It’s WOTY Time!

“The trouble with words is that you never know whose mouth they’ve been in.”  – Dennis Potter, playwright

If you’re a word person, then this truly is the most wonderful time of the year. Why, you might ask? Because it’s time for the various and sundry word authorities (i.e., dictionaries and the American Dialect Society (ADS) – yes, there really is such an organization) to declare their official word of the year (WOTY for those who follow such things). The timing, as well as the pomp and circumstance surrounding these proclamations, vary. While most publish their words in the end of the calendar year to which they apply, ADS is one of the only to issue its WOTY in the following calendar year, so we’ll have to wait until 2018 to see what its word is. The ADS is also proud to stake the claim for the longest tenure of issuing English words of the year, dating back to 1990.

Sign of the times

Not surprisingly, the words of the year tend to reflect what is/was on people’s minds at the time. Let’s avoid most (it’s impossible to avoid them all) of the more politically focused WOTYs and explore a sprinkling of WOTYs throughout the years from ADS:

If you have a word you’d like to nominate for 2017, suggestions are open to all at

The first WOTYs of the year

Like the first robin in spring, the first WOTYs have recently been sighted. In the U.S., has declared its word of the year to be “complicit,” defined as “choosing to be involved in an illegal or questionable act, especially with others; having partnership or involvement in wrongdoing.” Across the pond, Collins, which is both a UK printed and an online dictionary declared its WOTY to be “fake news,” defined by Collins to mean “false, often sensational, information disseminated under the guise of news reporting.” While it remains to be seen what other major publishers of WOTY (Oxford and Merriam-Webster) designate as their top words for 2017, neither words already published evoke a particularly positive mood.

Not just any word can be WOTY

The path to word of the year is not easy. According to Oxford Dictionaries, “Every year, candidates for Word of the Year are debated and one is eventually chosen that is judged to reflect the ethos, mood, or preoccupations of that particular year and to have lasting potential as a word of cultural significance.” For most issuers of a WOTY, an increase or spike in usage during the year in response to events is typical.

Collins describes their approach “by monitoring word output across all forms of media and (by consulting their 4.5 billion word database) as having most grown in visibility over the past year, reflected social and cultural developments, and gained traction for reasons both good and bad.” According to Collins, “fake news” saw a usage increase of 365% since 2016.

Never underestimate the power of the word

Words, like images, are powerful and can provide a record of the feelings and events of a time. Even seemingly innocent, neutral words can evoke (and provoke) strong emotions and reactions depending on how they are used and in what context.

Bitcoin: A Teaching Moment

Whether a wealth advisor sees Bitcoin as an attractive investment opportunity or as more of a speculative investment, the dramatic rise in the distinctive currency’s price this year can offer a valuable teaching moment on an advisor’s core investment beliefs.

For advisors who are long-term, value investors, the Bitcoin phenomenon appears to be a speculative bubble. As a crypto-currency, existing in cyberspace, it could be argued, as Jack Bogle recently did, that Bitcoin has no intrinsic value at all. For those who believe this, underlying fundamentals to turn to in setting a price are lacking, leaving no basis to predict future value. The price spike is based on perception, and, therefore, a change in perception could cause the bubble to burst. Such advisors believe that holdings like Bitcoin have no place in a soundly managed investment portfolio.

On the other hand, advisors more favorably disposed to Bitcoin may underscore its potential role as an “alternative” investment appropriate for a non-correlated, but possibly more speculative allocation, in a diversified portfolio. These advisors may reinforce the view that all value is fundamentally based on perception and feel that growth opportunities in particular may be missed if too much weight is placed on “fundamental” value.

For either side, the nature and characteristics of Bitcoin provides an opportunity to explain in the clearest of terms, their distinct approach to investing.

Think Digital, Act Human

In the new Digital Age, the word “digital” has almost become redundant. From how we get our news, plan our trips and make purchases, just about everything is digital. It’s become the standard and, for many, the expectation. As a recent study from Ernst and Young (EY) demonstrates, the wealth management industry is no exception. 

 Clients’ Primary Channel Preference

Source: The experience factor: the new growth engine in wealth management

What is striking is the pace at which that expectation is changing. The study, which queried more than 2,000 individual clients ranging from mass affluent to UHNW, shows that, today, a third of these clients prefer to find an advisor through digital means, but in the next two or three years, that number will increase to 46%. Similarly:

1.Preference for opening accounts digitally will grow from 38% to 52%

2.About two-thirds of clients will prefer to learn about and buy products digitally in a few years, up from 58% today

3.And their preference for receiving advice and research digitally will rise to 60%

As you might expect, the trend is especially prevalent among younger clients, who represent the future success of wealth management practices. The study reveals that 43% of UHNW millennials surveyed globally would be “very likely” to consider opening an automated account. They’re also “very likely” to consolidate their assets into fewer firms – 51% of them versus only 9% of UHNW baby boomers.

But, according to the study, while UHNW millennials may have assets, their financial needs may not be sufficiently complex to demand the same range of services – like tax and estate planning and trusts – as those of UHNW boomers. And even if they did, the study points out that they’re concerned that digital advice is “too generic” and firms delivering it have limited track records. This reinforces our belief that established firms capable of delivering a truly personalized experience still occupy a strong position.

The takeaway is to stay current with solutions that meet clients’ digital expectations and thereby make their experience as frictionless as possible. As the EY study observes, “digital capabilities are at the top of wealth management clients’ must-haves.” But at the same time, this digital facility needs to be balanced with the distinctly human value-add of listening, empathizing and understanding the full range of client needs, as well as providing customization at some level, whether it’s by need, type of client or other criteria.

ESG is Here to Stay

ESG is attracting growing interest, particularly among millennials and women. Assets in strategies using ESG factors grew a dramatic 33% between 2014 and 2016, although they still represent a relatively small share of total investment assets. As interest grows in ESG and impact investing, offerings have increased substantially. Many organizations now offer either individual ESG strategies or ESG overlays that can be applied to a client’s entire portfolio.

Robos jump into the fray

Robo advisors too are getting in on the act. Both Betterment and Wealthfront rolled out their approaches to responsible investing (we will save the SRI, ESG, impact investing debate for another day) this summer. Betterment offers a portfolio that uses a mix of iShares ETFs (currently the iShares MSCI KLD 400 Social Fund and the iShares MSCI USA ESG Select Fund) “to improve social responsibility scores in U.S. large cap assets” and plans to offer more funds in the future. Wealthfront’s plan is to give clients the option to invest directly in stocks that are socially responsible or exclude those that don’t meet their SRI criteria. They offer the ability to screen on four criteria: fossil fuels, deforestation, weapons and tobacco.

 All ESG, all the time

Smaller independent robos are springing up that are exclusively focused on ESG investing. Prophecy Impact Investments invites investors to Grow Your Wealth and Do Good at the Same Time. OpenInvest allows you to choose the values with which you want to align your investments and even gives you the opportunity to participate in voting on shareholder actions. Earthfolio offers portfolios focused on sustainability by only investing in mutual funds that “promote social and environmental progress.”

It’s a millennial world

It’s a natural fit for robos to offer an ESG option or to focus on ESG only, given that their primary target market is millennials. According to a 2017 study by Morgan Stanley’s Institute for Sustainable Investing, 86% of millennials say they are interested in socially responsible investing. They feel even more strongly regarding their retirement assets, with 90% expressing interest in sustainable investments as part of their 401(k)s.

Leaving aside concerns about whether investing responsibly and sustainably requires a financial sacrifice, it appears that interest in ESG investing will only continue to grow among individual and institutional investors and wealth and asset management firms would do well to think strategically about how to provide access for their clients.

Q&A with Ken Hoffman

This interview was conducted by Jerry Michael, President, Board Member and Co-Founder of Smartleaf. To find out more about Smartleaf and its financial technology capabilities, click here.

Our President, Ken Hoffman, was recently interviewed by Jerry Michael from Smartleaf about the future of the asset and wealth management industry. They covered a wide range of real and perceived business threats as well as opportunities to profitably accelerate growth.

What separates great wealth management firms from also-rans. Why declining fees may not be your biggest problem. How to get the most out of working with a consultant. What it takes to be great. And more.

I sat down for a Q&A with Ken Hoffman. Ken is the President of the Optima Group, Inc., a consultancy that provides strategy and marketing services to some of the largest global names in wealth and asset management, as well as larger boutiques looking to profitably expand market share.

Smartleaf: What do people get wrong about the business of wealth management?

Ken Hoffman: It’s common wisdom that fees for wealth management are under assault, but there’s no data to support this. This doesn’t mean wealth managers can rest easy. There is increasing competitive pressure, but it’s taking the form of increased service levels, not lower fees.

Interestingly, there’s data to show it’s the asset managers (those who make “products”) not the wealth managers who are facing fee pressure. So while the total cost of advice to end clients is lower, wealth managers’ fees are quite stable even in the face of “robo-solutions.”

Does that mean advisors shouldn’t worry?

KH: No, advisor fees are stable, but that doesn’t mean advisors can do nothing and prosper.  Client demand for enhanced service and a more robust experience is widespread. Wealth managers who want to increase or even maintain profitability will have to deliver more, and that means increased spending on planning, portfolio management, customization, marketing and client communication. So, costs are being redeployed by using technology to streamline end-client solutions and reduce the number of people it takes to get key functional tasks done. The demand for customization is on the rise, and the winners in this business are increasingly using technology to provide this customization.

Can wealth managers compete by simply lowering their fees?

KH: I don’t think so. Wealth managers who lower fees but don’t improve service and the client experience are barking up the wrong tree. The data clearly shows that clients and prospects are not demanding cheaper wealth management. They want better wealth management.

What do the best firms do right?

KH: The best firms know their target markets and their value proposition. They then structure everything—employee roles, compensation, incentives, technology, product development, marketing—to deliver that value proposition to their market.

They create service models that are relatively lean, which they can do because they are clear about what what’s important and what’s not. They rely less on generalists and more on a division of labor among specialized functional groups. They do not try to solve problems by just adding more staff.

What do struggling firms do wrong?

KH: Struggling firms find that their value proposition gets lost in the demands of their day-to-day business operations. They may rely on assumptions to guide their business, but they rarely fact check these assumptions against data that indicates where the industry is going today.

In these firms, inertia takes over. They may not be losing current clients at an unacceptable rate, but they’re missing the needs of their clients’ children, and they have trouble attracting new clients to the firm.

Bluntly stated, they’ve lost the fire in their belly. They may still be profitable enough to provide significant income to some people in the firm, but the path forward is murky. Issues of growth, succession, income and capital are often confused. Without a clear strategy, these firms will begin to atrophy, and if they wait too long to act, the only path forward will require radical transformation or a sale of the firm.

Some firms will tell us that they don’t need to structure their capital and compensation as if they were for sale, because, well, they’re not for sale. We think this is completely wrong. Firms that manage their organizations for growth and to enhance valuation are simply better-run firms. Even if they are never for sale, these are the firms that are winning in their markets.

Let’s talk about consulting, starting with the basics. Why do people call you? 

KH: Clients call us because they’re not growing fast enough, and their expenses are too high. They may want help with organizational structure and technology. They may want assistance selecting their best market opportunities, revitalizing their brand, their marketing and improving their sales.

Clients also call because they may want an objective and unbiased view of the M&A landscape, including assistance with evaluating specific opportunities.

If you’re a boutique firm, your challenge is how to grow past your natural market. Cost drivers in compliance and technology are also significant hurdles, and the expertise to select the best solutions may not be available in-house. Smaller organizations are realizing that going it alone may not be the best path. We see a new wave of consolidations and mergers in the wealth management business.

If you’re a large player, your biggest risk is becoming inefficient and inflexible; locked into the approach that made you successful in the first place, but which may now be hindering your growth. This is a big problem. It’s very hard for most firms to allow for change in the face of traditions that helped them in the past. But these firms need to look objectively at what’s going to help them win going forward. Some of the business models that have existed for decades at trust companies and very large asset managers are under tremendous cost pressure. Those that intelligently plan and manage costs will be the winners in the future.

Across the board, there’s also a growing appreciation that it’s not enough to do your job well. Asset and wealth management firms need to market themselves well. It’s alien to a lot of firms, but it’s becoming more accepted that your brand, your marketing and your sales efforts really matter.

What does a business and marketing consultant in wealth and asset management do? 

KH: The details vary from engagement to engagement, but in any situation, we’re going to try to do four things and I expect most consultants will try to do the same:

1. Clarify goals. What is your purpose? What do you want to accomplish? You can’t do everything. You can’t compete in every market. You’re going to need to focus in order to succeed. And, the analysis should be rigorous, data- and metrics-driven.

2. Create an action plan. Once you have your goal, what are you going to do to get there.

3. Get management support and align incentives. You need to align your capital structure and your employee incentives to support the plan. And you need to get management buy-in to make sure the action plan happens. Getting everything in sync is, frankly, the hardest part. Change almost always creates uncomfortable HR issues. No project will succeed without management’s willingness to implement disciplined evaluation of performance at every level and align incentives with new goals.

4. Create benchmarks. You need to know if you’re succeeding, which means you need to determine benchmarks in advance. Metrics need to align with the research-based expectations set at the onset of the engagement.

Consultants don’t run the companies they advise, so they can’t independently make any of this happen. A consultant’s job is to guide companies through the process. And, better consultants stay with their clients throughout the implementation phase.

What would you look for in selecting a consultant?

KH: Hire people who know your space. It’s faster and less expensive, because they don’t have to educate themselves on your clock.

And look for firms that are data driven — firms that are willing to validate their recommendations and challenge the bedrock assumptions you’ve built your business on.  It’s easy for accepted wisdom to become company gospel without ever having been really analyzed — a form of groupthink. You want to work with consultants who are willing to get their hands dirty and to check that the “facts” everyone thinks are true are actually true.

Lastly, consultants need to be blunt when they see a need for you to make hard choices. If there is an easy and painless solution to your problem you probably don’t need a consultant.

What advice would you give on how to get the most out of working with a consultant? 

KH: Don’t sugarcoat your situation. Treat your consultant like you’d treat your doctor or counselor. And be open, even if it makes you uncomfortable. Hiring a consultant to parrot back what you want to hear is not going to be helpful.

And be prepared to work. Consultants will want information, and that’s going to require you to devote resources. You should ideally be prepared to assign a project manager to work with your consultant.

From a consultant’s perspective, is there such a thing as a bad client

KH: Yes, consultants want to help firms succeed, and it’s very frustrating when they don’t.

The most common reason projects fail is that someone in the organization is unwilling to implement change. The bottom line is that consultants can’t resolve managerial discord without help and concurrence from the very top of the house.

Projects can fail for more mundane reasons. Consultants are sometimes hired simply to validate predetermined conclusions. If the consultant ends up disagreeing with this outcome, the project may be shut down.

But, in most cases, clients want to succeed. They work with consultants to prioritize change and to focus on the future.

What’s the best advice you can give in one sentence?

KH: Find out what differentiates your firm, set clear goals and make sure everyone and everything in your organization is working together to achieve that goal.

Ken, thank you.



‘Tis the Season


You know what we mean, the Starbucks holiday cup season, of course. Since its introduction 20 years ago this year, the unveiling of the now iconic Starbucks holiday cup has come to be a hotly anticipated event; fraught with speculation and often debate. A leak in mid-October of what turned out to be the design this year by a Reddit user (and presumably a Starbucks employee) had many people rebuking the poster for spoiling the surprise. Yes, all this, for a cup that will be thrown away following a brief one-time use.

And Starbucks continues the quest to own the holiday space, with the Halloween Frappuccino now marking its fourth year of existence. Add in the change of season fall and spring cups, not to mention the ever earlier appearing pumpkin spice latte (#PSL), seasonal food items, and it appears that, no matter what the time of year, it’s always a good time to visit a Starbucks. A classic example of great branding from which all companies, including financial services, could gain a few pointers in terms of being:

1. Constant – Starbucks is continuously out there exploring what they can do to reinforce and build awareness of the brand throughout every part of the customer journey through multiple touchpoints, especially important as business innovations, such as Starbucks’ very successful mobile app, reduces human interaction

2. Consistent – All efforts are consistent with the values and products that Starbucks promotes, with the goal of personalizing and localizing what is, at the end of the day, a large multinational food and beverage purveyor

3. Bold – While you always want and plan for your marketing efforts to be received positively, it’s important to resist reining back or watering down what you do from fear of negative reception. Learn from missteps and move on; who can forget the debacle over Starbucks’ alleged lack of holiday spirit when it introduced (gasp!) plain red cups for the holiday season in 2015. I think we can all safely say they won’t do that again.

4. Tangible – This is probably the most difficult area for wealth and asset management companies; your product or solution can’t be touched, held or really seen in a three-dimensional way. In this respect, your people and your knowledge may be the most tangible manifestations of what and how you deliver, so the challenge is how to market them impactfully

Are Advisors an Endangered Species?

A headline on the cover of the latest edition of BISA Magazine about bank advisors caught our eye.

Behind their question is the recent decline in the number of Financial Advisors working in banks and credit unions. The article proposes that short-term drivers for this drop may be increasing competition by wirehouses for reps and disruption from the ongoing debates about Fiduciary Rule.

Alleged longer-term drivers for the decline in advisor numbers are the upward trend in robotics and artificial intelligence (AI) and the advanced median age of bank advisors.

But according to the article, some industry experts view the prospects for advisor growth within banks optimistically, for at least three reasons:

1. Many banks have a cadre of licensed reps on their retail platforms who are eager to graduate to higher-value customers.

2. Recruiting and training in wirehouses is on the rebound, which means there’s an increasing number of well-trained reps who could migrate to banks to access the built-in bank client referral stream – a more attractive prospect for brokers that prefer to mine an existing book of business versus building their own book from scratch in a traditional brokerage model.

3. Some highly successful advisors come to banks because they’re weary of or skittish about having to manage compliance and adapt to changing technology. Better, in their view, to let the bank take care of it.

Aside from these reasons for potential growth, we also think the fear of robo-technology and AI is overblown. There is little evidence that advised clients are moving toward robo. In fact, robo-providers are quickly integrating advisors into their offering to serve clients who need that personal touch. The growth in robo seems to be a shift in how the clients already served through direct models access advice. For the near future, we believe that clients who currently have $trillions with advisors are not at risk of defecting to the robo-advisor world.

Customers tend to trust their banks, and many of them transfer that trust from lending and retail products to wealth management. Likewise, many very good advisors prefer working within a stable, trusted institution. It often makes for a good emotional fit and good chemistry. Which is why bank advisors can probably be taken off the endangered watch list, if they ever were there in the first place.

Black Box Investing 2.0

This past week, it was announced that a San Francisco-based tech firm, EquBot was launching the first ETF to use artificial intelligence (AI). EquBot is built on IBM Watson, a platform which rose to prominence from its highly publicized success as a robot contestant on Jeopardy. The ETF applies proprietary algorithms to Watson’s AI technology to build predictive financial models on 6,000 publicly traded U.S. companies. It then ranks the companies in terms of risk and return potential to create concentrated portfolios of 30-70 holdings. The goal is to beat the broad market indices without incurring additional risk.

In recent years, a number of investment firms including Sentient Technology, Numeri and Emma have employed AI in various ways to improve returns. But these pioneers, have to date, been hedge funds or private investment startups so there has been limited information on performance results and limited access to the products for retail investors. EquBot will be the first opportunity for the public to weigh the performance results of a true AI engine and be able to include it in their portfolios.

It will be interesting to see if EquBot can post consistently above market returns out of the box. It will be equally, if not more, fascinating to discover whether it can improve its performance over time as the machine continues to learn and adapt.

Material performance success by EquBot is likely to lead to a significant rise in AI managed products going forward, perhaps even creating a broad new class of investments. It may at the same time reawaken the argument around the efficiency of markets and the relative value of passive investing.

Do you suffer from (said in a whisper) jargonitis?

Let’s be honest. We’ve all fallen prey from time to time, present writer not excluded, to jargonitis (or its sister malady acronymbia). After all, who doesn’t love a good term that no one but industry insiders really understand? Adding alpha, bottom up, top down, smart beta, SMA, UMA, you name it, it all sounds impressive. At least when we’re talking to each other.

You lost me at factor-based investing

But we need to remember our audience may not find these terms quite so fascinating….or easily understood. It’s all too easy to forget that we are trying to communicate what may be very complex thoughts to individuals for whom this isn’t their daily lives. Plus, is that what people really care about when they talk to their wealth advisor? Well, yes, of course, they want to know their wealth advisor has knowledge, expertise and a defined approach, philosophy and way of managing money. But they also really want to know their advisor is listening to them, understands their concerns and goals and can help address them appropriately and successfully.

Small, simple words only?

Of course, there’s the other approach to communication which can be equally annoying; when you assume your reader knows nothing and develop content that carries the implied “don’t worry about these very complex and sophisticated concepts, we know you won’t understand them and we’ll take care of everything for you.” No one wants to feel patronized and talk down to, especially intelligent individuals and families that have been extremely successful in their chosen fields.

Balancing act

It can be a challenge when communicating with prospects and clients. Striking a tone somewhere between “we’re all rocket scientists” and “we all know nothing” can be an elusive endeavor. A certain amount of educative content is helpful and value-added, a full-blown lecture, not so much.

Differentiation and Survival


We’re often called on by our investment advisory clients to help them select the TAMP best suited to improve their operational efficiency and grow their businesses. These search and due diligence exercises invariably included two names, FolioDynamix and Envestnet. For firms primarily focused on model management in an open architecture format, these two have been the dominant players for the last several years and have each grown to offer among the most comprehensive and advisor friendly service packages.

The challenge for the market and for these players was not their adequacy as capable platforms. Each had minor advantages and disadvantages relative to the other, but overall either were adequate in serving the needs of their target markets. Rather, the challenge was their inability to clearly differentiate themselves from each other or to effectively increase their penetration of the other’s core market. While Envestnet had greater scale by some measures, there was no clear leader in technology, service breadth or pricing.

Now the competitive battle is over. Envestnet has purchased FolioDynamix, marking a significant consolidation in the TAMP marketplace. TAMP clients and prospects are not likely to be negatively impacted. FolioDynamix clients will be able to avail themselves of the added services of Envestnet, including potentially easier transition for brokers to fee-based advisors. Envestnet clients should see little change. New TAMP clients will have one higher quality provider rather than two similar ones from which to select. Differentiation is a key to survival. Without a clear and distinctive value proposition, scale will typically win.