Road to Independence

This past week I received a couple of phone calls from advisors who were seeking an unbiased opinion about my custodian, TradePMR. Although I’ve written about this in past blogs, I thought it might be good to consolidate a few of my thoughts in a single posting. From fees to product offerings to service, I hope this information will help answer any questions you may have.

First, there is no such thing as the perfect custodian.

For a custodian to be perfect, it would have to satisfy every need of every advisor. Since advisors’ needs vary, this is both impractical as well as impossible. Although some custodians may be a better fit for some advisors there is no “perfect” fit. Finally, my comments will obviously stem from my own point of view.

One of the questions I fielded this week was, “If you had to do it all over again would you have chosen TradePMR?” My answer is “Yes.” Sure I’ve had a few frustrations, but I’m very satisfied with my choice.

Fees
TradePMR doesn’t “nickel and dime you to death.” In fact, its fees are reasonable (actually some of the fees charged are  assessed by their clearing firm). Its trading fees are in the middle of the pack and its annual IRA fee is not excessive. Outside of those fees, every other fee is for something to which I choose to subscribe such as performance reporting, account aggregation, or streaming quotes.

Service
High-quality service is critical. If a custodian drops the ball, it can reflect poorly on you. How well does it handle requests? How long does it take to resolve issues? In my experience, Trade has provided consistent, high-quality service. The firm’s desire to help is without question.

Fee Deduction
There is one glitch here. For example, I have a client with three separate accounts. Trade’s system will calculate the fee for each individual account and add them together. Instead, it should add the value of each individual account and calculate the fee on aggregate balance (at the lower percentage). I’m sure this will be resolved in time. Submitted fees are credited to our sundry account the following day.

Summary
TradePMR have over 12,000 mutual funds, paperless applications, a modern technological platform for advisors and, of course, client online viewing.

If you’d like to hear more, please let me know and I’ll go into more detail next week. And let me know about your experiences with your custodian(s).

Thanks for reading!

I had my second audit in three years this week. During the audit, one of the examiners asked if I ever advertise. My response was, “Rarely.”

When you begin an advisory business, gaining new clients can be a slow, arduous process. Even though the growth of your business hinges on client acquisition, it takes a while to get to the point where the stream of referrals is enough to provide the growth you need. In theory, the longer you are around, the more referrals you should receive. My business has been in existence for three years now and the referral stream is slowly beginning to accelerate. What makes this the case?

Several years ago I heard Roy Diliberto say that the most effective marketing plan is your current client base. In other words, satisfied clients refer their friends. Naturally, the question is, “How do I create satisfied clients?” You begin by setting realistic expectations and then delivering on your promise.

All this begins with client expectations in each area of your business: portfolio management, financial planning, and service. Two out of three aren’t good enough if the client happens to value the one lagging area more than the other two. For example, I had a client who was also an engineer – granted, a risky combination. In the planning department, our deliverable was stellar. As far as service was concerned, we passed the test with flying colors. However, in the client’s mind, the portfolio management was not up to his expectations. Let’s take a deeper look at this.

The period in question was from April 1, 2009 until recently. During this period, the stock market was up 44.1% as measured by the S&P 500 Index. One of his portfolios returned 35.0% and the other 22.0%. The first had about 50% in stocks and the other had only 25%. To summarize, the first portfolio garnered almost 80% of the return of the market with only 50% exposure. The other realized 50% of the market’s return with only 25% exposure. By all accounts, it was a good day, right?

Wrong! Dead wrong!! Why? Because his expectations were so far out of line that, at least in his mind, it wasn’t good enough. A year earlier he was thanking me that his portfolio didn’t experience the severity of the market. Now, he was unhappy.

What really happened? I suspect that another advisor painted a surrealistic portrait like that of the great artist Salvador Dali. Dali’s work was rather hallucinogenic and distorted in nature, but widely accepted nonetheless.

The lesson learned? Stay close to your clients. Make sure you are exceeding their expectations. Even so, you may do everything you can possibly do and the client will still be unsatisfied. Perhaps, some relationships were just never meant to be. I suppose that’s what Forrest Gump’s mother meant when she said, “Life is like a box of chocolates. You never know what you’re gonna’ get.”

Do you have similar stories?

Thanks for reading!

I, like many of you, enjoy the money management aspects of this business. This week I took a fresh look at the categories in which I invest and the vehicles I use with a focus on mutual funds and ETFs. One of the primary questions I had was, “Should I use mutual funds, ETFs, or some combination of both?” The answer, I found, greatly depends on the category.

Before we go there, I should mention that the result is also influenced by the sheer fact that the ETF world is still in its infancy. In fact, according to Morningstar, there are a total of 975 U.S.-traded ETFs and according to the Investment Company Institute, there are 7,000 mutual funds. Therefore, it stands to reason that, the better choices, at least for now, would reside with mutual funds. To avoid confusion, I am speaking in generalities as there are obviously some ETFs which do better than some mutual funds.

In my analysis, I began by selecting what I consider to be the best mutual funds in each category using my fiduciary scorecard and compared them to the ETF world. If I found an ETF which I thought was better than my fund, then I chose the ETF.

With many of the stock categories, I found mutual funds offered the better alternatives. Of course, if you want to buy an index fund, an ETF is a good option. With bonds, I like some of the municipal ETFs such as SHM and SMB. For the rest, it’s hard to beat bond shops such as PIMCO, Vanguard, and a few others. That leaves alternative investments. Mutual funds seem to offer better options in the following categories: Long-short, hedge funds, and possibly real estate (I haven’t finished looking at real estate). With commodities such as precious metals, industrial metals, and energy, ETFs have some great options.

When looking at the long-short category in Morningstar’s mutual fund universe, be careful. I found this to be a real “catch-all” for several different strategies. For example, the Absolute Strategies fund is a hedge fund of funds, but is included in the long-short category. Sure, part of the fund is long-short, but much of it is not. Moreover, there are a couple of funds that will buy the stock of the company being acquired and may occasionally short the stock of the acquiring company. Another fund sells call options to cover their short side so they never actually short any stocks, yet they were included in this category. Not to cast any aspersions on Morningstar, but like the early 2000s when there weren’t enough TIPS funds to create a separate category; they too were lumped into another category.

The bottom line is that you need to become familiar with the specific strategies of alternative investments to be sure you’re getting what you are seeking. Oh, about correlations, some alternatives are highly correlated with the stock market and some are not, so check this as well. You may not be getting the portfolio risk reduction you are seeking.

Thanks for reading!

While attending the TradePMR conference in Orlando recently, advisor and tech guru Joel Bruckenstein discussed advisor technology tools. Part of his presentation was about backing up our computer files. I’ve often wondered what would happen if my computer’s hard drive were to crash. Although some applications are Web-based and would not be affected, I would lose my spreadsheets and documents and the results would be devastating. I knew I needed to do something. Although I have an external hard drive I’ve never really incorporated it into my practice. Finally, after much procrastination, I subscribed to Carbonite. Now all my files are backed up and secure. I don’t mean this to sound like a commercial, but it was so easy and inexpensive. The best thing is that it only costs $55 per year per computer. That was an easy decision.

Open Wide, Please
Perhaps it’s unrelated, but we just updated our Form ADV and guess what? We get to go through our second audit in three years. Luck of the draw? Perhaps there just aren’t that many RIAs in Louisiana. In any event, it’s scheduled for mid March. I’ll let you know what happens.
 
SPECIAL REQUEST TO READERS: What do you use for a Policies and Procedures manual? Did you create your own or buy a template and customize? I’d love to hear about it.

Behind the Curtain
In the past, I’ve written much about our “client portal.” This is the back end of our Web site where clients can store and retrieve their important documents. This week we changed direction and subscribed to a third-party solution called Advisor Portals. Why? Because our portal was crude and undeveloped. Its developers took a different direction with their business model and stopped construction after reaching a point where it was functional. Therefore, I figured it was time to change. Advisor Portals is a very robust, cost-effective product. In addition to a document storage system (not a document management system), you can use it to also conduct Webinars. I plan to conduct these for clients and prospects, perhaps on a quarterly basis. The client can view my computer screen and call into a conference center for the audio portion. We’re just getting started with this. I’ll keep you posted.

Thank You!
It’s very gratifying to know that so many people are following this blog. I had the pleasure of meeting a few of you at the TradePMR conference.

I’d just like to say thanks for reading!

Last week I attended my second TradePMR conference. This year’s conference was in Orlando and was important on a number of fronts. Let me begin by sharing what I perceived to be Trade’s overall approach to the one-and-a-half-day event. They had three main speakers covering the following topics: business operations including marketing, technology tools, and compliance. The permeating theme was how to increase advisor efficiency. In addition, TradePMR formally unveiled some of its exceptional technological offerings. Here’s a brief description of each.

Paperless Applications
Find the form, fill out the form, print the form, get signatures on the form, mail the form, file the form, etc. That was the old way of doing things. Now we can find the form, fill it out, and have the client go through a verification process, all online. Paper not required! In fact, if the client is already in the system, the forms will automatically populate. This has the potential to save a number of man hours (sorry ladies, it’s just a figure of speech).

Enhanced Performance Reporting
While they have had this for a while, the new version is much improved. Want to group accounts together? No problem! Want to combine all clients together to measure performance on your entire book? No sweat! Do you prefer graphs? Good, they have ‘em. How about numbers? There are a lot of them as well. In fact, you can even click on the numbers to get a detailed description of the underlying data. Is it reasonably priced? Compared to most, I’d say absolutely. I’ll have to compare this to Morningstar’s Office Edition before deciding which one I’ll use.

And last, but certainly not least….

Account Aggregation
I realize this is not a brand new technology, but it is perhaps one of the most valuable tools in the competitive toolbox. With account aggregation, you can easily aggregate clients’ outside holdings and create a comprehensive report on the entire enchilada. If you do financial planning, you can use this information to easily update a client’s financial plan. Instead of asking the client to provide a list of updated documents, the information is easily retrieved in the aggregated report. This represents a significant uptick in operational efficiency.

I am just getting started with paperless applications and account aggregation. I’ll keep you posted.