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Clients Don’t Want Wrap Accounts, They Want You

The financial press is flooded with discussions about wrap fee vs. commission accounts, services that investors can get on the Internet and how you can stay competitive. I see missing from all of these discussions the reason why investors do business with you—YOU. The clients you want, the best quality clients seek the advantage of the advisor relationship and NOT the best fund, the best manager or the best technology. Therefore, anything you put in the way of your relationship with the client will increase your risk of losing clients. And third-party managed accounts are one of the items that could ruin a relationship.

Yes, using mutual funds or outside money managers can cost you dearly, particularly in a bear market. I’ll explain.

There are two basic types of clients you can attract. The poor kind who ask questions like, “What’s a good investment?’ or “Is now a good time to invest?” or “When will the market go up?” These are immature, uninitiated investors asking short-term oriented questions. These questions all beg the issue of market timing or investment selection. These are the types of clients that are oriented to buying “things.” These are clients looking for a hit and run. You sell them something, you collect a commission and the relationship, if any, is about the investment. They call to see how their investment is doing; they are performance oriented. They often ask for additional hit and run encounters—they want another tip, pay another commission and any further interaction with them is about that investment’s performance. They leave as soon as performance is negative.

If that’s the type of relationships you want, that’s fine. But the above investor does not describe the clients most advisors seek. Most advisors seek people who buy “services” rather than seek to buy “things.”

The investor who buys services is placing much of their decision to proceed on their perception of you and the relationship with you. When you present them with a financial plan pushing them off on the money manager du jour or the basket of 5-star funds, you violate what they seek. Unless you are really providing a quantitatively measurable service like watching for style drift in the funds, watching for manager changes, and looking for performance variance from that firm’s stated benchmark, your tactic of pushing the investor off to as manager may cost you the account. Most advisors are not providing such services and are in fact using third-party managers as a way to duck responsibility for the clients’ financial future and to supposedly put them in the hands of experts.

But in a bear market, this strategy comes home to roost.

In a bear market, the client questions why they pay you when their account is falling. They question why they pay two sets of fees—one to you and one to the money manager. And what measurable value are YOU adding?

So I recommend that you sell your services (and they better be real value-added services for which you can provide evidence) or manage the money yourself. Yes, you can do as well or better than most professional money managers. Take a look at simple strategies such as the Dow Dividend Strategy, The Value Line ranking system or the Standard and Poor’s model portfolios and compare their three-decade records to any money manager you want.

Regarding those professional money managers you have been hiring to manage your clients funds, Peter Lynch, after discussing the handful of geniuses as George Soros, John Rogers and Warren Buffet in One Up on Wall Street says, “These notable exceptions are entirely outnumbered by the run-of-the-mill fund managers, dull fund managers, comatose fund managers, sycophantic fund managers, timid fund managers, plus other assorted camp followers, fuddy-duddies, and copycats hemmed in by the rules.”

There are many mechanical money management systems that do not require you to be in front of a quote screen, that require you only to rebalance your client portfolios annually. The advantage of mechanical systems is that all bias and judgements are removed (bias and judgement are the two downfalls of every investor if you study the literature on investor psychology). The biggest advantage however is that your client gets what they pay for—YOU handling their money.

You never need to make excuses for an under-performing fund or manager. You only need to bring them back to the system and services they agreed to when you met and show them that the promises of the system (to pursue a strict method of investing) are being met. Sure, values stocks and growth stocks have their cycles but if your services are sold correctly, your clients will anticipate that and not complain in a down market. When you give the client what they want—YOU—you retain them and you get more referrals. Additionally, when you manage portfolios with individual stocks, your clients have more identification and loyalty to their portfolios with you. Each month they get a statement showing recognizable, familiar names (assuming you have a fair portion or large caps in your portfolios) rather than statements showing a bunch of unknown fund names.

Get back to basics. You be the advisor and give the best clients the relationship they want. Give them the comfort of knowing that the person they came to trust is the one watching their nest egg.



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© 2008 Financial keynote speaker—Larry Klein