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Active, Passive and Factor-Based Investing, Oh My

While not quite as scary as lions and tigers and bears, the many approaches to investment management can seem daunting, particularly when wealth managers are considering what to offer. Throw in the question of proprietary, open architecture or a mix of both, and things really get complicated. And that’s all before we’ve even raised the issues such as the inclusion of alternatives, ESG investing and other more esoteric investment topics. It can be particularly tempting to go for the ice cream parlor approach of offering many flavors in order to be all things to all clients – “you like chocolate, we’ve got that,” “rum raisin, no problem.” Yet, all too often, in the wealth and investment management space, this leads to confusion and a perceived lack of beliefs, not to mention dispersion of portfolios and results.

So what’s a manager to do?

The question that often comes up, as a result, is what approach is right? Not to kick the can down the road, but the answer is, there is no “right” answer. This is a decision each firm must make for itself after thoughtful consideration and one that can be polarizing and sometimes divisive. A small sampling of questions to pose include:

•  In what does your firm, at its core, believe?

•  Can you articulate your philosophy and approach?

•  What is the composition of your current and aspirational client base?

•  Do your beliefs and desired approach align with client needs (if not, either your beliefs or your client base may not adapt)?

•  Is that belief consistent with how you have been managing money; if not, why?

•  Is everyone at the firm in agreement with the direction being taken?

•  Do you have the resources to continue (or to implement) the approach in which you believe?

•  If you don’t, what would it take to enable you to do so?

To the decisive go the $$$

While the exercise may be painful, our experience has shown us that those who can be definitive in their message and their actions are more successful in attracting and retaining clients. Clearly setting, communicating and meeting (or exceeding) expectations in terms of money management results in acquiring clients that are a good fit for your firm and minimizes the potential for unpleasant surprises down the road.

More and More Advisors are Going Social

According to recent research from Putnam Investments, the percentage of advisors reporting that social media has helped them gain clients has increased dramatically, up from 49% to 86% in just five years. These advisors say social media has disrupted how they approach prospects, convert them to clients, and conduct business, all while sharply reducing their face-to-face time. Among the top findings:

•  60% say social media is a “great deal more efficient” than traditional networking.

•  83% say social media has helped shorten the time needed to turn a prospect into a client.

•  Nearly nine out of ten (88%) report that social media has changed their relationship with their clients, through easier information sharing and greater contact frequency.

•  More than one-third maintain that social media plays a “very significant role in their marketing efforts.”

It’s probably no surprise that LinkedIn is where most of the action is (although usage of other networks is growing while LinkedIn usage appears to have plateaued): 73% of advisors engage it for business use, personal use, or both. Its top five uses are to:

•  Accept connections

•  List my company/firm on my profile

•  Request connections

•  Follow companies

•  Display skills

Facebook comes in second, but those who use both report they use Facebook more frequently – an average of 22 times per month versus only 16 for LinkedIn. As one survey respondent puts it, “LinkedIn is primarily for people seeking solutions rather than relationships, which is where Facebook is more effective.”

Most advisors agree that social media has helped them build their business and that greater usage is a top priority. However, almost half are “self-taught,” learning through hands-on experience and friends and family guidance. This may not result in optimal use of social media.

Social media is growing as a powerful sales and marketing tool, and advisors who ignore it, to do so at their peril. Social media needs to be considered and deployed strategically in the context of an integrated approach to prospecting and client nurturing.

Goldman goes retail: say hello to Marcus

Goldman Sachs isn’t exactly the first company that comes to mind when you think mass market banking. For most, in fact, it wouldn’t come to mind at all. Yet, that’s exactly where the company is making a significant move with its online banking platform, formerly GS Bank, now going by the name of Marcus, in homage to Marcus Goldman, founder of Goldman Sachs. During the financial crisis, the firm became a bank holding company as part of its effort not to go the way of other failing investment banks. Initially, that didn’t have much impact on its business; its main “retail” component remained the high-net worth. As revenues from traditional business lines, such as trading, have continued to decline, Goldman has sought out other diversified sources of income, entering into both deposits and lending.

Goldman is said to consider three criteria for assessing a new business direction:

•  Is there an unmet need?

•  Can Goldman identify a competitive advantage?

•  Can the company be successful without market dominance?

Yes, was the answer

The company concluded that the answer was “yes” for both the deposit and lending side, but within very defined categories. On the lending side, its efforts were de novo, offering loans for a variety of purposes, ranging from home improvements to debt consolidation. Lines of credit per load are relatively small, capping out a maximum of $40,000, limiting risk to any one defaulter. The borrower gets to indicate how much they wish to borrow, for how long and how much they wish to pay off per month, giving it a very customized feel. There are no origination or other fees, and borrowers can pay off the loan at any time without a penalty or fee. On the deposit side, in April 2016, Goldman Sachs Bank acquired GE Capital Bank’s online deposit platform, comprising approximately $16 billion in deposits, offering high-yield savings accounts and CDs online, competing with direct banks such as Synchrony, Ally, CIT, Barclays and others. Both the deposit and lending offerings were consolidated under the Marcus brand to reduce any confusion, create a more integrated brand and build awareness among consumers.

The future of banking?

While Goldman has not expressed any intention to go beyond this initial product offering, creating a single, separate direct brand for banking appears to indicate that an expanded set of products and services could be coming down the road, with a checking account being a logical extension. Certainly, Goldman has the wherewithal and the staying power to make an impact in the direct segment. And, Goldman has been aggressive in linking the Marcus brand to Goldman Sachs, which carries a certain cachet. Perhaps, someday, we will all be able to say we bank with Goldman Sachs.

Two-way Squeeze on Mutual Funds

 

Mutual fund managers, particularly those offering actively managed funds, have come under significant economic strain in recent years due to increasing fee pressure and declining net flows. Firms offering products with subpar performance rankings in core asset classes have been especially hard hit.

Unfortunately, it appears that more clouds are on the horizon. UBS just announced that it will remove some 840 funds from its platform, a roughly 20% decline in total product. This follows a similar move late last year by Morgan Stanley that culled 600 funds, or 25%, of their fund stable. This trend among the wirehouses to limit fund shelf space began in earnest in 2016, when Merrill Lynch cut back on its fund platform options by nearly 37%. These companies have focused on eliminating funds that have underperformed or failed to attract significant assets.

Of course, fewer funds means lower research and tracking costs for the wirehouses. For fund manufacturers, on the other hand, it means increased pressure for improved performance rankings and more costly access to distribution, putting the squeeze especially on fund groups with more limited resources and/or poorer selling products.

It’s not unlikely that as distribution channels dry up, mutual fund manufacturers will in turn be forced to “rationalize” their product lines, and slow new fund development in the active space.

What’s Your Net Promoter Score?

It seems you can’t make an online purchase or service inquiry these days without being greeted afterward by a pop-up questionnaire: “Help us improve our service to you by taking this brief survey.”

The problem is the survey usually isn’t brief, which is why we often dismiss them reflexively. The company may then be left with results which are not representative of their customer base.

Which might explain why the net promoter score (NPS) is so widely used. To gauge customer loyalty, NPS comes down to essentially one question: How likely is it that you would recommend our company/product/service to a friend or colleague?

The question was the product of two years of research in the early ’00s by Frederick Reichheld of Bain & Company, who was looking for the one question that was more predictive of profitable growth than any other. In his 2003 article in the Harvard Business Review, he called NPS “The One Number You Need to Grow.”

Respondents answer on scale of 1 to 10 and are categorized: 9 and 10 makes the responder a “Promoter”; 7 and 8 “Passive”; and 1 to 6 “Detractor.” The NPS becomes the difference between the percentage of Promoters and Detractors. It’s that simple, although NPS is often used in conjunction with a variety of other metrics and insights to provide more depth and detail on the reasons behind scores.

According to the American Marketing Association, the NPS method has three principal advantages:

1. It’s simple. And it’s readily applicable in the digital era, so adaptation is high.

2. Its findings are easy to digest. Rather than an amalgam of attributes reduced to an obscure index, NPS measures one thing that everyone in an organization can understand (“60% of our customers are Promoters,” e.g.).

3. It can be benchmarked. NPS is standardized, so companies can compare results from period to period or to other companies.

On the other hand, there are three potential shortcomings.

1. It’s meant to measure relationships, not transactions. Applying an NPS to isolated events rather than a company’s body of work can be misleading.

2. It shouldn’t stand alone. NPS can measure a company’s overall health, but it can’t diagnose the cause or reveal a treatment plan. It needs to be accompanied by a deeper dive.

3. Detractors need to be heard too. What makes a Promoter a Promoter may not be what turns a Detractor into a Promoter. Future success can lie as much in converting perceived deficiencies into undiscovered potential as accentuating the positive.

We provide a full range of market research capabilities that we’ve been using to promote our clients’ businesses for three decades. To learn more, give us a call at 203-255-1066.

 

Sources: Harvard Business Review, December 2003 and Marketing News, September

Five Ways to Win Your Audience Through Social Media

This data highlights the importance of implementing a social media strategy that considers the target audiences you are trying to reach and not relying on a single platform to get your content out to the market. Click here to view the study in its entirety.

Customer Experience as a Market Driver

Imagine you recently took a driving vacation in Europe. Like most other travelers on the road, you relied largely on Trivago to find the best places to stay along the way. The popular travel site made it easy to compare hotel pricing and features. Plus, it gave you access to reviews by previous guests including ratings of their satisfaction levels. While in some instances, you may have found yourselves going directly to a hotel’s website for information, your final selections were likely influenced primarily by reference to the shared experiences of a sizable number of current and past customers.

While there is no Trivago available for choosing a wealth manager yet, recent studies have shown that the significance of “independent opinion” in the selection process of financial services providers by HNW and UHNW individuals including client referrals, ratings and reviews has risen significantly in the past few years. Thanks in part to social media and the web, client experience, in wealth management as well as in many other industries, is becoming an increasingly important element of marketing and a core driver of sales.

Considering this trend, many firms are shifting attention from the sales cycle to the experience cycle. The experience cycle model as shown in the table below was first introduced by Hugh Dubberly, an ex-Apple designer. It describes the steps people go through in building a relationship with a product or service.

Most important, the experience cycle captures the process by which customers become advocates and introduce others to the product, beginning the cycle anew. It suggests a shift in focus from “the sale” as a point event or “trial” as a single interaction to nurturing a series of relationships in a continuous cycle that yields increasing returns.

Creating a rewarding customer experience that drives growth in turn requires a shift in focus from sales or marketing management to customer experience management. Firms must begin with a deeper understanding of client needs and satisfaction triggers and must follow through by creating an ongoing experience that satisfies these needs over the life of the relationship.

All Social Media is not Created Equally: A Look at Five Main Platforms

A question that financial services firms grapple with in today’s digital world is how frequently they should be posting to social media (we’ll take it as a given that most firms have accepted that social media is a valuable way to engage with clients, prospects, centers of influence and other industry audiences). The answer is, not surprisingly, it depends. Each platform is structured differently based on its main purpose. An informative blog post by Constant Contact provides insight and a useful graphic that describes five main social media platforms, Facebook, Twitter, LinkedIn, Google+, and Pinterest, classifying each by suggested volume (low to high) and value of posting (again low to high).

What do these two classifications mean?

Volume – Volume is pretty obvious and refers to frequency of postings. Posting daily or multiple times a day every day on a platform would be considered a high volume of posting.

Value – This category is a little more subtle. High value postings focus on quality of content; i.e., providing proprietary insight or perspective to the reader. A low value posting might be more along the lines of “We had an event focused on a relevant industry topic” or “Here’s an article from elsewhere that is relevant and interesting (with a link).”

LinkedIn would be considered a low frequency/high value platform, where you would post less frequently, with weightier, more value-added information. On the other end of the spectrum is Twitter, a high frequency/low value platform. Posts there should be much more frequent, distributing a wide array of potential proprietary and curated information.

The digital world changes quickly

These guides are good starting points, but we believe that these are guidelines only. Our observations have shown that the world is evolving toward a more digital presence, not less, and that there is increasing convergence of frequency and value across the different social media platforms. Twitter has become a way to push both proprietary thought leadership as well as curated content out to your audience, and LinkedIn and Facebook are a great way to show the more personal side of a company. In addition, each company’s social media strategy should be carefully constructed based on their unique needs, resources and goals.

Why Positioning Matters

In marketing, the terms “value proposition” and “positioning” come up a lot. But both are often misunderstood or used interchangeably.

A value proposition captures the essence of what an organization stands for – why it’s in business, its raison d’être. It should be the first thing anyone on the inside thinks about or articulates when describing that organization.

Positioning is more specific and is often captured in a positioning statement. A company can have a positioning statement for the firm itself, but it’s more likely to have several – for each of its products, offerings or practices. In this regard, positioning is a subset of the value proposition.

A positioning statement should capture these elements:

•  Specific audience

•  Product or service offering

•  Distinctive competence

•  Competitive differentiation

•  Reason to believe

Why does positioning matter?

•  It helps your firm identify and stand for something that you may do better than anyone else in your marketplace

•  It helps individuals within the organization internalize their own advantages and differences, so they can readily explain and promote them

•  It also keeps them focused on what your firm does best, and from pursuing business that may look promising but turn out to be distractions

• It allows principals to better manage the overall practice by better understanding and nurturing its individual components

Correction or Turning Point

At $685 billion, cash flows into long-term mutual funds and ETFs hit a new record in 2017. While actively managed bond fund flows enjoyed healthy gains in the year, overall investors’ love affair with passive vehicles continued unabated. Indexed domestic equity funds grew by $220 billion, an amount just about evenly matched by continued outflows from actively managed domestic equity funds. In a stellar year for international equities, the $35 billion in active fund inflows was dwarfed by nearly $240 billion into passive options. The chart below from Morningstar illustrates the longer-term accelerating trend toward passive investing.

Investors’ growing interest in index products has been driven largely by performance. In an environment of steadily rising markets and low volatility, as shown in the chart below, higher cost active managers on average have simply not been able to keep pace with their passive counterparts. Over time, as the performance advantage of passive has persisted, the supporters of active management, particularly in core asset classes, have declined.

It will be interesting to see how soon and to what degree recent market volatility impacts the trend to passive and whether active managers can take advantage of more volatile markets shouldthey continue.