Close Close

Portfolio > ETFs

Clark at Large: Embracing Change

Your article was successfully shared with the contacts you provided.

When Tom Lydon’s receptionist told me that he was on the phone and would have to call me back, I couldn’t have been more surprised. As a journalist who’s refrained from the “gotcha” reporting so rampant in the mainstream media these days, I’ve gotten kind of used to people wanting to talk to me, either to tell me how great they and their business are, or at least to tell their side of a controversial story. But more than that, in the many years I’ve known Lydon, I’ve never known him to miss an appointment or blow off a call. So, when I called for our scheduled interview, it never occurred to me that he wouldn’t take the call.

He phoned back a few moments later, very apologetic, explaining that he had gotten a call from a prospective client with an $8 million portfolio formerly managed by three brokers. He’d seen Lydon on CNBC, liked what he heard, and logged onto Lydon’s Web site, and liked what he saw even better. After getting the names of some current clients he could talk to, the guy was calling back with just one question: “How soon can you send me the paperwork to move my accounts?” Okay, so maybe that was more important than a call with me.

Probably the best part of being a journalist is getting to write about the success of old friends. I met Tom Lydon so long ago I can’t even remember when it was–probably on a golf course while we were both playing hooky from an industry conference in some warm, sunny location (aren’t they all?). Over the years, we’ve played a lot of golf together, while I’ve followed Tom’s career building his advisory practice–Global Trends Investments in Newport Beach, California–and becoming one of the most respected and possibly the nicest financial advisor in the country (and that’s saying something, in a profession largely made up of incredibly nice women and men).

A compulsive joiner and natural leader, Tom is one of Schwab Institutional’s leading advisors, a founding member of an organization now known as the National Association of Active Investment Managers (NAAIM, formerly SAAFTI, for those keeping acronym score), serves on the board of directors of US Global Advisors and Rydex Investments, sits on PIMCOs’s advisory board, and is one of a handful of advisors invited to participate in Chip Roame’s CEO Summits.

Yet as seems to be more the rule than the exception, popularity and stature within the advisory profession don’t always translate into a successful practice. Lydon’s is one of those not-infrequent cases where it took him 25 years to become an overnight success: within the past two years, his client assets under management have increased 50% at a time when many advisory portfolios are experiencing a similar change but in the other direction. Tom’s story is more than one of simply being in the right place at the right time: His continuing search to find better ways to manage client money–and better tools with which to do it–offers a model for many advisors today who are searching for new strategies to restore client confidence and perhaps manage downside risk a bit more effectively.

An Early ETF Adopter

Always an active manager, Lydon was one of the first independent advisors to grasp the advantages of exchange traded funds–primarily lower costs, greater liquidity, and a broader range of asset classes–and to pass those along to his clients by using them in his portfolios. Through years of sometimes painful experience, he learned that despite what Modern Portfolio Theory and the clients themselves may tell us, many clients just aren’t comfortable riding out the kind of volatility that most investment markets experience from time to time.

So in the late ’90s he devised a disciplined strategy using ETFs aimed at avoiding the most severe downturns. The results can only be considered successful: down 3.7% vs. -38.4% over the past three years through March 31, 2009; and up 25.3% versus -39.6% since inception in December 31, 2000, through the first quarter of this year.

Yet, despite his solid returns, Lydon didn’t get much attention until he decided to publicize his expertise in using the relatively new ETF investments by launching a newsletter called ETF Trends in late 2005, and publishing his book, iMoney: Profitable Exchange Traded Fund Strategies for Every Investor, last year (written with John Wasik; FT Press, 2008). That’s when his client roster and AUM began to skyrocket, a trend which if anything is continuing to accelerate, due to expanded newsletter circulation, continued interest in his book, and regular appearances on CNBC.

Like many advisors today, Lydon feels that “Modern Portfolio Theory has been bruised by the markets over the past year.” Moreover, he says that “clients are frustrated; they’re looking for something different. If we ever see this type of market again, they don’t want to see the same result. So, if you don’t have a plan that’s different from the past…”

Lydon and many other advisors I know believe that in this environment advisors need to offer something different. Just what constitutes this “different thing” is, of course, the $64,000 question. For Tom Lydon, the answer is three-fold: actively generate solid investment performance; use better investment vehicles across broader asset classes; and embrace technology to reach clients and prospective clients.

If, unlike Lydon, you don’t have solid portfolio performance today, it’s going to be a while before you can create a track record that will get anyone’s attention. So what do you do in the meantime, especially if you want to take Tom’s suggestion to move beyond the MPT risk-management model? Lydon offers a clue: “If we’re just there for beta, the long-term prognosis for the advisory profession isn’t very good. Clients today are looking for alpha.” But generating higher-than-market returns in actively managed portfolios is much more labor-intensive (read: costly) than creating statically allocated portfolios.

Time to Outsource?

I suspect that in the coming months we’ll see increasing numbers of independent advisors decide to stop managing client portfolios in-house, turning over those duties to third-party management firms, funds of managers like American Beacon (see my April 2008 column, “Timing Is Everything”) or other independent advisors who have good records. Be sure to consider that changing the way you handle client assets can change the economics of your firm. A 70 basis-point fee is nice, but doesn’t look quite so good if it costs you clients. I suspect most advisors would agree that 35 bps on a constant and happy $100 million is a lot better than 70 bps on $50 million of high-turnover AUM. What’s more, many managers who, like Lydon, use low-cost ETFs or index funds can tack on their fee and still deliver a portfolio with lower total costs to the client than one made up of some of today’s higher-cost portfolios.

Lydon’s choice for better investment vehicles is, of course, ETFs. With lower costs to the clients, ETFs have the potential to radically change the financial services industry. This bear market may be their opportunity to do just that. As their popularity grows, so do the options that ETFs offer investors. Last fall, many savvy investors used leveraged short ETFs to profit as the market fell; now a number of firms offer 3X short and long ETFs, magnifying winning bets even further. There are also quite a few actively managed ETFs, indicating the potential for mutual fund companies to seamlessly make the transition to this new vehicle. Index ETFs also offer a variety of weightings, giving portfolio managers an array of index options beyond the traditional market-cap weighting that skews portfolios toward buying high rather than buying low. In addition, there are now hedged ETFs, global sectors, and commodities such as gold, which smaller managers typically have found difficult to access.

Don’t forget to embrace the latest technology if you want to remain credible, retain current clients, and attract new clients during this time. That means effective Web sites, client communications, e-newsletters, online services, and the ever expanding mass media. Lydon’s experience is that with a good Web site for prospective clients to land on first, your close rate is much higher. Combined with his CNBC spots that drive already interested people to his site, signing up new clients is, he says, a one-click process: “If people like what they see on the Web site,” he says, “they make a decision. Phone calls are already closed engagements.”

Bob Clark, former editor of this magazine, surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at [email protected].