Advisors who want to recruit Gen X and Gen Y members as clients should look to the children of their existing clients who are in or near retirement, said advisors and other financial professionals during a recent webinar on the topic.

The webinar, "Acquiring the Next Generation of Wealth: How to Attract Gen X and Gen Y Clients," was hosted by the firm By All Accounts. Gen X are people in their thirties and forties born after 1964, and Gen Y folks were born between 1977 and 2001.

Andy Seth, managing partner and co-founder of Lotus Group Advisors LLC, said people in these age demographics by and large don't have enough assets to qualify for accounts with many financial planning firms, but they remain an underserved population that advisors should target. "These potential clients may not have much to invest now, but they will have and they want to feel part of the team, so advisors have to fine-tune their message to younger people," he said.

Top firms use active marketing to reach out to younger investors, Seth said.

Another webinar participant, Jason Whitby, senior financial advisor at Investor Solutions, said many advisors are missing an opportunity by not reaching out to the children or grandchildren of their existing clients.

"This is an added value you can offer your high-net-worth clients," he said. The risk is that the advisor can alienate the original high-net-worth client if the children do not do well, financially or in a career. However, that can be offset by communicating with all generations through simple conversations.

It helps to understand the mindset of Gen X and Gen Y, webinar panelists said. That includes knowing when to indulge their self-indulgence. If they "don't want delayed gratification, financial advisors who want them as clients need to know this," Seth said. "Gen X and Gen Y are not going to cut back on the things they like, so we tell them to spend extravagantly once in a while."

Seth added that he had clients who wanted to take a luxury vacation. Rather than telling them to put off their trip, Seth helped them to arrange three months off work to travel.

One of the big differences between Gen X and Gen Y and their baby boomer predecessors is that they are more technology savvy. As such, Jeff Rose, the CEO and founder of Alliance Wealth Management LLC, says he created his firm to allow him to do as much as possible online and through social media. "There are 800 million users of social media and you need to go everywhere they go," he said. He added that his most important tool is his blog.

"Once you write about something, you are an expert," he said. "Share your knowledge, but also share your personality. I make sure I put something of myself on there so I am more than just a financial advisor. People then feel like they know you when they make that first phone call."

For better or worse, those techniques might be needed to serve Gen X and Gen Y clients in a 24/7 online world.
--Karen DeMasters

Systematic Withdrawals Help Stabilize Clients In Retirement

The science (or art) of withdrawing income from a client's retirement account can take different forms. But a recent study conducted by the Financial Planning Association suggests clients rarely make significant changes to their employment status or lifestyle during retirement if they work with planners who employ a systematic withdrawal approach for generating sustainable retirement income.    

The 2011 Financial Advisor Retirement Income Planning Experiences, Strategies, and Recommendations Study gauged attitudes toward retirement planning. Among the 595 planners who participated, three-quarters said they frequently or always use systematic withdrawals. Another 38% said they frequently or always use time-based segmentation, which entails withdrawing money from the lowest risk investments first.

One-third frequently or always use the essential-versus-discretionary income approach, where low risk investments fund daily expenses and higher risk investments fund discretionary expenses. And 23% used a less formal strategy with clients who mainly live on pensions or Social Security.

The survey found that planners employing systematic withdrawals had clients who were the least likely to change retirement plans. One-third of planners using this method say 96% of their retired clients made no changes to their employment status or lifestyle during retirement.

Across all withdrawal methods, the study found 76% of retired clients made no significant changes in their retirement plans or lifestyles during the past 12 months. That's a hefty jump from the prior 12-month period, when 60% didn't make big changes to their plans.

Many retired clients haven't had to make many changes because they have pensions to rely on, but the next crop of retirees might not have that luxury, says Jack Gardner, president of Thornburg Securities Corp., which sponsored the study.

"The next wave of baby boomers will not have pensions, and making changes in their plans-cutting back on expenses or getting a part time job-is going to become the norm because volatility is going to be with us for a while," Gardner says.   

As a result, withdrawal methods used by financial planners might have to be more flexible. "Systematic withdrawals have been embraced by many, but I think there is going to be a shift to a combination of using systematic withdrawals and total returns, rather than just focus on the balance sheet like in the accumulation phase," Gardner says. "The FPA survey shows that financial planning strategies are improving, but we still have a lot to learn. As an industry, we have not given advisors the tools to efficiently implement retirement income planning across their book. Platforms are still built for accumulation; they 're not built out yet for the distribution phase."

The surveyed planners also offered their take on how to bolster their arsenal of retirement planning products. Their wish list includes products that allow clients to automatically take income from fixed-income portions of a portfolio, more annuities with no fees or commissions and lower expenses, and long-term care insurance/annuity hybrids that offer enhanced payments for terminal illnesses and tax advantages.
-Karen DeMasters


Advisors See Growth Opportunity In 401(k) Plans
The 401(k) market is dominated by a few advisors and retirement plan consultants who have a large number of multi-million-dollar plans, but investment advisors who oversee smaller plans increasingly want a bigger piece of the pie in the 401(k) plan management business, according to Cogent Research.

Slightly less than half (47%) of the retail investment advisors in the U.S. are serving two or more 401(k) plans. Cogent's recently released 2011 Retirement Plan Advisor Trends study put those folks into three categories: heavy plan advisors with an average of 30 plans totaling $25 million or more in assets; moderate advisors with an average of 11 plans worth between $5 million and $25 million; and light producers with an average of five plans worth less than $5 million.

Those advisors in the "heavy" category want to boost their 401(k) business by about six plans in the next year. Moderate advisors want to grow the number of plans they advise from 11 to 14, while light advisors want to increase their activity from five plans to seven. On percentage terms, the latter two groups want higher growth rates.

"In order to gain a share of this business, advisors need to educate themselves about what is available in the market, and they need to approach employers directly instead of waiting for an employee they are dealing with as an individual to be ready to roll over a 401(k)," says John Meunier, Cogent principal. "There is a great opportunity and a lot of money to be made in dealing with this market."

Advisors say plan providers who offer good customer support, quick problem resolution and a user-friendly Web site are the ones they most often present to an employer for his or her choice.

Cogent's survey canvassed 523 advisors with a minimum of 4% of their total AUM invested in 401(k) plans.
-Karen DeMasters

Don't Forget The Roth 401(k)
In the Roth family of retirement plans, the Roth IRA, which hit the scene in 1998, seems to get a lot more attention than its sibling, the Roth 401(k), which arrived in 2006. But some financial professionals say the latter can play an important role in people's portfolios.

"Only about 38% of plan sponsors offer the Roth 401(k) to their participants because it means extra time and expense that plan sponsors prefer to avoid for now," says Christine Fahlund, a senior financial planner with T. Rowe Price in Baltimore.

But Fahlund predicts the Roth 401(k) will grow in popularity and urges financial advisors to include it as an option for their clients. A Roth 401(k) combines features of the traditional 401(k) with those of the Roth IRA. It's offered by employers like a regular 401(k) plan, but contributions are made with after-tax dollars.

"The Roth 401(k) is especially advantageous for high-income workers because there are no income limits," says Fahlund. "With a Roth 401(k), if you are 50 or older in 2012, $22,500 can be invested so that your money grows tax-deferred and can be withdrawn tax-free at retirement."

Barry Milberg at Milberg Consulting LLC, a third-party pension administrator in Blue Bell, Pa., cites another potential advantage of Roth 401(k)s. "Depending on if a retiree's tax bracket is higher in retirement, the Roth 401(k) investor could receive more spendable after-tax income, which is why it's so attractive to a high-net-worth individual."
--Juliette Fairley

Correction
December's cover story, "Reorganized For Success," indicated that the performance numbers for Wescott Financial Advisory Group's investment portfolios are publicly available on its Web site. The information is available only on its private-access client center page.

New Breed Of ETFs Aim To Not Dance The Contango
Investors love commodities-based exchange-traded funds. But they hate contango, that nasty little quirk that occurs when distant commodities futures prices are greater than near-term prices. Investors lose money when ETFs roll expiring contracts into more expensive future contracts.

But help might be on the way to help sidestep contango, said panelists at the fourth annual Inside Commodities conference held last month at the New York Stock Exchange.

Matt Hougan, president of ETF analytics at Index Universe, the organizer of the conference, noted that contango has resulted in some exchange-traded products racking up net losses over the past decade while commodity prices have actually gone up, leaving some investors wondering how that happened.

The so-called third generation of commodity funds seek to mitigate this issue by blurring the line between index and active fund management with portfolio configuration rules that determine commodity exposure based on the desirability of futures contracts rather than the fundamentals of commodities themselves.

The initial generation of funds, which date back to 2005, were balanced selections of commodities based on their liquidity and respective economic importance. The second generation of funds, whose composition was still driven by an ostensibly desirable mix of commodities, started selecting contract maturities based on positive roll yields. That occurs when distant commodities futures prices are less than near-term prices. This condition, know as backwardation, is the opposite of contango.

"Except for high-priced commodities like gold and platinum, it's far too expensive for funds to hold the physical commodities, leaving futures contracts the only way to provide investor exposure to this asset class," said John Hyland, chief investment officer of the California-based US Commodity Funds. "So the problem for longer-term investors has been that they couldn't escape the impact spreads between contract and spot prices have had on total returns."

Hyland's US Commodity Index Fund, which began in late 2010 and now has more than $400 million in assets, puts itself into the third-generation fund category due to its methodology that systematically selects 14 commodity futures contracts (from a list of 27 possible commodity futures contracts) based on futures contract prices that are lower than their respective spot rates. Backwardation conditions suggest tight supplies and indicate upward moving price trends because commodities with low inventories tend to outperform those with high inventories.

By devising an index formula that actively looks for contracts that maximize this positive spread, or positive roll yield, the fund theoretically should be more profitable than first generation commodity indices.

Hougan cautioned that this latest product iteration doesn't ensure profitability. "There always can be market shocks that can cause both spot and contract prices to move sharply against investors," he said. And he noted that screening for spreads can reduce commodity diversification, which is a portfolio characteristic considered essential for mitigating volatility, and which is an underlying argument for owning exchange-traded products.

Developers of these products are betting their increased selection conviction will likely produce outperformance, Hougan said, which justifies to them the creation of portfolios that appear riskier than traditional commodity portfolios.

Still, Hyland believes his third-generation fund is a sign of things to come. He thinks the major index providers--Dow Jones, UBS, S&P and GSCI--will start offering variations of their static portfolios based on strategy rotation that will shift commodity weightings and positions on the roll yield curve. "That will be the future of indexing," he asserted.
--Eric Uhlfelder


SEC, Finra Issue New B-D Inspection Guidelines

The Securities and Exchange Commission and the Financial Industry Regulatory Authority have issued a new broker-dealer branch inspection program that includes guidelines on how securities firms can better supervise themselves.

Along with specific requirements outlined in the report, the program includes effective practices to be observed by broker-dealer branch office examiners:
Use risk analysis to identify whether individual non-supervising branches should be inspected more frequently   than the Finra-required minimum three-year cycle, and conduct more frequent branch inspections. Some firms are to conduct "re-audits" when routine inspections reveal a high number of deficiencies, repeat deficiencies or serious deficiencies. These re-audits and audits for cause are conducted as unannounced inspections.
Use surveillance reports and employ current technology and techniques to identify risks and develop a custom approach for branch office inspections.
Use comprehensive checklists that use previous inspection findings and trends noted in internal reports.
Conduct unannounced branch inspections either randomly or based on certain risk factors. "Surprise" exams may yield a more realistic picture of a broker-dealer's supervisory system as they reduce the risk that individual registered reps and principals might attempt to falsify, conceal or destroy records in anticipation of an internal inspection.
Use qualified senior personnel in several branch office examinations each year.
Insert branch office inspections findings into management information or risk management systems and use a centralized, comprehensive compliance database that allows compliance personnel access to information about all of a  firm's registered reps and their business activities. The system is useful in supervising independent contractor registered reps dispersed across a broad geographic area.
Provide branch office managers with the firm's internal inspection findings and require them to take and document corrective action.
Track corrective action taken by each branch office manager in response to branch audit findings.
Elevate the frequency of branch inspections or their scope, in cases where registered personnel are allowed to conduct business activities other than as associated persons of a broker-dealer-for example, away from the firm.

Talk Is Money
Financial advisory firms can dramatically increase their business by segmenting clients, taking regular surveys and writing  business and succession plans, according to a new survey released by Multi-Financial Securities Corp., a Denver-based brokerage firm affiliated with Cetera Financial Group.

The survey, The Pulse of Practice Health: An Insight into the Health of Elite Advisors' Firms, took feedback from professionals who identified themselves as financial planners, investment managers or wealth managers.

Those who talked with clients more than 12 times a year made 68% more revenue than those who talked with them fewer than six times a year, the survey found.Yet only a small group of respondents communicated with their clients more than once a month. Those who categorized themselves as financial planners communicated the least--nearly 80% of planners said they talked with clients fewer than 12 times a year.

"All advisors should review the effectiveness of their client communication programs," the survey says. "There is indeed a very real business benefit in getting this right."

Another key finding: The most successful firms segment clients and provide elite service to the more valued clients. Nearly half of respondents (47.9%) segmented clients and provided different levels of service to each.

One of the survey's surprising results was that one-quarter of the respondents were still using paper-based filing systems. "In today's environment, a computerized client database is an absolute must," the report says. Firms that used computerized data systems made 46% more in revenues than paper-based firms.