Road to Independence

Anytime the markets react as violently as they did last week my mind switches to high alert. I tune in to see what may be causing the decline and question whether it’s a temporary blip or is there something fundamentally wrong which could lead to a more severe downturn. Although losses cannot always be avoided (unless you’re 100% in cash), I do feel some degree of responsibility to do what I can to minimize them.

To this end, I have been in the process of structuring client accounts in a fashion which will allow flexibility if I should need to reduce the exposure to stocks. Since mutual funds trade at the end of the day and ETFs trade intraday, ETFs are a good investment for this. Here’s an example. Let’s assume I’ve allocated 10% to large value stocks. I might put 50% in a mutual fund and 50% in an ETF. If I believe the markets are headed for a protracted downturn – as I believe to be the case presently, I can sell all or a portion of the ETF to reduce the exposure to stocks and minimize the bleeding. While I will probably never completely exit stocks (with the mutual funds representing the long-term hold), I may want to reduce a particular asset class and ETFs work well for this

Why do I think this “correction” could linger or worsen? In the April issue of my newsletter (free subscription at: www.integritywealth.us), I listed the top 20 indebted nations as ranked by their debt-to-GDP ratio. Eighteen of these countries are located in the euro zone. Greece, which has garnered all the press lately, is a smaller economy and is ranked 16^th on the list. This means there are 15 countries with worse debt problems than Greece! If Greece is causing such turmoil with the global financial markets what would happen if one of these other countries (14 of the 15 are in the euro zone) were to need a bailout? Spain (ranked 15^th) and Portugal (ranked 10^th) are facing debt ratings reductions because of their own debt problems.  I believe the European Socialist experiment is finally blowing up. There are simply not enough tax dollars to support their ever growing public sector programs. In other words, I think the ‘you-know-what’ is starting to hit the fan.

On a somewhat positive note, the U.S. economy is improving, but the European problem could impede the recovery. There is also a lot of counterparty risk between European and American banks and that would be enough to take the market averages down several more notches.

Here’s what I’m doing. I am reducing foreign investments (as the dollar should continue to strengthen), getting out of junk bonds, and investing more in U.S. government issues. Although the American fiscal house is also in disarray, it’s in much better shape than Europe’s. Ironically, the U.S. becomes the safe harbor and the investment of choice.

Have a good week!

It’s important to keep a close eye on expenses when running a business. Even small, incremental savings can add up to meaningful amounts over time. Recently we changed our phone and Internet service provider—from AT&T to our local cable company, Cox Communications—and not only have we cut our expenses, but we’ve gotten an additional service.

We’ve used AT&T from the beginning of the business back in April 2007. The phones have always worked fine and I have no compliant about the speed at which we accessed the internet. Also, whenever we needed help, the people on the phone were always—or I should say, almost always—courteous. So why did we make the switch? Because every month, and I mean every month, our bill was different. For the first year or so, we would call after receiving the bill, and they would correct it, send us a new bill, and we would pay it. After a while, this got very old. The time it takes to contact the phone company is time taken away from the business.

That’s what you might call a chronic inefficiency. With AT&T we were paying around $350 per month for three phone lines and Internet access. The cable company is charging us around $275 a month for the same three lines and Internet access, but with one additional feature. We now have cable TV! So we are getting more for less! Now I can cancel my online subscription to CNBC TV which is about $10 per month. The savings per year is close to $1,000 and we’re getting more for our money.

Next Up: Going Paperless

Speaking on the topic of efficiency, our next move will probably be to go paperless. We are looking for a fairly priced document management solution, preferably one which integrates with a  good contact management software, also known as CRM, for customer relationship management. Currently we use ACT but are considering a change, mostly because ACT interferes with other programs we are running. Also, ACT is sometimes a bit slow. I think it’s a great bargain for the price, but since our cash flow is improving, it may be a good time to look for a long-term solution for our CRM needs. Moreover, it may be better to move more to cloud technology instead of desktop applications.

Can anyone recommend a good CRM?

How about a document management solution?

Thanks for reading!

After three years as an independent advisor, I can safely say that the business has never been healthier. Every new client I have received this year has been a referral from an existing client. I’ve mentioned this before but it bears repeating. Besides, I believe in giving credit where credit is due. Roy Diliberto once said that the best marketing strategy you can employ is satisfied clients. Your existing clients are the very best way to grow your business. This is another yet another reason you should do everything in your power to make their experience a positive one. Here are a few things on the list for consideration. 

Accessibility
Being accessible is possibly one of the most important components of a successful advisory business. When clients feel they can reach you easily, their comfort level rises (and it’s all about making the client comfortable). My clients have my cell phone number and understand they are free to call me if needed. 

Respect
Don’t talk down to them…..ever. Appreciate their intelligence even though they may not know as much about the financial markets as you do. You can learn something new from everyone you meet. I mean everyone. 

Education
I view each client relationship as an opportunity to provide as much education as they desire. Some clients want to understand how the markets work and some don’t. I ask each to help guide me in this and periodically check to assure I am providing the right amount of detail for them. 

The Right Match
Let’s face it, not every client is a good match for a particular advisor. It really depends what the client is looking for and what you, as practitioner, provide. For example, I don’t consider myself a broker and as such I don’t recommend the hot stock of the day. If the client is looking for home runs, a strategic asset allocation, even with a tactical component, is probably not a good fit. The client will eventually become frustrated. Believe me, I know. This happened to me recently.

The Strategy
Whatever strategy to which you subscribe, let the client know it. Make sure they buy into what you are doing. If you fail to bring them into the loop, when things get tough—and at some point they certainly will—you will have to do a lot of explaining. The time to explain is up front, before the challenging times come.

Thanks for reading and have a great week!

I was watching a CNBC special recently about the Enron scandal. During the program the announcer said that Merrill Lynch was complicit in helping Enron “cook the books.” I may be mistaken, but I don’t recall hearing of any legal action taken against Merrill over this. The narrator went on to explain how Merrill’s stock analyst was fired because he wouldn’t give a “Strong Buy” recommendation on Enron. This analyst didn’t believe the numbers on the balance sheet added up to the same ‘rosy’ story Enron was espousing. I also thought about how Merrill would have ceased to exist if it had not been acquired by Bank of America. Yes, Bank of America, the same company that acquired Countrywide and all those toxic loans.

From Lehman to Bear Stearns to AIG to WAMU, the American public has been utterly shocked as these stalwarts of industry brought our nation’s financial system to the edge of the abyss. And now we are hearing about Goldman Sachs and its alleged fraud. Is it possible that any rational thinking human being would not question the honesty and integrity of these “darlings of Wall Street?” I don’t see how. To top this off, as if it needed any toping, investors experienced huge losses as a result of the selfishness and greed of those who earned some very hefty paychecks. So I suppose not everyone lost, right? Again I ask, “Will there be any legal actions taken against those who lied and cheated and disregarded the laws of our land?” I wouldn’t hold my breath. Now why am I going on and on about this?

In one sense, the sudden downfall of these firms represents a gain for the ethical independent advisor. In another sense, their loss is a loss for everyone. You see, every dishonest action taken by someone in our industry brings about an erosion of trust on the part of the consumer. Also, what have we been told is one of the most important things an advisor can do? Differentiate yourself from the rest of the pack. As a result of the blatant illegalities of so many, differentiating ourselves has become a very easy thing to do.

I believe there has never been a better time to be an independent advisor. To be an advisor without a corrupt management hovering overhead is a freedom which is priceless. As long as there are humans on the planet, every industry will have their bad apples. What I’d like to know about our industry is WHO IS GOING TO CLEAN IT UP? So we carry on. For if we do the right thing for the client, continue to learn all we can, we will never lack for new business.

Thanks for reading and have a great week!

With the passing of the first quarter of 2010, it’s time for the portfolio review process. We will be contacting clients, scheduling meetings, and reporting to clients on the progress of their accounts. This is also a great time to attend to other miscellaneous items such as our client portal. As I’ve mentioned in the past, I formerly called it the Client Vault. But we abandoned our less-developed portal in favor of an existing program called Advisor Portal, by MIAGD (Make It a Great Day), a company that has developed a unique system which offers much more than just a place to upload client documents. Through the MIAGD technology you can hold Webinars, post blogs, and much more.

Sometimes a file we need to e-mail to a client is so large that it takes several minutes to send. Moreover, sending confidential information through e-mail is probably not the best idea. Therefore, with Advisor Portal, I can upload a document and the client receives an e-mail notification. Advisor Portal uses a 256-bit encryption which, as I understand it, is the highest available. In short, it would take the most sophisticated computer program, working day and night, nearly 300 years to break the code. I think the data is safe for now. During these meetings, I intend to get every client on board with this tool. Even if clients choose not to post their documents, I will use it to post copies of their financial plan, agreements, or any other pertinent documents I currently maintain in a paper file.

Client Presentations                                              
In the past I discussed how I plug my laptop into the flat screen TV in our conference room to present various items to a client. The problem is that the 32-inch TV is really not large enough. To remedy this, I plan to purchase an In Focus machine (that’s what I’ve always called it anyway). Then, I will be able to connect my laptop to it and project my screen onto the wall. This will provide a much larger picture. I’ll turn off the conference room light and use a small lamp. As long as the room isn’t too dark, they should be able to stay awake while I present their data to them. If not, I’ll make some popcorn and we’ll watch “This is Your Financial Life.”

I’ll keep you posted.

Thanks for reading!

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.