Build Your Own

Last month Fidelity announced the opening of its Wealthscape Integration Xchange. The Xchange is an open market “digital store” designed to make it easy for Fidelity’s clearing and custody clients to assemble the best technology solutions for their practices.

The Xchange leverages Fidelity’s integrations with over 100 third-party technology vendors. These include such well-known providers as Black Diamond, Orion, Envestnet Tamarac, Junxure, Redtail and SS&C as well as a broad selection of supporting technologies. Along with access to these platforms, Fidelity offers an array of capabilities to facilitate integration and data communication across solutions.

The Fidelity Xchange is the latest evidence of leading custodians’ acceptance of the value of an open architecture approach to advisor technology. Schwab too has recently come to recognize the limitations of its Portfolio Connect platform and has promised to double its current technology integration by the end of next year. First on the block, TD Ameritrade made the move to open architecture a few years ago with its VEO platform.

We expect that the move to open architecture technology approaches in general will continue for several reasons:

1. Advisor technologies are being developed at a rapid rate making it difficult for any single developer to keep pace with the state-of-the-art solutions across all platform functions.

2. As advisors use an expanding array of technologies, vendors are being forced to facilitate integrations to meet market demand.

3. Advisor technologies are expanding beyond portfolio management to CRM, planning, and digital client communications, again putting strain on traditional solutions to provide the fullest range of leading-edge available functionality.

You’re Four Times Better than They May Think

With competition heating up, wealth advisors, more than ever, are challenged to justify their fees. When times are good, clients may attribute it to market momentum, not the advice they’re getting. When markets turn, an advisor’s fee is more visible and may be questioned, particularly if there is a loss.

Recognizing this as a persistent issue, Russell Investments (Russell) went about quantifying the value of advice clients get from their wealth advisors. The results are heartening: Russell calculated in 2017 that the value of an advisor is 4.08% – more than four times what might be considered an attractive advisory fee.* Here’s the breakdown:

These numbers confirm what most advisors already know: their value exceeds the price their clients pay for it and goes far beyond managing investments. The key is communicating this value to clients. That’s where Optima Group can help. We specialize in defining an organization’s value and promoting it. Let’s talk about what we can do for you. Call us at 203-255-1066.

*  Source: Why Advisors Have Never Been So Valuable: 2017 Value of an Advisor Study, © Russell Investments Group, LLC 2017

What’s in a Name

Recently, there has been an interesting uptick in the return of nostalgia brands. This was brought home by the announcement in late August of the return of the iconic FAO Schwarz toy store brand.

FAO Schwarz, which closed in 2015 and was owned by the now defunct Toys “R” Us, was acquired by ThreeSixtyGroup Inc., in 2016. The firm has big plans to revive the brand, beginning with a bricks and mortars presence in Rockefeller Center which is being designed to be “as much about the experience as the buying” and is set to include “product demonstrators, magicians and men and women playing various costumed roles, including toy soldiers.” Further, the costumes for the toy soldiers have been designed by one of the millennial celebs of the moment, Gigi Hadid, a super model, designer and general lifestyle influencer.

Everything old is new again?

Several other retail brands of the past appear to have captured the hearts of consumers. Adidas has hopped on the athleisure wear bandwagon and has also been endorsed by a number of celebrities of all ages. Ditto, the Birkenstock, a brand formerly worn by the socially, not fashion, conscious. This list goes on, Tommy Hilfiger, Polaroid and almost every comic book character you knew as a child. And who can forget the public mourning, followed by jubilant celebration, over the imminent demise and subsequent rescue of Hostess Twinkies, when Hostess Brand went under?

Every brand needs a face

Much of the success of recent brand revitalization has been through an association with a successful spokesperson, celebrity or retail brand; the FAO Schwarz brand is a prime example. Celebrity collaborations are becoming a commonplace to draw attention and potentially a new audience to a brand. Gigi Hadid, for example, really gets around; she has also collaborated with Tommy Hilfiger to revitalize that brand and with Stuart Weitzman, a maker of classic high-end women’s shoes, to bring the brand to a new, younger audience.

When EF Hutton talks (again) will everyone listen?

Financial services have been less interested in reviving old brands, which may be because most brands have disappeared under less than positive circumstances. But there is an example in the revival of the once venerable EF Hutton brand, which disappeared in the 1990s through various mergers after the firm suffered a number of financial and regulatory issues. Fast forward to the 2000s, and the brand, then owned by Citigroup, was sold during the financial crisis to a group that includes a grandson of EF Hutton.

The new EF Hutton was formally relaunched in 2016 and offers online discount trading, a digital advisor platform and research on cryptocurrency, as well as being the sponsor of a prospective new cryptocurrency exchange known as ACEx. No information is available on how the firm is doing, so it remains to be seen whether the nostalgia for brands of the past extends to the less tangible world of financial services. This leads one to ponder the question of who would be an appropriate celebrity spokesperson, influencer or collaborator for reviving an old financial services brand. We’re guessing Warren Buffett is otherwise occupied, unfortunately….

More Arrows in the Quiver

Recent reports suggest that traditional trading/brokerage firms like Goldman Sachs and Morgan Stanley, having been forced into becoming bank holding companies by the financial crisis, are rapidly increasing their lending businesses to HNW and UHNW clientele.

The chart below shows the rapid build in Morgan Stanley’s private bank loan book since 2012. Goldman’s book also more than quadrupled in the same period.

Although not without risk, lending to wealthy clients can be a profitable business on its own. But it has added benefits for bank wealth management units.

•  Access to specialized loans, along with a wider array of banking products, helps distinguish these units from standalone RIAs whose product set is largely confined to planning and investments.

•  Loans, particularly those collateralized by distinctive assets like art or collectibles, are sticky and tend to more strongly tie borrowers to the institution.

•  The presence of lending makes it more difficult for wealth managers/brokers to break away from their employers in favor of platforms that do not include banking products.

Given these benefits, we expect the pace of HNW lending and other specialized products and services to continue to grow as financial institutions search for ways to remain competitive in the HNW and UHNW space and realize more profit from their expanding wealth relationships.



Six Ways to Help Clients Behave Themselves

In the wake of volatile markets this week, we thought it useful to revisit the concept of behavioral investing. No matter how much advisors stress the importance of taking prudent risk in the pursuit of long-term gain through rational asset allocation, many people let their emotions rule in the face of short-term turmoil.

In a recent piece, Cadaret, Grant in association with InvestmentNews deconstructed behavioral investing into six elements that are worth keeping in mind during uncertain times.* Understanding them can help advisors better help their clients when they may need it most.

1. Loss Aversion. Research shows that to an individual, losing feels more than twice as bad as winning feels good. The average investor would need the prospect of realizing $225 for the same level of risk of losing $100. The implication is that however rational and well-meaning an investor may be when filling out a risk profile, their fear of loss may override. Just as in good times an investor may be irrational in the pursuit of gain, so he or she may impulsively pull back at exactly the wrong time.

2. Anchoring. Anyone trying to sell a house in a buyer’s market may have experienced anchoring. It’s the tendency to focus on one piece of information – in this case the property’s purchase price – in evaluating a reasonable selling price. Often investors “anchor” on a fixed price of a security – what they paid for it or what they somehow think it’s worth now – before parting with it. This emotional attachment can get in the way of rational action, or inaction.

3. Familiarity Bias. Part of our survival instinct is to evaluate new situations through the lens of our experiences. Our minds tend to seek out similarities to past events to come up with a conclusion or assessment of a current situation, no matter how new and unrelated it may be to what we’ve experienced in the past. So, familiarity with domestic equities or mature industries may lead an investor to overweight them in a portfolio to the exclusion of less familiar asset classes or sectors, and possibly to the detriment of overall investment performance or risk management.

4. Mental Accounting. When it comes to money, we tend to compartmentalize. We may try to save a couple of dollars on a weekday lunch but think nothing of spending twenty times that while on vacation. Through mental accounting, we tend to view the same dollar amount differently based on what we’ve mentally earmarked it for. Retirement savings, for example, may be a mental compartment in which a dollar is more sacrosanct than in a self-directed trading account. Understanding these compartments, and making sure each has an appropriate share of total worth, can help a client buy, spend, save and invest more wisely.

5. Gambler’s Fallacy. This behavior tends to view a coincidental series of events as predictive. If a coin toss comes up heads six times in a row, it doesn’t mean it’s less likely to be heads than tails on the seventh. But the fallacy discounts the logic because we humans tend to see patterns in random events. So, if a stock gets repeatedly hammered, the flawed thinking says it’s got nowhere to go but up.

6. Herd Mentality. Market bubbles (and troughs) are a telling result of herd mentality. What starts as reasonable optimism sometimes takes on a life of its own as the herd adds more and more likeminded overenthusiastic investors to its ranks. Herds can also head in the opposite direction when reasoned pessimism turns to outright panic. Keeping excessive enthusiasm or dread in check can be the most valuable service an advisor provides to a client. In a recent study, Vanguard pegged the value of being an “emotional circuit-breaker” at as much as 150 basis points to a client’s portfolio over time.**

*  Behavioral finance: Six principles that fuel your clients’ fears, Cadaret, Grant in partnership with InvestmentNews Research

** Putting a value on your value: Quantifying Vanguard Advisor’s Alpha®, Vanguard Research, September 2016

Peace, Love and….Coffee?

While coffee lovers around the world await the eagerly anticipated Starbucks holiday cups, the company has thrown a brand reinforcing tidbit our way in the form of its newest reusable cup.

Sold at the register for $2.00, these cups are “grande” size and can be used when ordering drinks. Made of plastic, they are designed for multiple use and can be recycled. To date, they have all been primarily white, mimicking a regular Starbucks paper cup. From time to time, they have had a thematic or purely artistic design, but always retained the large central Starbucks logo as the visual focal point.

Different and yet instantly recognizable

The back of the cup does have the Starbucks name and the different boxes for your coffee drink order. The front of the new cup is different, however, in a few ways.

•  First, the cup background isn’t white, but black

•  Rather than the large logo in the center, the focus is on three large words in white stacked vertically: Peace, Love, Coffee

•  Finally, while the logo is there, it is very small and at the bottom below the three much larger words

Despite this relative lack of branding, most viewers instantly identified it as a Starbucks creation. Even when the logo itself was covered, a random, non-scientific sample universe still guessed that it was a Starbuck’s product. Why?

1. The brand style is so strong and pervasive that with or without a logo, you know it’s Starbucks

2. Starbucks is becoming the “kleenex” or “xerox” of coffee – we are on our way to a point where people don’t go get a “coffee” anymore, they go get a “Starbucks”

Winning brands are recognizable with or without a name or logo through consistent and stringent application of brand essence throughout every product or service they offer. Optima Group helps wealth and asset management firms become brand leaders in the industry.

It’s Time to Make the Donuts… Go Away

Big news, Dunkin’ dropped the Donuts from its name. If you really like donuts, this is huge. If you are like us, and follow branding trends, this is really huge. Some of you are skeptical, we get it. What’s the big deal, let’s face it, the whole rebrand thing didn’t work out so well for GAP. This is different.

For one thing, in a health-conscious competitive marketplace, doughnuts are not up there on the list of things that are good for you. By eliminating the word donuts from its name consumers could grow to believe Dunkin’ is an option for healthier foods. Ditching the donuts might help Dunkin’ in its ongoing coffee war with Starbucks, which dare we say, also sells unhealthy food products, but doesn’t allude to this in its name.

Paying attention

This may also be a case of a brand listening to its consumer base and adjusting accordingly. Think of it this way: you’re rushing out the door on a Saturday morning trying to get two kids onto two different fields for whatever sport they are playing this season and as everyone is buckling up you say, “We’re going to stop at Dunkin’ on the way.” Your teenager, your mom, your significant other…everyone knows them as “Dunkin’” (unless you’re an old-line New Englander) and now they have acknowledged it. Brands evolve and must align with what their audiences make them.

The company made the decision to become a “beverage-led, on-the-go brand.” As we sit here and watch the stock go up (for this moment in time anyway) it may appear it was the right decision. Time will tell, but we think it’s refreshing when a brand refreshes. They can take the donuts out of the name as long as they don’t take them out of the store.

It’s a Global Revolut(ion)

The newest entrant to the U.S. digital financial services wars is coming to your app stores, although the exact timing is unclear since the launch has been delayed multiple times due to technical obstacles.

Revolut, a digital financial services company is set to take on digital and physical providers of financial services in the U.S. Founded in 2015 by Nikolay Storonsky, an ex-Lehman and Credit Suisse trader, and Vlad Yatsenko, a former Credit Suisse and Deutsche Bank developer, its goal is “modest” – to become the Amazon of banking. Revolut started out with a prepaid currency card. However, in contrast to many digital providers that concentrate on doing one thing really well, Revolut believes that its success lies in offering multiple products and services to multiple markets. Today, it offers a range of both personal and business financial services (most digital offerings have focused on one segment or the other) and is set to launch in the U.S.

Personal services include basic, premium and metal bank accounts, with an escalating level of perks, and an array of “products,” such as global money transfers, a savings tool, a budgeting tool, a Perks offering (currently in Beta testing) and cryptocurrency exchange. On the business side, it offers a corresponding set of packages called Start, Standard and Professional. The basic tier is free on the personal side and with a low monthly fee on the business side, while the premium tiers each have a corresponding monthly fee.

This formula seems to be working. Its valuation has grown from $350 million to $1.7 billion in the past year, and while exact financials are not available, Revolut announced in 2017 that it had reached break even in terms of profit. Since then the customer base has grown by an estimated 1 million, according to an article in Forbes.

There are other providers that also offer a wide array of products and services to their markets, such as Moneysupermarket in the U.K. While Moneysupermarket offers an extensive number of products and providers per category, Revolut aims to differentiate itself by “providing the best product in every category.”

Whether Revolut lives up to its name and become a significant market disruptor in the U.S. remains to be seen. What is clear is that both traditional financial services and digital providers face increasing competition across the board from each other and new entrants to the industry, and all must continue to innovate and pay close attention to their customers’ needs and preferences in order to survive.

The Best of Both Worlds

This past summer the Journal of Financial Planning released findings from The 2018 Trends in Investing Survey, which represents the views of largely IAR/RIA, fee-based or hybrid financial advisors.

Not surprisingly, current usage of ETFs by advisors was high (at 87%) and expected to continue to rise in upcoming years. However, the belief in passive management was not unreserved. The table below shows that in 2018 just 22% of advisors believed that 100% passive portfolios produced the best overall investment performance even after account management costs. (Of course, the belief in fully active portfolios was even weaker at just 12%)

Instead, advisors overwhelmingly favored a blend of active and passive management. This is consistent with the growing trend toward core-satellite portfolios that use low cost passive vehicles for more efficient asset classes and high alpha products for asset classes where active management can add value.

We expect core-satellite portfolios to continue to grow in popularity among RIAs and advisors using model management approaches. We also expect managed portfolios from leading asset managers to continue to add active/passive options to their product line ups.

Interested in the full report? Click here.

Source: 2018 Trends in Investing Survey, Financial Planning Association (FPA) | Journal of Financial Planning | FPA Research and Practice Institute™

The Words You Choose Matter

Frank Luntz, a political consultant, pollster to the Republican party and skilled communicator, understands the value and influence a name or description can have on audiences. He knows that two phrases meaning the same thing can result in two very different perceptions and skew research and polling results accordingly.

As an example, the term “death tax” is used versus “estate tax” to help drum up opposition to inheritance taxes. Similarly, “tax relief” may connote an easing of an unfair burden whereas “tax cut” might evoke a gift to the wealthy.

This can be extended to financial services. The Alliance for Lifetime Income (Alliance), a confederation of financial services firms (mostly insurance companies) seeks to elevate the benefits of having a protected income in retirement.

It’s how you ask the question

When people are asked if they would favor a financial solution that would guarantee them an income for life with the opportunity to participate in market gains, the response is overwhelmingly favorable. But what the Alliance is referring to is an annuity, which is not always viewed favorably by advisors.

Not surprisingly, then, the Alliance’s June 14 press release launching the initiative mentions “protected lifetime income” or “protected monthly income” more than twice as often as “annuity” or “annuities,” and even then, these latter terms are usually de-emphasized by being grouped with other terms like “pensions” and “comprehensive retirement plan.”

Our aim is not to make a judgment call on annuities or other financial products, but to illustrate the significance of language, especially as it applies to topics that are complicated and/or controversial.