Safe zones of consensus thinking inhabit almost no area of advisor life

December 4, 2012 — 5:08 PM UTC by Guest Columnist Rob Isbitts


Brooke’s Note: We are a week past publishing an explosively popular piece written by Bob Veres about what is keeping advisors awake at night. See: The top 10 deepest fears — and highest hopes — of RIA practitioners. The article made it clear to me that advisors are tortured souls not only because of their own challenges but because of irrational fears faced by clients. Change is hard, and everything seems to be changing at once in the RIA business, including the fabric of the economy, the competitive landscape, the client mind and the technology that powers a firm. Fortunately Rob Isbitts saw IMPACT as a place to get a snapshot of the house of horrors that is the advisor’s embattled psyche, and his take affirms the Veres piece and offers some of its own insights.

If our recent survey of RIAs at the Schwab IMPACT conference is any indication, it appears advisors have a lot of good things going on in their practices — and just as many frustrations. My colleague recruited 100 advisors’ cards, invited them all to our SurveyMonkey site and 20 of them filled out the survey, answering a series of questions — about a variety of timely topics — prepared jointly by my firm and RIABiz. Here is our interpretation of the responses we received: See: The 2012 Schwab IMPACT conference comes off with a theatrical flair.

1. Advisors like outsourced investments

But when it comes right down to it, they like to keep a few toes in the water. Most of the RIAs managed their clients’ investments themselves, but several that did not (or managed just some of them) seemed to be most comfortable with an arrangement that still gave them some veto power over decisions. This would seem to jibe with the recent emergence of model portfolio services, whereby advisors get the information but decide for themselves when and if to execute trades based on those recommendations. See: After bringing in $500 million in first year, breakaway Lockwood execs set sights on bigger growth.

2. Advisors’ endorsement of modern portfolio theory resembles the U.S. electorate map

We asked respondents how effective they think modern portfolio theory is, and while their answers ranged from terming it useless to very helpful, the average was right down the middle. Unlike the recent presidential election, there was no electoral system to declare a winner. However, what is clear is that, as with the country at large, the advisory business is growing in its polarization around this topic. I intend to explore this further in future columns. See: The 4 biggest investment performance myths — and how they can torpedo advisor-client trust.

3. In this business, nothing comes easy anymore

Time management, staffing, technology and communication with clients all made the list of advisors’ biggest challenges. This may be nothing new, but it does point out that there are several pain points hitting firms at the same time. We all have that daily temptation to tackle everything, but it appears that the complexity added by increased regulation, market strife and the rapid advance of technology applied to our industry is leaving some advisors more than just occasionally weary. See: 5 ways for stressed-out advisors to build a more efficient practice.

4. What keeps us awake at night

Pass the Ambien — I guess we were asking for it when we proposed the question, “What keeps you awake at night?” and asked it from both a business and investment perspective. We’ll take the liberty of calling this the “stress question” and from the responses, it’s hitting us from all sides. Client concerns, the opacity of compliance, politics and finding the right people to fill out one’s squad were all part of a lengthy list. If we didn’t know better, we’d think we were interviewing Mr. Richard Feder of Fort Lee, N.J. (write to me if you get that obscure reference, and I will congratulate you for your pop culture knowledge!). What is apparent is that advisors are influenced by uncertainty no differently than their clients and institutional investors are. Perhaps this prompts us to look deeper into how advisors can gain the upper hand in the client relationship by treating uncertainty as an opportunity to educate and pacify clients. After all, cocktail parties, ballgames and other events take client care only so far. From many accounts, what clients want today is someone who worries less than they do, and confidently exudes a message of “I’ve got your back on this.” Naturally, anyone can say that. What makes the difference is backing up that confidence with a rationale and strategy for whatever comes our way. See: RIAs are managing client fears surrounding the debt ceiling crisis.

The investment “awake at night” responses were directed primarily at two main issues: the political discourse in D.C. and fears that one’s clients are not sufficiently protected from the next big market decline. As I routinely tell my advisor clients, what Congress and the executive branch ultimately do is not something we can control. We also cannot control what the market does. What we CAN control is how we prepare for a variety of outcomes and the mere fact that we prepare at all. In other words, having a fire extinguisher in a school building is a very good idea, even if you don’t know exactly when you will need to “break glass in case of emergency.” The key is that if there is a fire, you already know what you will do. If you have taken the steps to outline for your students (i.e., clients) what that is, they rest easy. In turn, you do too. See: The top 10 deepest fears — and highest hopes — of RIA practitioners.

5. Technology: can’t live with it, can’t live without it

Jim Cannon, who runs Dynamic Wealth Advisors in Scottsdale, Ariz. (the firm with which I am affiliated), told me a while back that he loves technology … and he hates it too. That is a common refrain in a business where we often get the taste of ultimate efficiency, only to find out that no technology is perfect and none of it is perfectly integrated. As a result, we often try to be tech-fectionists — technology integration perfectionists — only to find out that it’s an unhealthy habit.

Advisors who are frustrated with their CRM, research sources, trading system, custodial interface, client reporting system or client web portal do have a choice, however. It seems to me that if you want to upgrade, it simply takes some time and effort. The “players” in each respective advisor tech area are pretty easy to find. Its like any other business decision — set a budget, figure out what the architecture of your practice’s organization looks like, and fit in the pieces as best you can. Custodians such as Schwab are getting much better at consulting in this area, and from my experiences talking to several technology vendors at Schwab IMPACT, they seem to be far more straightforward in explaining both their strengths and weaknesses. They seem more interested in looking for good-fit prospects for their services, and less about trying to rope in everyone who has a pulse. Apparently, no one in the industry has a lot of time to waste and that is a very good thing to realize. Thank the Internet and consumer mobility for that. See: Schwab bids to become the 'Zagat’ of RIA technology and to nix ink signatures from RIA life.

6. Fees: The song remains the same

I can only guess that investors are friendly to round numbers. For all of that talk years ago about fee compression, the advisors we surveyed crowded around that iconic 1% annualized rate for their advisory services. One question we did not ask, and I now wish we had, was how advisors consider mutual fund expense ratios in explaining the total cost to their clients. As regulators get much tougher in this area, it behooves every advisor to take into account what the client is paying that is visible (the fee they are billed from their account) and the fee that is invisible (mutual fund expense ratios). Yes, I know the latter are disclosed by sending out prospectuses when funds are bought, and you can summarize them in a presentation. But you had better make sure you incorporate these into the discussion. Good news is, they don’t pay it to you, so they can’t say you have not earned it. Bad news is that if your returns are muted by high product costs, its going to reflect badly on you anyway. See: What RIAs must know about hidden, and excessive, fees in serving as fiduciaries to a 401(k) plan.

7. Next moves

Advisors we surveyed had plans to make some important changes over the next three to five years. Naturally, technology was one area targeted for upgrade. CRM was mentioned several times. See: As advisors flunk social media 101, CRM makers are starting to pick up the slack.

8. Once more into the breach

Finally, it seems as if the lost decade of investor returns is moving advisors to act. Several respondents plan to make changes to their investment process to adapt to the market evolution that has brought interest rates to near 30-year lows and the global stock markets to a point where short-term behavior is driven more by factions not like “us” (e.g., high-frequency traders). This leads me to a couple of conclusions: First, income strategies need a serious makeover. Second, making decisions based on potential near-term market movements is far more irrelevant than it was a decade ago. Unless you want to enter the fray and try to guess/bet your way to portfolio management glory, an investment process that usurps the burden of defending this month or that quarter’s performance to clients is likely to become a necessity for many advisors. See: Performance measurement challenges for investors who live in a perpetual time horizon world.

Our thanks go out to the advisors who responded to the survey. You certainly made an IMPACT on us and have given our industry a lot to think about as we enter a new year.

Rob Isbitts, a 26-year industry veteran, is the founder and chief investment strategist of ( He publishes “Investment Climate Weekly,” a new private-label newsletter that helps financial advisors deliver insightful communication to their clients each week. Sungarden provides outsourced investment strategy, research, portfolio management and communication assistance to financial advisors. Rob has written two investment books, created several portfolio strategies, and is a former chief investment officer and mutual fund man.

Mentioned in this article:

Sungarden Investment Research
Asset Manager for RIAs, Separate Account Manager, Alternative Investments
Top Executive: Rob Isbitts

Dynamic Wealth Advisors
TAMP, RIA Serving Other RIAs, RIA Welcoming Breakaways, Performance Reporting
Top Executive: Jim Cannon

Share your thoughts and opinions with the author or other readers.


Jay Eisenberg said:

December 5, 2012 — 5:10 PM UTC

I work with Rob Isbitts. Based on the high readership, attached is a free 15 Point Investment Check Up. Completing the survey should only take you a few minutes. The goal of the Investment Checkup inspection is for you to conduct a critical self-evaluation of the process you use to research, invest for clients, and communicate progress to them. The purpose is to make you think introspectively about a vital yet frequently overlooked area of practice management. When you submit your results to us, we will respond back to you with a grade based on your responses. We will also identify which, if any, of our investment practice management upgrade strategies may potentially benefit you and your clients.


Matthew Halloran said:

December 5, 2012 — 4:51 PM UTC

Fantastic article! I feel more advisors need to give themselves a checkup annually.


Robert Boslego said:

December 5, 2012 — 5:21 AM UTC

I look forward to reading your future columns on MPT, and specifically on its implementation through mean-variance optimization, and how advisors have found that useful in choosing a portfolio.

Image said:

December 4, 2012 — 4:28 PM UTC

“First, income strategies need a serious makeover.” That’s basically what Sally Krawcheck has been arguing as well. Just as you stated, clients want to know that their adviser “has their back”. These days it seems to be more about the relationship, especially long term, not stock picking prowess.

One big change that Krawcheck likes to hit upon as partially behind this trend is the growing importance of women in the financial planning process.

The other change that I find interesting is the demographic and generational shift that Gen X and Gen Y pose. Some studies have suggested that 86 percent of these two cohorts plan to fire their parents’ advisers. Couple that with that fact that when it comes to relationships and communication, these two segments seem to also think very differently than their parents.

While this represents opportunity, it’s also just more to keep advisers awake at night. Still, I find the change exciting and much needed in the industry — of course, I’m not an adviser!.

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