Fees Hold Steady

Pricemetrix, a McKinsey company, recently released its 9th Annual The state of North American retail wealth management report. The findings suggest some important trends related to fee levels and revenue generation among advisors in the latter half of the decade.

First, the longer-term slow decline in advisory fees appears to have bottomed out. As the table below shows, new account fees have stabilized at close to one percent for the last three years. Supporting this fee trend is an increase in the breadth and depth of client relationships as advisors have sought to provide more value to their larger client relationships.

The stabilization in fee levels also occurred during the later years of an extended bull market and subsequent robust investment performance, resulting in less focus on the impact of fees on returns. It remains to be seen whether investors’ views on fee levels change significantly given the expected lower return environment. 

The Pricemetrix study also shows the dramatic rise in advisors’ dependence on fee income as their primary source of revenue. In 2015, fee revenues accounted for just under half of advisors’ gross production. By 2019, this share rose to nearly 70%. If there is a material decline in AUM stemming from the pandemic’s effects on the economy and the markets it will have an immediate and significant negative impact on advisors’ income. This may lead them to be more aggressive in searching for new clients as well as retaining existing clients, which could lead to discounting of fees. However, the increase in fee-based revenue as a percentage of overall production means the impact of that strategy would be quite severe. 

As we monitor the widespread impact of the pandemic and its aftermath on the economy overall and the wealth management industry specifically, we continue to keep a close eye on longer-term trends in fee levels.  

More Inroads for Private Equity

In recent years, the use of private equity (PE) as part of an asset allocation strategy has increased substantially. Investors have come to recognize the advantages of this class of alternatives both as a source of added returns and as a portfolio diversifier. The opportunity set in PE is also growing while the relative number of public company investments is declining.

Due to the complexity, cost and illiquidity of most PE investments, those able to benefit from the asset class to date have largely been institutions and UHNW individuals, who are typically considered accredited or qualified investors. However, this may be about to change.

This week the U.S. Department of Labor issued an Information Letter under ERISA concerning private equity investments as a component of a professionally managed asset allocation fund offered as an investment option for participants in defined contribution plans. The Letter concluded that: “a plan fiduciary would not, in the view of the Department, violate the fiduciary’s duties under section 403 and 404 of ERISA solely because the fiduciary offers a professionally managed asset allocation fund with a private equity component as a designated investment alternative for an ERISA covered individual account plan in the manner described in this letter.”

In effect, the DOL put its stamp of approval on PE investments in DC plans when they are part of an asset allocation fund. This is a significant development in potentially enhancing access to more sophisticated investment options for plan participants while expanding the market for PE firms and firms that package and distribute PE-based solutions.

The acceptance of PE in the DC market will depend in part on whether portfolios are constructed to provide appropriate risk management for investors and, longer-term, how PE enhanced portfolios perform. We continue to monitor the market in the DC space going forward, as well as the impact on target date portfolio construction and availability in the 401k marketplace. 

A Message from Optima Group

All of us at Optima Group have been moved and saddened watching the tragic news about George Floyd, Breonna Taylor and Ahmaud Arbery. While much has been written about these killings and the continuation of the racial injustice and inequality that exists in our country, change takes action. Here are some things we can all do to promote positive change.If you or a friend is an educator, buy books that feature people of color as protagonists and heroes. A few good lists are 
1. NPRGrassROOTS Community FoundationMahogany Books, and Today’s Parent.
2. Watch and share this video of Neil deGrasse Tyson speaking about his experience as a black student telling people that he wanted to be a scientist and astrophysicist.
3. Work with your local police departments and town government to ensure that body cameras are available (and turned on) and promote high-quality police de-escalation training.
4. Promote the hiring of black educators where black children are being taught. If you want to know more about why and how this makes a difference for black children, check out this episode of Malcolm Gladwell’s podcast.
5. Support the ACLUNAACPSouthern Poverty Law CenterUnited Negro College FundBlack Youth Project 100Color of Change, the Equal Justice Initiative or an organization of your choice that focuses on racial equality and justice. 
6. Support black businesses. You can find them at WeBuyBlackThe Black Wallet, and Official Black Wall Street.

Together we must transform the United States into a country where all people are treated with dignity and respect. A nation where no one will have to look over their shoulder and fear for their lives because of the color of their skin.  

RIA UX design before and after COVID-19

There is currently a plethora of information and opinions about how COVID-19 has and will continue to change the way we all do business. Technology is often at the forefront of these decisions.

Consider your local pizza restaurant, where you order pizza for Friday movie night. In the past, you’d call in an order, and you could hear the background conversations because the teenager who answered put you “on hold” by putting the phone down on the counter. You would go in to pick up the pizza, maybe see a neighbor, chat, come home and relax for the night. That same pizza place now has to compete more fiercely with Domino’s, which has a full staff that designed a compelling user experience (UX) that makes it easy for you to order online and have your pizza delivered. You can pick a time and select one of their promotional items while also applying coupons and racking up rewards.

The biggest difference, now, between your local place and Domino’s may be the UX you are using while interacting with them online. Many small restaurants have had to update or launch a website where you can order—without the expert UX staff Domino’s has. For a small pizzeria, the UX may be terrible, and in frustration, you may start ordering from Domino’s. This scenario can be applied to any business. Simply put, a good user experience can help keep and acquire new clients, while a bad user experience can be a deal breaker.

In a recent study by Aite Group, when asked about the benefits RIAs would like to see from client-facing technologies in the near future, found that 51% said, “acquire new clients.” This is not surprising; your pizza place would like to acquire new clients too. And, just like restaurants, RIAs need to provide an online UX that is easy to navigate, provides information where people expect to see it, has calls to action and delivers relevant thought leadership. While UX alone isn’t going to give RIAs everything they want (after all, people still want good pizza), now is a great opportunity to make a UX that works harder and is more effective. In combination with creating informative campaigns and continued communication with prospects and clients, technology can begin to play a bigger role in acquiring new clients.

RegTech gets Holistic

The trend toward consolidation in the regulatory technology (RegTech) arena may be heating up. Last week leading compliance technology and surveillance firm, Smarsh, announced its acquisition of Entreda, a fintech provider focused on helping RIAs and broker-dealers address information security and cybersecurity risk. Together, the firms seek to provide a more holistic RegTech solution spanning regulatory and compliance, as well as security and cybersecurity risk.

An increasingly competitive field
The acquisition is further evidence of a trend toward blending related risk and compliance services for those who support the RIA and broker-dealer markets, a trend undoubtedly buoyed by the SEC’s increased emphasis on cybersecurity issues. Leading TAMPs, custodial and other platforms, including Orion and LPL, have seen this trend coming for some time and continue to expand their suite of services to include compliance and/or cybersecurity. Other fintech providers are recognizing this as well. Last year, RIA in A Box, a compliance software and consulting services provider, announced the addition of a cybersecurity solution to round out its toolkit. Traditional compliance service providers including ACA/Cordium and Aurora also offer a range of cybersecurity services as well.

Becoming best-of-breed
A key challenge for RegTech consolidators is to ensure their ostensibly all-in-one solutions can compete with the bevy of discrete best-in-breed compliance, surveillance and cybersecurity solutions on the market. This will be particularly important for those RegTech providers wishing to move “upstream” to service larger RIAs – where more established TAMPs and custodians maintain a strong foothold.

Aggregators Get Strategic

An area that we follow closely as an indicator of the overall market health is RIA transactions in progress and/or completed, particularly by aggregators. This includes outright acquisitions, as well as joint ventures or major new offerings. After a record number of transactions in 2019 at unprecedented multiples and a strong Q1 2020 start, March and April deals declined sharply as the markets reacted to the impact of COVID-19.

However, we are seeing some signs of renewed activity, as firms adapt their deal focus to align with the environment. Some examples:
1. Kestra Financial’s Bluespring Wealth Partners, an acquirer of RIAs and wealth management firms, with an emphasis on providing succession strategies, sees demand accelerating for succession planning from firms
2. Hightower Advisors continues to concentrate on RIAs versus breakaway brokers and announced two transactions in April and May, the first being the purchase of tax and estate planning specialists, Wellspring Associates and the second taking a stake in RIA Osborn, Williams and Donohoe
3. In April, Dynasty Partners and Mariner Wealth Advisors introduced a wealth management platform, Mariner Platform Solutions, which combines “Mariner’s Wealth Management skills with Dynasty’s Core Services platform and its turnkey asset management platform.” Typically, Mariner’s acquisitions are absorbed into the Mariner brand and structure. This model facilitates transactions with firms that want to partner with Mariner, while remaining independent. Mariner has also taken a minority stake in Dynasty Partners
4. Goldman Sachs, after acquiring United Capital in 2019 and folding it into the Goldman Sachs brand, in mid-May announced its intention to buy Folio Financial, which offers retail robo-advisory services and an RIA custody platform

Aggregators, often backed by PE firms that need to deploy capital, have served as a gauge for deal strength and valuations. Similarly, as we look at the current opportunities, we study what aggregator activities might portend. Our takeaway is that, as the climate has shifted away from being a seller’s market, aggregator and other firms have begun to be more thoughtful and strategic in their transactions. While this may not be a permanent change, we anticipate that it will continue at least through the end of 2020.

Instagram—It’s Not Just For Fun Anymore

Instagram, which used to be primarily a platform for personal use, is increasingly used by companies to promote their brands and their businesses. It allows organizations to show the friendly, personal side of themselves. In 2020, usage of social media has increased substantially as a way to access the larger world while we stay at home.

According to a study from, an Influencer Marketing Agency, Instagram campaign impressions have increased by 22% between Q4 2019 and Q1 2020. Instagram is a cost-effective way to organically connect, build awareness, raise image perception, reach prospects and engage with current clients.  

Here are a few tips to optimize Instagram for your business.

1.     Understand Instagram culture. Instagram is heavily people focused and content is key. This is your opportunity to unite people, connect with a community and share stories.
2.     Use images and videos. Clients respond best to original, engaging images and videos that do not look too staged. Give them a behind the scenes look at your company. Showcase employees and leadership and show your audience you care about people.
3.     Increase your reach and grow your following. A large percentage of growth comes from partnerships and sharing. Support and collaborate with non-profits, local causes, other businesses and people that have the same target market.  
4.     Find the right time and frequency. Find the amount of posting that is right for your firm. This will depend on what you have to say, the resources that you have to devote to posting and other factors. The focus should be on quality, not quantity, and it’s important to maintain a regular schedule. And time of day for posting can make a difference. According to HubSpot, these are the best days and times for professional services to post on Instagram: Tuesday, Wednesday/Thursday, and Friday at 9 a.m. or 10 a.m.
5.     Words matter. Although Instagram is primarily a visual platform, content and hashtags are still important. If you’re referencing a longer piece or an article from elsewhere, link to it via your bio. Use hashtags to help raise awareness of your profile. 

Know Your Client

While not a new concept, content marketing, particularly in the form of thought leadership programs, is proving to be an effective tool for promoting service firms like wealth and asset managers. This is not surprising since these firms “sell” an intangible product where expertise is critical, and well-crafted thought leadership can provide a compelling proof statement of capabilities and product quality. 

Personalization, in the form of targeted messaging and communications demonstrating you understand your clients, their challenges and needs, is trending in content marketing today. Several recent studies from McKinsey and others have quantified the significant sales advantage of personalized outreach campaigns. Surveys also suggest rising expectations by clients for increased personalization as an essential element of a satisfying client experience. 

We believe wealth and asset management firms that closely align their thought leadership content with the needs, goals and circumstances of their clients will be more successful. Traditional thought leadership often focuses on general topics about how a firm, for example, manages assets or builds diversified portfolios. It tends to cover investment process, philosophy, and expected outcomes apart from specific client experiences. Personalized thought leadership shifts the focus to the client. It explains product and service design and delivery from the perspective of the specific way clients will find value in the experience. 

Crafting this type of thought leadership requires first and foremost a deep understanding of your clients. Increased data collection from a wide array of sources coupled to sophisticated analytics can help you build dynamic client profiles and achieve highly granular client segmentation. 

These client profiles can serve as the foundation for personalized thought leadership. Marketers can now create content that connects expertise and product features to the specific needs of the individual (or micro-segment) client. Tone, language, and comprehension level can also be closely tailored to the target as can timing and media choice. 

The result is more relevant and compelling messaging, resulting in deeper and more satisfying client relationships.

Optima Group’s Perspective: Impact of the Current Market Environment

As a research-driven organization, Optima Group closely monitors events that are expected to have a material impact on the financial services sector. Needless to say, we are carefully watching trends that might emerge from the current situation. We are focusing special attention on several key questions, the answers to which may portend consequential future developments in the industry. These questions include:
1. How have investment managers responded to a new normal of financial market volatility and what will be the intermediate and long-term effect of these decisions on their businesses?
2. What share of managers across HNW and institutional markets rebalanced according to pre-bear market strategic allocations and what share have reacted with significant tactical shifts?
3. Did industry standard asset allocation strategies suffer from insufficient risk management in black swan events, and will this lead to new approaches that achieve more effective diversification? 
4. Will new approaches to risk management catalyze a round of creative product development in alternative asset classes or accelerate the expanding use of alternatives and alternative platforms among RIAs and OCIOs
5. How will wealth management and institutional clients react to the current reliance on and benefits of innovative forms of communication — and will increased familiarity with these forms of interaction accelerate the trend towards the digital client experience?
6. What market share changes will we see among robo-advisors serving individual as well as institutional clients over the next year?
7. Will behavioral and political consequences of the crisis drive interest in and use of ESG strategies by individual and institutional investors? 
8. What impact will the down markets have on the broader competitive environment in wealth and asset management and how will it affect firm valuations and M&A activity generally? 

There’s no doubt that the financial services industry will change. As it does, we are committed to keeping pace with these changes as we determine the effective strategies to manage the future challenges our clients face.   

Stay safe and healthy,

Dennis Dolego
Director of Research

Black Swan Event Communications

Back in 2011, AON Risk Solutions published an insightful article on surviving unexpected catastrophes, called “Keys to Success in Managing a Black Swan Event.” The article is instructive for organizations, including wealth and asset management firms, looking for guidance in crafting their communications and client outreach programs through the current COVID-19 pandemic. 

First, what not to do 
It is important to understand the psychological effect a Black Swan event can have, namely shock, fear, panic, disbelief, denial, anger and ultimately, grief. According to the article, companies that struggle to survive in such circumstances exhibit one or more of the following reactions: 
1. Failure to acknowledge the event, stick their head in the sand and hope it goes away
2. Spend time denying responsibility for it
3. Look for someone else to blame for it
4. Become paralyzed by disbelief and indecision
5. Act too slowly to find a solution or try only one solution at a time – maintain too narrow a focus, thereby missing obvious options that might be more readily available

For wealth and asset managers dealing with concerned clients, these reactions can lead to fewer communications and/or erratic, confusing and unsatisfying communications that do more damage than good to an already stressed client relationship.

Next, what to do
1. Take emotion out of the equation. Focus on accurate, factual and objective data
2. Break down the situation into manageable pieces and clearly outline the tactical response
3. Own the responsibility for the choices made and the actions taken
4. Be confident that a solution will be found
5. Be persistent and do not give up

Evidencing these steps through client outreach provides reassurance to fearful clients instilling much needed calm and a sense of confidence in the firm’s leadership. Objectivity, clarity and command of the data surrounding and explaining an event, reinforce clients’ belief that the firm is honest, fair- minded, realistic and understands the situation to the extent possible. The client does not have to be concerned that they are being misled by too rosy or too dire a scenario. Finally, the client can take comfort that all options are being weighed and the best decision will be made given the circumstance. 

Communications are an important component of client relations for wealth and asset managers even in the best of times. But during periods of extreme stress, the right communications can save, and even enhance a business, that may otherwise suffer significant damage.