't being asked several years ago," he said. This suggests institutions are focused on long-term investing rather than opportunistic trading. If so, it bodes well for improving market valuations and shrinking discounts.

Another evolving theme: Industry competitors are increasingly buying one another's products. According to Will Kover, a senior vice president at Guggenheim Funds Distributors, the growth of closed-end funds of funds is diversifying the shareholder base, especially in unit investment trusts where sponsors assemble a series of closed-end funds in limited-term products.

"This enables investors to have professionally selected and actively managed portfolios of closed-end funds," Kover said. He noted the leading UIT sponsors include First Trust Portfolios, Guggenheim Funds, Invesco, and Advisors Asset Management.

Kover said expanding ownership among closed-end funds improves liquidity, which has helped closed-end funds quickly rebound after dramatic sell-offs over the past several years.

Loughlin believes the growth of UITs that specialize in closed-end funds will likely reduce the free float and liquidity of these funds. On the flip side, though, he said growing demand for closed-end funds will likely boost market values and reduce discounts.
--Eric Uhlfelder