FT SPECIAL REPORT FT 400 Top Financial Advisers Wednesday March 25 2015 Industry scales value heights Surveyed firms report that assets under management have grown by 30 per cent, Page 2 Inside Is cheap oil good for investors? Advisers are divided over how to position client portfolios Page 3 Industry turns to its forgotten youth It is time to cater for the financial needs of the Millennials Page 5 Focus on key US economic trends Growth is set to slow as the Fed prepares to raise interest rates Page 12 Providers promote smart beta tools But sceptics are waiting for longer performance records Page 12 Data mining online Advisers are turning to social media Page 14 Bargains scarce in bond markets Few expect to raise allocations to fixed income Page 14 www.ft.com/reports | @ftreports Illustrations: Daniel Mitchell
Transcript
FT SPECIAL REPORT
FT 400Top Financial Advisers
Wednesday March 25 2015
Industry scales value heightsSurveyed firms report that assets undermanagement have grown by 30 per cent, Page 2
Inside
Is cheap oil goodfor investors?Advisers are dividedover how to positionclient portfoliosPage 3
Industry turns toits forgotten youthIt is time to cater forthe financial needsof the MillennialsPage 5
Focus on key USeconomic trendsGrowth isset to slowas the Fedpreparesto raiseinterestratesPage 12
Providers promotesmart beta toolsBut sceptics arewaiting for longerperformancerecordsPage 12
Data mining onlineAdvisers are turningto social mediaPage 14
Bargains scarcein bond marketsFew expect toraise allocations tofixed incomePage 14
www.ft.com/reports | @ftreports
Illus
trat
ions
:Dan
ielM
itche
ll
2 | FTReports FINANCIAL TIMES Wednesday 25 March 2015 FINANCIAL TIMES Wednesday 25 March 2015 FTReports | 3
FT 400 Top Financial Advisers FT 400 Top Financial Advisers
ContributorsLoren FoxDirector of research,Ignites Distribution ResearchTom StabileSenior reporter, FundFire AltsEmile HallezReporter, IgnitesMorgan M DavisFormer reporter, FundFireAaron StanleyFT Washington bureau managerLaura SuterFormer associate managing editor,FundFire
For advertising details, contact:Dennis Asselta, +1 212 641 6585 [email protected], or your usual FTrepresentative.
All editorial content in this report isproduced by the FT. Our advertisers haveno influence over or prior sight of thearticles.FT reports are available on ft.com/reportsFollow us on Twitter: @ftreports
Investors may have digestedthe stark fall in oil prices — andeven the rebound since Janu-ary’s lows — but the impact ontheir portfolios has yet to playout, say advisers and assetmanagers.
Oil prices always weigh oninvestors, saysRichardJones,aLos Angeles-based financialadviser in Merrill Lynch’s pri-vate banking and investmentgroup. The energy sectoraccounts for more than 8 percent of the S&P 500 index, andcommands an outsized shareof investors’attention.
“Clearly what’s been hap-pening with oil prices has animpact on client portfolios andpeople’s general anxiety,” MrJonessays.
The debate now is aboutwhere oil prices are headedand how investors shouldreact. Few investors expectprices to stay low indefinitely,says George Papadoyannis, anadviser in San Mateo, Califor-nia,whoheadsthePapadoyan-nis & Associates practice atAmeriprise Financial Services.
“I love filling up my gas tankfor $60 and not $100,” he says.“But most people don’t believeit’s only because of supply anddemand. Most people expectpriceswillgobackup.”
The question is whetherthey will rise in 2015 or fur-ther out, and how much toadjust investments for the
period that prices remain low.Advisers and managers say oilappears likely to hover arounditscurrent level thisyear.
Laila Pence, president ofPence Wealth Management,says: “We think oil prices aregoing to stay in the $50-$60range per barrel. We’re not in arush to [react].” Her inde-pendent advisory firm is affili-ated with LPL Financial and isbased in Newport Beach, Cali-fornia.
Oil appears to be in a longer“bottoming process”, says BobDoll, chief equity strategistand senior portfolio managerat Chicago-based NuveenAsset Management. “It willtake a long time for the car-nagetobedone,”hesays.
Investors can approach thisnew reality by looking at thebig picture, or through moresector-specific bets and partic-ular investment vehicles. At amacro level, lower oil pricesare good news, says SeanClark, chief investment officerof Clark Capital ManagementGroup, a Philadelphia-basedassetmanager.
“A 50 per cent decline in oil[prices] acts as a tax cut forbuyers, and that’s a good thing
for consumer confidence andthemarkets,”hesays.
Obviously, cheaper oil canimpact energy companies, butit boosts prospects for almosteveryoneelse,MsPencesays.
It also will be positive foroil-importing developingcountries such as China andIndia and low-growth Euro-peannations,MrJonessays.
At a sector level, cheap oilmay favour several invest-
ment moves, both bargain-seeking and growth wave-riding innature.
Mr Doll says some large-capenergy stocks and capitalgoodscompaniesrelatedtothesector are attractive now, asare fuel-guzzlingairlines.
Other sectors may benefitlater in the year, as consumersmuster their gas pump savingsto spend on luxuries, such as
entertainment and travel, MsPencesays.
Mr Doll says that phenome-non boosts anything transpor-tation related. “As those $20bills accumulate, at somepoint Ma and Pa will say: ‘Hey,let’s takeavacation,’”hesays.
US industry also will benefitfrom cheaper oil, furtheringthe “manufacturing renais-sance” that started with lowernaturalgasprices, saysDrydenPence, chief investment officerof Pence Wealth. “As theseprices work through the sys-tem, it increases the competi-tivenessof theUS,”headds.
Investors should pursue anysuch ideas with caution untilthere is more certainty of oil’snew level, Mr Clark says. “Nib-bling is not a bad idea,” he says.“Investorsshouldbepatient.”
That means shifting “oppor-tunity money” to energy plays,but not “betting the farm”,says Mr Papadoyannis, sug-gesting that clients considerenergy-focused exchangetraded funds or mutual fundsratherthansinglestocks.
For clients who can take onilliquid holdings, energy-related alternative funds maybe a viable play, Mr Jones says.“We’re doing due diligencenow on private equity andhedge funds both on theenergy equity and debt side,”hesays.
Still, investors must keeprisks in mind, especially thepossibility that oil prices zoom
back to $100 a barrel againor fall further, Mr Doll
says.Such swings would
stun an already dazedmarket, he says, “cre-ating dislocations and
creditproblems”.
Cheap oil prompts debateon best investment responseEnergy
Few expect prices toremain low, but thetrend demands action,says Tom Stabile
‘As the $20 billsaccumulate, at somepoint Ma and Pa willsay: “Hey, let’s takea vacation”’
I nvestors face a host of uncertain-ties. The US economy seems tohave been growing well, butquestion marks hang overEuropeandtherestof theworld.
Jobs are being created, but wagesappear stagnant. The stock marketdid well in 2014, with the S&P 500 ris-ing more than 11 per cent, but thathas stoked fears of overvaluation andoverconfidence.
What is an investor to do? Recentevidence suggests that the bestanswer is to seek advice. Mutualfunds, perhaps the bedrock of retire-ment-orientated investing in the US,are increasingly sold though financialadvisers. Even discount brokers suchas Charles Schwab offer recommen-dationsandphoneconsultations.
After all, investors of all ages andlevels of affluence recognise that theyneed help in overcoming their psy-chological biases. And the investingworldandtherangeofavailableprod-ucts are more complicated. Forexample, are declining oil prices athreat or an opportunity? How muchriskshouldan investor takeontogainsome yield? Should one bet againstJapanese companies and on the yen,
or bet on Japanese companies butagainst the yen? No wonder the do-it-yourself investing movement hasshrunksincethe late1990s.
As the investing landscapebecomes more complex, wealthyinvestors demand even more from afinancial adviser. Elite advisers mustbe part psychologist, part economist,part coach, and part financialese-to-Englishtranslator.
These traits are reflected in the2015 edition of the Financial Times400 Top Advisers. The FT 400 pro-vides a snapshot of the best advisersto be found at traditional broker-dealer firms in the US. Less thanthree-quarters of the prior year’s FT400 returned to this year’s list, whichis a sign of how difficult the job offinancialadviserhasbecome.
The team at Ignites DistributionResearch, the Financial Times’ sisterpublication that conducted theresearch, set a minimum for advisersof $200m in assets under manage-ment (AUM) and 10 years of experi-ence, then assessed nearly 1,500qualified advisers drawn from topbroker-dealer firms.
The team used a combination of
brokerage data, survey responsesfrom advisers and their own researchto score the candidates on attributessuch as AUM, AUM growth rate andexperience,amongother factors.
The methodology is explained fullyin a separate article published along-sideour listingonpage10.
The researchers used verified AUMfrom the brokerages’ home offices, sothat “apples-with-apples” compari-sonscouldbemade.
Advisers were awarded bonuspoints for having earned any of thetop industry certifications: the CFA,CFP, CPA, CIMA or an MBA. Some 65per cent of the FT 400 advisers haveone of these credentials, and one infive have two or more — a testamentto their dedication to professionaldevelopment.
Advisers whose information is eas-ily accessible online were alsoawarded small bonuses, because suchtransparency should be the norm in2015. Indeed, 70 per cent of the FT400 advisers are on LinkedIn, and 13per cent are on Twitter, demonstrat-ing how committed those at the toparetoengagingwiththeirclients.
In addition, the list is presented as a
grouping of 400. There is no attemptto rank the advisers from 1 to 400,because no methodology could credi-bly distinguish between the 200th-bestadviserandthe201st.
Dozensofhigh-qualityadvisers justmissed the list this year, edged out bypeers with only marginally betterprofiles — sometimes the differencewas just a few more years of experi-ence or an additional professionaldesignation.
The Financial Times 400 is listedstate by state, and the states withhigher populations, and higher con-centrations of wealth, understanda-blyhavemoreadvisersonthe list.
This third annual edition of the FT400 lists advisers from 43 states plusWashington, DC, representing thegreatest degree of geographic diver-sity the survey has had since itslaunch in 2013. California and NewYork are tied with the greatest con-centrations of FT 400 members, eachstate accounting for 12.5 per cent ofthe total. Texas, Massachusetts, Illi-nois and Florida are also well repre-sented.
We aimed to provide a picture ofthe leading financial advisers. So,
afterrunningthenumbers,whatdoesthe list of 400 look like? It is a big andexperienced group. The “median” FT400 adviser manages more than$850m in assets and has 26 years inthe business. The average FT 400adviser saw his/her assets undermanagement grow by at least 30 percent inoneyear, to$1.7bn.
In keeping with the current trendtowards specialisation in wealthmanagement, some 84 per cent of theFT 400 advisers work in teams. Ofthose, the average team has 14 client-facing professionals, including part-ners and relationship managers, upfrom an average team size of 10 in2014’sFT400.
If there is a gap in expertise in theFT 400 group, it is a relative lack offocusonservingGenerationsXandY.One issue is that, because it takestime to build an elite practice, topfinancial advisers tend to be older —68 per cent of the FT 400 membersareaged50orover.
Another factor is that brokerageshave been encouraging their bestadvisers to target the wealthiestinvestors as clients. About 85 per centof the FT 400 serves very wealthy
Complexityaddsweight tobusinesses
Fewer than three-quarters of last year’s listingsfeature again this year, writes Loren Fox
investors — those with between $1mand $10m in investable assets — only45 per cent serve “individual” (or“retail”) investors, or those with lessthan$1minassets.
Some three-quarters of FT 400advisers employ tactical allocation —shifting among asset classes based onshort-term market dynamics — insomeway.
Roughly two-thirds of FT 400advisers invest, on average, aboutone-third of client assets in so-called“core-satellite” portfolios, with morethan half the assets in traditionalcore classes, such as stocks andbonds, and the rest in non-tradi-tional, satellite investments, such asalternatives, commodities, and otherstrategies.
A diversity of styles emerges from adiversity of advisers: the FT 400advisers hail from 23 broker-dealerfirms across the country. This meansit is difficult to find universal agree-mentamongtheseprofessionals.
The bright side of this multiplicityof viewpoints is that an investorshould be able to find an adviser whoperfectly matches his or her invest-mentaims.
Elite advisersmust be partpsychologist,parteconomist,part coach,and part . . .translator
FINANCIAL TIMES Wednesday 25 March 2015 FTReports | 5
FT 400 Top Financial Advisers
J ust two years after openinghis own practice at the age of25, financial adviser AlanMoore is ready to sell hisbusinessandmoveon.
A steady supply of clients has notbeen an issue, nor his passion for thejob.
Rather, he has noticed a big prob-lem with the industry, one that gener-ally caters to much older clients withsizeable assets. Advisers have beenlargely clueless about how to servepeople his own age, and some of theseestablished professionals began turn-ing to him for guidance on how towork with Generation Y (also knownas Millennials — people born duringtheearly1980stoearly2000s).
“No one was working with peoplewho didn’t have $1m in assets,” saysMr Moore, who has founded a secondbusiness, the XY Planning Network,which connects about 60 adviserswithpotentialclients.
“Working with younger clientsrequires a total restructuring of theprocess,” Mr Moore says. “Whenyou’re in your 30s, you don’t need tobe talking about retirement plan-ning . . . but rather cash flow, cashmanagement, income.”
Young clients often have multiplesources of income and changejobs much more frequently than their
parents and grandparents did, MrMoore says. Discussions often focuson achieving “financial independ-ence”, rather than how much they arecontributing to employer-sponsoredretirementplans, suchasa401(k).
While some clients should put thecash they have into stocks, he advisesothers to put their savings toward amasters degree or other education —an investment that often pays offlater intheformofhigherwages.
“The highest return opportunitythat Millennials have is investing inthemselves,” he says. “The [return oninvestment] is higher than anythingweexpect inthestockmarket.”
Generation Y advisers, such as MrMoore, are helping fuel a radicalchange in the business of financialadvice, says Craig Pfeiffer, chief exec-utive of Advisors Ahead, a group thattrainsadvisers.
Many young people were affectedby the US recession in 2008, someseeing familymembersoutofworkorwatching the value of their parents’retirementaccountsplummet.
“There is a scar,” Mr Pfeiffer says,explaining that advisers are nowentering the profession with the
intention of helping clients avoid sim-ilarpain.
Thus, he sees a growing number ofprofessionalsofferingcomplete finan-cial planning for customers, ratherthan focusing most of their energy onselling investmentproducts.
“There truly was a product distri-bution [and] sales era. Today, we’remuchmore inanadviceandsolutionsera,”hesays.
Millennials tend to be more recep-tive to highly structured financialplanning and advice, he adds. “Roadmap, plan. They want to see where itgoes.”
Younger clients are also moreappreciative of diversification thanmany older investors, whose portfo-lios for decades were composedalmost exclusively of stocks, bondsandcash,headds.
Today, young workers do not thinktwice about incorporating alterna-tives and property into their portfo-lios, he says. “They’re in a world ofproductabundance.”
Yet, most young investors havegleaned much of their financial liter-acy from their parents, says Bradley
Kastan, a senior vice-president ofinvestmentsatRaymondJames.
About a quarter of Mr Kastan’s cli-ents come from Generation X (bornfrom the early 1960s to the late 1970sor early 1980s) or Y, many of themreferred to him by his existing clients—theirparents.
“The thing that keeps my older,wealthy clients up at night . . . is con-cern about the financial literacy oftheirchildren,”MrKastansays.
“I don’t think Millennials and GenXers really get what we do. I don’tthink they understand it, and I thinkit’sour fault.”
About 64 per cent of people aged18-35 have a financial plan of somekind, though 68 per cent say they donot think they are saving adequatelyfor retirement, according to a surveyconducted last year by NationwideFinancial.
Building relationships with a cli-ent’s family is simply good for busi-ness,MrKastansays.
In the event of a client’s death, nextof kin transfer the inherited assetsto another adviser about 90 per centof the time, as they rarely have anestablished relationship with thedeceased’sadviser,hesays.
“We shouldn’t be surprised thatmoney is in motion,” he says. “Life isallaboutrelationships.”
A key to teaching financial literacyeffectively to clients’ Generation X orY children is to make the advice pal-atable, and perhaps entertaining,says Deborah Stavis, chief executiveof Houston, Texas-based Stavis &CohenFinancial.
“The average American worker hassaved less than$25,000,andthatcon-cerns us — and it concerns our cli-ents,”MsStavissays.
Time to cater for Generation YMillennialsFocus has shiftedaway fromolderclients with sizeableassets, writesEmile Hallez
Financial advisers are ageingand the industry is developingto keep up with the changingdemographics.
The average adviser retiresfrom Ameriprise at 67, and theaverage age at the firm is 52,says Bill Williams, executivevice-president of Ameriprise’sFranchiseGroup.
“The next generation ofadvisers coming in is critical,”he says, adding that it is ashrinking industry and feweradvisers are starting out ontheirown.
Nancy Cooley, privatewealth adviser at MorganStanley Private Wealth Man-agement says working within ateam structure creates a natu-ral succession plan that manyadvisersneedtopursue.
Financial advisers shouldlookatbuildingateamasmorethan a succession plan, shesays, adding that it is alsoaboutbuildingthebusiness.
When Ms Cooley was in her
early 30s, she realised thatbringing on a partner was goodforherandherclients.
Ms Cooley’s team is multi-generational, and the ages ofher partners span three dec-ades. “We can readily identifywith different generationswithin the same family,” shesays.
She adds that clients likeworking with someone close totheir age, and also seek conti-nuity for when they transferwealthtothenextgeneration.
“Those clients want to knowthat there’s going to be peopleleft that were there in thebeginning,”shesays.
Andrew Nehrbas, executivevice-president of wealth man-agement and branch managerat Janney Montgomery Scottagrees: “The key . . . is thatyou want to have people thatbringdifferentskills.”
Having two 50-somethingmen with the same skills andbackground will not make asuccessful team,hesays.
“In order for successionplanning to work well, the cli-ents need to see your partnersasequals,”saysMsCooley.
It takes time for clients tobecome comfortable with anewadviser, shesays.
Adviser training varies by
firm, but generally involvesaspiring advisers studying,passing certifications andworking with different parts ofthegreater firmbusiness.
Training also allows branch
and regional managers to findoutstanding talent who canbecome a plateauing senioradviser’s new junior partner,saysMrNehrbas.
“[Advisers] get so bogged
down and focused on theirown business that often theydon’t do as much planning astheyshould,”hesays.
“[Teamwork] is not naturalfor advisers who learned tosurvive on their own,” agreesMr Williams. Not only do sen-ior advisers need to work on ateam,theyalsoneedto learntobe a leader and mentor, anddelegate tasks,hesays.
Mr Williams says firms,including Ameriprise, offertraining classes to senior teammembers to meet these newtasks, as well as answer suchquestions as: “How do you talktoa20-something?”.
Young advisers offer continuity in a shrinking industrySuccession
It is crucial for firmsto develop freshtalent, writesMorgan M Davis Bill Williams:
‘The nextgeneration ofadviserscoming in iscritical’
Still waiting to get in: many young people were ‘scarred’ by the recession in 2008 — Bloomberg/Michael Nagle
‘They are worried aboutthe financial literacy oftheir children’
FINANCIAL TIMES Wednesday 25 March 2015 FTReports | 7
Nam
e
Client segments served
Com
pany
City
Indi
vidu
al
HN
W*
Ultr
a H
NW
**
Inst
itutio
nal
ALABAMA
WHudson, Steven M. Ameriprise Financial Birmingham ✓ ✓ ✓
Runkle, Robert F. Merrill Lynch Wealth Management Montgomery ✓ ✓ ✓
Smith, Tony R. UBS Financial Services Inc. Birmingham ✓ ✓ ✓
Gall, J. Charles RBC Wealth Management Portland ✓ ✓ ✓ ✓
Hale, Kelly I. RBC Wealth Management Portland ✓ ✓ ✓ ✓
Hart, Teresa D. UBS Financial Services Inc. Portland ✓ ✓ ✓
McGee, Judith A. McGee Wealth Management / Raymond James Portland ✓ ✓ ✓
Wrenn, James A. UBS Financial Services Inc. Lake Oswego ✓ ✓ ✓
10 | FTReports FINANCIAL TIMES Wednesday 25 March 2015
FT 400 Top Financial Advisers
In autumn 2014, the Financial Timescontacted the largest US brokeragefirms to solicit advisers’ practiceinformation and data for the topadvisers across the US.By seeking information in this
manner, the FT was able to obtainverified data on assets undermanagement instead of relying onself reporting by advisers. We askedfor information on advisers withmore than 10 years’ experience andthat had more than $200m in assetsunder management.The FT then invited qualifying
advisers — a list which totalled justunder 1,500 — to complete a short
questionnaire that gave us moreinformation about their practices.We augmented that informationwith our own research on thecandidates, including data fromregulatory filings.The formula the FT uses to grade
advisers is based on six broadfactors and calculates a numericscore for each adviser.Areas of consideration include
assets under management, assetgrowth, years of experience,industry certification, FinancialIndustry Regulatory Authority(Finra) compliance record and onlineaccessibility.
The criteria can be taken to havebroader meanings. For example:3Assets under management
(AUM) — can signal experiencemanaging money and client trust3AUM growth rate — growing
assets can be taken as a proxy forperformance, asset retention andability to generate new business3Years of experience — indicates
experience managing assets indifferent economic and interest-rateenvironments3Compliance record — provides
evidence of past client disputes. Astring of complaints could signalproblems
3 Industry certifications (CFA,CFP, etc) — demonstrate technicaland industry knowledge andobtaining these designations showsa professional commitment toinvestment skills3Online accessibility — illustrates
commitment to providing investorswith easy access and transparentcontact informationAssets under management
accounted for an average ofapproximately 65 per cent of eachadviser’s score. Additionally, the FTplaces a cap on the number ofadvisers from any one state that isroughly calculated according to the
distribution of millionaires acrossthe US.We present the FT 400 as an elite
group, not a competitive ranking. Weacknowledge that ranking theindustry’s top advisers from 1 to 400would be a futile exercise, since eachtakes different approaches to theirpractice and has differentspecialisations. The FTmethodology aims to be bothquantifiable and objective.
The research was conducted onbehalf of the Financial Times byIgnites Distribution Research, aFinancial Times sister publication.
Methodology
Nam
e
Client segments served
Com
pany
City
Indi
vidu
al
HN
W*
Ultr
a H
NW
**
Inst
itutio
nal
PENNSYLVANIA
Archer, Ben UBS Financial Services Inc. Conshohocken ✓ ✓ ✓
Beck, Robert W. Wells Fargo Advisors, LLC Allentown ✓ ✓ ✓
Bodine, Lisa Penn Wealth Planning, LLC New Hope ✓
Brennan, Patricia C. Key Financial, Inc. West Chester ✓ ✓ ✓ ✓
DiValerio, Jr., Anthony J. Morgan Stanley Private Wealth Management W. Conshohocken ✓
Fragasso, Robert I. Fragasso Financial Advisors Pittsburgh ✓ ✓ ✓ ✓
Nehrbas, Andrew R. Janney Montgomery Scott LLC Bryn Mawr ✓ ✓ ✓ ✓
Parker, Sr., John J. Wells Fargo Advisors, LLC Philadelphia ✓ ✓ ✓ ✓
Rimmel, James W. UBS Financial Services Inc. Pittsburgh ✓ ✓ ✓ ✓
Salmansohn, Eric Morgan Stanley Wealth Management Philadelphia ✓ ✓ ✓
RHODE ISLAND
O’Neil, Tricia S. Morgan Stanley Wealth Management Providence ✓ ✓ ✓
Houchins, David L. BB&T Scott & Stringfellow Charleston ✓ ✓ ✓ ✓
Miller, David J. RBC Wealth Management Huntington ✓ ✓ ✓ ✓
WISCONSIN
Burish, Andrew D. UBS Financial Services Inc. Madison ✓ ✓ ✓ ✓
Epstein, David Baird Milwaukee ✓ ✓ ✓ ✓
Finley, Barbara S. Morgan Stanley Wealth Management Madison ✓ ✓
Fries, Timothy M. Fries Financial Group / Raymond James Chippewa Falls ✓ ✓ ✓
Klein, Michael G. Baird Milwaukee ✓ ✓
Larsen, John E. RBC Wealth Management Mequon ✓ ✓
Smith, Michael E. Ameriprise Financial Stevens Point ✓ ✓
Spano, David J. Annex Wealth Management, LLC Elm Grove ✓ ✓ ✓ ✓
* High net worth (clients with $1m-$10m in investable assets)
** Ultra high net worth (clients with $10m or more in investable assets)
12 | FTReports FINANCIAL TIMES Wednesday 25 March 2015 FINANCIAL TIMES Wednesday 25 March 2015 FTReports | 13
FT 400 Top Financial Advisers FT 400 Top Financial Advisers
Broker-dealers and registeredinvestment adviser firms arebeefing up their cyber securityafter the Securities andExchange Commission and theFinancial Industry RegulatoryAuthority (Finra) announcedthey would be scrutinisingthese systems in the yearahead.
Advisers need to ensuretheir systems are encrypted,they must teach staff aboutpossible sources of attack, andcarry out regular audits toensure their systems are safe,saysecurityexperts.
A sweep by the SEC’s Officeof Compliance, Inspectionsand Examinations of 57 regis-tered broker-dealers and 49registered investment advisersfound 88 per cent of broker-dealers and 74 per cent ofadvisers had experienced acyber security attack, eitherdirectlyorthroughavendor.
Adviser firms are reacting.An SEC report released in Feb-ruary found that 93 per cent ofbroker-dealers and 83 per centof advisers had adopted writ-ten information security poli-cies, while 89 per cent and 57per cent respectively conductperiodic checks to see if theyare incompliance.
However, many firms arenot going far enough, the SECreportsaid.
Mary Jo White, chairwomanof the SEC, said as the reportwas released: “Cyber securitythreats know no boundaries.That’s why assessing the readi-ness of market participantsand providing investors withinformationonhowbetter toprotect their online invest-ment accounts from cyberthreats has been, and willcontinue to be, an importantfocusof theSEC.”
structures, risk assessmentsand processes for dealing withpotentialbreaches.
Andy Zolper, chief IT secu-rity officer at Raymond James,a brokerage firm, says that inthe past two years the com-pany has invested in real-timedetectioncapabilities.
“The recognition in the pastseveral years is that being ableto detect an attack in the earli-est stages is critical,” says MrZolper.
Email is the most prevalentform of attack among adviserfirms, the SEC data show, withabout half of firms havingalready been the subject ofsuchattacks.
Adviser awareness is crucialfor reducing attacks of thiskind,saysMrZolper.“Fromanawareness perspective, we aresharing information withadvisers, making them under-stand their importance in thecontrol structure,”hesays.
“We have a dedicated teamvisiting branches week in,week out to answer questionsandshowexamples.”
But regulators are justbeginning their push forgreater cyber security, saysEldon Sprickerhoff, founderand chief security strategist ateSentire. While last year regu-lators conducted more of adocument request, this yearthey are likely to start foldingthe cyber security questionsintoaudits,hesays.
Mr Sprickerhoff says this isthe first time regulators havemade cyber security a formalpart of their checks into thefinancialadvisory industry.
“The overlying issue is thatthis isnotgoingaway.”
New focus oncyber securityRegulators
The SEC and Finrahave announced theywill scrutinise firms’systems this year,writes Laura Suter
Investorsarehearingthehype:smart beta is supposed to bethe new best way to approachpassive investing.
But whether these funds —which track indices that havebeen reweighted so they are nolonger based on market capi-talisation — are the wisestchoice for clients is debated byadvisers.
John Bacci, president ofFoundation Financial Advi-sors says he is sceptical of theconcept, but he says he usesVanguard ETFs that embracesomesmartbetaprinciples.
“It is a great term, as far ascosmetic approaches go, butremember that this business iscyclical,” says Mr Bacci. And ifthe decade-plus run in passivestrategies ends, Mr Bacci doesnot want his clients left on thesmartbetabandwagon.
The strategy is known for itsdiverse approaches: somefunds screen securities basedon fundamental stock data, forexample, and others mighttake an equal-weighted ordividend-weightedapproach.
Smart beta’s growth hascoincided with the continued
expansion of passive fundsafter thefinancialcrisis.
At the end of December,smart beta funds and ex-change traded funds togetherboasted $506bn in assetsunder management in the US,according to the research firmMorningstar, which refers tothe products as “strategicbeta”.
It said strategic beta ETFsattracted $59bn from US retailinvestors in 2014, nearly dou-ble the$31bnin2012.
Established managers suchas BlackRock, Invesco Power-
Shares and Pimco are increas-ingly committed to sellingsmartbetaproducts.
Yet, despite the increasedavailability of smart beta solu-tions, many advisers remainon the fence. Last year, only 15per cent of advisers surveyedby Kasina, the consultancy,were invested in smart beta.And among those users, smartbeta comprised just 15 per centof the overall portfolio alloca-tion, says Matthew Fronczke, directoratKasina.
For smart beta to win overdoubters, multiple factors will
needtoconverge,MrFronczkesays. These trends include theestablishment of longer per-formance records for newer,lessprovenstrategies, strongereducational initiatives onsmart beta for advisers andincreased enthusiasm for pas-sive strategies among activemanagementstalwarts.
The latter trend will behelped by the growing em-brace of active exchangetraded funds — a catch-all cat-egory that describes any ETFthat deviates from its bench-mark index — by traditional
Smart beta gains both devotees and doubtersActive passive
Sceptics arewaiting for longerperformance recordsbefore committing,writes Greg Shulas
asset managers such as Ameri-canFunds,hesays.
“As advisers become morefamiliar with active ETFs,adoption rates will increase,”Mr Fronczke says. “Whether itgets bigger than 15 per centdependsontheadviser.”
But of the factors needed toconvert smart beta scepticsinto believers, performancemay be the most important, asunderperformance in smartbeta could have amplifiedimpact, says Jeff Tjornehoj,head of Americas research at Lipper, thedataprovider.
“Every characteristic fallsout of favour eventually,” saysMr Tjornehoj, adding thatsometimes small-caps outper-form large-caps and some-timestheydonot.
Hepointsoutthat intimesofturmoil, investors often lookfor safety in well-known, veryliquid securities and smartbetaproductsare intentionallylighter inthose investments.
Active management propo-nent JosephChornyak,manag-ing partner of Columbus,Ohio-based Chornyak & Asso-ciates, part of the Common-wealth Financial Network,also has questions about smartbeta’s ability to hold up in anextrememarketevent.
“At the end of the day, youare still buying an index fundthat is characterised by paint-ing by numbers, as opposed tohaving an active managementteam.”
For adviser Gerard Kling-man, founder of Klingman and
Associates, a New York-basedregistered financial adviseraffiliated with RaymondJames, smart beta’s value lies in its transparent nature andcost-effectiveness.
“Indexing makes sense forlarge parts of portfolios, and isgood for US stocks, including large-caps,”hesays.
For Mr Bacci, however,smart beta still needs to showhow it performs over the longterm. “There are times when amarket cap approach can runaway with your portfolio andequal weighting is a good thingtodo,”hesays.
“But I count buzz words andsmart beta is one of them. It isa good new one but everythingold is new again and this is anexampleof that.”
‘Indexing makessense for large partsof portfolios and isgood for US stocksincluding large-caps’
Advisers have helped drivehuge flows into liquid alterna-tives, but a challenging 2014has raised questions about theproducts’popularity.
Liquid alts deploy hedgefund-like strategies but prom-ise greater liquidity and trans-parency and at a lower costthan most alternative strate-gies, which are often not acces-sible toretailbuyers.
They gained traction in arisk-averse, post-crisis envi-ronment as a way to diversifycore holdings and eke outsomereturn.
The products hit a milestonein 2013 with $95bn in netflows, according to Morning-star, setting high expectationsfor 2014, which was expectedto see high volatility and theprospect of rising interestrates. But when volatilityfailed to materialise and salesslowed, scepticism grewamong some advisers andtestedtheresolveofothers.
“The cost of a lot of theseproducts makes us cringe,”
says Mike Genovese, partnerat Sacramento, California-based adviser Genovese Bur-ford&Brothers.
Despite having some expo-sure to liquid alts with a 7 percent allocation in the LitmanGregory Masters AlternativeStrategies fund, a multi-alter-native investment vehicle, MrGenovese remains lukewarmabout liquidaltsoverall.
Others can still see advan-tages. Greg Hersch, seniorvice-president, wealth man-agement for UBS FinancialServices, works with wealthyclients who have been disap-pointed with the traditionalalts universe or hedge fundsand those products’ liquiditylock-upperiods.
ThemainobjectivesMrHer-sch wants with liquid alts issuperior risk-adjusted returnsover a market cycle, betterliquidity terms and lower feesthan he would get with hedgefunds. He typically aims toinvest 15-20 per cent of a port-folio in liquidalts.
Liquid alts have won overmany advisers by undercut-ting the traditional hedge fundfee structure of a 2 per centmanagement fee and 20 percent slice of performance.Even hedge fund managershave become fans, as anincreasing number now part-
ner with mutual funds as sub-advisers to liquid alts orlaunched their own liquid altproducts.
Liquid alt providers alsorepresent one of the mostvibrant growth areas formutual funds, collectivelyreceiving $38bn in net flowslastyear.
Two of the most popularstrategies — long/short equityand multi-alternative — alsosaw the most annual productlaunches last year, accordingtoMorningstardata.
Total assets in liquid altswere$304bnat January31.
After last year’s setback interms of interest rate rises andvolatility — two market condi-tions that liquid alts are sup-posed to counter — manyadvisers are taking a wait-and-see approach. This could be ill-advised, say some partici-pants. “We are in it for the longhaul, but my fear for advisersis that we see a lot of fence-sit-ters,” says Tom Florence, chief
executive of Denver-basedboutiquealt firm361Capital.
Mr Florence and other altproviders expect greater vola-tility this year and say hesita-tionmaycostadvisers.
But Mr Florence acknowl-edges the products are compli-cated, adding to the challengesproviders face in educatingadvisers. In order for liquidalts to be an effective riskdiversifier, they need to repre-sent 15-20 per cent of a portfo-lio,heandotherproviderssay.
But Mr Genovese is uncon-vinced most liquid alts willdeliver on their promise formitigatingrisk.
“[Providers] are poundingmy door and some people areembracing these in a huge wayand buying the party line thatthey can protect you on thedownside,” Mr Genovese says.“I’m more sceptical, taking itslow and not worrying aboutthe world crashing tomorrow,which seems to be a marketingployformanyproviders.”
Search is onfor volatilityas flows slowLiquid Alternatives
Advisers remaindivided on theirinvestment benefits,writes Peter Ortiz
Setback: scepticism rose as risks fell — Bloomberg/Chris Ratcliffe
T he US economy recordedits strongest perform-ance of the post-financialcrisis era in 2014. With a2.4 per cent rise in gross
domestic product it has become animportant source of global growth forthenear future.
But the FT’s top 400 financialadvisers urge caution in proclaiminggood times are here to stay for the USeconomyandinvestors.
Despite GDP growth of 4.6 per centand 5 per cent in the second and thirdquarters of 2014, respectively, and an11.4 per cent annual increase in theS&P 500 index, nearly 80 per cent ofadvisers surveyed said they expectslow US growth in 2015, according toIgnites Distribution Research, a sistercompanyof theFinancialTimes.
“I think we are in a low growthtype of market that is certainly goingto be more volatile than we’vebecome accustomed to over the pastseveral years,” says Eric Wightman,an adviser with The Wise Investor
Group at Baird in northern Virginia.After six years of monetary wiz-
ardry by the Federal Reserve aimeda t b r e a k i n g t h e U S o u tof a prolonged downturn, steadyimprovements in macroeconomicfundamentals led the central bank tocease its quantitative easing pro-grammein2014.
The Fed is now preparing to raisethe benchmark federal funds rate,which has been at zero since 2008, inan attempt to stave off inflationarypressures resulting from a half dec-adeofeasymoney.
With the era of easy monetary pol-icydrawingtoanend, the likelyresultwill be a flatter yield curve anddampedgrowth.
While pronouncing that the overallUS economic outlook had improved,Janet Yellen, chairwoman of the Fed-eral Reserve, told Congress in Febru-ary that GDP growth in the 3 per centannualised range — as in the secondhalf of 2014 — would be difficult tosustain in2015.
But with 2014 enjoying upbeat dataon nearly all the key macro indica-tors, including the reduction in long-term unemployment and more con-sumer spending, other advisers areofferingamorebullishprognosis.
“We expect US growth to improvein 2015 and are estimating growth toexceed 3 per cent for the first time innearly nine years,” says Chris Shafer,an adviser with RBC Wealth Manage-ment inNewYork.
The central themes to watch thisyear will be the timing of the Fed’sinterest rate rise — most observersexpecteitheraJuneorSeptember lift-off — the impact of a strengtheningdollar on US companies and theeffects of low oil prices on consumers’discretionaryspending.
John Moore of John Moore & Asso-ciates, a Raymond James-affiliatedadviser, says: “We think GDP growthcould be better than expected, butstock market returns [will be] muteduntil there is more clarity on 2015earnings — specifically related to thepotentialpositiveeconomic impactofloweroilprices.”
What does this mean for US equi-ties? Baird’s Mr Wightman fears thatcompanies will be unable to matchprior years’ earnings in the new land-scape.
“Unfortunately, the 12-month for-ward earnings estimates have fallenfrom 11 per cent to about 4 per centand I think they could decline evenmore,” he says, citing Thomson Reu-tersdata.
Despite this uncertainty, roughly80 per cent of the advisers surveyedby Ignites said they would increasetheir clients’ investments instocks over the next six months,while just under 25 per centindicated they would hedge by
increasingfixedincomepurchases.Healthcare, technology and finan-
cials were identified as key growthsectors, and it will be important tokeep an eye on how consumers adjustspending habits and whether banksincrease lending.
But beneath the glossy surface lurknumerous risks that could furtherhinder the economy’s momentum in2015.
The most pressing is wage stagna-tion. Excess “slack” in the labourmarket — in which there are moreworkers than available jobs — is per-ceived to be holding wages down andlimitingspendingpower.
Another closely watched trend isthe steady decline of the labour forceparticipation rate, which registered asluggish 62 per cent in January 2015after topping66percent in2007.
Slowdowns in big emergingeconomies such as China andBrazil could have spillover effects inthe US, as could uncertainty in theeurozone.
Key trendsscrutinised asUS braces forlower growthEconomy Wage stagnation and headwindsabroadwill take their toll, saysAaron Stanley
Caution: Janet Yellen, Fed chairwoman, said GDP growth of 3% would be hard to sustain — Bloomberg/Andrew Harrer
SEC’s Mary JoWhite
‘Stock market returns[will be] muted untilthere is more clarity’
14 | FTReports FINANCIAL TIMES Wednesday 25 March 2015
FT 400 Top Financial Advisers
Financial advisers areincreasingly tapping intothe potential of LinkedIn,Twitter and Facebook toreel in new clients and givetheir assets a boost.More than 70 per cent of
the advisers who landedspots on the FinancialTimes 400 reported usingLinkedIn, while 11 per centare on Twitter. And thosenumbers are on the rise, sayindustry experts.This is partly a result of
clearer guidelines issuedover the past few years bythe Financial IndustryRegulatory Authority andthe US Securities andExchange Commission onhow advisers should usethe platforms.“More and more people
are online using thesenetworks,” says Linda York,vice-president ofsyndicated research atCogent Reports. “It’simportant for advisers tohave a presence, so thatthey are able to . . . buildtheir businesses.”Advisers prospecting for
new investors can useLinkedIn to view theirclients’ connections, searchfor individuals based ontheir interests and accessalumni networks, says AmyMcIlwain, vice-president ofsocial and digital strategyat Moore CommunicationsGroup, based inTallahassee, Florida.Putnam Investments
found that 75 per cent ofthe more than 700 financialadvisers it surveyed areusing social media forbusiness, according to a2014 study.And about 66 per cent of
them reported gaining newassets through thewebsites, up from 49 percent the year before.Advisers active on four or
more social media channels,using them at least 40times a year, gained anaverage of $1.1m in newassets annually, says MarkMcKenna, headof globalmarketingat Putnam.Morgan
Stanley-affiliatedfinancial adviserJim Spiro, whomanages about$1.6bn in assets with
his New Orleans team atthe Spiro Group, usesLinkedIn to drive traffic tohis webpage, sendcompany-approvedupdates to his network andidentify about 10prospective clients a week.“You make a few clicks
and you mightcommunicate with tens orhundreds of people or evenmore,” says Mr Spiro.Wells Fargo adviser
Charles Margolis, at Hefter,Leshem & Margolis CapitalManagement, in Deerfield,Illinois, credits LinkedInwith helping the firm bringin between 15 and 20 clientsover the past two years.The new investors have
added about $30m-$40mto the firm’s $2.3bn inassets, he says.“If we’re going to meet a
prospect or there’ssomebody that we’re goingto try to cold contact, wewill look on LinkedIn tolearn about the individualand try to establishcommonalities,” says MrMargolis.Wells Fargo advisers
eager to get on LinkedIn orTwitter are required tocomplete the company’ssocial media programme,launched in 2012.It includes three 15-
minute training sessionsand the installation ofcompliance software thatfilters out potentiallyproblematic posts, such asspeculation that interestrates will rise.Advisers must be careful
about what they say online,but, as Ms McIlwain says:“Social media advertising ischanging the game.”Clare Trapasso
Social media Sites are turning outto be rich sources of new business
Fewer than half of FT400adviserssaytheyare likely to increaseallocations to fixedincome, either in the
USor internationally.Bargains in the debt market
are getting harder to find com-pared with equities and alter-native investments, but theydo exist and the right types ofdebt are worth holding on to,adviserssay.
Now that quantitative eas-ing is a thing of the past in theUS, advisers expect the Fed-eral Reserve to raise interestrates this year. This would sig-nal the beginning of the end ofyears of low rates and thushigh prices for domesticbonds, leaving investors withlarge allocations to Treasurieswith assets that are set todecrease invalue.
Even skimpier interest ratesin much of the rest of thedevelopedworld lookset todipfurther, or go negative, inresponse to monetary policiesin those countries. In addition,political risks in Europe divideadvisers looking forstabilityaswellasyield.
Fixed income might becomemore attractive in about threeyears, if interest rates rise tobetween 3 and 6 per cent, saysFT 400 adviser Adam Estes.
His team manages more than$800m for Hilliard Lyons inBloomington, Indiana. His cli-ent portfolios have between 10and 30 per cent allocated infixedincome.
“I don’t love a lot of fixedincome at all, but it’s such abroad base of options and it’snecessary,” Mr Estes says. Heprefers bonds with durationsbelow five years, favouringmunicipal and corporate debtovergovernmentdebt.
FT 400 adviser Peter Princiof Morgan Stanley likes corpo-
rate debt on the lower end ofinvestment grade, at BBB to Aratings. With corporates, MrPrinci is underweight energyfirms because of low oil prices.With munis, he holds revenue-generating issue from waterand sewage departments,bonds backed by taxes andtolls as well as universitieswithstrongendowments.
Anyone searching forreturns comparable with other
asset classes must accepthigher volatility and lowercreditquality,warnsMrEstes.
Mr Princi points out thatequities, hedge funds, privateequity and property all havegreater potential returns thanfixed income, albeit with vary-ingdegreesofrisk.
Mr Princi’s average clientwith a moderate risk profilehas only 25 to 30 per cent oftheir portfolio in fixed income,the lowest allocation in hiscareer. That is partiallybecause the earnings yield forthe S&P 500 is more than dou-ble that of the 10-year Treas-ury. He believes the US econ-omy wil l cont inue tostrengthen, making this a sta-ble environment for investorstotakemorerisk.
“This all stems from ourmacro view of interest rates,”Mr Princi says. “We think theFed will be slow and methodi-calwith itsmoves.”
Internationally, Mr Estesprefers debt in developedEuropean countries, and holdsit through mutual funds orexchange traded funds. Heeven finds European bondsmore attractive than the US,despite thechallengesabroad.
Some experts see value inemergingmarkets. India,Mex-ico and South Korea all have
relatively strong economieswith healthy sovereign debtand corporate bonds, accord-ing to George Rusnak, co-headof Wells Fargo’s global fixedincome strategy at its Invest-ment Institute. However, therising US dollar means advis-ers should hedge clients’ expo-sureto foreigncurrencies.
Conditions are ripe foractive strategies in fixedincome, says Tony Destro, sen-ior portfolio manager at Lock-wood Advisors, an affiliate ofBank of New York Mellon’sPershing unit. Rising interestrates typically entail highervolatility. This allows excep-tional active managers toshine,headds.
Traditional fixed incomehas taken a back seat to “fixedincome proxies” for RajSharma, an FT 400 adviser atMerrill Lynch. These proxiesare products that generateincome, for example dividend-paying stocks of financiallysolid firms that are slow grow-ing but returning significantcashto investors.
“Fixed income is in a bubbleand it is greatly overvalued,”Mr Sharma says. “It’s a goodtime to lock in a mortgage orborrow for a business, but it’snot a good time to buy long-termbonds.”
Fixed income bargainsbecome harder to findBonds The Fed is expected to raise rates later this year, writes Chris Latham
‘Fixed income is in abubble and is greatlyovervalued. It’s not agood time to buy’
Reflective mood: investors could be left holding assets that are set to decrease in value — Bloomberg/Andrew Harrer
‘If . . . there issomebody we aretrying to coldcontact, we lookon LinkedIn’
