by Cynthia Harrington
The back offices of independent advisors are being flooded by a wave of new accounts.
Hundreds of small positions in separate accounts can require nightmarish coordination and analysis logistics. Proprietary wirehouse products sometimes can’t be transferred, and hefty back-end commissions prevent selling.
The new advisor is left to untangle the mess before implementing a plan designed to meet client goals.
The memory of bad performance is one thing driving the investors toward change.
Stephen Barnes works extra hours to keep up with the demands of new business. “Many of these new clients are holdovers from last year,” said Barnes, a CFP and CFA, of Barnes Investment Advisory, in Phoenix. “The decision to move the account was triggered when the clients hit their maximum threshold for pain. For many investors, that was the fall of 2002,” he said.
Much of the extra work is due to account problems, not volume of new business. Barnes illustrated the challenges with the experience of an current client account. The $300,000 balance in the account had been invested in separate accounts at a wirehouse. The account had been split between two platforms and the managers held over 300 positions.
“Fortunately, this was in an IRA, so I didn’t need to worry about the tax impact,” said Barnes. “But the transition out of 18 shares here and 32 shares there took a lot of time and effort.”
Nor is this situation isolated. “I’d say this is quite typical of accounts we’re getting from wirehouses,” said Barnes. “A couple of months ago, we got a $1.5 million account in similar condition. This was not an IRA, so we spent weeks tracking down cost bases before making changes.”
Not all advisors have trouble transferring in separate accounts. “We have the transferring broker liquidate all the positions because the client pays no transaction fees with many of these accounts,” said Benjamin Tobias, CFP, CPA, CIMA, of Tobias Financial Advisors, in Ft. Lauderdale, Fla. “We have not had to worry about taxable gains for the last couple of years, because of the wonderful job the separate account managers have done with these accounts.”
Tobias cited a bigger problem with accounts coming from bank trust departments. The accounts are easy to transfer but difficult to reallocate.
He recently received two new clients’ accounts with about $2 million each that came from two different banks. Each held about half in municipal bonds and half in domestic large cap equities. The clients were retired with no other income except Social Security and the cash flow from these accounts.
“Because of the losses on the equity side, these clients were in a zero-tax bracket and couldn’t take advantage of the tax-free income,” said Tobias. “But I couldn’t get fair prices to sell the bonds, so I hung on for these clients.”
Bad service ranks alongside bad performance and badly managed separate accounts as the reason for some account movement. “I’m getting these $1 million to $2 million accounts that are a perfect size for me but are ignored by trust officers because they’re too small,” said Tobias. “Plus, at the low end, there’s tremendous turnover in trust personnel so these accounts get pushed off to new officers too often.”
Proprietary products clog up the system at Dallas-based broker/dealer 1st Global.
These firm-specific mutual funds and other vehicles, like unit investment trusts and variable annuities, sometimes nick investors wanting to change with back-end sales charges. In many cases the product can’t be moved from the issuing broker.
“Our advisors spend lots of time with the client making sure the investor understands the concepts of proper diversification and asset management,” said Al Prentice, CFP, MBA, 1st Global’s vice president of business development and practice management. “These days, they add more hours on analyzing the impact of taxes and selling concessions on the client’s current holdings before recommending a transition plan.”
In the meantime, advisors also are busy holding hands. Investors move their accounts because they’re unhappy. Sometimes the new client’s emotions come into play before the new plan is in place. “Sometimes the advisor’s only friend in a tough situation is time. The problems of selling concessions and negative tax impact get worked out in a period of months, and hopefully not years,” said Prentice. “But sometimes investors are so upset with a particular situation, they want to just sell it no matter what the cost.”
Many 1st Global advisors currently are putting in the extra work. According to Prentice, their transfer of assets department doubled in size to accommodate the tremendous upsurge in the numbers of new clients. Advisors said that their new business comes both from do-it-yourselfers and clients burned by retail stockbrokers. “We hear from our advisors that the new clients come over looking for help in setting, then managing, realistic expectations,” reported Prentice.
The increased volume at 1st Global is partly due to an increase in advisors coming on board. “We expected this to be the toughest year ever for adding advisors,” Prentice said. “But it’s going to turn out to be our best ever.”
Prentice credited the recent upturn in the equity indexes with some of their new volume. “Hopefully, the prolonged downturn is over, but I thought the pain of recent years would keep investors out of the markets longer,” said Prentice. “I remember after the 1974-1975 bear market, individuals didn’t come back until the bull market started in 1982.”
Even after the accounts are cleaned up, the client education process continues. Barnes gets frequent calls for reassurance from the owner of an account that transitioned over last fall. Barnes is nearly done reallocating the assets from hundreds of positions down to the 25 to 30 recommended by the Barnes Investment Advisory philosophy.
“This investor knows and liked our belief that the optimal diversification comes from 20 to 30 positions,” said Barnes. “Even though he wasn’t happy with the hundreds of positions, he drew some comfort from the larger numbers.”
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