Executive Summary
Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the shocking announcement that Bill Gross is leaving PIMCO 41 years after founding it and taking over as the bond manager for the Janus Global Unconstrained Bond Fund, it what appears to have been a "voluntary" departure just days before PIMCO was going to fire him anyway for "increasingly erratic behavior" and threats from multiple PIMCO executives that Gross must be fired or they would leave instead.
In further notable news this week, the SEC announced that it is investigated how PIMCO has been pricing illiquid securities in its BOND ETF and suggesting that its returns may have been overstated (the investigation has also been attributed as a contributing but not primary factor in Gross' departure), an article about a recent NASAA proposal that state-registered investment advisers may soon be required to establish a succession and business continuity plan (public comment period closes on October 1st), a summary of FPA's current membership and revenue situation (declining for several years but now stabilized) as shared with the media at last week's annual conference, and an announcement from the CFP Board that it will be launching a "Career Center" with a job board, internship listings, and more, to encourage young people to enter the financial planning profession.
From there, we have several technology and practice management articles this week, including a discussion of the current technology offerings from the "Big Four" custodians and what they're working on rolling out in the coming year, the increasingly challenging environment for smaller RIAs to find a custodial platform that will work with them after Scottrade Advisor Services recently increased their minimums and introduced a significant platform fee for smaller advisors, a profile of the new management at Scottrade that suggests their goal is to turn the "Big Four" into the "Big Five" with rapid growth for Scottrade, and reviews of the new Junxure Cloud CRM (which advisor technology guru Joel Bruckenstein describes as having been "worth the wait") and also the Oranj practice management and marketing technology platform.
We wrap up with three interesting articles: the first describes the ongoing rise of the "virtual advisor", a human advisor who uses technology and video chat to work with clients efficiently and cost effectively (and remotely) in a "location independent" practice; the second is an "expose" on the too-close relationship between the Federal Reserve Bank of New York and the banks it oversees (especially Goldman Sachs) as illustrated by a "whistleblower" Fed examiner who recorded 46 hours of conversations highlighting the issue; and the last is a look from venture capitalist and Wealthfront founder Andy Rachleff about why VC firms will plow extraordinary amounts of money into companies that are not currently profitable (hint: it's all about the potential of future compounding growth).
And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including some highlights from this week's Finovate (financial services technology innovation) fall conference, and the Advicent (maker of NaviPlan) acquisition of Dutch financial planning software company Figlo! Enjoy the reading!
Weekend reading for September 27th/28th:
Bill Gross Leaves Pimco, Reportedly Under Pressure, to Join Janus (Matthew Goldstein, Dealbook) - The big news today was the announcement by "bond king" Bill Gross that he will be leaving PIMCO, the firm he founded 41 years ago, to join Janus Capital and managed the Janus Global Unconstrained Bond Fund. The surprise decision appears to have occurred because PIMCO may have soon been about to let Gross go anyway, with internal sources saying that there were five PIMCO executives who threatened to quit if Gross was not fired. In fact, it appears that Gross' departure - voluntarily or otherwise - may have been in the works for some time, with what has been reported as "increasingly erratic behavior" that may have led to his termination this weekend anyway, and was accelerated after the falling out earlier this year with Mohamed El-Erian, and this week's announcement of an SEC investigation into the pricing and returns of PIMCO's BOND active ETF (see article below). The decision to join Janus appears to have been the result of Gross' outreach to several companies, including Jeff Gundlach's DoubleLine and others, and Janus announced that it will be setting up a new office in Newport Beach (where PIMCO is currently located) for Gross to work there. As of publication, PIMCO has not yet announced who will replace Gross as Chief Investment Officer and head the firm's flagship PIMCO Total Return Fund, though an announcement is expected shortly. See here for a copy of the press release announcements from both PIMCO and Janus about the change.
PIMCO’s Bond ETF [Pricing] Woes Widespread in Industry (Janet Leveaux & Ron DeLegge, ThinkAdvisor) - This week, the SEC announced that it has been investigating for the past several months how PIMCO values the bond holdings in its $3.6B Total Return ETF (ticker symbol: BOND) and whether bonds bought at a discount were (inappropriately) priced at higher values later, causing the ETF's performance to be overstated. The investigation is apparently focused specifically on PIMCO's valuation methods for small increments (odd lots) of mortgage securities, and PIMCO has stated that it is cooperating fully with the SEC and that its pricing procedures will ultimately be upheld. Morningstar's director of manager research suggests that the question of whether underlying holdings of ETFs are being priced appropriately (especially for those with less liquid underlying holdings) is not unique to PIMCO's ETF though; funds holding non-agency residential mortgage-backed securities, collateralized loan obligations, or even less-frequently-traded high-yield bonds may have issues as well. Notably, Morningstar also points out that the problem may be more likely to occur in the context of actively managed ETFs, if only because most other ETFs try to mimic indexes and end out holding positions that are more liquid and more easily priced (because they're components of the index).
Advisor Input Sought in Looming Succession Plan Rules (Kenneth Corbin, Financial Planning) - Small and mid-sized RIAs could soon face a requirement to have some form of succession and continuity plan in place for their firms, under a recently proposed new rule from NASAA. The proposal appears to be driven by both a general concern about the graying demographics of investment advisers, the dearth of firms implementing succession plans (a recent SEI survey found that just 17% of advisors have a "binding and actionable" succession plan in place), and also reports from securities examiners in the field that when an advisor is incapacitated and has no contingency plan in place it can be highly disruptive to clients in a manner that may fail to satisfy the advisor's fiduciary duty. Regulators seem especially concerned about solo practitioners, where the client may not even be made aware that the advisor is no longer available (and certainly isn't monitoring their portfolio anymore) due to death or disability! To avoid being overly prescriptive (recognizing the wide range of firms), the NASAA proposal includes a relatively simple model rule for states to adopt and 18 pages of supporting guidance, focusing primarily on the requirement that investement advisers at least have a bona fide written plan in place (which examiners will then review upon audit) for continuity of the business itself and also client service. The "succession plan" could include a formal junior advisor who can take over, or a buy-sell agreement with another firm, or some other continuity solution. NASAA is still accepting public comments (including from advisors) on its proposal through October 1st.
Revenue Deflated In Recent Years, FPA Says It's Now On A Growth Trajectory (Trevor Hunnicutt, Investment News) - At their annual conference this past weekend, FPA leadership defended its recent revenue and membership declines (its 23,150 members is down 17% from 2007 but "stable" in recent years, and its $10.5M of revenue last year was off 36% from its 2008 peak), insisting that it can still deliver on its mission to advocate for a growing profession. Nonetheless, its losses have forced the organization to pare back; in 2008 the FPA spent nearly $1M on its advocacy efforts, but in 2013 they spent 1/3rd less (and closed its Washington DC office), and their spending on lobbying is only $40,000 through July 28 of this year compared to $432,000 in 2012. Nonetheless, the FPA has been active in advocacy at both the state level amongst its chapters (not directly reflected in the aforementioned advocacy spending), and with Federal regulators, especially on the issue of a fiduciary duty for advisors and a "user fees" solution to improve investment adviser oversight (as opposed to the alternative of potential FINRA regulation of RIAs). The FPA is also focusing on deepening the pipeline of younger people into the profession, developing "knowledge groups" for members in various subject matters, increasing sagging volunteerism, and championing diversity in the industry - most recently symbolized by the fact that in 2015, the majority of the FPA's board will be women in the traditionally-male-dominated industry.
Fidelity Teams With CFP Board On Career Center (Mark Schoeff, Investment News) - The CFP Board has announced that it will be launching a career center on its website in the first quarter of 2015, designed to be a "one-stop destination" for bringing students together with firms, offering both job and internship listings as well as information about career management accessible from both browsers and via a smartphone application. The effort will be sponsored by Fidelity, which also released a study on Thursday entitled "Recruiting Redefined" which found that only 2-in-10 college students and young professionals are even familiar with the advisory profession, and that many who are familiar associate financial planning with boiler-room style sales tactics and movies like "The Wolf of Wall Street" without recognizing its current more holistic and less-sales-oriented approach.
Tech Update: What the Big Custodians Now Offer (Joel Bruckenstein, Financial Planning) - The four major RIA custodians (Schwab, Fidelity, TD Ameritrade, and Pershing Advisor Solutions) have all made significant progress in enhancing their technology platforms in recent years, but pressure is mounting as the rise of robo-advisor platforms has exposed weaknesses in the industry's technology user experience for clients. In this article, Bruckenstein highlights the accomplishments (and some shortfalls) of each, along with a glimpse of what they're working on in the future, based on interviews with each company's technology executives. In the case of Pershing, the big focus right now is on its new NetXInvestor portal for end users, which will sport a clean, modern web-based design, with flexible "widgets" that can be moved and adjusted to allow clients to see what they wish, including the ability to view accounts individually or change the view to a group or the entire household of accounts; Pershing is also working on an API so third parties will be able to integrate with NetXInvestor, with Albridge performance reports as the first. From TD Ameritrade, its focus is on an upcoming new Veo advisor dashboard, which will be fully customizable (again, with a widgets-style interface) and deeply integrated with Veo partners, allowing the dashboard to pull in relevant data from outside accounts or vendors as well and push edits made in Veo out to partners (e.g., a contact information change in Veo could automatically update in Redtail CRM as well). With Schwab, the recent push has been on eSignature capabilities with its advisors (currently limited to wire transfers, but coming soon for checks, journals, address changes, and other actions that now require signed paper authorizations), and adoption has been very strong at every stage of rollout; other incremental changes include integrations with Schwab's Portfolio Rebalancer and Tamarac's rebalancing tool, and the addition of Morningstar Office and MoneyGuidePro to its OpenView Gateway offering, with Schwab's PM2 (its next-generation portfolio management system) expected to be in beta testing soon. With Fidelity, the changes are also more incremental, and include new account-opening integrations with Redtail and Skience, improvements for bulk mutual fund orders generated via Orion, single sign-on for Tamarac users, the ability to import Fidelity investment holdings information to MoneyGuidePro and NaviPlan, and an effort to bring together the two Fidelity advisor platforms (Streetcscape and WealthCentral) into an integrated account access through Streetscape.
Custodian Castoffs (Jerry Gleeson, Wealth Management) - Scottrade Advisor Services, which has historically been one of the few RIA custodians with a "low/no minimums" policy (the other two are Shareholder Services Group [SSG] and TradePMR, the latter still requiring that firms get to $1M in AUM in 6 months), started communicating this summer its "smaller" advisors that their relationship will be terminated (and/or that they need to pay a significant new platform fee to stay); although the exact number of advisors being culled hasn't been publicly stated, other custodians are all reporting a sharp increase in the number of former Scottrade advisors looking for a new home. As this article highlights, though, the trend is not entirely unique to Scottrade; last year, Fidelity announced it would charge a platform fee of $2,500/quarter to certain advisors below $15M of AUM (up from $10M previously), and many custodians just won't take smaller advisors at all (or like TD Ameritrade, will only allow smaller advisors on a selective basis, likely chosen based on their growth potential). Broad-based data suggests that the number of under-$25M advisors is shrinking across the industry, though, even as custodians themselves are under margin pressure from rising technology and servicing costs for today's increasingly complex RIA needs (even sometimes amongst small firms). Nonetheless, with an increasing number of advisors deciding to move away from growth and shift to lifestyle practices instead, some are now beginning to explore mergers or other strategies to get "big enough" to be appealing to more custodians and avoid the squeeze.
Scottrade Moves to Take On 'Big Four' Custodians (Charles Paikert, Financial Planning) - Continuing the prior article's theme, Scottrade has hired industry veteran Brian Stimpfl (a 17-year veteran of TD Ameritrade Institutional and more recently a senior executive at ActiFi) to rejuvenate its Scottrade Advisor Services unit, attempting to turn the "Big Four" RIA custodians into the "Big Five" instead by growing beyond its current 1,000 advisors with reinvestments into technology infrastructure, advisor support, and business development to bring more advisors on board. Yet critics raise the question of who Scottrade is trying to serve; the company says it is open to advisors of all sizes, but its recent push of "smaller" advisors out of its program and lack of clear differentiators for larger advisors make it unclear where the sweet spot may be in their efforts to take market share. Stimpfl says Scottrade's differentiator will be a "more intimate" personal relationship service, and is hoping that consumer-friendly Scottrade's retail brand (not to mention the retail company's technology, infrastructure, and resources) will help to bolster the offering.
Worth The Wait (Joel Bruckenstein, Financial Advisor) - After a longer-than-anticipated wait, the cloud-based version of Junxure CRM for advisors, aptly named "Junxure Cloud", has finally rolled out, and Bruckenstein states that it was worth the wait, showing right from its log-in home page that it is clearly designed with a deep understanding of the RIA [financial planning and wealth management] business. The dashboard interface is built around "tiles" that provide useful information that updates in real time (think Windows 8 live tiles), and the software has much deeper capabilities to not only capture and link actions, but to more easily search for them to find historical client activity and details. An "analytics" section will allow reporting on the firm, and there is also a "Report Assistant" tool that "is so intuitive that any novice should be able to master it in no time." Junxure Cloud also includes workflow management tools (including a number of work-flow templates you can load right in), integrations to third parties (the most robust integration currently available is with Orion, and ties to major custodians like TD Ameritrade and Schwab, as well as Envestnet, are coming soon), two-way syncing with Microsoft Exchange Calendar and Google Calendar, and in-depth fields to capture the kind of complex breadth of information necessary for financial planning clients (e.g., assets/liabilities, insurance, taxes, etc.). Pricing is "reasonable" for the system's capabilities, at $75/user/month, with discounts available through Schwab, TD Ameritrade, and other partners. Notably, though, while Bruckenstein says the new Junxure Cloud solution is a strong offering for a new Junxure users, the fact that it doesn't have quite the same functionality as the prior desktop version means some existing users may be more hesitant to move.
Oranj Promises One-Stop Practice Management, But Does It Deliver? (Joel Bruckenstein, Financial Planning) - A Chicago RIA called Main Street Financial started up in 2012 and built its own practice management technology platform to attract and retain and manage clients, and after their success (Main Street has quickly grown to $270M in AUM already) founder David Lyon decided to offer the solution to other advisors under a separate entity called Oranj. The Oranj "one-stop shop" solution aims to address the four core areas for advisory firms: engagement (communicating strategically with clients and prospects); scale (improving productivity and directing resources); management (ability to understand the business to refine it); and intelligence (identifying areas of opportunity). The current version of Oranj 2.0 aims to do this in a fully integrated manner (the prior version was split between "Oranj Cloud" and "Oranj App"), offering everything from a website and internet analysis (if you don't have a website, Oranj will build one for you, or you can integrate Oranj into your existing site), to a "lite" CRM (where clients who visit your site and enter information to view your content have their details automatically captured/updated in the CRM), to billing and e-marketing capabilities; as Bruckenstein notes, the features aren't revolutionary, but their integration is impressive. The Oranj App drives its marketing efforts, and includes account aggregation and portfolio tracking (powered by Yodlee), goal tracking, a secure vault, and various reports, and using DocuSign electronic signature capabilities can help clients open accounts and transfer funds to the account directly from the Oranj interface. Pricing for advisors is $250/month for the first user, and $50/month for each additional user, and is framed as a tool to help advisors deliver a technology client experience more like a robo-advisor.
The Freewheeling Life Of The Virtual Advisor (Ellen Uzelac, Research Magazine) - This article profiles the rise of the "virtual advisor", human financial planners who are working with clients using technology and digital platforms but without any physical office to meet clients in person (so they are "location independent" advisors), a solution that they say doesn't diminish the advisor-client relationship but enhances it... along with being cheaper, faster, and more efficient. And while many of the early adopters have been younger advisors, the trend is not purely about working with young people; a recent Spectrem Group found 50% of millionaires surveyed want "face-to-face" financial advising through video chat, and a Boston Consulting Group survey found that 40%-60% of high-net-worth investors want to be able to video chat with their advisors to receive customized investment recommendations (yet fewer than 20% of advisors actually offer such an option). So far, though, it appears that most "virtual" work with clients is done with existing clients, not necessarily as a means to bring on new clients. On the other hand, some advisory firms are actually working hard to build a brand and strong [online] service offering that will be capable of attracting new clients with the approach as well, drawing clients from social media, podcasts, and blogging. And in the meantime, advisors building virtual practices are enjoying the flexible lifestyle it affords, from being able to work from home or a coffee shop (or the lodge near the ski slopes), to simply saving on the raw cost of office space and the time of traveling to meet clients!
Inside the New York Fed: Secret Recordings and a Culture Clash (Jake Bernstein, ProPublica) - The "hot" story this weekend (beyond the big news about Bill Gross and PIMCO!) is this Jake Bernstein expose highlighting Federal Reserve "whistleblower" Carmen Segarra. The story starts back in the aftermath of the 2008 financial crisis, when legislators were looking to the Federal Reserve to take steps to keep a financial meltdown from happening again... and acknowledge that it had failed miserably to catch the 2008 meltdown ahead of time either. New York Fed President William Dudley addressed the issue by hiring an outsider to examine the Fed and figure out "what went wrong", and the conclusion was that part of the issue was the Fed's own culture, which was too risk-averse and deferential to the banks it supervised, and that it was necessary to hire outside examiners who were unafraid to speak up; Carmen Segarra was one of those new expert examiners, was hired to examine Goldman Sachs, and was fired after only 7 months, which she claims was a retaliatory act for refusing to back down from a negative finding about the firm and over which she filed a lawsuit. While Segarra's case was ultimately thrown out (on the grounds that her complaint didn't quite fit the statute under which she sued), in the court filings it was revealed that Segarra had made a series of audio recordings - 46 hours' worth - while at the New York Fed, to protect herself. The details of the article go through some of the "revelations" of the recordings in depth (which have also brought forth this stinging article about Wall Street by Michael Lewis about "the secret Goldman Sachs tapes"), and paint a not-very-pretty picture of the New York Fed as a regulator that has succumbed to "regulatory capture" and is still too beholden to groupthink, conformity, and a deference towards and discomfort-with-challenging those banks it is supposed to be overseeing and regulating. The Fed has posted its own response to the allegations here.
Demystifying Venture Capital Economics (Andy Rachleff, Wealthfront) - In this article, Wealthfront founder (and respected venture capitalist) Andy Rachleff looks at the economics of venture capital investing, from the perspective of why VCs will invest heavily in companies that operate at a significant loss, implicitly responding to recent critics (including yours truly?) who have questioned whether certain segments of the industry (e.g., "robo-advisors") may be getting over-invested. At the most basic level, the key point is simply that VC firms looking to capture "the next big thing" are not necessarily worried that their companies aren't making money now, as long as they can turn a profit (hopefully at a much larger size) in the future, and in fact when a few breakout companies can be worth 100X their original VC investments the VC fund can be successful even if most of the companies fail entirely. That being said, Rachleff notes that the rise of software has dramatically changed the focus of VC investing, where now angel investors often help to support a company to get it up initially and find a product/market fit, and then VCs can invest to help the company scale and grow rapidly one the "value hypothesis" has been proven (there is a clear product/market fit), resulting in higher demands on initial VC investments (since the company will already be larger and further along) but much greater returns in the end (e.g., in the past a $5M VC investment might have aimed for a $500M valuation, now the VC may wait and invest $50M further along the way but with a potential for a $5B company the payoff potential remains). The key from this perspective is whether the lifetime value of a client/customer is greater than the cost to acquire them (as is often the case in wealth management, including potentially the robo-advisors if their turnover rates stay modest enough); once that's true, companies may raise capital and reinvest heavily even if they lose money on every current new client, knowing that the payoff will still be there in the long run. And because the market leader often commands the most new growth, growing companies in a market leader position may take in even more venture capital to further reinvest for long-term growth and scale. Of course, these metrics can also amplify the potential losses, especially since many companies on this model are not necessarily profitable at all now, but only in the long run; nonetheless, as Rachleff emphasizes, ultimately it's all about growth, and recognizing the incredible compounding effect that growth can have on the future value of a (startup, venture-capital-funded) company.
I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!
In the meantime, if you're interested in more news and information regarding advisor technology I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read "FPPad Bits And Bytes" on his blog!
Junxure CRM (www.advisorengine.com/junxure) is everything you need for a productive advisory services company. It’s a cloud-based platform to use to increase productivity and manage workflow.