What One Advisor Wants From Asset Managers

What do financial advisors want? Marketing staffs (and others) spend their days developing products and creating communications they hope will resonate with the advisor community. Despite all best efforts, some fall short.

In the 11 months since the launch of AdvisorTweets, we’ve learned a lot by “listening” to financial advisors’ tweets. In this post, we’re publishing excerpts from an interview we had with John Benedict, a 12-year financial advisor who recently broke from the FINRA-regulated broker-dealer world to establish his own registered investment advisor (RIA) J2Capital Management of Troy, MI. On Twitter, Benedict is @GeckoJB.

john benedict

Benedict is critical of large asset managers’ approach to product development and its overall support of advisors. While this stance poses some discomfort for us (given that our clients are asset managers), we think there's value in these comments. They add context in a way that survey results can't. And, note that at the end of the interview, Benedict offers to help.

We first met Benedict when we were talking to a few advisors for a narrowly focused article for AdvisorTweets on the investment community’s approach to communicating during the May 6 “flash crash.” Did asset managers provide any helpful insights? What else might they have done?

We were intrigued by Benedict’s response, which included: “There is no value for these longer term players [asset managers] to tweet on what they view as short-term micro movements. Understand that the entire industry is built on a long-term buy-and-hold philosophy. They may feel like they are promoting fear when their goal is the exact opposite.”

The industry's advocacy for buying and holding is at the core of Benedict’s complaint about what he refers to as “the large fund companies.”

“Buy-and-hold is based on the premise that the stock market always goes up. Fifteen to 20 years ago, that was true but we have just gone through a lost decade. Investors have nothing to show for 10 years of investing,” Benedict said. “We believe in a different approach and that’s to avoid bad markets.”

In other words, Benedict uses tactical asset allocation, what his Web site calls “active investing,” to manage his clients’ assets. The Financial Planning Association defines tactical asset allocation as "an active management strategy of rebalancing the percentage of assets held in various categories in a portfolio to take advantage of market pricing anomalies or strong market sectors."

If you’re a dyed-in-the-wool asset management marketer, as I used to be, all kinds of alarms and bells might have just gone off. Mutual fund communications continually discourage shareholders from thinking that short-term investment moves are appropriate for a long-term investment strategy. Or cost-effective.

Advisors Actively Trading Their Portfolios

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5. finplanLydon says ten years ago 70 percent of advisors had buy and hold portfolios. Now 70-80 percent have actively managed portfolios #schwab #etf10 Aug 2010from HTC Peep

-- this quote was brought to you by quoteurl

But the markets of 2008-2009, especially, have caused many advisors to rethink what might still be conventional wisdom at your firm. How many advisors? We saw a tweet yesterday (above) quoting ETF Trends’ publisher Tom Lydon at a Schwab press conference: “Ten years ago 70% of advisors had buy and hold portfolios, now 70-80% have actively managed portfolios.”

The risk is that some advisors will find your firm and how you're communicating out of step with the shifts they're making in building clients' portfolios. This is not to suggest a consensus. We also see many advisors online advocating versions of "stay put." Lots of advisors are gravitating to passive exchange-traded funds (ETFs).

What follows are excerpts of one conversation with a single financial advisor. While we’d caution against extrapolating too much from it, we see similar strains of discontent elsewhere. In their tweets and in the blog posts their tweets point to, it’s obvious that some advisors are rethinking buy-and-hold, and they can be derisive of some fund company communications.

For your reference on the shift away from the buy and hold gospel, I’ll recommend the articles to you that Benedict mentioned prior to our interview:

• Ten Stock-Market Myths That Just Won't Die
• More Investors Say Bye-Bye to Buy-and-Hold
• Advisers Ditch 'Buy and Hold' For New Tactics

Oh and what does all of this have to do with digital marketing?

We’re writing it about here because asset managers that seek to support advisors’ interest in tactical asset allocation will find that they need to optimize their communicating. Buy-and-hold investment recommendations have not required the same turnaround in information delivery or even, as Benedict alludes below, access to information. Tactical asset allocation directions will need to be supported by more finely tuned Web-based communications. (See our earlier post about an emerging communications competency that we think will require some stretching by asset management marketers.)

The Industry 'Is Not Leading,' Just Reacting

Q. John, before we get into this, how representative do you think you are?

A. I probably am somebody who would be on the far right of an opinion. I believe I’m where advisors’ opinions are moving to. If you look at just the landscape of the country right now, you have a situation where there’s cynicism in politics and people have all kinds of conspiracy theories, there is a vacuum of trust.

When a big fund company is putting out a piece, I’m cynical when I see it. There’s a vacuum of trust. A lot of advisors feel my way. We feel betrayed.

Q. What could asset managers do for you and other advisors that would be relevant and useful?

A. The industry is not leading, they are reacting. Asset managers are wonderful after the fact. They were nowhere to be found on the international crisis. Then weeks later, I just knew it—a plethora of conference calls.

Wholesalers are always out selling the latest and greatest. They have their phony narratives. Six months to a year ago, the rage was about rising interest rates and all the fund companies came up with their narratives about protecting against inflation.

We thought the opposite. We’re in a deflationary environment and why aren’t they talking about that? Because there are no products, I guess. So they loaded all these advisors into inflation products and it’s not going to work. Nobody is selling on inflation any more but everybody [all the large fund companies] did it. Everyone was selling on rising rates. Every time we talked to a wholesaler it was about rising rates.

Q. When did you start to change your mind about the buy-and-hold approach to investing?

A. It was borne out of frustration. I spent 2000 holding my clients' hands and watching them lose 30%-40% of their portfolios. And on top of that were the market timing scandals. Fund companies are still sending my clients’ checks 10 years later.

Buy and hold works if you have a 30-year time horizon. By 2008, we were tactical and we came out of the market unscathed and our clients were thankful.

I felt that the large companies were a day late and a dollar short. I always felt that there was something better out there. So I searched and dug a little deeper. The National Association of Active Investment Managers was a gateway, I guess you could say. That’s where the nerds of the financial advisory world are, looking for unique niches.

Q. But what about the trading expenses you’re exposing your clients to?

A. Some advisors like to espouse the cost of stuff and that’s why they use ETFs. Well, excuse me, I could pay 10 basis points for an index fund and lose 50% of my money in a bear market or I could pay 2% annually hypothetically on a mutual fund that does tactical investment that declines only 20%.

What does cost have to do? I understand it. It’s in the conversation but it’s not the end-all and be-all. The bottom line is.

The costs to do tactical management are higher but in a down market if it’s going to save you money, and wouldn’t any reasonable person agree that’s what it’s about? We market our firm based on our risk management. We think that there’s a time to be invested and a time not to be invested.

Q. Whose funds do you work with today?

A. Asset managers I trust and respect. They have a passion for what they believe in and they’ve been practicing it before it became chic—Smart Portfolios, Aston Funds and Stadion Funds.

Derivative Product Development

Q. What difference do you see between the products developed by the larger companies and the niche managers?

A. Large fund companies see the demand for something and they feel like they’re missing out. I have the impression that they sit around in a boardroom and say, we’d better create something, too. A lot of times the execution is lacking. It’s as if they say that we have to get a product in the market or we’re missing the boat.

That’s what’s bothered me for the last 10 years.

Q. And yet you seem open to product announcements.

A. That’s right. You re-tweeted a product tweet the other day and I clicked on it because I thought it was interesting. But no, it was pretty typical. Somebody saw a need and said, “Let’s just throw something against the wall.” Maybe that is or is not the case and I could be jaded but I didn’t need to know anything more about that product.

I’ll look at something if it’s unique. If it’s just another “we buy undervalued securities, we dig deep and kick the tires,” how many more of those do I need to see in my lifetime.

The products that asset managers are coming up with are fad products and by the time they get into them they’re arriving way too late. The commodity products are a perfect example. They were just poorly executed products that weren’t thought out. The goal in mind is the revenue rather than the advisor perspective.

Q. Have you ever heard of an advisor being involved in product development?

A. Are advisors involved?

Q. No, not usually. But wholesalers are often asked for their input.

A. Wholesalers are the wrong people to include. You can either go to the car salesman and ask him what kinds of cars people are looking for or you can go to the buyers and ask them. Wholesalers come at it from a different place, to get their compensation up.

Right before the recession when a wholesaler was sitting in front of me, he opened his book and said, “We don’t see a recession coming.”

“When was the last time you saw one coming?” I said. “It doesn’t seem as if it would be in your best interest to see one coming.”

He wanted to talk about emerging markets but I said, “Let’s talk about your gold fund.”

“Gold?” the wholesaler said. “5% isn’t going to pay you or me.”

I have no need to meet with him ever again if he’s going to come in and slot me into his narrative, based on what pays me the most.

What Information Can Wholesalers Deliver?

Q. We met you online and online is where most advisors get most of their information today. It used to be that a field sales force could bring advisors information that they didn’t have or didn’t know. What could wholesalers bring to you today?

A. If somebody came in here and understood the market and understood technical analysis and was someone I could respect, I might be open to listening and learning. I don’t know that there is such a wholesaler out there. They just come across as salespeople to me.

Why aren’t wholesalers out there blogging or on Twitter? That way people out there could follow them and see if they offer any value. Any real-time information.

Look at a wholesaler. He’s only interested in reaching his top clients to begin with. There are a lot of other advisors out there who get ignored. That’s how the model is built and the model is broken. I come across wholesalers who don’t want to do business with us unless we place a certain amount of assets with them and they’re not shy about saying it.

Q. What’s your opinion of advisor-only Web sites?

A. I don’t have an opinion as I don’t visit them. I have in the past and I would suspect that I wouldn’t find much value in the information they provide. I have low confidence that they can identify a trend before it happens.

Q. Are there any marketing communications that the niche managers provide to you that the larger asset managers don’t?

A. With most of the niche managers I can speak directly with the manager. Just yesterday I had a wonderful 20-minute conversation with David Wright at the Sierra Core Retirement Fund. The lead manager of the Aston/MD Sass Enhanced Equity Fund answers his own phone if you call him. I email Bryce James of the Aston Dynamic Allocation Fund directly.

An 'Out-of-the-box' Solution

Q. It seems that tactical asset allocators may need more information from an asset manager than an advisor who uses ETFs, for example.

A. I’m somebody willing to do a lot of digging to get the answers I want. For the advisor who doesn’t want to dig deep or doesn’t know where to start, they could use an out-of-the-box solution from the big firms. Advisors know they could be doing something different. People turn to active management for one reason: It gives them a sense of control.

More advisors I’m talking to are seeing that buy and hold doesn’t work. You can espouse buy and hold along with doing something different; a tactical approach could be an alternate slice of an overall strategy.

The longer this market continues to drive people crazy, the more pressure there will be on asset managers to do tactical management, to wiggle in the door. They figured out how to get more long/short strategies in their portfolios and that’s very close.

Q. Advisors tweet about an eclectic collection of topics—their business model, personal finance, sports. Your tweets stand out because they are so equity- and so market-focused. What’s your plan with your Twitter account? Who’s following you?

A. Most of my followers are from the StockTwits community but recently I’m starting to get financial advisor followers. Now that I’m out from under the FINRA blanket, my plan is to gear the tweets more toward our model portfolios. We are going to be 100% transparent about our positions.

I posts videos through StockTwits and I want to post trading videos about how I manage accounts and what I’m looking at. What if a wholesaler did that? They could start to educate advisors on simple philosophies. I have simple things that I could show advisors that would do wonders for their practice.

Q. If an asset manager asked you for help on developing an “out-of-the-box solution," would you do it?

A. I’d be open to it. I’m passionate about educating.

So, what's your reaction? Is John Benedict on the mark? Off the mark? We welcome your thoughts below.