Advisors Using Fewer Asset Managers
Financial advisors each year are reducing their use of asset managers in building their clients' investment portfolios, according to Cerulli Associates.

"Despite the proliferation of new products and providers over the last several years, we've documented the extent to which advisors are using fewer asset managers,'' says Scott Smith, head of Cerulli's intermediary practice and lead author of the report, Advisor Portfolio Construction Dynamics, that explores this issue.

According to the report, 37% of advisors in 2005 reported regularly using five or fewer asset managers. By 2011, the numbers of advisors in that bracket climbed to 57%. The basic reason behind this trend is simple--mutual funds have become a commodity (i.e., How many large-cap value funds do we really need?), and advisors have better things to do than sort through reams of companies providing essentially the same thing.

"Financial advisors need to find ways to cut through the clutter," Smith says. "This is a shortcut for them where they can say, 'Here are five managers I trust, and this is the field I want to work from.'"

More specifically, Smith points to several factors contributing to this trend, including the need to reduce both costs and asset management risk. He says cost savings particularly register with clients of insurance broker-dealers, and to a certain extent independent broker-dealers and bank advisors, where people are paying commission loads.

"That is still a big deal in the regulatory community," he says. "For those advisors using commission products, they have to have a good reason not to pursue representation of a single firm. If that firm has solid offerings in the three or four asset classes that you need for a particular investor, then you'd better have a good reason not to do it if you'd end up saving client money on the commissions by [using] a single manager."

Smith says some advisors also fear the risks of dealing with many providers because each new manager brings potential issues with it. For example, if a manager's name ends up in a negative headline (perhaps one from the recent past involving Janus, MFS or Putnam), it could cause concern for clients, he notes.

"You can call it headline risk--that has certainly contributed to [using fewer asset managers]," Smith says. "If you believe in an advisor firm, and believe in their process, why wouldn't you use them for more than one asset class if they're among the top offerings?"

Growth in the use of exchange-traded funds is still another factor contributing to advisors' use of fewer asset managers. "A single manager can provide coverage of several asset classes within an ETF structure," Smith says. "While use of passive products has not pushed aside traditional active products, advisors are willing to consider them to address specific needs or to serve as complements to active products."

The report found that the RIA and bank channels are the most concentrated with a primary asset provider. RIAs place an average of slightly more than 40% of assets with their primary provider, reflecting the high use of passive products and the existence of single-manager devotion prevalent in the channel, Cerulli found.

Bank advisors, the report says, are more likely to implement fund-of-funds solutions or operate in a commission environment where reducing sales charges by using a single manager is an ongoing concern.

For asset managers, the consolidation trend among advisory end users can work both ways. "When they're winning [with good advisor relationships], it can be a good trend," Smith says. "When they're losing, it's not."

The New CFPs (Chinese Financial Planners)
If China today is akin to where the U.S. was a century ago, then the Chinese financial planning industry currently is where its U.S. counterpart was roughly 40 years ago--inchoate and an unknown quantity trying to prove its worth to investors. To help bridge that gap, 43 U.S. financial planners (and one Canadian planner) recently participated in the 2011 Sino-U.S. Dialogue on Financial Planning, a series of meetings over 12 days in late May and early June coordinated by the Financial Planning Association and the Financial Planning Standards Board China (FPSB China). The FPA invited the planners to fly to China on their own dime to meet with Chinese financial planners, exchange ideas, and help kick their industry into a higher gear.

"It's a relatively young industry that's only about five years old," says Carol Lampe, a Pittsburgh-based financial planner who participated in the U.S. delegation. "They really wanted to learn from us. They use our entire financial planning process and go through exams like we do. They know what the process is, but they have hurdles to go through."

Chinese advisors are a young lot with an average age of 32 years. "This is the first generation of wealth [in China], and so this is the first generation of advisors," says Dan Moisand, a principal at Moisand Fitzgerald Tamayo LLC in Melbourne, Fla., a trip participant. "And they have no mentors to learn from."

The two sides met in Beijing, Guilin and Shanghai. Moisand says they talked about some technical aspects, such as joint accounts (which don't exist in China), but they mainly discussed how to educate clients and help them understand basic, solid financial principles such as setting financial goals and not taking on too much risk or chasing returns. "The Chinese are new to capital markets, so they have the opportunity to both invest and to speculate. It kind of reminds me of the day trading craze here in the U.S. ten or 15 years ago," he says.

One of the obstacles faced by Chinese advisors, Lampe observes, is that the Chinese don't open up to outsiders, which makes it hard for planners to probe deeply enough to accomplish the planning process. She adds that Chinese planners also face unrealistic expectations from clients who hit them up with a familiar request-"Just give me something with a high return and no risk."

Lampe says she discovered the average Chinese investor is fixated on real estate. "To them, real estate is the only thing that will provide for their retirement," she notes. "They can't get enough of it, and don't seem to grasp that the bubble is going to burst." Meanwhile, the Chinese government is trying to douse the speculative frenzy by increasing minimum down payments and limiting the number of properties people can buy.

For their part, Chinese financial planners peppered their U.S.counterparts with questions about the types of products they use for their clients. "A lot of us use mutual funds, but that's not a developed product in China," Lampe says, adding that the Chinese expressed an interest to someday visit their American colleagues in the U.S.

For his part, Moisand says the advisory exchange of ideas was a success for both sides. For the U.S. delegation, it helped the FPA stay connected with the global financial planning movement. For the Chinese, "it helped young planners there learn the counseling side of the business and the interpersonal communications skills that will benefit them."

Avoid The Analyst Herd
(Bloomberg News)  Wall Street analysts are more united on earnings forecasts than ever before, and using their predictions to buy stocks flopped during the first half of 2011, according to Bank of America Corp.

There is an "unprecedented level of complacency" among analysts given that the difference between the highest and lowest estimates has shrunk to the smallest level since at least 1986, according to Savita Subramanian, a New York-based quantitative strategist at Bank of America.

Investing in companies that had their average profit projections increase the most returned 1% between December 31 and June 30, the third-worst strategy out of 36 tracked by Bank of America, Subramanian said.

"Consensus estimates haven't been adding value," Subramanian wrote in a note dated July 11. They may be "not as predictive given what we regard as a marked level of complacency built into consensus earnings expectations."

Other estimate-based investment strategies have also "struggled to outperform" this year, according to data compiled by Bank of America. Buying stocks with relatively low forecast price-to-earnings ratios returned 7%, half the gain from investing in companies with above-average five-year return on equity, the data show.

The relatively small difference between earnings forecasts contrasts with a high level of volatility in profits, Subramanian said. During the past five years, earnings at S&P 500 companies had the biggest swings since 1940, according to the Charlotte, N.C.-based firm.
"There is a remarkable disconnect between actual earnings variability and forecast earnings certainty," Subramanian wrote in the note. "Analysts are more clustered than ever," she said. "The market is discounting elevated earnings risk."

Analysts may be too optimistic about future earnings because chief executive officers are turning pessimistic, Subramanian said.
Managements started diverging from Wall Street in October, with the number of companies providing forecasts that were lower than analysts' estimates almost double those that provided higher-than-expected projections. At the same time, the amount of estimates that were boosted by analysts outpaced reductions by 50% in the second quarter, the data show.

The "continued disconnect between analyst optimism and management conservatism" suggests analyst projections are "too high," Subramanian wrote.

Bank Of America, Morgan Stanley Top Private Bank List
(Bloomberg News)  Bank of America Corp. still heads a ranking of the world's 20 biggest wealth managers while BNP Paribas SA climbed two positions to ninth place, according to Scorpio Partnership.

Morgan Stanley was second, followed by Zurich-based UBS AG, which was one of five Swiss private banks in the top 20. The results from London-based Scorpio, which were released last month, came from a survey of nearly 200 institutions.

Market gains helped boost assets managed by these banks by 11% last year, with the top 20 overseeing a combined $11.1 trillion, Scorpio said. The rate of net new money inflows declined on average by almost 19% from 2009, and many banks saw margins squeezed.

"If there were to be another market crisis of even a minor scale, we would be very concerned for many institutions and their future," said Sebastian Dovey, a partner at Scorpio. "Many firms need to upgrade and modernize or else call time on their exposure to this client segment."

LinkedIn Tops Facebook Among Mass. Advisors
Facebook, schmacebook. Among investment advisors in Massachusetts, the hands-down social media outlet of choice is LinkedIn. In a social media survey sent by the Securities Division of the Office of the Secretary of the Commonwealth to the 576 advisors registered with the division, 44% of respondents said they used some type of social media and that their usage of it will likely rise within the next year. As for types of social media they tap into, 42% said they use LinkedIn versus 14% who are on Facebook. In addition, 8% said they use Twitter and another 8% blog.

The point of the survey, according to the state's securities division, was to gauge the scope of investment advisors' use of social media and ascertain what type of records-if any-are kept and whether supervisory procedures are in place concerning social media use.

Among the findings, just 31% of respondents said they have written record retention policies regarding social media content. Along those lines, a minority of the firms that replied (43%) said they retain all content posted on social media Web sites maintained or operated by the firm. Furthermore, only 32% of surveyed firms said they have written policies and procedures governing an employee's use of social media.

In other findings bound to make a regulator's ears perk up, less than half (48%) of firms said they monitor or review social media content produced by its employees for business-related uses, and only 29% said they keep tabs on content posted on their sites by third parties.

Add it up, concludes the state's securities division, and it points to the need for additional regulatory guidance for social media use among Massachusetts' registered investment advisors.

The Bay State's concerns about advisor use of social media is mirrored on the national level, where the Financial Industry Regulatory Authority is grappling with how to establish clear rules for broker-dealers' use of social media. Two years ago, Finra created its Social Network Task Force, comprising Finra staff and industry types, to figure out how brokerage firms and their registered reps could use social media sites for legitimate business purposes in a way that protects investors.

At a conference in June, Finra Chairman and CEO Richard Ketchum said Finra later in 2011 will issue guidance on Internet-related issues, including the use of social media sites by its member firms.

Increasing Profitability Through Consolidated Brokerage Platform
A recent study from Pershing LLC asserts that investment advisors can potentially double profitability, boost productivity and extend client relationships by converting from direct business with fund complexes and annuity providers to a consolidated brokerage platform.  The report, Asset Consolidation: Your Path to Greater Growth and Efficiency, was developed with FA Insight. Among the conclusions:

Eliminating direct business practices saves time and money. FA Insight estimates direct trading costs for a typical investment professional exceeds $50,000, or 20% of an advisor's total practice revenue.

A consolidated platform creates efficiencies that translate directly to significantly greater productivity by enabling advisors to spend less time on operations and more time on business development.

With assets consolidated on the brokerage platform, commission and 12b-1 processing is automated for potentially faster payment and improved cash flows.

Consolidation onto a single brokerage platform improves compliance by limiting the potential for error and reducing market risk associated with delayed executions.