Looking after wealthy clients

By Sheila Avari | August 28, 2012 | Last updated on August 28, 2012
27 min read

To stay competitive in a rapidly changing and dynamic environment, wealth managers, advisors and their firms must develop skills and solutions to successfully attract and serve clients.

The theme of Toronto CFA Society’s 2011 Annual Wealth Management Conference—Adapt or Die—focused on the acceleration of the industry changes caused by the financial crises of 2008 and 2009 and what practitioners and firms must now focus on to succeed.

The conference offered participants an opportunity to stay current with the best practices and innovative thinking necessary for successfully maintaining client relationships and expectations, particularly resulting from the recent financial crisis.

Sheila Avari: Our live coverage of the 2011 Annual Wealth Management Conference began on Tuesday, May 3. Opening remarks from Tom Trainor, CFA Conference Co-Chair. Approximately 100 professionals in attendance in Toronto. Four chapters—Cleveland, South Florida, Winnipeg and Vancouver are listening remotely.

There’s a huge change in what’s going on in private wealth, as well as what it takes to succeed. Read the live event coverage below:

Adapting to a Changed Industry, Petrina Dolby, Vice President, Capgemini

Petrina Dolby: Let’s set the scene where we explore with asset allocation, risk management and how to work in this new environment. We’ll talk about the global market for HNW individuals.

Petrina Dolby: Capgemini develops World Wealth Report (with Merrill Lynch), a global benchmark for HNW investor behavior. It’s a mix of primary and secondary research. We talk to investors around the world and advisors. Coming out of the crisis, what is the difference in behavior. What are the emerging trends in organizations and how they’re dealing with this? The new World Wealth Report will come out in June 2011.

Petrina Dolby: Why is there is all this hype with wealth management these days. Wealth management has been a sustainable and profitable part of the business for many institutions. if you look at the margin generator, you’re seeing a lot of new competitors coming into the market.

Petrina Dolby: We define HNW individuals as those who have $1 million USD in investable assets, excluding primary residence.

Petrina Dolby: In 2009, the world’s HNW population increased by 17% to 10 million and the wealth increased by 19% to $39 trillion from 2008. The Asia Pacific region has eclipsed Europe with the number of HNW individuals and the amount of overall wealth. Canada continues to grow and remains in the top 10.

Petrina Dolby: 8 of top 10 countries with highest growth in HNW individuals are in Asia Pacific. Hong Kong is very susceptible in swings. Hong Kong has a high concentration of mid tier millionaires ($1-$5 million in investable assets.) The recovery in India more sustainable. With the Non resident Indian population, we expect India will grow at a similar rate.

Petrina Dolby: Canada has been in 7th position for quite a while. We;ve sustained north american growth trajectory. we will see Canada’s HNW population will go to just over to where we were in 2007. Where they’re investing is a bit different now. And what they’re expecting from their advisor is a bit different. Well talk about this later.

Petrina Dolby: Global market capitalization rose nearly 47% in 2009, reaching $47.9 trillion. People are becoming more bullish.

Petrina Dolby: After reaching record highs in 2008, volatility levels remain high, despite significant drop. while we’re feeling a sense of normality, we’re still way more volatile than we’ve been in the past. Advisors should keep this in mind because we are still in a period of significant change.

Petrina Dolby: We’re seeing HNW individuals cautiously returning to the markets. They have a cautious pursuit to returns. They’re placing more emphasis on predictable returns. Allocation to fixed income increased. We saw a huge increase in them investing outside of their home market. Europeans invested significantly in Canada. they are looking for Canadian organizations (HQ in Canada) who are expanding in to the US, so they have some US exposure.

Petrina Dolby: Allocations to equities expected to increase this year.

Petrina Dolby: When we talk to financial advisors, they say their clients are pushing them to think more globally as well. Advisors are saying they need to bring more specialized advisors in who know where the global markets are going, and where the global organizations are. Asia Pacific expected to surpass Europe as a HNW destination.

Petrina Dolby: Europeans have 41% of their holdings outside of Europe. HNW individuals from Europe and Canada continue to shift their home region allocation globally. they feel that will drive more portfolio stability.

Petrina Dolby: Talking about “passion investments and philanthropy.” Art and wines are nice to haves, but they are also increasing in value. Seeing demand for luxury cars, boats, jets coming back. They’re collecting it but they’re being more strategic about it, creating smarter exit strategies.

Petrina Dolby: In 2009, HNW individuals increased philanthropic contributions. it’s tapering off in North America, while it’s expected to grow in other regions.

Petrina Dolby: They’re starting to focus on health and wellness, likely due to aging population. Spending less on luxury consumables. Not surprising.

Petrina Dolby: They’re looking for advice on philanthropy. Financial advisors are asking for specialized advice. They want monitoring and impact assessment advice from advisors, a new area not seen/requested before. They want to know how to give a vehicle. Firms may need to offer specialization around philanthropy by building in house expertise or partnering with third party groups.

Petrina Dolby: They’re more conservative. They’re more engaged in their financial affairs. Investment decisions driven by emotions than logic. they have been personally affected by the crisis. They want greater transparency, simplicity and risk management. They want to know the advisor’s risk management capabilities. Financial advisors are trying to develop deeper understanding of clients psychology. Advisory processes starting to focus on behavioral finance. All companies tell us they’re trying to approach clients more holistically.

Petrina Dolby: We’re seeing more of a teaming approach. Advisors are collaborating more, looking for referrals from investment banks. Trying to overcome problems of sharing information across divisions.

Petrina Dolby: HNW investors are doing more upfront research. They’re asking more focused, educated questions. They know more about fees. They’re not just relying on advisors for advice. they’re reading product disclosures more. Advisors tell us they have to do more homework before meeting a client.

Petrina Dolby: Clients want to see more of “what would happen if” scenarios.

Petrina Dolby: There is low trust with regulators and markets, not surprisingly. But, financial advisors and firms have been successful in growing client trust. Canadians seem to love to hate the banks, though they invest in them a lot. But they have more trust in their advisors here than in other regions.

Petrina Dolby: Clients are playing it conservative, on the sidelines, but we’re seeing an opportunity for US advisors to differentiate themselves and help their clients get back into investing. Less so in Canada because we’re more regulated here.

Petrina Dolby: Top 5 HNW client priorities: preserving capital, effective portfolio management, transparency and simplicity of fees (clients want a “client balance sheet”, specialized advice, independent investment advice.

Petrina Dolby: Full service firms most likely to address these priorities, but independent advisors can address independent advice strongest.

Petrina Dolby: Firms are bringing risk, product specialists into early client meetings more now than ever before. A lot more people are getting involved in client meetings. This isnt sustainable, though. Firms are thinking about how to make this arrangement scalable and profitable. Throwing people at the problem isnt a long term solution.

Petrina Dolby: Efficiency, scalability and profitability are 3 biggest challenges for wealth management firms. Need to re-engineer processes.

Petrina Dolby: Firms who are transforming entire practice (about 15% of 52 boutique and firms globally, called “breakthrough visionaries” in the presentation)—products, platforms, service models—are investing heavily in technology. They’re reaching more client segments. They’re trying to make it more of a global business. Family offices are more people intensive, have less need to make wide-sweeping changes.

Petrina Dolby: During crisis, there was a flight to safety. seeing a cautious return back. Embracing current and emerging realities will be key to success. Develop excellent wealth management brands, adapt to regulatory risk, fiduciary requirements, adapting to IT platforms (and how much to invest there). Keep processes simple, collaborate with clients.

Sheila Avari: Open mic for questions. Here are key responses.

Petrina Dolby: Advisors are having more frequent dialogue with clients, which is driving up cost of delivery.

Participant: You have to set the tone in the beginning. Portfolio allocation should be risk based, or what they say they wanted. Advisors are doing this in a reactive way, it’s no surprise client’s react with whatever their near-term sentiment is. it could be from a headline. if it comes to mind, and they call you, you’re put on your heels. you should be able to say when we sat down and constructed your portfolio based on these metrics and here are 5 reasons why we’re doing a good job. advisors become defensive.

Participant: This is a people business so we all have to have regular communication with clients.

Question from Cleveland: What type of philanthropic offerings do you expect to see in future?

Petrina Dolby: Microfinance offerings. Individuals put together a fund and they’re expecting returns on that. they are not just giving money away. They are using funds to educate next generation. They are concerned with how next generation will manage this type of wealth. They are asking the next generation to manage their own “passion.” They provide finances to underprivileged entrepreneurs but expecting a return. They are trying to instill responsibility in the next generation.

Participant: Are there firms using social media since this is a high touch business?

Petrina Dolby: Social media leveraged in retail side, less on wealth management side because that’s more 1:1. In the 2011 World Wealth Report, wealth management firms are looking at retail banks to gather lessons learned before they venture in. I haven’t seen a lot of it.

Participant: The next generation are 20s, 30s, they are all into social meeting. To secure them as clients, social media is a good opportunity.

Petrina Dolby: The next gen has a different lifestyle demand. It’s the Prince Charles syndrome, is it the next generation who is inheriting your wealth or is the next, next generation? That is a whole other topic.

Sheila Avari: That wraps up the first session. Off to get a coffee. I will pick up coverage in about 20 minutes.

Best Practices for Advisory Firms

Kelli Cruz, Director of Custom Research & Consulting, InvestmentNews

Jeff, Sr. Financial Analyst, InvestmentNews

Now that we have a sense of the industry and where we’re going, Kelly will review best practices used by top performing firms. Her presentation will focus on practice management, and less on investment data.

InvestmentNews bought research firm Moss Adams (New York based). they do two main studies: Financial Performance and Compensation and Staffing. In the 2010 study, 600 firms participated (61% are wealth managers, 16% investment managers, 14% financial planners, 9% investment advisory)

Kelli Cruz: Top performers show higher firm revenues, improved client retention, more new client wins, higher asset acquisition and enhanced productivity.

Kelli Cruz: Top performers focus on marketing and business development. 38% refine strategic plan; 33% spend more time for advisor to develop business.

Kelli Cruz: Top five things advisors want to change in business. marketing, technology, time management, succession planning and changing clients.

Kelli Cruz: Top performers are getting more out of their people, they have a wider distribution of ownership and have a focused service delivery approach.

Kelli Cruz: Top performers manage their practice like a business. They took advantage of the downturn.

Kelli Cruz: They have smaller staff, but more productive. Top outsourced processes: payroll, compliance, portfolio reporting, investment research, account aggregation.

Kelli Cruz: Top performing groups are making sure staff are trained on technology. They have higher clients to staff ratios (37 clients per staff, vs. 33 clients per staff for lower performing companies). Most new hires were in the technical specialist areas. they “free up” the advisor’s time. they may be a research assistant, portfolio manager.

Kelli Cruz: They are focused on staffing all the time, not always hiring all the time. Keeping an ear to the ground from a recruiting basis. What does the talent look like. They are being more proactive to find the right talent. Staffing and hiring a big part of strategic plan. Another key focus in tying incentive pay to performance goals.

Kelli Cruz: Not everyone in firm needs to be an owner, but top performers typically have more than one owner and often have a culture where everyone “feels” like an owner. Being an owner means you’re taking the risks.

Kelli Cruz: I venture to guess the next generation may not want to take on the risks of being an owner. Is it worth it? Today, owners are owners because they founded the firm. The next generation may not be as entrepreneurial.

Kelli Cruz: Top performing firms who have pushed down decision making to other levels, more people have a say in decisions. there is more ownership, more buy in.

Kelli Cruz: Owners should focus on developing consistency across the firm. When you look at valuation of a firm, a lot of it is based on policies and procedures that can be duplicated. Clients are clients of the firm is a common statement meaning there is common policies and procedures that applies to all clients, even though there may be one key advisor for that client.

Kelli Cruz: They also invest in and develop junior staff, hiring interns, new grads.

Kelli Cruz: If you know who your ideal client is, and your staff knows it and your clients know it, it’s easier to get referrals.

Kelli Cruz: Top performers offer narrower services and leverage high-value services. They have higher client minimums.

Jeff: He’s up next talking about the 2011 RIA Technology study. These results had not been released until now!

Jeff: 500 firms to find out what their tech use overall. it’s the 3rd largest expense but it’s 3% of annual spend.

Jeff: 50% are investing in new technology and 34% are automating one or more process. Top performers arent necessarily using the newest technology, they’re leveraging what they have.

Jeff: Software is the largest expense. They’re spending money on training for staff. They’re planning to upgrade CRM systems so that a client can be more easily shared among advisors. Firms are migrating from legacy-based systems to more dynamic programs.

Jeff: System integration a big buzz term now. How to get the systems to talk; firms are looking for viable integrated solutions. FIrms are finding internal solutions. 22% of advisors are still maintaining separate systems, but that increases room for error because data has to be entered into multiple systems.

Jeff: Cloud computing…not everyone knows about this. it’s coming on to the radar now. 30% of firms are using this.

Jeff: 49% consider social networking important in business development, marketing and because everyone else is doing it. LinkedIn and Facebook most popular. There is still understandable fear about compliance. Blogging is more compliant, there is less risk.

Peter Jarvis, Executive Director, Toronto CFA Society: Toronto CFA Society will have a LinkedIn page in short order.

Kelli Cruz: Question about successful compensation structures. In 2009 we saw more firms give discretionary bonuses. This was a troubling trend because discretionary bonuses aren’t tied to something specific. They also become expected and it isn’t reinforced through strong performance. We would say 25-30% of base is what we see as a target. we see firms being specific how they’re tying performance to that number. Tie objectives to a measurable outcome. Do you want people focused on driving business, focus on client experience?

Jeff: Firms are trying to find balance between firm and individual objectives. And let them understand rationale behind metric.

Kelli Cruz: Make objective setting collaborative so you will get better results. If you are paying discretionarily, challenge yourself to find measurable outcomes. Dont underestimate the training aspect, either.

Jeff: Firms are spending 20+hours on social media, writing on blogs, writing on Facebook, but only 3% report generating leads.

Kelli Cruz: Question about next generation as clients and as employees. I urge you to identify common working traits between boomers and the next generation. But there are differences, too. Be flexible in the way you create work space, encourage working in teams, offer team bonuses.

Kelli Cruz: In a show of hands, no one has an adequate succession plan in the room. that is very troubling. I was hoping the Canadians would be able to lead the US. In the US 1 in 3 have a plan. Succession takes time. A well thought out plan takes 10 years, I think. Identifying the right successor is the top factor in succession planning. it’s important for clients, for the business you built, to maximize your revenue.

An advisor friend of mine, in his late 50s doesn’t have a succession plan. He says he doesn’t want to think about retiring. It’s an emotional reaction.

Sheila Avari: Break for lunch. Catch you in at around 1 pm EST.

Sheila Avari: We are back. Session 3 about the begin.

Crisis Lessons from Thrivers, Survivors & Divers: Research on Investment Leadership & Culture

James Ware, CFA, Founder, Focus Consulting Group

Sheila Avari: James Ware just gave away a book called “High Performance Investment Teams” to a lucky participant.

Sheila Avari: Each participant has a personal polling device to keep us engaged. Interesting.

James Ware: “Founder’s Syndrome” – Owners haven’t thought about succession and what should be handed down the next generation, so we’ll talk about this.

Sheila Avari: We just voted on the importance of culture in a firm. Most “strongly agreed” it is the most important factor.

James Ware: Our business is thinking. Downtime is like watching money sail out the window. A “Red X” employee—toxic team members, poor performers, the demotivated type that suck energy out of colleagues, make life difficult for others—can really cause damage.

James Ware: No one believes they are a Red X. They dont have the emotional intelligence to see themselves that way. They see themselves at doing their job better than the others. Ask yourself, “Are you a Red X?” and ask yourself, “Would you work for you?” 92% of the industry say we have Red X’s.

Sheila Avari: Polling device: 75% of CFA participants said they have Red X’s in their firm.

James Ware: These Red X’s create “sludge” in the firm, something he talks about in a cover story in CFA’s magazine.

Sheila Avari: Polling device: 36% say Red X’s live in Operations, 29% are in Investments, 29% are in Distribution.

James Ware: Your first filter has to be ethics and integrity as your top value. (His slide shows client satisfaction ranks highest, only 50% rated that as #1, though!)

James Ware: Success Factors for top firms: Attract top talent, operate free from silos, strong talent management (career pathing, succession planning), they have “ownership mentality” across all employees, good at executing plans, regular and clear senior-level communication.

Sheila Avari: Polling device: 55% provides a challenge for senior managers. (Challenge was meant in the negative, but one participant viewed “challenge” as being positive for managers.)

James Ware: We would call this a bona fide culture clash.

James Ware: Leaders are obviously doing something to do well. The top leaders compensate employees fairly, establish strong teams to accomplish goals, have high level of trust among team members, encourage open debate, value and appreciate one another.

James Ware: Compensation is Pandora’s box. Focus on mastery, autonomy and purpose. Knowledge workers are motivated by these three. They want to get better at their work, autonomy means no micromanaging, purpose means making a difference. Too many people try to motivate by money. But that is not the way to do it. As we heard this morning, from Kelli Cruz, bonus amounts can change year to year.

James Ware: We are big fans of candor. But there is privacy differences between the generations. You wave those numbers in front of people, it’s a formula to create drama in the organization. Dont show each other what you make. But we do think it’s a good idea for senior leaders/owners to discuss openly with workers how rewards will be dealt out. That’s how we do it. Workers don’t get to decide how big the pie is, that’s for leaders to decide. Performance, business development, teaming (you’re not a Red X) should be rewarded and then leaders and workers buy in. It’s simple but it works.

Participant: Portfolio managers will say we want 100% of our compensation on how our funds perform.

James Ware: That’s where we will call on leadership to decide on that one. Leadership should say 20% should be on business development, and you can decide the mix of the other 80%.

Sheila Avari: Polling Device: 73% agree or strongly agree owner has largely shaped firm’s culture.

Sheila Avari: Polling Device: 29% say founder will likely be transitioning out of his/her role in 10 years. 40% say 2-5 years.

James Ware: To do succession right, you should be looking at these things (succession) 3-5 years out. You need to give successors time to take different assignments. The wrong leadership can take a company down. We’ve seen that in today’s paper.

Sheila Avari: Polling Device: 31% say with regard to your found, the level of “key man risk” is very high. If that person gets hit by the proverbial bus, company is in trouble. underscores importance to develop bench strength.

Sheila Avari: Polling Device: 13% say level of urgency around a succession plan at your firm is high or very high.

Sheila Avari: Polling Device: 96% strongly agree that teams work well together for firm’s success.

James Ware: Core values among Investment, Operations and Distribution “tribes”—Client satisfaction, ethics/integrity, professional, collaboration. But when you look at individual groups: Investment-analytical, disciplined, creative, value meritocracy. Operations-accountability, efficiency, quality/precision. Distribution-competitive, passion/energy, humour/fun. They all want leadership development and mentoring. Book recommendation: Ram Charan’s “Leadership Pipeline.”

James Ware: There is a lot of friction among these three groups, largely driven by ego. Investment advisors are like the quarterbacks, but they cant do their jobs well without solid distribution and operations team members. Similar to an NFL quarterback. He needs those 4 big guys in front of him or he’d be killed. There’s a rapport in the sport, but I am not sure it’s happening in investment firms.

Sheila Avari: That wraps up a lively discussion. Stay tuned for the next session, “Risk Management in a New Financial Era for Private Wealth Clients” presented by Samuel K. Won, Founder and Managing Director, Global Risk Management Advisors Inc.

Risk Management in a New Financial Era for Private Wealth Clients

Samuel K. Won, Founder and Managing Director, Global Risk Management Advisors

Samuel Won: Participants approached me before this presentation telling me that risk is a hot topic and we need to hear you. Risk is on our minds. They also asked me, “What do you do exactly around risk?” Let’s define terms. Risk Management means different things to different people and leads to misconceptions.

Participants: [Hesitant to respond] Appreciating client’s risk tolerance and a “permanent impairment of capital.”

Participant: Optimizing risk—adjusted returns, or maximizing.

Participant: Risks not investment related. Compliance risk, moral hazard risk, operation risks.

Samuel Won: You are all right. Unfortunately, most people define risk management as the measurement of risk. There are three buckets. Market, credit, operational risks. These make up enterprise risks. This is the textbook definition.

Samuel Won: In the US they are thinking of forcing family offices to register with the SEC. So people who didnt have to think about risk management, will have to. People are taking a formal approach to risk management. A lot of very large institutions have been exposed for not have the right controls in place.

Samuel Won: People are concerned about “tail risk.”

Sheila Avari: Tail risk was not explicitly defined, but I will probe.

Samuel Won: Key elements required for institutional-quality risk management: investment process, strategic plan (outlines client’s risk parameters, this needs to be pre-defined), limits (limits around liquidity, leverage, drawdowns), risk/performance metrics (ensure metrics are established BEFORE making investments), monitoring of performance and risk metrics and portfolio reviews.

Samuel Won: Investment advisors needs a new approach because clients demand it. They have serious losses in their portfolio. You have to change to survive. eight new approaches, processes and tools:

Samuel Won: 1. You need to make a cultural change and bake it into your investment process. It will take time. Educate your client so you change their expectations.

Samuel Won: 2. Obtain risk management training and education.

Samuel Won: 3. Use same kinds of risk management analytic tools and processes used by institutional people. Portfolio managers can have the same processes, but you have to invest in changing infrastructure and controls.

Samuel Won: 4. Educate and change your clients’ mindset and expectations. Make them understand.

Sheila Avari: Samuel Won spent a decade managing millions and huge trading floors in several Wall Street firms. He had a vote on every major transaction and veto power.

Samuel Won: 5. Better definition and delineation of your clients’ risk parameters. This process has to be interactive with clients. Advisors use questionnaires with clients, know your client documents or they wing it. The flaw in that is they dont know the risk associated with investments they’re selecting for clients. For example, let’s say you picked a growth and income fund for a client. You dont know what the risk of that investment is, you are not the portfolio manager. How can you say the client’s portfolio lines up to the risk parameters? It’s crickets.

Samuel Won: It’s well intended, I am not saying advisors are being fraudulent. But I am showing you empirical examples of where the logic breaks down.

Samuel Won: 6. Enhanced risk measurement and risk monitoring.

Samuel Won: The tools and techniques exist for you to know what the risks are in advance.

Sheila Avari: Surprised faces in the audience.

Sheila Avari: Just learned where the saying “There’s no such thing as a free lunch” came from. During the Great Depression bars couldnt get anyone to come in and buy alcohol. So, they decided to give free lunch—salty peanuts and a high-salt meal. What happens when you eat a lot of salt? You buy alcohol. (Just an aside…not sure how even got off topic. Ok, back to risk management.)

Samuel Won: Simple way to measure risk in a portfolio. Annual portfolio reviews are not sufficient. We need to improve our questionnaires, create more meaningful parameters.

Samuel Won: Educate your client about what risk dimensions they should be thinking about. You are telling clients you’ve looked at assets, liabilities, investments and you’re giving them a prescription, but you are not getting proper feedback from them. It’s about not having all eggs in one basket. if they are in mutual funds, they can have liquidity and they need to understand some of their investments may not allow them to get the money out. they need to know this and we’re not telling the, that. Concentration, liquidity, leverage and volatility. These four areas of risk must be communicated.

Samuel Won: When you have right infrastructure, process and controls, you have consistency. Advisors need to focus, as starting points on what does that better questionnaire look like, what do our risk parameters look like?

Participant: Any practical advice on inserting tax into parameters?

Samuel Won: Resounding yes. If you’re leaving clients with a huge capital gains bill, you’ve done a huge disservice. Explain ramifications.

Samuel Won: Sometimes you’re portfolio manager, sales manager, shrink. If advisors only provide better customer service, touch them more, well, data will show you will do well. In terms of competing, you cannot compete on performance alone. It’s unsustainable. What is sustainable is a consistent process.

Samuel Won: Use risk management as a differentiating tool and a marketing tool. all the data supports this is what people are looking for. If you look at the old paradigm, that will lead to extinction.

Samuel Won: risk management needs to go beyond vocabulary and lexicon. it’s about sustainability and repeatability.

Sheila Avari: Quick break and then the last session: Communicating Risk and the Use of Investment Policy Statements by Robert Dannhauser, CFA, Head, Advocacy Outreach & Communication, CFA Institute

Communicating Risk and the Use of Investment Policy Statements

Robert Dannhauser, CFA, Head, Advocacy Outreach & Communication, CFA Institute

Robert Dannhauser: Investment Policy Statements (IPS): client specific summation of circumstances, objectives, constraints and policies that govern the relationship between advisor and client.

Robert Dannhauser: IPS means this is a partnership, requires active participation from both sides. In a pre-survey, 72% of today’s participants are doing IPS for all clients. 68% use templated IPS documents, or what I call shortcuts. Some templates are better than others.

Robert Dannhauser: In institutional space, IPS is well established. less well established in the HNW space, based on anecdotal evidence.

Robert Dannhauser: IPS provides a great opportunity to tie in qualitative and quantitative stuff. it’s usable and understandable by advisor and client. it’s an art and a science, so I cant give you a definitive way to develop an IPS. The same is true for communications strategies. These are all custom to your clients.

Robert Dannhauser: Risk merits as much attention as return. Governance issues becoming more relevant (who is responsible for risk measurement?)

Robert Dannhauser: For individual investors, write down where the wealth came from (earned, inherited, business etc.) to make clear to the investor you understand all the issues that may be tied up with that wealth. Define the investors (indivdual, married couple, kids?)

Robert Dannhauser: Governance needs to be clearly outlined. How often will you review the IPS? Who has authority to hire and fire other advisors? Assign responsibility for asset allocation and for risk management.

Robert Dannhauser: Classic IPS: Investment objectives, define risk tolerance (when do they want to retire, providing for next generation, charitable obligations). Are there socially responsible investing (SRI) issues? This is the document to list all relevant considerations.

Robert Dannhauser: Risk management is big. Establish how often you will report on performance management, appropriate metrics for risk measurement, define portfolio rebalancing process.

Robert Dannhauser: 36% of participants assess risk through conversations with clients, which is not all bad, it shows your value, but you may need a little more structure. 16% use questionnaires.

Robert Dannhauser: Risky tolerance factors: age, gender, marital status, current wealth level. It’s not a given that older client will be less risk tolerance. Males tend to be less risk averse. Single people have higher risk tolerance. You cant make an assumption of risk based on current wealth level. For the less wealthy, they start to treat investments as a lottery ticket. That is a great audience for less ethical financial advisors.

Robert Dannhauser: There is a lot to be said for taking an objective approach to clients’ risk tolerance.

Sheila Avari: Interesting, Robert likens a good IPS to Myers-Briggs personality test. Multiple factors, lots of question repetition throughout questionnaire (though it’s not immediately apparent to the questionnaire respondent.)

Robert Dannhauser: Risk is different than uncertainty. Talk about both words with your clients.

Robert Dannhauser: Key messages depend on situation: “calm down,” “watch out,” and “we’ll get through this together.” You need to be able to frame messages that recognizes emotional triggers have been activated, without looking like a shrink.

Robert Dannhauser: Have your colleagues hear your “risk conversation” and help you adjust it before you present to clients.

Robert Dannhauser: Think of the IPS as a living strategy roadmap to refer to during troubling times to guide conversations.

Sheila Avari: That wraps up Day 1 coverage of “Adapt or Die,” the 2011 Toronto CFA Society Conference. Coverage resumes May 4. See you then!

Sheila Avari: 8:29 am…Day 2 sessions starting momentarily. Yesterday we talked about the changing financial landscape and what financial advisors need to know—and do—to prosper and properly serve high-net-worth clients.

We learned what high net worth and ultra high net worth clients worldwide are thinking and feeling. Kelli Cruz talked about how and why advisors need to build a sustainable and scalable business

The Simple Truth About Selling—the New Paradigm in a Changed Environment

Al Townsend, Founder and President, Training and Management Consulting Group Inc.

Al Townsend: Clients are looking at portfolio and saying “great, now I am back to where I was 10 years ago.” They want to recoup those lost assets. This is part of today’s environment. Advisors have to understand and manage clients’ perception of value, performance and risk. And know that perception changes everyday!

Al Townsend: Clients are willing to pay fees. If we cannot communicate effectively the value of what we do, they will push back. Clients want high quality and trustworthy information. They want you to understand their family circumstances.

Al Townsend: What’s making your work more challenging?

Responses: Media, product innovation (it’s not just stocks, bonds and mutual funds anymore), clients have more access to information (they’re influenced by media, family and friends and by YOUR competition), clients move from long-term thinking, to short-term thinking (clients want to know what you can do TODAY to manage the risk I may be exposed to based on today’s headlines).

Al Townsend: Let’s talk sales. Consultative selling is where we are now…match your client needs to product features and benefits.

Al Townsend: The definition of sales is “getting someone to take action in their own best interest.” Only give your client the information they need or want to make a decision, no more.

Al Townsend: Clients’ performance expectations are aligned with their perceptions. Five, six years ago, clients said, “if you cant get me 12%–15%, I will find someone who can.” Two years ago clients said, lock up my money and keep it safe. Now they are saying, “if you can get me 6%, I’d be happy.” The number is going up.

Al Townsend: Advisors need to be conscious of in getting people to take actions and make decisions. Understand client “emotional triggers”—there are four—fear, greed, love (drives insurance purchases, estate planning), ego. If a client can afford to pay for the value, they want the value.

Al Townsend: Wealth managers speak “financial.” Clients don’t. Articulate your investment philosophy in a way that makes sense to clients. Advisors need to know what clients know. Express terminology in a way they understand. Confused clients won’t work with you.

Al Townsend: If a prospect asks you for “information to read at home to better understand what you do” that is a bad sign. It means you didn’t explain your skills and value proposition clearly.

Al Townsend: The KISS (Keep it Simple and Short) principle. Know your client’s knowledge and sophistication level. Never use slang or jargon or acronyms. Position what you do as a solution to your client’s need. Offer practical examples of what the term or concept means (“let me show you how asset allocation works.”)

Al Townsend: If you’re talking for more than three minutes, you are just about at the end of your client’s mental tape recorder. Two or three concepts at a time. Let them process, let them ask questions.

Al Townsend: Explain your investment philosophy clearly—what you truly believe. Define how you will measure risk and it will affect a client’s “expected return.” And be completely upfront about what risks you can and cannot manage according to your investment philosophy (“I cant protect you again major market crashes, like what happened in 2008.”)

Al Townsend: Explain your investment discipline. Why are you selecting certain investments for your clients? What is your selection and screening process for investments (this is a huge value add. the average investor cannot comb through the investment universe alone.) How strategic and tactical will you in portfolio management to meet client goals?

Al Townsend: As soon as you talk “strategic” and “tactic” emerge from your mouth, you need to explain what that means.

Sheila Avari: Al Townsend defines “standard deviation,” “alpha,” “Sharpe ratio.” Try defining these in normal English.

Al Townsend: When we use terminology we understand, be careful. Look at your proposals, marketing materials, website. Underline what’s there that the average investor won’t understand. It will also help you identify the type of investor you want to do business with.

Al Townsend: (Product Performance + Advisor Performance)/Client Expectations = Client Satisfaction. Just know their expectations change on the fly.

Sheila Avari: Scroll up for factors that influence client expectations. Remember…friends, the Internet, newspaper headlines, etc. etc. etc.

Al Townsend: One of the hardest things to do as advisors is to train clients to keep you in the loop. Remind them to call you whenever they have a concern or question. Advisors can’t read a client’s mind. That said, set a regular check-in schedule, review portfolios at least quarterly. Some clients may warrant monthly reviews and conversations.

Al Townsend: Never forget that it’s your client’s money. Don’t be all things to all people. Confused people don’t buy. Your best clients come from your best clients.

Sheila Avari: 10 am. Short break. I will be back at 10:15. Next presentation is: Asset Allocation in Private Wealth: Evolution or Revolution? by Brian Singer, Chief Investment Officer, Singer Partners, LLC.

Asset Allocation in Private Wealth: Evolution or Revolution?

Brian Singer, Chief Investment Officer, Singer Partners, LLC

Brian Singer: Why has the industry changed? Singer started working as a derivatives trader in 1981 and 1981-1999 was formative for him and influenced his behaviors. Investors were getting great returns at that time and came to expect those returns over time. Most of your clients entered the world in that environment and have experienced that environment and that is powerful.

Brian Singer: The lessons learned over time never seem to be applied properly. As we look back at 1965–1981 there was just a dead return over that time. High inflation, oil embargo. Firms set themselves up to exploit “diversification.” It was the beginning of globalization.

Brian Singer: What happened in 1999? Tech bubble was at it’s peak and it was a tough time for people who took concepts like “diversification” and “asset allocation.” What came out of it was “alpha” and “specialization.”

Brian Singer: Now we’re into the 1999–Present timeframe. All the alpha generation and specialization don’t seem to be working. Hedge fund didn’t do well in 2008. I think the pendulum is swinging back on “alpha.” Instead, I think there is a resurgence of “beta.”

Brian Singer: The emerging markets are moving in or already in the “happy zone” (the 1981–1999 period where bond and equity markets were “happy.”) Demographics and improving education impact this. The regulatory environment is developing dramatically in emerging markets. In developed world, it’s under threat. Without immigration, the developed economies will be under threat.

Brian Singer: Use a roadmap analogy—not formulas—to understand risks. Where do you want to spend most of your time? The yellow roads on a map are primary roads and will help to reach destination more efficiently. Choose the “yellow road” investments for your clients to help them meet their individual goals.

Originally published on capitalmagazine.ca

Sheila Avari