As Mark Hurley wrote over a decade ago, compared to other professions, independent advisors are woefully underserved by their traditional industry vendors. Consequently, independents have to look to innovators who understand their needs to come up with solutions that truly work. That’s why I’m always on the lookout for innovative solutions to the myriad challenges faced by independent financial advisors.
Over the years, we’ve seen remarkable solutions to some of the advisory community’s most perplexing problems: deducting client fees from their portfolios (Schwab Institutional); realizing the inherent value in an advisory practice (FP Transitions); quantifying the business of advice (Moss Adams); consolidating client reports (Advent); outsourcing portfolio management (AssetMark); cost-effectively communicating with clients (Advisor Solutions); and virtual practice management help (Financial Advisor Resources), to name only a few.
Collectively, these companies and others have made major contributions to the current success of independent practices, as businesses. Yet three of the stickier practice management challenges remain unsolved: what to do with smaller clients who really aren’t profitable; how do fee advisors get compensated for advising on client assets in pre-existing, heavily-loaded (is that redundant?) VAs; and how do you cost effectively add the alternative investments that today’s wealthier clients demand?
At least, they’ve been unsolved until now. Recently, I came across Gemini Fund Services in Hauppauge, New York, a 20-year old firm that historically specialized in creating and servicing mutual funds and hedge funds, but which over the past few years started offering what appear to be viable solutions to all three problems faced by independent financial advisors. With $8.6 billion in assets under management for some 45 RIAs, a growing number of advisors seem to think so, too.
A Small Client Solution
Most financial advisors initially come to Gemini because they want to take their hot-shot asset management to a national audience. As you might imagine, that’s about as realistic as playing in the NBA. But lightning does strike some people, so instead of being discouraging, Gemini CEO Andrew Rogers tries to add a dose of reality into the conversation: “I call it the Fund of Dreams,” he says. “Many advisors think that if they just create a mutual fund, investors will flock to it. I tell them to put sales and marketing before the actual operations. We can build the product for them, but first they have to have a business plan for how they will attract client assets. Performance is a good start, but how’s anybody going to know about it?”
The best place to start, of course, is with one’s own clients. Which happily offers what looks to me to be the best solution to the problem of small–but sticky–clients. Everybody has them: they’re some of your first clients, whom your firm out-grew long ago, but you just can’t bring yourself to jettison; they’re relatives or friends of some of your biggest clients, who aren’t anywhere close to meeting your minimums but strengthen your ties to clients who do; and they’re influential stalwarts in your community, whom you view as marketing loss-leaders. Regardless of why you keep them, they continually show up near the bottom of your annual client profitability analysis, yet partly for those reasons above, tend to command much larger portions of your time and energy.
What do you do with them? Suppose you had a mutual fund–probably a fund of funds, with many of the same funds you put in other client portfolios, but tailored to the lower risk tolerance of smaller investors–into which you could place them, consolidating all your smaller portfolios so you can efficiently make decisions about fund selection, and rebalancing across the board. No more complex statements, quarterly client meetings, or phone calls to discuss the latest hot tip they got off motleyfool.com. The best part is that it’s cheaper for the clients–because you’re spreading your decisions over many clients, you can charge a lower fee.