It’s been the mantra for close to a decade in the financial advice business, at least among advisors: Clients value trust, a long-term financial plan and good service above everything else, including investment performance. Don’t sell clients on a stellar investment record, the story went, because when markets head south—and at some point, they will—you’re toast.
But in the wake of the disastrous downturn starting in 2008, Morgan Stanley is turning that conventional wisdom inside out. In “a strategic shift,” Morgan is making a “culture of investment excellence” the top priority for its wealth management group.
Since 2008, performance has surpassed relationship and service as the No. 1 concern for the wealthy, says David Lessing, chief operating officer of U.S. Wealth Management. Service and relationships are seen as “table stakes.” Clients “want to know that they’re getting really good advice, translated as good performance in line with their goals.”
That doesn't mean service is out, of course. “We believe superior service is absolutely critical,” Lessing said. “We’re always going to talk about it. But we think the danger of not focusing on performance outweighs the danger of focusing on it.”
To sharpen the focus, the firm recently rolled out a number of new tools that, among other things, allow advisors to compare their own investment performance with that of other advisors at the firm. It’s something that most firms do not currently measure and historically haven’t wanted to track. Advisor management of portfolios can of course be tricky (witness the proliferation of legal and regulatory actions against the big Wall Street firms, including FINRA’s settlement Tuesday with Wells Fargo, UBS and Morgan Stanley over their sales of leveraged ETFs in 2008 and 2009.) While Morgan Stanley isn’t saying so, the benchmarking technology could limit liability by potentially helping the firm identify underperforming accounts before they create deeper and more contentious arguments with clients and regulators.
Advisors themselves worry that Morgan Stanley will use the portfolio performance information to reward the best and penalize the rest. Lessing says the firm does not plan to do this because no two portfolios are alike—some clients may have a lot of individual securities in their portfolios and many clients, at least in nondiscretionary accounts, do not take their advisors’ recommendations.
But if the firm finds that an advisor is underperforming across the board, will it be able to justify allowing this advisor to continue managing client accounts? Todd Taylor, partner at Heidrick & Struggles in New York, a global executive search and consulting firm, says this will be a hurdle for Morgan Stanley. “Clients will get better results, which will enhance the brand. But that doesn’t mean it won’t be without challenges. If you take this to the extreme, can you allow FAs who are perennial nonperformers to continue working at Morgan Stanley?”
Clients Want Performance
It’s true that clients care more about performance post-2008, said Stacey Haefele, CEO of HNW, which provides strategy and marketing services to wealth management firms and luxury brands. “Everybody is paying more attention because even the richest were very badly affected by the market place. We all rode it up and we all rode it down, it just varied in the amplitude of the waves.”
Data from Aite Group to be published Thursday demonstrate that as much as advisors want to focus on service and planning, clients value performance a bit more. About 29 percent of respondents said that better investment performance would cause them to switch financial advisors in the next six months, followed by 27 percent who named higher-quality advice and 25 percent who wanted a greater focus on their needs. Meanwhile, some 42 percent of respondents to the Aite survey indicated that a desire for improved returns was the reason they hired their first financial advisor. Another 39 percent said they sought out their first financial advisor for help with investment management generally, and 34 percent said they decided to work with a financial advisor so that he or she could review their retirement and/or education plan.
But while Morgan hopes its new performance emphasis will make a difference in clients’ monthly statements, it is not going to roll out a client-facing marketing campaign to advertise the new strategy. The firm would not say why it wasn’t taking this step, but it adds weight to the argument that its primary interest is reducing liability.
Cerulli and Aite Group analysts said it’s generally a smart shift for Morgan Stanley, in as much as it allows the firm to standardize performance in increasingly complex markets, and considering that more advisors are doing investment management themselves rather than farming it out or leaving it to the home office.
“As advisors take more control and discretion over client accounts, firms need to make sure there aren’t detrimental effects on clients,” said Scott Smith, Cerulli Associates analyst. “Getting advisors focused on doing it the right way as opposed to investing with their gut, you can make a lot of progress. From a risk-management perspective it’s good.” What all of the firms really want is for their advisors to use the home office portfolio models, because that would mean more revenue for the firm and less liability at the advisor level, said Smith. But firms can’t force advisors to use the in-house stuff or they’ll lose them to the rival wirehouse across the street.
Further, Morgan needs an edge. Consider that wirehouse rivals Merrill Lynch and Wells Fargo both have far greater breadth in banking products, said Aite Group analyst Alois Pirker. “Look at Morgan Stanley. They can try to offer up banking products, but it’s not going to be the core thing. Investments will be the core thing, so it’s smart for them to focus on that and differentiate themselves on that point.”
On the other hand, the tool that allows financial advisors to track the trading of other financial advisors could encourage advisors to fall into the trap of chasing the market, says Smith. “You just don’t want to be managing portfolios through the rear-view mirror.”
Some of Morgan Stanley’s new tools have been around for a year or more; others have just been launched. Perhaps the most significant tools are Peer Activity, Performance Dashboard and One View.
Peer Activity, launched in March, allows financial advisors to see what equities certain aggregated groups of financial advisors are trading and how they’re allocating their assets on a weekly basis. For instance, an advisor could get a snapshot of the investment trends among the top performing financial advisors at the firm with $1 billion or more in assets and 20 years of experience.
The performance dashboard allows financial advisors to aggregate the performance of all of their clients on one screen, to identify clients that need more attention, and to benchmark the performance of their own clients against other clients across the firm with similar risk tolerances, ages and asset levels.
“It allows you to identify which clients are under-performing relative to a customized benchmark, and open up a conversation with the client about their asset allocation or their risk tolerances. The primary focus of the tool is to allow FAs to prioritize their time and understand where they should be focusing.”
One View, which was introduced in February, allows financial advisors to see the holdings in a client’s other investment accounts if they give the advisor permission, which allows the advisor to provide more holistic advice. Just a few weeks in, $4 billion in outside assets had already been linked to it and Morgan’s advisors can now offer advice on these assets, though there are compliance considerations and terms and conditions associated with such advice, said Lessing.
Morgan also launched what it is calling the Academy of Investment Excellence in March, a multi-day program that provides more comprehensive, in-depth product training. Then there is Star Mine, which can provide a ranking of every analyst from whom the firm provides a recommendation. And finally, there is Wealth Bench, a portfolio construction tool that allows advisors to do what if scenarios on client and prospect portfolios. Morgan advisors could do scenario planning in the past, but this tool allows advisors to do it more quickly and to have access to positions and assets classes they did not previously have access to.
Advisor Insights, which has been around for some time, is an internal linkedin, which features advisors who cater to certain kinds of clients or who have deep expertise in certain areas. These advisors have audited track records and other advisors can partner with them to gain expertise or to woo a particular client.
“One of the benefits we get from the scale we now have is that we literally have an expert in every possible subject and discipline among our financial advisor population,” said Lessing.
Pirker, who has had a chance to demo the new tools, said the design is very modern and user-friendly. “The user interface is very modern, almost Apple-inspired, with tiles, so they did really well there. It was a project that everyone was waiting for them to complete so they went the extra mile to rethink some of the architecture.”
According to Pirker, Merrill Lynch is the only firm that has anything close to what Morgan now offers technology-wise. Some of Morgan’s new tools are available through online brokerages directly to consumers but they have not been put in front of financial advisors before, he said.