From the February 2007 issue of Research Magazine • Subscribe!

February 1, 2007

Benchmarking for Dollars

When I lived in Washington, DC in the early 1980s, the fact that I was born in Russia almost always elicited an incredulous reaction. People instantly assumed I was a Kremlinologist -- i.e., professionally interested in sorting out murky politics in the USSR. That I studied economics somehow didn't fit.

But here I am lunching with another former Muscovite at Butterfield 9, an eatery a few blocks from the White House named after the telephone exchange in the Thin Man movies of the 1930s. Listening to the mixture of English and Russian at our table, other patrons may legitimately assume we are deep into some esoteric point on sagging Russian-American relations. What we're actually talking about is the challenges of running an independent financial advisory business, meeting clients' expectations in an era of aging baby boomers and sharing information on best practices in the industry.

Tapping the Best Talent

The U.S. economic system is still very good at attracting the best and the brightest from abroad. My lunch guest Maya Ivanova is one of those dynamic new Russians who came of age during the collapse of the communist economy. In the early 1990s, she was on a team developing the first financial market index in Russia. She holds a degree from the Plekhanov Economics Institute, named after the father of Soviet economics. If nothing else, the school's emphasis on math and statistics has been an asset in her all-American job of designing and conducting industry surveys among registered investment advisors for AdvisorBenchmarking.

The firm has its origins in industry surveys conducted by Rydex Investments, a mutual fund company, for the benefit of its wholesalers. At the time, only the firm's clients were polled, says Ivanova, and the purpose was to improve customer service by identifying hot-button issues for RIAs. However, it quickly became clear that information obtained in the process is in great demand -- not just at Rydex but among RIAs themselves, who found it was a great way to learn what other practitioners in the field are doing and how they approach problems they all share.

That is how Rydex became a pioneer in the field, conducting regular, broadly ranging surveys with data going back to 1999. Ivanova runs AdvisorBenchmarking, a Rydex subsidiary. In fact, she is AdvisorBenchmarking.

Rydex does not charge for the data, and Ivanova summarizes her findings in a PracticeEdge best-practices newsletter. The survey has grown considerably in popularity, she says. The latest annual survey featured responses from more than 600 firms nationwide, obtained both on the firm's website www.advisorbenchmarking.com and in telephone interviews.

How to get some very busy people to answer nearly 60 in-depth questions? Easy.

"We constructed a fairly sophisticated web tool," says Ivanova. "As advisors plug in their information, they can see how they stack up against their peers and how what they do compares against best practices."

Divided into 10 chapters, the annual survey covers such diverse issues as time allocation by advisors and use of technology to succession planning and projections for the future.

This is the most comprehensive product put out by Ivanova. There are others, such as smaller supplemental surveys and topical questionnaires. There is also the monthly Rydex Advisor Confidence Index. This gauge of advisor sentiment is worth watching. After all, advisors keep a finger on the pulse of the economy and financial markets. In November, for example, the index inched lower and stood on the dividing line between Neutral and Positive. While RIAs were reasonably upbeat about the market, their outlook for the economy 12 months down the road was quite pessimistic. Accordingly, by the end of the year, Wall Street also began to express doubts about a benign soft landing for the economy in 2007.

Industry Concerns

A strong background in statistics aside, Ivanova says she has to be an industry insider to do her job right. She stays in constant phone contact with advisors, attends conferences and goes to visit their offices in person. She's got to live and breathe the industry, so to speak.

So, what does the industry live and breathe?

Independent advisors are business owners, and that means they must wear many different hats -- not just provide investment advice but conduct marketing, handle customer service, manage the practice and stay abreast of regulatory requirements. Curiously, profits tend to be highest among small firms -- which are not as encumbered by managerial issues -- and really large ones, which can afford to hire back-office staffers. Mid-size practices -- with assets under management measuring $100 million to $199 million and encompassing the industry's median of $124 million -- tend to get squeezed.

Says Ivanova: "It may be self-evident, but our surveys show that profits are very closely correlated with how much time is devoted to clients. The more time an advisor allocates to client contact, the higher are his profits."

In short, where advisors probably need most help and are eager to learn more about best practices is how to focus on what they do best. This could become an even more crucial issue, since a majority expect a substantial increase in AUM in coming years.

The role of the financial advisor is growing in complexity, too. For instance, as they and their family members age, clients come to their financial advisors for advice on such "unrelated" issues as health care and living arrangements, Rydex surveys find.

This may explain why there has been such strong demand for Ivanova's data and why so many other companies have emulated Rydex and instituted similar surveys and regular industry studies. Ivanova welcomes the competition -- both because there is always a need for more information and because other surveys confirm her own findings.

Providing a valuable add-on service to advisors is nothing to sneer at in an environment where competition among mutual fund companies is becoming increasingly intense. But Rydex derives a more direct benefit from AdvisorBenchmarking findings. For example, Ivanova's surveys have found that RIAs are now keenly interested in alternative investments and are looking for cost-effective alternatives. Another surprise in her surveys, says Ivanova, is that RIAs are becoming more tactical in their asset allocation.

Perhaps there is a connection between Ivanova's findings and the fact that Rydex has been very active in the exchange-traded-fund field. In late 2006, Rydex filed to bring to the market nearly 100 new ETFs, some of them using leverage to deliver a multiple of the performance of a benchmark index. Other new Rydex ETFs seek to short the market, providing an inverse return on an index or even a multiple of that inverse return.

Although their market capitalization has surpassed $1 billion, ETFs remain a fairly new and innovative product. It makes perfect sense for a company that aspires to be a leader in this field to keep abreast of the market.

Who: Maya Ivanova, Market Research Manager, AdvisorBenchmarking

Where: Butterfield 9, 600 14th St., N.W., Washington, DC

On the Menu: Pumpkin soup, roasted duck leg salad with potato galette and industry best practices

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Alexei Bayer runs KAFAN FX Information Services, an economic consulting firm; reach him at abayer@kafanfx.com.

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