Custodians are continuing to offer new services for fee-only planners In their efforts to woo RIAs.
Freud never asked, "What does an RIA want?" But if
he had, he might have found something like the financial planner's
version of the Maslow's Hierarchy: not shelter, food and sleep, but
simply the back-office comforts planners used to have when they were
reps for a brokerage firm or worked in another large organization,
before they hung out a shingle and went it alone.
According to people who serve them, these breakaway
independents, for the price of their freedom, have found themselves
drowning in paper.
"What we're hearing is that they are very good at
raising money and managing money, but not nearly as well-versed in
running a small business," says John Iachello, managing director at
Pershing Advisor Solutions LLC. "So while they have been given a fairly
wide range of products in the marketplace by custodians like ourselves,
their first and foremost concern is running a more successful business.
It's not terribly different than any other small business, like
lawyers, doctors or accountants."
With this challenge in front of them (and
competitors trying to woo advisors away, sometimes literally out from
under their noses), broker-dealers and custodians have been called upon
to constantly step up with new fee-based offerings targeting breakaway
RIAs-services such as beefed up technology, more bulk trading, trust
services and outsourced portfolio management, as well as practice
management help.
Keith Newcomb, a financial planner with Full Life
Financial LLC in Nashville, Tenn., dropped his broker-dealer
affiliation last year, which freed him to seek new vendors. Though the
process of finding new partners may not have been as exciting as the
reality show elimiDATE, Newcomb says he did see a lot of interesting
suitors pitching innovative services. Among them were Foliofn, which
attracted him for its innovative and cheap trading platform that tried
to match bid and ask prices, and Fiserv Investment Support Services,
which did omnibus level trades for ETFs. "A big deal," he says.
Eventually, though, he went with TD Ameritrade because "they blew the
doors off on service," and gave him the one stop he needed for most of
his services.
Expanding Platforms
This idea that advisors are not being allowed to
spend enough time with their clients is a recurring theme that has
brokers and custodians working to give RIAs more outsourcing options.
TD Ameritrade acknowledged that issue when it announced in February
that it was expanding its managed accounts platform in partnership with
Capital Market Consultants LLC.
"They are going to help us in broadening that
selection of investment management available to RIAs-those who want to
either do their own investment management research and selection or
those who want CMC to do that work for them, if they want to outsource
it completely," says Brian Stimpfl, managing director of business
solutions.
One piece of the puzzle will be a new unified
managed accounts offering that will roll out from TD Ameritrade some
time in 2007. These types of accounts, which primarily have been the
domain of the broker-dealers, have been a big noise recently, since
they can wrap together a bouquet of multiple products-individual
securities, mutual funds separately managed accounts, ETFs,
multiple-style portfolios and alternatives-all within one account,
without multiple brokerage fees.
"UMAs are just starting to gain attention," says
Stimpfl. "In the traditional world, if you had three separately managed
accounts, that would mean three brokerage accounts. If you wanted a
mutual fund, that would be another brokerage account. If you wanted an
ETF, that would be a fifth. The UMA would combine it into one, and then
you would have an overlay manager that would sit on all the brokerage
in that account and allow you to just manage those investments in a
tax-optimized way."
Pershing and Schwab Institutional are working on
UMAs as well. Meanwhile, Pershing has developed a wrap-fee retirement
product with a third-party asset management provider to address some of
the thorny issues facing retirees, namely, a longer retirement where
their nest egg has got to last longer. It's an account with multiple
"sleeves," divided between cash-bearing vehicles, blue-chip stocks and
smaller-cap stocks that have a longer time horizon, says Iachello.
These are all managed in one brokerage account with
a third-party provider that buys three different models from three
different managers, and this third party can monitor the account to
make sure there is no overlap. Pershing has created the technology that
allows them to do it all within one single account with a single
performance report and a single package. The firm is testing other
similar products with other providers.
"We don't look at it as an annuity per se," Iachello
says. "It's the type of solution that has to be developed in our
industry for all the baby boomer retirement groups. It will not be
feasible, in my opinion, for advisors to separately manage each small
relationship that will be coming their way."
Broker-dealer Commonwealth Financial Network has
also expanded its fee-based platform with two new initiatives. One is
its PPS Retirement Solutions retirement plan, which allows RIAs on its
platform to offer 401(k) plans to corporate clients with full
transparency and disclosure. Managing principal Wayne Bloom says the
new product was not meant as a response to changes in last year's
Pension Protection Act of 2006, though the timing was perfect with the
new law.
"What the PPA is all about is that they do not want
variable compensation at the point of sale," Bloom says. "Typically,
reps in this segment of the marketplace earn 12b-1 or finder's fees.
Depending on what a traditional no-load company, say a Vanguard, will
pay them versus a traditional 'A' share, the company's compensation
will be different. Now we've removed that so that the advisor gets a
flat fee based on the assets in the plan. There is no variable
compensation based on the assets selected."
The firm has also come out with a new turnkey mutual
fund and exchange-traded wrap program called PPS Select, which offers
15 different sets of portfolios as part of the firm's partnership with
research and consulting firm Ibbotson Associates.
Trusts Become Trendy
In the meantime, execs at Schwab Institutional have
been looking more closely at trust products, which it sees as a big
area of growth as advisors deal with more wealth-transfer issues amid
mass Baby Boomer retirement. "At Schwab Institutional, when we look at
the assets that our advisors have with us, 40% of the nonretirement
assets are held in trusts," says Cathy Clauson, vice president of
product development. "As we go out and talk to advisors, that number
gets greater for the percentage of assets under management."
And as that happens, she says, advisors will have a
great opportunity to clinch (or lose) those assets, depending on
whether they have relationships with the successor trustees and the
beneficiaries. Evolving trust laws have begun to liberate these assets
from their past stranglehold by banks. Until fairly recently, most of
the money was held in such a way that trusts holding the money also did
the management, and advisors often got cut out-often at a time, Clauson
says, when the trustee has died and the family needs the advisor the
most.
Schwab has taken a couple of steps in this area, she
says. The firm is building a corporate trustee offer in which the
advisor can name Schwab as a successor trustee, and that allows the
firm to manage the trust. Schwab has also partnered with Innovest
Systems LLC, a technology developer whose trust accounting software
will be integrated into Schwab Institutional's custody and trading
platform so that advisors can provide trust accounting. The new system
is in a pilot program now.
"Traditionally you'd separate the principal of the
investment and income and you'll pay the income beneficiary," she says.
"However they want that paid out, we'll be able to do that now, where
before we had that [software] we couldn't. Broker systems in general
haven't been able to do that. Banks were the ones that were set up to
do that. So this weds the full functionality of the broker-dealer
system with the full functionality of the trust accounting system."
The trust strategy differs from Schwab's arrangement
when it owned U.S. Trust, Clauson says. Because the previous offering
required custody at U.S. Trust, she says it was less efficient for
advisors and limited the number of investment products. The new
approach allows the advisors to keep custody at Schwab Institutional
and avail themselves of the firm's mutual funds and managed accounts
platform.
Outsource A-Go-Go
Pershing has been focusing a great deal of its
energy on practice management issues as it aggressively pursues RIAs.
In conjunction with a study the firm commissioned with Moss Adams LLP
on buying and selling firms (called Real Deals: Definitive Information
on Mergers and Acquisitions for Advisors), Pershing has begun a series
of workshops around the country for small groups of 15 to 20 advisors
to bring the lessons from the study down to a personal level, says
Iachello. Pershing has also released a report focusing on hiring and
retaining the best staff (called A View From the Top: Best Practices in
Leveraging Human Capital).
"Another thing we keep hearing from RIAs is that
they are frequently at risk of loss of control if they lose senior
operational people," Iachello says. "The advisor is not frequently in a
geographic region that has a lot of knowledge of the brokerage
industry, so it's hard for them to reach out and get new staff that is
trained."
Raymond James has also focused on succession
planning, says Mike Di Girolamo, managing director of the Investment
Advisors Division. The firm formed a practice management and succession
planning department and will roll it out this year. The new department
will help advisors value their practices, and help buyers and sellers
find each other. The firm will offer financing for advisors who buy
other firms and bring the assets into the Raymond James platform. In
addition, Raymond James has been integrating new kinds of software into
its platform, having paired up with Microsoft to integrate its customer
relationship management software-Microsoft Dynamics CRM-after last year
adding the CheckFree APL institutional portfolio management system into
its platform and routing portfolios there from its in-house system.
"We've made a concerted effort in the last two years to really
integrate the various modules right into our platform," says Di
Girolamo.
A recurring theme in practice management is that
advisors want more time to spend with their clients, and that's the
overarching theme motivating many of these big initiatives. Outsourcing
is the buzzword at TD Ameritrade, says Stimpfl, and the firm is sending
out consultants to help tie together all of the firm's business
development programs, including the new managed accounts platform. TD
Ameritrade is also trying to step up its technology initiatives, and in
2006 it bought iRebal, Gobind Daryanani's popular rebalancing software,
which it will continue to sell separately but also integrate into its
platform.
"You could really outsource everything," Stimpfl
says. "You've got to have processes and procedures with your vendors,
but you could do nothing but manage your client relationships in this
day and age and outsource everything else in your business. I don't
think many advisors are doing this. Many don't want to. But they could
outsource any of those disciplines: trading, back office, portfolio
management, investment management compliance. We're helping them make
those choices."