What Advisors Do When Wrap Clients Get Jittery

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Most advisors agree that involving ones clients in asset allocation is an integral part of designing a mutual fund wrap. However, the current economic downturn has many investors prematurely ditching their carefully designed long-term programs, despite having taken part in choosing the funds, says Michael Bonevento.

With 90% of his business as an American Express senior financial advisor in mutual fund wraps, a significant number of the long-term relationships Bonevento has cultivated are showing signs of strain these days.

“Every advisor is unpopular right now,” he says. “Probably our clients dont believe anything we say.

“Mutual funds are not doing well now. Thats just a function of a slowing economy–people get concerned about the possibility of losing money and mutual funds get sold.”

As defined by Cerulli Associates, a Boston-based research and consulting firm, a mutual fund wrap is a program “designed to systematically allocate investors assets across a wide range of mutual funds.

“Services include client profiling, account monitoring and portfolio rebalancing. An asset-based fee of 1.25% for example, is charged instead of commission. Account minimums typically range between $10,000 and $50,000,” Cerulli says.

When clients want to sell mutual funds earlier than they had planned, Bonevento, who works out of the Wall Township, N.J., American Express office, asks them whether they still have the same financial goals they had when he initially worked with them to plan the wraps. If the answer is yes, he tells them that abandoning the plan early in a tough spot is typically a bad idea.

In explaining why they should hang on to their programs over the long term in spite of sagging values, he goes over with his clients figures he can factually measure, including interest rates, inflation, energy costs, unemployment levels, corporate profits and the value of the euro. He mentions that the economy has faced similar conditions before and has eventually rebounded.

Bonevento also explains that being a successful long-term investor means remaining faithful to ones portfolio in good times and bad.

“When the market was doing well, everyone was a long-term investor,” he says. “Now, everyones leaving the market. Success comes in the long term.

“When the economy suffers is not the time the investor should be panicked. As long as nothings changed from their financial perspective, theres a very good chance they should stay where they are,” he says.

Investors who become upset with their advisors usually do so “because the advisor makes money whether the investor makes money or not,” Bonevento says. “The wrap account came from investors being tired of the investor not doing as well as the advisor.

“In a wrap account, the amount of money the advisor gets up front is very low, so it behooves the advisor to give good advice,” he says. “If the relationship isnt cultivated, it ends.”

Despite the apparent pitfalls of a trying economy, Keitha Kinne, director of investment management services for Prudential Investments, Newark, N.J., says there are many “good reasons why a mutual fund wrap program is a good vehicle for the advisor to work with.

“We find a very strong connection between client satisfaction level, both with the firm and advisor, and the degree to which that advisor uses the investment-consulting program this is based on,” she says.

Mutual fund wrap programs “are about putting together an overall investment plan that includes being diversified,” Kinne says. “Advisors who have provided their clients a diverse book of business are happy today, not like people who sold large-cap tech funds a year ago.”

The process built into the mutual fund wrap program is in itself a safeguard against misinterpreting a clients needs and risk tolerance level, Kinne says.

“Because these programs follow that process, it allows the representative to have a systematic way to sit with clients, to understand what the clients risk tolerance is compared to other investors and be able to monitor plans in an efficient way as well,” she says. “So its a good way for the representative to bring solutions to her client and a good and efficient way to build your practice.”

Involving the client in the creation of the wrap is a way to maintain her confidence level when the investments chosen begin to drop in value, Kinne says.

“Theres always a process the advisor needs to be going through with the client, and it begins before” funds lose value, she says. “We see a definite difference in the happiness of clients when theyre included in selection of funds. The advisor should not succumb to a client asking her to pick the investments.”

A scenario in which Kinne would support a change in the program is if a fund manager picked for a certain style “is performing outside of the context.

“The client should understand the history of a manager upfront and that hours are dedicated to monitoring performance of the fund,” Kinne says.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 24, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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