Liquid Alternatives Pioneer
Position: Managing and founding principal, AQR Capital Management
Location: Greenwich, Conn.
Education: B.S. in economics, engineering, University of Pennsylvania; MBA and Ph.D. in finance from the University of Chicago.
When Cliff Asness decided to launch his first alternatives mutual fund based on his hedge fund strategy in 2009, it seemed like a risky bet. He was going into uncharted territory. Besides that, it would mean sacrificing the lucrative “2 and 20”—that 2 percent of assets plus 20 percent of any profits earned, typically charged by hedge fund managers.
Today it looks like Asness, a Ph.D., made a smart move. Since 2009, AQR Capital Management has gathered $4.7 billion in its liquid alternatives funds, according to Morningstar, and interest in these types of funds is only expected to grow. According to data released by Cerulli Associates and Strategic Insight/SIMFUND, alternative mutual funds account for 2.8 percent of overall mutual fund assets today, but are projected to reach 15.8 percent of assets a decade from now.
Asness now runs four alternative mutual funds, including the AQR Managed Futures Strategy (AQMIX), the AQR Multi-Strategy Alternative (ASAIX), and his largest fund, AQR Diversified Arbitrage Fund (ADAIX), which is closed to new investors. The firm just recently rolled out the Risk-Based Commodities Strategy Fund (ARCIX), a portfolio of commodity futures contracts, and a series of defensive equity funds. Most other alternative mutual fund firms are either small boutique shops or traditional asset managers breaking into the alternatives space for the first time.
Asness knows alternatives; he’s been running these strategies for institutions for 14 years. And his fees are surprisingly low compared to other alternative fund managers. The expense ratio on AQMIX is 1.25 percent. On average, managed futures funds charge 2.7 percent, says Terry Tian, alternative investments analyst at Morningstar.
He’s also got skin the game. According to Tian, Asness has over $1 million invested in the firm’s global equity mutual fund, and a significant amount in the international equity fund and international momentum fund.
Asness’ challenge going forward will be to learn the distribution model in the retail space, says Jeff Tjornehoj, head of research at Lipper. “They’ve got a good name behind them; it’s just finding an audience. I think they’re more familiar with high-net-worth individuals, not so much on the retail side.” —Diana Britton
Position: Assistant Secretary for the Employee Benefits Security Administration of the U.S. Department of Labor
Location: Washington, D.C.
Education: J.D. from Catholic University Law School; M.A. in English from Syracuse University; Undergraduate degree from Ladycliff College.
Phyllis Borzi is not your typical Washington politician. She’s blunt rather than smooth-talking, and her candor can put some people off, says Knut Rostad, regulatory and compliance officer at Rembert Pendleton Jackson and president and founder of the Institute for the Fiduciary Standard.
Since taking her post at the Department of Labor, Borzi has made it her top priority to tighten up the definition of fiduciary under ERISA rules. Her doggedness on this issue has put her at odds with brokerage industry trade groups such as the Financial Services Institute and SIFMA, who oppose the legislation.
The FSI disliked Borzi’s original proposal because it would apply a fiduciary standard to individual retirement accounts, which would prohibit financial advisors providing advice to IRA clients from charging commissions for product sales linked to that advice. Investors who get retirement account advice on commission would have no choice but to get their advice from a fee-only advisor instead, which can be more expensive for smaller investors, argues Dale Brown, president and CEO of FSI. IRAs are also big business, with 42 opercent of all advisor assets in retail IRAs, according to Cerulli Associates.
But Borzi has also gotten pushback from members of Congress. Thirty-three Democratic congressmen sent a letter to the DOL in late June, criticizing the agency’s failure to conduct a cost-benefit analysis of the rule and its failure to coordinate with the SEC, which is working on separate fiduciary rules under Dodd-Frank that would apply to non-retirement retail accounts. The DOL is preparing to re-propose the rule after conducting such a cost-benefit analysis and addressing industry and legislator concerns.
A final rule will not be issued by the end of the year, says Borzi. According to Borzi, revisions to the rule could include clarification that fiduciary advice applies to individual advice, not to financial education, or to sales of financial products. She will also consider conditional exemptions to allow some compensation arrangements to continue under certain conditions.
Since Borzi’s position is a presidential appointment, leadership at the DOL will likely change if Mitt Romney is elected in November, affecting the status of the proposal, says Duane Thompson, president and founder of Potomac Strategies, a public relations and lobbying firm.
Borzi’s biggest challenge now will be to gain broad-based political support for the rule. “It’s not something the DOL can ignore,” Thompson says. —Diana Britton
Position: Director of digital strategy—content and social media, Morgan Stanley Smith Barney
Location: New York City
Education: B.S., Wharton School, University of Pennsylvania; M.B.A., Harvard Business School.
Wirehouses aren’t exactly leading the advisor industry’s charge into social media. But that’s because supervising the tweets of over 10,000 reps is quite an undertaking. So even a tiny step forward in this arena seems monumental. With that in mind, Morgan Stanley Smith Barney’s Lauren Wagner Boyman is one to keep an eye on. Boyman’s job didn’t even exist before May of last year, when she moved over from a marketing role to the firm’s new Digital Strategy Group. Boyman’s own Twitter handle—@lboymanmssb—is less than a year old. “The industry is tiptoeing into this,” she says.
And yet, Boyman’s work is starting to pick up the pace. After a pilot program that started more than a year ago and took longer than expected, this month the firm will starting rolling out new social media policies to its more than 17,000 advisors to encourage greater use of social media, including Twitter and LinkedIn accounts.
There’s been some sniggering in the blogosphere about the effort; Morgan Stanley advisor tweets have to be selected from a pre-approved library that MSSB has compiled, and LinkedIn status updates also need management signoff. Where’s the “social” (interactive) part in all this? But Boyman says that’s simply a matter of regulation—the firm can’t have conflicting messages from its equity analysts and its advisors floating around the web. Bloggers don’t get it, she says—“There are a lot of nuances to the content side of this that aren’t necessarily understood or appreciated.”
MSSB is leading the other wirehouses in this field, says Chad Bockius, CEO of Socialware, which is partnering with Morgan Stanley to manage its social media expansion. During the pilot program, 40 percent of advisors reported recruiting new clients from the effort, he said, and at least 60 percent of those clients had assets of at least $1 million or more. Tech consultant Bill Winterberg of FPPad.com says he is “shocked” at the 40 percent figure, having expected something closer to 10 percent—but it’s possible, he adds. “It just shows if you have profiles, if you have Twitter, chances are better you’re going to connect with clients and prospects.”
Boyman says she would consider MSSB’s effort a success if 30 percent of advisors became active on social media. “It’s not an option,” she says. “Everybody Googles everything these days. You want (clients) to know you have a digital presence, an online presence.” —Jerry Gleeson
Wizard of Worry
Position: Chief investment officer Innealta Capital
Location: Austin, Texas
Education: BS, Lehigh University; PhD, Lehigh University.
Fearing that markets could sink, Gerald Buetow took defensive measures in January 2008. During the month, he lowered the equity allocation in his sector rotation portfolios from 80 percent to 10 percent. By end of the spring, the allocation had dropped to zero. That bearish stance proved to be a winner and caught the attention of advisors who raced to invest in Buetow’s portfolios. Assets at Innealta Capital climbed from $250 million in 2007 to $3 billion today. The question is: Are the brilliant calls he has made in the past few years repeatable? Or is he just another flash in the pan?
These days Buetow is cautious again. Worried about unemployment and debt problems in Europe, he has put only 10 percent of his sector rotation portfolios in stocks. The cautious strategy provided protection in the second quarter of this year when stocks sank. Can the approach deliver competitive results if markets climb later this year? Buetow thinks so. “Our strategy is risk averse when risk is high and pro-growth when risk is being rewarded,” he says.
After developing his approach over many years, Buetow started his company in 2007 and sold it to Al Frank Asset Management in 2009. In the past, he offered mainly separate accounts. At the end of last year, the company introduced two mutual funds, Innealta Capital Sector Rotation (ICSNX) and Innealta Capital Country Rotation (ICCNX). The funds can hold from zero to 100 percent of assets in equities. To set the allocation, Buetow watches a host of indicators, including standard deviation of stocks, changes in profit margins and monetary policy.
For the sector rotation strategy, he examines each of the 10 S&P industry sectors. Buetow evaluates each sector based on whether it seems poised to outdo the Barclays Capital Aggregate bond index. If so, he puts 10 percent of assets in an ETF that tracks the sector. If it looks to lag, Buetow puts 10 percent of the portfolio in fixed income. Because he is currently negative on nine sectors, the sector rotation mutual fund has 90 percent of assets in fixed income ETFs, such as Vanguard Total Bond Market (BND). The only sector Buetow likes these days is energy.
For the country rotation fund, Buetow monitors 28 countries, including Australia and Brazil. Then he picks the top 20 names and decides whether to invest. Today, 95 percent of assets are in fixed income. The only stock holding is iShares MSCI Singapore ETF (EWS). By maintaining a conservative position, Buetow is prepared for trouble abroad. –Stan Luxenberg
Position: Director of Advisor Services, Scottrade Advisor Services
Location: St. Louis
Education: B.S., University of Phoenix
When breaking into the custodian market, it doesn’t hurt if you do discount brokerage business. (Look at where it got Charles Schwab, Fidelity Investments and TD Ameritrade.) So it’s natural to speculate about how ambitious Scottrade Advisor Services and its top executive, Brian A. Davis, are feeling these days.
Privately-held Scottrade launched its advisor unit in 2005 after it realized that close to 100 RIA firms already were running trades through its discount platform, Davis says. While most of its firms average a relatively modest $30 million to $50 million in assets under management these days, growth has proceeded at a brisk pace, according to Davis. The firm now has close to 1,100 advisors on its platform, up from 966 at the end of last year and up from 812 at year-end 2010. This year Aite Group reported that Scottrade Advisor Services saw assets increase 45 percent in 2011 to $35 billion. Davis confirms the growth rate but disputes the total asset figure, and declined to offer an alternative figure.
There’s no fee to custody assets with Scottrade—Charles Schwab and Fidelity charge a custody fee for RIAs with under $10 million in assets—and no minimum asset threshold for firms that want to join the platform. That means less financial risk for advisors making the leap. As for service quality, Davis says there is a dedicated team of people that work with each advisor and a ratio of about one support person for every 10 advisors. Among other things, Davis touts the lack of a telephone prompt system for service calls; calls from advisors are automatically routed to the correct associates assigned to service their practice. Plus, Scottrade this year began offering half-off discounts on MoneyGuidePro financial planning software; Davis also envisons partnerships with TAMPs to expand his service offering, although he wouldn’t offer a target date.
Does he see himself following the path of other discounters to the top of the custodial pack? “We’re going to keep plugging away … Where we end up, we end up,” he says. “With almost 30,000 RIAs and 500,000 brokers that can potentially become RIAs, there’s plenty of room for us all to find our niche and cater to it.” —Jerry Gleeson
Position: Co-founder, Advizent
Location: Boulder, Colo.
Education: B.S., University of Southern California; M.B.A., University of California, Los Angeles.
You could say that Charles G. Goldman is his own brand within the RIA industry. Goldman ran the Fidelity Investments unit that oversaw its registered investment advisor platform, Fidelity Institutional Wealth Services. And earlier, he led Schwab Institutional, the nation’s largest RIA custodian. Now Goldman is trying to build a brand for something new: an ambitious national consortium that will promote the channel to investors, set practice standards, and provide marketing muscle for the thousands of disparate advisor firms. The effort has caught a lot of attention.
Together with Convergent Wealth Advisors Chairman Steve Lockshin (a former client of Goldman’s at Schwab), Goldman launched the startup last spring, which they dubbed Advizent. The founders sought nonbinding pledges of interest from practices with relatively deep pockets—minimum AUM of $250 million, in order to afford membership fees that would run up to $100,000. Perhaps in testament to Goldman’s credibility, it only took a few months to round up 80 RIAs with $107 billion in assets. Nobody’s writing any checks yet; “We won’t send a bill to anybody until we’re demonstrating value,” Goldman said. “But the first thing we need to make this work is advisors.” He’s looking to fill a few marketing and sales positions this summer.
Advizent’s mission isn’t just to consolidate a group of RIAs to squeeze better service deals from custodians via economies of scale. The core of the enterprise is the establishment of a range of best practices that its members would agree to abide by, in effect a seal of approval that they hope will attract investors looking for professionals they can trust with their money in an era of tarnished reputations.
In many ways, Advizent is an undertaking that’s tailor-made for someone with Goldman’s background. Consultant John Furey of Advisor Growth Strategies worked under Goldman while at Schwab. Furey says Goldman’s work on Schwab’s breakaway broker program—developing sales and marketing programs and a system for transitioning brokers to independence—dovetails nicely with the tasks ahead. And his connections in the business will serve Advizent well, Furey adds. “He can just unlock a lot of doors for advisors,” he says. “Everyone takes Charles’ calls. This is a relationship business. We all know that. And Charles has great relationships, and that’s going to be his leverage point.” —Jerry Gleeson
Ghost in the Machine
Position: CEO, Personal Capital
Location: Redwood City, Calif.
Education: Middlebury College; Harvard Business School, MBA
Who is your biggest business rival? Cyborgs and machines probably do not immediately come to mind. But online financial advice is becoming a real presence in the wealth management world, and Personal Capital is probably the one offering that most squarely faces off against personal financial advisors who cater to retail clients.
Launched in September by Bill Harris, former chief executive of PayPal and Intuit, Personal Capital couples high tech with high touch. Customers sign up online for account aggregation and tailored portfolio management, monitoring and rebalancing while a licensed financial advisor, often with a CFP, is assigned to each account. The firm won’t yet disclose how much it manages in assets, but says investors have registered $4 billion in aggregated assets on its platform. Personal Capital charges an annual fee on assets for advice of 75 to 95 basis points, depending on account size, and courts clients with a minimum of $100,000. The firm will launch more financial planning offerings in the fall.
“Who is my competitive set? Schwab or Fidelity or Bank of America,” says Harris. “Because what we are really trying to provide to customers is financial services, not software.” Harris believes Personal Capital’s software has greater depth of functionality than that offered by other financial services firms “by a country mile.” Where he would like to improve: customer experience. “So the next year and a half will be focused on simplifying it to make it effortless.”
Today the firm employs just 10 financial advisors and only a couple hundred people use its paid services, with average assets per client at a little over $250,000. But Harris believes his service “is a fantastic solution for people with as much as $5 or $10 million.” Will the Personal Capital model continue to attract financial advisors and retail clients, especially wealthy ones? It’s too soon to tell.
Will others follow its lead? The answer to that question is already, yes. In October, Ric Edelman will launch Edelman Online, a web-based platform, built in-house, that will give consumers access to the firm’s investment management and financial planning services.
“Edelman probably has even more capital to invest,” says Michael Kitces, director of research for Pinnacle Advisory Group, a private wealth management firm. “But Bill has something already under way that’s getting clients and flows. He has big goals and has made some pretty impressive progress so far.” —Kristen French
The Big Pockets
Position: Chairman, Lightyear Capital
Location: New York City
Education: The City University of New York
Insurance firms and banks have long been considered serial acquirers of independent broker/dealers. But there are new acquirers on the scene—private equity firms—and they have deep pockets. Of these private equity firms, Lightyear Capital, owner of Cetera, has some of the deepest, having managed, raised and invested $3 billion in capital.
Donald Marron, chairman and founder of Lightyear, is not new to brokerage acquisitions. In 2000, he orchestrated the merger of UBS and Paine Webber, where he was CEO. A day later, he launched Lightyear.
In February 2010, Lightyear purchased three of ING’s broker/dealers, rebranding them as Cetera. Since then, Cetera has grown from about 4,800 advisors with $75 billion in assets to about 7,000 reps and $100 billion in assets. The firm folded in Genworth Financial Investment Services in April, which focuses on tax and accounting services, and inked a recruiting deal to bring over FAs from Pacific West Financial Group at the end of last year.
“[Private equity is] almost like a game of monopoly,” says Philip Palaveev, CEO of his recently launched firm The Ensemble Practice. “They’ve acquired properties on every street. Time will tell which properties turn out to be the best.”
Cetera’s biggest challenge in the next 12 months is to keep up the pace of growth—these days acquisition pickings are slim. That means, in part, competing head on in the recruiting arena with LPL Financial, the 800-pound gorilla of the IBD space. Both firms use centralized operations facilities, have scalable resources and act as one well-coordinated entity, Palaveev says.
“The effect that Cetera is having on the industry, the only other company I could perhaps compare them to is LPL, in the sense that they’re very aggressively growing, inquisitive, aggressively looking to create new platforms and solutions for advisors,” says Palaveev.
Private equity firms often seek liquidity for their investments after about five to 10 years, and this could be in the form of an acquisition, going public, a leveraged buyout or a merger, Palaveev says. Marron would not discuss any plans to take Cetera public. But Jonathan Henschen, a recruiter with Henschen & Associates, expects the firm to go public in about seven years. —Diana Britton
Position: Senator (R.-Ala.), ranking member of the Senate Committee on Banking, Housing & Urban Affairs
Location: Washington, D.C.
Education: University of Alabama, undergraduate and J.D.
What happens to Dodd-Frank regulatory reform, and more specifically to pending Dodd-Frank rulemaking that pertains to financial advisors, hinges heavily on what happens this November.
In the House of Representatives, the Republican majority will likely hold. But in the Senate, Democrats currently have a narrow majority, and that could change come election time. If it does, Sen. Richard Shelby (R-Ala.), a longtime member of the Senate Banking Committee, would likely become chairman.
Yes, that is a lot of ifs, but predicting the future is a tough business.
Richard Shelby has a reputation as a moderate Republican, but he is a big believer in scaling back the size of government. More to the point, he has been a vocal critic of Dodd-Frank and has vowed to repeal it all together. On the other hand, he believes that regulators need to do a better job of uncovering wrongdoing before it surfaces in order to restore trust in the banking system. At recent hearings on J.P. Morgan’s enormous 2012 trading loss, Shelby grilled Gary Gensler, head of the Commodity Futures Trading Commission, about his failure to spot the problem. (The Commodity Futures Trading Commission does not yet have authority to regulate the bank.) Similarly, he has expressed disappointment that regulators here and in the U.K. missed the Libor interest-rate setting scandal that erupted in July.
Shelby is one of the Republican senators behind a push to require regulators to conduct cost-benefit analyses of all of the rules they write under Dodd-Frank. It is precisely that cost-benefit analysis that has delayed SEC rule-making on the fiduciary standard. Will Shelby be satisfied with the SEC’s analysis when it is complete? Will anybody?
Hard to know. Currently, there are two major regulatory issues facing financial advisors that will likely get kicked around in Congress next year: Whether to extend a fiduciary standard to broker/dealers and who will regulate investment advisors. The former is generally split along party lines, with Democrats in favor and Republicans opposed. The latter is a little bit more mixed. If the Senate holds its Democratic majority, heavily Republican legislation that makes it through the House will be less likely to get approval in the Senate. If not, it may breeze on through. —Kristen French
Position: Executive Director and Executive Vice President, Investment Adviser Association
Location: Washington, D.C.
Education: J.D. University of Kansas, Jayhawk
For investment advisors, there is perhaps no bigger business issue on the horizon than who will ultimately serve as their regulatory overlord. Will the Securities and Exchange Commission continue to wield the whip, or will a self-regulatory organization (SRO), most likely FINRA, take it up?
David Tittsworth, director of the Investment Adviser Association, is arguably the person who already has had and will have the biggest impact on how this plays out. After all, Tittsworth has been working on the SRO issue for 22 years. In 1990, he was a partner at a small lobbying firm in Washington, and the Investment Adviser Association, then a tiny two-person shop, hired his firm to oppose legislation that had been introduced in Congress to, yup, authorize the creation of an SRO for investment advisors. The bill did not pass. Six years later, the IAA hired him to take over the office.
The highly controversial topic is back on the table under Dodd-Frank, which requires greater oversight of investment advisors. Earlier this year, House Financial Services Committee Chairman Spencer Bachus (R-Ala.) sponsored a bill that would authorize an SRO for investment advisors. At a June hearing for the Bachus bill, Tittsworth was one of just two witnesses opposing the bill, and he did a lot of talking. In mid-July, Congresswoman Maxine Waters (D-Calif.) sponsored a bill, which Tittsworth helped draft, that would give the SEC additional funding to do the job itself.
“He’ll say he’s just a humble boy from Kansas, but he knows how things work, he knows where some of the proverbial bodies are buried, and he gets things done,” says Duane Thompson, president and founder of lobbying firm Potomac Strategies and government relations analyst for fi360, a fiduciary training firm and advocate.
Neither the Bachus or Waters bills are likely to pass before the November election, political pundits agree, but there is little doubt the subject will be picked up again next spring. Between now and then Tittsworth will be working behind the scenes in Washington to get his organization’s message to members of Congress and their staff and urging members to write to and meet with their congressmen. And surely we can expect more testimony down the line.
“This is an important investor protection issue that must be addressed and I know that David views it that way,” says Dale Brown, president and CEO of the Financial Services Institute, which represents small broker/dealers and supports an SRO for investment advisor oversight. “He is an effective advocate for his members.” —Kristen French
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