Horror stories abound -- like the 82-year-old widow who has 15% of her holdings in Apple stock and 9% in Facebook
February 15, 2013 — 6:14 AM UTC by Lisa Shidler
Brooke’s Note: The wirehouses are pushing for an SRO? I have an idea. Advisors can self-regulate by blowing the whistle on indefensible portfolios that come across their desks — with no statute of limitations. Wirehouse portfolios have long been a gun that smoked out the barrel as it sat on the RIA desk after transfer. But nobody has ever found much to do with the energy of shock that they deliver like electric eels. Perhaps Aaron Klein can change all that.
For years, RIAs have shuddered privately at the outrageously awful wirehouse-crafted portfolios that prospective clients brought with them to a first meeting. Now, one firm is giving advisors a way to make them into teachable moments and to drum up business.
At the end of 2012, a relatively new technology company, Riskalyze, began offering an RIA version of its portfolio evaluation tool to analyze a prospect’s risk and pinpoint client expectations, a software program called Riskalyze Pro. See: How Schwab may yet reap value from brokersXpress accounts, advisors, staff and assets.
Now the firm is adding a piece to the product dubbed “Worstwirehouseportfolios,” in which advisors will tell tales about real-life portfolios they’ve seen from prospects.
Portfolios I have seen
“We thought it was a unique way to introduce advisors to what our technology can do for them and their clients,” says Aaron Klein, chief executive of the Sacramento, Calif.-based startup. “We hear advisors talking about these horrible wirehouse portfolios all of the time and we thought it would be funny and cheeky to illustrate the power of this tool and highlight some of the worst ones.”
Klein concedes one aspect of the site is all in good fun and is akin to Mad Libs. But the firm also hopes this site will generate buzz about Riskalyze and that advisors may choose to use the tool to gain prospects.
Previously, Klein was director of optionsXpress Holdings Inc. In March 2011, he formed Riskalyze, which was funded with investments from friends and family investors. Initially, the firm, which has seven employees began marketing the product to investors, and Klein says it helped investors build some $2 billion in assets. Then, at the end of 2012, the firm launched Riskalyze Pro, aimed at advisors.
This week, the firm was named to Fast Company’s Top 10 Most Innovative Companies.
In the last few months, Riskalyze has started signing on advisors as clients. Klein declined to state how many clients his firm has now, but he did say that well-known advisor “Downtown” Josh Brown is a client. See: 'Reformed Broker’ and blogger 'Downtown’ Josh Brown joins BrightScope’s advisory board.
The firm charges $99 a month per advisor for Riskalyze Pro. There is a limited free plan, which gives RIAs a snapshot of the tool.
Grandmas under the bus
Winning business by slamming the competition’s portfolio isn’t an ideal way to drum up business, says Ryan Shanks, principal of Finetooth Consulting.
“They’re throwing someone under the bus to win the business,” he says. “I think the conversation advisors will have is spot on, but I’d like to engage with someone and win the business the right way.”
But Klein is unapologetic. “I’m hoping that our entire industry will rise up and throw the idea of selling IPOs and derivatives to grandmothers under the bus. Great advisors of every stripe know that understanding client risk expectations, and designing portfolios to fit, is the only way to do business in 2013.”
15% Apple stock for 82-year-old widow
The site hasn’t been officially launched yet, but in a “soft-launch” a few advisors have posted portfolios, and Klein shared one of the worst ones with RIABiz. it belongs to an 82-year-old widow who has just under $1 million in assets and needs to tap into the portfolio for income. Her largest holding was Apple stock at 15%, and Facebook stock made up 9% of the portfolio, which consists of mostly U.S. stocks. More than 90% of the portfolio is invested in equities.
Mike McDaniel, an LPL advisor in Nevada City, Calif., who manages about $55 million in assets for 50 households, says the widow, whose husband died in the summer of 2011, came to see him a few months ago after noticing a dip in her portfolio. McDaniel says her asset drop correlated with the drop in Apple’s share price: In September 2012, it was around $700. On Tuesday, it closed at around $467.
McDaniel explained to the widow that given the volatility of her portfolio, in the short term she could lose 29% of the assets — which would be about $250,000.
The woman, a client at a wirehouse (McDaniel declined to say which one), didn’t understand how much of her portfolio was invested in individual stocks.
“When I showed her how risky her portfolio was, it was very eye-opening to her,” he says. “Her husband used to watch the finances, and she figured everything was fine. But her biggest holding is Apple, and it was going fine until it went off a cliff.”
Odds on the house
On the site, worstwirehouseportfolios.com, RIAs and advisors have an opportunity to offer colorful narrative about the portfolio. Klein says his firm may post some of the outrageous portfolios on Twitter as well. See: What three highly wired financial advisors have to teach us about social media.
McDaniel says he’s seen a wide range of bad portfolios but that this was one of the worst — reminding him of the movie “Titanic.” The broker, he believes, was using the classic “Viva Las Vegas strategy” of bets that favor the house.
“This is pretty rare to see and this is much more of outlier than others,” he says.
Need more information
While this tool seems helpful, Tim Kochis, former CEO of Aspiriant LLC, says that simply looking at a portfolio doesn’t give the full picture. as there are many factors that an RIA needs to know to craft the right portfolio — and it’s no easy task. See: Ex-RIA chief: 'How I learned more in a month as a client than in 20 years as CEO’.
“How much does she want to spend, what income sources does she have — such as Social Security or pension? How much does she want to leave for heirs, charity?” Kochis asks. “As you can tell, I’m not a fan of simple, one- or two-dimensional solutions and diagnoses.”
Analysis part of the equation
McDaniel grants that crafting any portfolio requires knowledge of a wide range of factors — including tax information, income needs, estate planning desires and risk tolerance. He says he’s spent a great deal of time talking with the client and will be meeting with her again on Thursday to chat more before making any changes to her portfolio.
“Knowing how much risk a client can handle is a foundational piece of information. Knowing risk tolerance and the risk associated with a given strategy allows for a candid discussion on risk/return and expectations,” McDaniel says. “Setting expectations is paramount to a productive long-term relationship.”
loads of factors
Sandi Bragar, a principal and director of planning at Aspiriant, agrees.
“We need to understand what risk they need to take and kick the tires around and make sure they’re capable of taking that risk,” she says. “If they’re not comfortable with risks, we need to dial it down. You can’t have your cake and eat it too.” See: How RIAs like Aspiriant and United Capital are working to put financial planning back at the center of financial planning firms.
In general, Bragar says, her firm does try to limit individual stocks as large holdings in portfolios.
“We feel that individual stocks are not that diversified and aren’t going to give clients’ a lot of exposure across the world,” she says. “We’ll want clients to have commodities, fixed income and other sources.”
It’s not that uncommon for prospective clients to come to Aspiriant carrying unconventional portfolios.
“When we meet with prospective clients, the portfolios tend to be all over the place,” she says. “These types of portfolios do happen from time to time.”
While it seems as if there should be simple solutions to these wild portfolios, Bragar says it takes a great deal of time for an RIA to come up with the right allocation.
“We spend a lot of time talking about risk and doing a better job making sure the clients understand the risk they’re taking,” she says.
Klein says he feels his tool is a starting point to help advisors illustrate the risk that prospective clients may be carrying in their current portfolios.
He says the technology quantifies risk tolerance using quantitative math. “It’s sort of like a quiz, but a mathematical quiz,” he says. “We’re testing when someone is willing to choose certainty and when they’re willing to choose risk.”
Mentioned in this article:
Compliance Expert, Portfolio Management System, Tech: Other
Top Executive: Aaron Klein
Top Executive: Bill Morrissey
Consulting Firm, Specialized Breakaway Service, Recruiter
Top Executive: Ryan N. Shanks
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