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THE GLUCK REPORT, Part II: Advisors Still Upbeat

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Advisors are overwhelmingly optimistic about the stock market and economy. The advisor market is segmented with RIAs targeting much wealthier clients than registered reps. About a third of advisors have beaten the market over the past year. These are some of the findings of our latest survey of advisors.

With the shadow of the worst bear market in decades still hanging over the investment advisory field, our survey finds that advisors have benefited from the upsurge in stocks that began after the Russell 3000, an index representing the total stock market, bottomed on March 11, 2003. The Russell 3000 has risen 27% since then, and advisors have regrouped and recovered. Although sales are up at the great majority of advisory firms, competition has stiffened.

This is the third time in the last 18 months that we have surveyed advisors by email. Our latest survey, conducted in late September, brought nearly 800 responses. To help refine the survey, I have enlisted the help of industrial psychologist Howard Gendel, who specializes in research about financial services.

Advisors are overwhelmingly optimistic, with 85% of those responding saying the stock market and economy would strengthen over the next 12 months. That level of optimism is in line with our survey results during the depths of the bear market in April 2003, when 86% of advisors said they believed the economy and market would strengthen over the coming 12 months. More advisors are optimistic now than in September 2003, when 10% of those surveyed predicted a stronger stock market and economy.

With the great majority of advisors optimistic about the stock market, many are putting their money where their mouths are. Twenty-six percent said they allocated more to stocks over the previous 12 months, while 20% said they had allocated less to stocks. The remaining 54% said they had maintained the same allocation to stocks over the past year.

Comparing advisor sentiment on the economy and stock market today with the results of our survey in April 2003, which coincided with the bottom of the bear market, reveals a less rosy picture. Then, as now, about half of those polled had maintained the same equity allocation over the previous 12 months. But that’s where the similarity ends.

In April 2003, when 86% of advisors brimmed with optimism as they do now about the prospects for the economy and stock market, only about 7% said they had over the previous 12 months allocated more to equities. According to the current survey, 26%, have allocated more to stocks in the past year. Another big difference: 45% of advisors had reduced allocations to stocks in the year leading up to April 2003, versus just 20% now.

Stock market sentiment indicators are reverse indicators. When more advisors reduce allocations to equities, the chance of gains in the stock market improves because their selling and lack of interest in stocks has already driven prices down. While you cannot draw any firm conclusions from a single indicator using advisor sentiment as a proxy for all stock investors, the data makes it seem less likely that the stock market will experience a pop in the coming year, as it did after our April 2003 survey, because we have seen half the number of advisors reducing allocations to stocks in the past year that we did then. There just have not been enough skeptics left on the sidelines to buy into the market.

Registered investment advisors are more likely to be skeptical about the stock market and economy than registered representatives affiliated with broker/dealers, according to our survey. While just 9% of the nearly 400 reps said the stock market and economy would weaken over the next year, 22% of the nearly 400 RIAs responding predicted a weaker stock market and economy. Skeptical about the market’s prospects, just 18% of the RIAs surveyed said they had allocated more to equities over the previous 12 months, while 32% of reps allocated more to stocks.

Commodities Gain Traction

For advisors allocating less to equities, no one asset class is drawing a huge portion of the freed-up cash. For advisors allocating less to equities, the favorite spot to deploy the cash among 24% of RIAs is in money market instruments, while the favorite spot for 30% of reps is in real estate. Commodities are getting more spare cash from 21% of RIAs and 15% of reps. Bonds are cited as the best spot for the freed-up cash by just 19% of RIAs and 20% of reps.

We wanted to see how closely aligned registered reps are with RIAs on key issues. So for the first time since we started surveying advisors online, we separated our respondents based on their classification. We found that the independent advisor channel comprises two distinct groups, with RIAs generally targeting a wealthier clientele than reps.

The market segmentation is most clear from the data we gleaned in asking about account minimums. Of the reps surveyed, 68% said their minimum account size was less than $100,000; only 34% of RIAs accepted accounts that small. Among RIAs, 25% said their minimum account was $100,000 to $249,000, and 19% said their minimum was $250,000 to $499,000. In contrast, among reps, 23% set a minimum of $100,000 to $249,000 and just 4% at $250,000 to $499,000. The difference in their respective sweet spots is clear at higher account minimum levels: Less than 5% of the registered reps set their minimum above $500,000, against 22% of RIAs.

Credentials, Please

RIAs are also more likely to hold a professional designation, with 31% saying they were CFP licensees, versus 25% of reps; and 15% of RIAs hold an MBA compared with 11% of reps. Fourteen percent of reps have no professional designation, half that for RIAs. In general, however, RIAs and reps were together on most issues. For instance, 80% of RIAs said they increased spending on compliance over the previous 12 months, while 85% of reps did, and about 70% of both reps and RIAs increased spending on technology. However, nearly 80% of RIAs said they increased spending on marketing over the past 12 months while only 61% of reps did.

Overall, the financial advice business has been stronger over the past 12 months. The great majority of advisors, 84%, say their revenues have risen over the past 12 months, while the rest experienced declining revenue. This stands in stark contrast to the survey we took near the bottom of the bear market, when more than half of those surveyed reported bringing in less revenue over the previous 12 months than they had three years earlier, when the 1999 bull market was still in full swing. Among advisors and reps, 41% reported revenues up over the past 12 months by between 1% and 19%. A quarter of all advisors reported sales up by 20% to 29%, while 21% reported sales gains of 30% of more for their business.

Respectable Performance

The Russell 3000, a broad index gauging the strength of the stock market, gained 14.3% during the 12 months ended September 30, 2004, while intermediate-term bonds gained about 4.4%. Assuming advisor portfolios have 25% in bonds or fixed income mutual funds, it is fair for advisors to benchmark their returns against an unmanaged stock and fixed-income return of about 10.5%. Just over half of the respondents, 51%, said their average portfolio was up between 1% and 9% over the previous 12 months. So most advisors were about even with a passively managed benchmark or trailed it slightly. The good news is that 35% of the advisors responding to our survey said their average portfolio gained between 10% and 19% over the previous year, and 5.5% of the advisors surveyed gained 20% in their average portfolio.

About 40% of advisors matched or beat the unmanaged indexes, a good showing considering that the great majority of mutual fund managers do not beat their benchmarks. More impressive, only 8.5% of advisors polled in our confidential survey reported that their average portfolio turned in a loss, with 6% saying their average portfolio dropped between 1% and 9%, 2% saying their average portfolio fell 10% to 19% in value, and less than 1% of those surveyed saying their average portfolio declined in value by 20% or more.

In comparing the performance of RIA versus rep portfolios, RIAs performed no better. Among RIAs and reps, 85% of each group said their average portfolio gained over the previous year. It was only in the top performers where RIAs had an edge, with 7.4% of RIAs reporting gains of 20% or more versus just 3.5% of reps.

Competition in the financial advice business is getting stiffer, according to the survey data, with reps feeling more competitive pressure than RIAs. While about 40% of RIAs and reps said competition had remained the same over the past year and 5% of both groups said they felt less competition, nearly 55% of both reps and RIAs said the advisory business had become more competitive. Among reps and RIAs who said competition had stiffened, 22% attributed the increased competitive pressure to full-service brokerages, 8% to insurance agents, and 6% discount brokerages. Where RIAs and reps differed is in whom they are competing against.

Of the reps who said they were feeling increasing competition, 14% said the increase in competition came from other independent advisors. In contrast, 37% of the RIAs who said they are feeling more competition said it is coming from independents. So if reps are not feeling more competition from other independent advisors, then where is the increased competition coming from? The answer: banks and trust companies, cited as the main reason for increased competition by 32% of reps. The other source of increased competition for reps is accountants, cited by 16% of reps.

Discounters? Who Are They?

Contrary to what everyone thought would happen five years ago, discount brokerages were not a significant competitive factor in the bull market of 2003-2004. In 1999, during the height of the Internet boom, brokerages were scrambling to create self-directed advice tools and everyone was certain that discount brokerages like Charles Schwab would be taking a larger piece of the advice market. That has not happened and, for now at least, advisors do not see it changing.

Reps presumably are seeing greater competition from banks because CD rates are so low that bank customers are more readily converted to brokerage products, and banks may be getting better at selling securities advice. For RIAs who say they are seeing stiffer competition from other independent advisors, it’s reasonable to assume that, thanks to the brokerage scandals, more retail clients are aware of the benefits of using an independent RIA, so they are competing more against one another.

Evidence of increased competition in the advice market is also seen in responses to our question about fees. A third of respondents said they feel more pressure on fees they charge, while 60% said they noticed no change and 7% said they felt less fee pressure. But reps are feeling more fee pressure than RIAs, with 26% of RIAs saying they are experiencing more, compared with 40% of the reps surveyed. Not surprisingly, 36% of reps said they felt clients have become more demanding, compared with 29% of RIAs.

Consistent with our two previous surveys, advisors say the greatest challenge in running their business is marketing. With just 11% of advisors saying their toughest challenge is mastering financial planning strategies, 15% citing technology and 26% naming personnel, the remaining 48% of advisors identified marketing as posing the greatest challenge to running their firms.

To gauge which software products advisors are getting the most from, we asked specific questions about advisor satisfaction with most of the popular financial planning, portfolio management, and customer relations software applications. The planning programs that claim to have the most users also have a higher percentage of users who are “very satisfied.” For instance, take EISI’s NaviPlan, which claims to have 80,000 users. Of the 68 advisors using NaviPlan Extended, EISI’s most advanced planning application, 46% of them said they were very satisfied. Of the 50 respondents using NaviPlan Standard, 30% said they were very satisfied. Of the 119 users of Financial Profiles, 42% were very satisfied, and 35% of the 106 MoneyTree users reported being very satisfied. Among the 40 users of

Financeware, an online planning application, 60% reported being very satisfied–the highest percentage among planning applications.

Among two planning applications that are not as well known, 35% of eMoneyAdvisor’s users and 28% of Methuselah’s users said they were very satisfied. (Disclosure: Owing to my error, MoneyGuide Pro, a favorite goal-based planning application, was not included in these results.) Of the eight applications we asked about, the three that received the highest percentage of “not very satisfied” ratings were Methuselah (16%), e-MoneyAdvisor (15%), and NaviPlan Standard, (14%). Just 11% of those polled said they are very likely to change their planning application; 24% said they were somewhat likely to change. This is consistent with my belief that few advisors change technology, even if they do not like an application, because changing systems is so disruptive and time consuming.

In the portfolio reporting software category, the favorite by far was Schwab PortfolioCenter, formerly known as Centerpiece. While both Advent and Schwab have always said they have about the same number of independent advisory firms using their software, the most widely used portfolio reporting software, according to our survey, is Schwab’s. More then a third of the RIAs in the survey said they use PortfolioCenter, twice the number of Advent Axys users. In addition, 64% of the PortfolioCenter users report being very satisfied, compared with 56% of Advent users. Thirty-two percent of advisors using dbCAMS said they were very satisfied, although the application is used by less than 10% of the RIAs we surveyed. CapTools had about as many users and was rated as very satisfying by 57% of them.

About 20% of the RIAs said they did not use a reporting package, compared with more than a third of the reps surveyed. Among reps, the most widely used reporting software was StatementOne, which has signed deals with many independent broker/dealers.

Editor-at-Large Andrew Gluck, a veteran personal finance reporter, is president of Advisor Products Inc. (, which creates client newsletters and Web sites for advisors. Advisor Products may compete or do business with companies mentioned in this column. He can be reached at [email protected]