Asset Management Fee Compression: The Next Shoe

It was recently reported that assets in Blackrock’s Style Advantage, a factor based hedge fund, nearly doubled in the first half of 2017 to reach an impressive $1.6 billion. The fund’s performance was reasonably strong but the boost in interest is likely to have been driven also by pricing. With a 0.95% investment management charge and no performance fee, Style Advantage is one of the cheapest hedge funds available.

The success of Style Advantage is the latest indication of a broader trend among advisors to opt for lower cost investment products generally. Saving on cheaper funds allows advisors to reduce some of the pressure on their “advisor level” fees while at the same time enhancing their value by increasing their role in asset allocation and portfolio design. The availability of tech platforms offering sophisticated modeling and automatic rebalancing encourages this trend by making advisors’ “in house” production process more efficient and affordable.

The trend toward cheaper product has its winners and losers. Among investment manufacturers, the winners in traditional investments will be firms that produce and distribute ETFs and index funds at scale. In alternatives, it is likely that low cost, liquid product manufacturers will meet with increasing success if the experience of Style Advantage is any indicator. Laggards are, and will continue to be, underperforming actively managed mutual funds and SMA managers, particularly those with above average fees. Hedge funds that stick to traditional pricing but fail to shoot the lights out are also likely to suffer, especially as the availability of lower cost, more liquid options grows.

Regardless of who wins on the investment management side, on the winning side for advisors may be those who can stabilize their fees while not sacrificing the quality of their service.

The Answer is Blowing in the Wind

At Optima Group, we often look outside financial services for inspiration in how consumers are served best. While companies such as Amazon or Apple are often cited as classic examples of the move from disruptor to market leader, another telling example comes from an unlikely source, the world of vacuum cleaners. More specifically, the work of James Dyson, the English inventor who quite literally reengineered the vacuuming experience.

Long, long ago….

As the story goes, Dyson’s interest in a better vacuum cleaner stemmed from his own experience. In 1978, he was vacuuming his house and was dissatisfied with the fact that the cleaner constantly lost suction because the vacuum cleaner bag frequently became clogged. At that time, the design and functionality of electrically powered vacuum cleaners had remained virtually unchanged since their introduction in the early 1900s.

From the ground up

This is where the story gets interesting. Rather than trying to improve upon the existing type of vacuum cleaner, Dyson rethought the whole process with an eye to solving the problem he encountered. The result, after thousands of prototypes, was a completely different cyclone-based bagless vacuum that used centrifugal force. Although the Dyson cleaner was priced significantly higher than most other standard vacuums, its market share, particularly in its UK home base, has grown significantly. Dyson has since expanded its product line to tackle other areas (electric fans and heaters, hairdryers, lighting and hand dryers) and Dyson himself is a billionaire.

The mind of the consumer

So why has Dyson been so successful? Two reasons, both of which are equally important:

1. The company tackles everything from the viewpoint of the consumer not from its own view of what needs improving. In the case of the vacuum cleaner, it was the suction power. For hair dryers, it’s controlling the heat, noise and the weight (at $400, it costs significantly more than the average hand held professional grade hair dryer, but pros and non-pros alike are buying it).

2. It ignores the status quo. Just because that’s how things have always been done is not a reason to continue doing them that way. In an Edison-like process, many different iterations are tested before being satisfied that the solution really solves the problem.

The important takeaway; don’t be afraid to try something different and be a market changer. But make sure it’s what the consumer wants.

Red Sky in the Morning

PriceMetrix recently released the firm’s annual report on key growth, pricing and market trends in the wealth management industry. What distinguishes the report is that it is based on a large sample of actual accounts. (The survey sample includes data drawn from 24 North American wealth management firms employing a total of 60,000 financial advisors, who serve 10 million investors totaling over $5 trillion in AUM.)

The report found that median assets per advisor have risen over the past four years. At the same time, however, median revenues have declined. The pressure on revenues is reflected in declining average fees as is shown in the table below. Transaction-based accounts have also suffered. The report indicates a drop in overall transactional revenue as a percentage of assets from 0.54% in 2013 to a low of 0.44% in 2016.

Source: PriceMetrix

Also notable in the report was a decline in the rate of new client growth. This is measured by the number of new household relationships added each year by advisors. This figure has dropped steadily from 8.3 in 2013 to a new record low of just 7.5 last year. Advisors may be facing challenges in appealing to younger clients. The share of client AUM accounted for by post-Baby Boomer generations has not grown materially in over four years.

Source: PriceMetrix

The wealth management business has been buoyed by strong markets in recent years which have lifted most boats. But data suggests looming systemic challenges to growth and profitability that firms would be well advised to address before markets turn adverse again.


The Asset Management Industry is Shrinking

So announces this week’s Wealth The headline refers to a new report from Boston Consulting Group that reveals both revenues and profits of the asset management industry have declined for the first year since the financial crisis.

It turns out the culprit is passive investing. Active core investing, as high as 60% in 2003, now accounts for only 35% of core investments and headed for less than 30% by 2021.1 In 2016, net inflows to passive topped $100 billion while net outflows from active exceeded $150 billion.2 This broad demand shift to commodified, low cost products is increasing pressure on fee revenues for both active managers losing market share and passive managers lacking scale economies.

But on the wealth (vs. asset) management end of the industry, the profitability outlook does not seem so dire. Most studies suggest that true advisory fees that cover planning, portfolio construction and selection of underlying investments have remained relatively stable at least since the Crash. Yes, there are the pernicious and cheap robo-investors, invading the industry like so many Asian carp trying to get into the Great Lakes. But their market penetration has remained relatively modest and the limitations of their advisory front ends align them more with the asset than wealth management providers.

So if you are a planning driven, true wealth manager, any rumors of your profession’s death are, in our opinion, exaggerated and very premature. As far as we know, no one’s yet come up with a machine that’s equal parts money manager, industry expert, psychiatrist, confessor and confidante. The key is to position yourself and your firm as such and not as a product vendor.


1Global Asset Management 2017: The Innovator’s Advantage, Boston Consulting Group, 2017

2 The Wall Street Journal, October 17, 2016


Living in an “Experience” World

The spending habits of the U.S. consumer is changing as millennials enter the work force and their wallets grow. Purchases and gifting of experiences versus “things” is growing rapidly. Research by Eventbrite of millennials (defined by them as Americans born between 1980 to 1996, although definitions vary depending on the source) revealed that 78% of millennials would rather spend money on an experience or event versus a material good. And 72% said they would prefer to increase spending on experiences versus tangible items in the coming year.

It’s not just millennials either

Research by StubHub bears this out, and not just for millennials. The company surveyed over 2,000 people in key U.S. and global markets and respondents universally choose a live event as one of the top three best gifts to give and receive. We are also more likely to rank our first concert among our top memories (along with first job and first kiss, arguably also experience-based).

Retailers have taken note

In an age when Amazon is there to fulfill almost one’s every consumer wish, retailers are finding ways to add the element of experience to shopping. Apple and Microsoft, not surprisingly, have been pioneers at creating an interactive in-store experience, with demonstrations, products to try out and classes to help users take advantage of all their devices have to offer. Sephora will let you try out makeup, hair and perfume products and even give you a makeover. Kitchen goods companies such as Sur La Table and Williams-Sonoma have cooking classes and demonstrations in store. And Sur La Table even offers Sur La Table At Home, where a chef will prepare a personalized meal for you and your friends at home.

A “better” customer journey

So, what does this mean for financial institutions? In a world of commoditization, those that can offer an enhanced experience that better aligns with customer preferences will be the winners. Depending, however, on a physical bricks and mortar experience alone, even at the highest level of wealth, will no longer suffice. Leveraging the ability to recognize and proactively respond to the most nuanced of customer needs and interests, financial and non-financial, regardless of how an organization is interacting with a client can help your organization stand out in a crowded marketplace. And maybe even provide that memorable experience they’ll never forget and always associate with you.

Allocation and the Generational Divide

U.S. Trust conducts an annual survey of high and ultra-high-net-worth Americans, targeting individuals with at least $3 million in investable assets. This year’s survey includes some interesting findings with regard to generational differences in portfolio allocations.

The chart below shows the distribution of investments across broad asset classes for each generation. Notable is a dramatic decline in the allotment to stocks among the younger generations coupled with a similarly steep increase in commitments to cash and “other” (private equity, hedge funds, tangible assets) investments. Survey data also showed a significantly higher percentage of the younger generations, Millennials and GenXers, either interested in, or owning, tangible assets.

Driving the generational divide may be a growing perception among the young that the classic buy and hold equity strategy of their parents has become outdated and suboptimal. For generations whose formative years included the Great Recession and its aftermath, the risk/return promise of traditional stocks may not be so obvious as it was to their parents.

Instead, Millennials and GenXers appear to see greater potential in selected private equity or venture cap opportunities or in other tangible assets like investment real estate or timber – thus the high cash balance kept in reserve for when these opportunities arise. These investments are perceived as more transparent, understandable, and potentially more rewarding than buying into a stock market where alpha is rarely found and price swings are unpredictable and potentially catastrophic.

This generational shift in the assessment of relative risk and return across investments is worthy of attention by wealth managers. Understanding the psychology of younger investors can be critical in both product selection and positioning.



Source: U.S. Trust Insights on Wealth and Worth

When Research Lies

The Liar’s Box is the repository of market research findings that you know are false even though respondents declare them to be true. We recall a vivid example: In a market survey, avid skiers dismissed the importance of graphics on their skis. Research reported that the desirability of skis was all about the shape, size, material and performance. How they looked? A trifle.

Not true, according to the manufacturers and retailers. Graphics are critical to the buying decision, which is why most manufacturers continue to outdo themselves putting out the hottest-looking skis on the market. Respondents’ feedback on graphics has been relegated to the Liar’s Box.

Recently, Forbes reported a similar example from the wealth management sector. More than a thousand institutional investors were asked to rank what’s most important in selecting an asset manager. As you might expect, performance ruled.1

But when the same respondents were asked if they would recommend certain asset managers and why, things like “provides proactive advice” and “understands my unique needs” bubbled to the top. Performance didn’t land solidly in the Liar’s Box, but formal research had given it outsized weight. Whether skis or asset management, it seems respondents often respond the way they think they should, which can often mask their true feelings.

Now comes a book from former Google data scientist Seth Stephens-Davidowitz with the stark if ungainly title Everybody Lies: Big Data, New Data, and What the Internet Can Tell Us About Who We Really Are. The author maintains that the purest form of honesty resides in what we search for on the Internet and where we visit. There’s no filter – no survey, no questionnaire, no moderator clouding our true feelings and intentions. The holy grail of market research is to capture that kind of candor through scientifically constructed surveys. We’re not holding our breath, but neither would we be surprised if big data mining and artificial intelligence somehow got us a bit closer to this goal.

For wealth advisors, there’s a lesson in the Liar’s Box. The first thing a prospect may ask might be about investment performance, but they’ll probably make their decision on chemistry. Cultivating the intangibles of your practice could be more important than the investments or manager selection. In fact, you may be weighing those intangibles more than you think in choosing the managers you’re working with.

1Source: Forbes CommunityVoice™, May 26, 2017

P2P – It’s not Just for Millennials Anymore

Anyone with a teenager or young adult in their family has probably at least heard of Venmo (a PayPal company), a person to person/peer to peer (P2P) payment network, where all you need is one simple piece of information such as a person’s email or cell phone number to initiate a payment. Venmo is the acknowledged leader in P2P transfers in the U.S. and has experienced rapid growth, particularly in the past few years. In Q4 2016, Venmo facilitated $2.6 billion in payments, 126% more than in Q4 2015.

Banks (and Apple) Enter the Fray

Recent estimates of the potential market for P2P payments exceed $1 Trillion causing competition to heat up for Venmo. Just this month, both Apple and a consortium of banks each announced the launch of their own P2P capabilities. The consortium includes the largest banks in the country, including Bank of America, Citi, Wells Fargo and JP Morgan Chase, as well as partnerships with MasterCard and Visa. Their offering, Zelle, has been six years in the making. Initially, Zelle will be integrated within the mobile banking apps of participating financial institutions, although that could conceivably change over time. It’s in the banks’ interests, though, to keep it as part of its overall consumer offering. This adds to the value and convenience banks can bring to its customers. In addition, for potential users outside of the millennials, there is comfort in association with established bank brands. To some extent, the same could be said of Apple, which stated that its P2P function (Pay Cash) would be integrated into iMessage in iOS 11, putting it head to head with Venmo, which already leverages iMessage for its functionality.

Cash May No Longer Be King

This may be the next evolution in banking. The introduction of ATMs in the 1970s revolutionized how people bank and how branches are used, although interestingly, the reports of the death of the bank branch have been continually “greatly exaggerated.” But with the rise of P2P and the digitization of financial transactions, it is possible that we could see a decline in ATMs and a move to a cashless world. So the next time you’re out with your friends and one of them forgets his or her wallet, show them you’re on top of financial trends and tell them to just Venmo/Zelle/Pay Cash you.

Ways to Reach Your Customers May Be Growing

P2P networks may also represent the next phase in selling financial services products to consumers, similar to the way ATMs are used. If consumers have to go through the sales message in order to get to the P2P function, just as ATMs display a sales message before you login, this represents a growing, captive audience.

Artificial Intelligence and What Wealthy Clients “Really” Want

This week Cetera Financial Group, one of the country’s largest independent broker-dealers, announced a pilot program for a new client profiling tool called Decipher. In the announcement, Decipher was described as a “unique, interactive technology that transforms the client discovery process, providing enhanced insights into client needs and concerns.”

Decipher works by combining facial recognition with artificial intelligence. Clients log in at a computer with a camera, answer a series of questions and view preset situational videos. The Decipher program maps clients’ reactions against a database of facial expressions signifying emotions. It then provides a readout into client emotions and behavior patterns regarding financial goals, decisions and concerns.

The use of biometrics, including facial recognition, has become increasingly common among financial institutions. But applications have largely been confined to relatively simple functions like managing account access and making sure account information is secure from unwanted intrusion. Decipher dramatically expands the role of these technologies, apparently using them to determine how clients “really” feel about their financial goals and how much risk they can tolerate.

The obvious concern with Decipher is whether the results can be trusted to be accurate and how accuracy would ultimately be measured. A scenario, for example, could be envisioned where a client’s verbal characterization of their risk level is very different from what the Decipher algorithm says it is. In such instances, does the advisor side with the man or the machine?

Cetera claims that “the new Decipher offering supports the DOL Fiduciary Rule’s key objectives and Cetera’s Best Interest Advice Model.” Consider again the scenario where the client’s self-perception differs from Decipher’s assessment. In such a case, would the advisor be in violation of the DOL Fiduciary Rule by listening to what the client says about themselves rather than Decipher? And on what grounds would this decision be defended?

It will be interesting to see how Decipher is received and used in the field and to what degree investors accept the judgment of a machine particularly when it contradicts their own “conscious” beliefs about themselves.

Up the Down Learning Curve











“If you don’t read past this first paragraph, remember just two things: You almost never move up a learning curve, only down. And the steeper the curve, the easier the learning.”      –Computerworld Magazine

Thank you, Computerworld, for clarifying what a learning curve is all about. Too many times, too many people get it wrong.

The classic learning curve, also known as the experience curve, is defined by Merriam-Webster as follows:A curve plotting performance against practice; especially: one graphing decline in unit costs with cumulative output

1. The course of progress made in learning something

2. The term was first applied in manufacturing to measure the progressively shrinking cost to units of output as the manufacturing process becomes more finely tuned.

The learning curve goes from the top left of a graph to the lower right and demonstrates how quickly unit costs can be reduced. The steeper the curve, the faster production costs can be lowered, at least initially (we learn more quickly at first, then the rate of learning diminishes). The idea is to get down the learning curve quickly, not to climb it.

But you’d hardly know it from how it’s often used.

Exhibit A: A well-known regional securities firm published a guide titled Helping Investors Climb the E-Learning Curve.

Exhibit B: From a highly visible wealth manager: “No matter how much you study and analyze, you cannot understand the market until you have money at risk. There are no fast or easy ways to get around the learning curve.”

Exhibit C: From the vaunted Harvard Business Review, in an article that coins the “sales learning curve”: “A large sales staff hinders more than it helps a company climb the [learning] curve.”

Are we splitting hairs? Not really. When it comes to wooing new investors, wealth management firms and advisors want to convey that they’re already well informed or quick studies, or both. They need to demonstrate that they’re well down the learning curve not good at climbing it. And in a highly regulated industry where every word and action is subject to scrutiny, managers can’t afford to err.