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V TRANSITIONS is Transitioning!

Business Management for Independent Financial Advisors

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TABLE OF CONTENTS Letter from the Publishers .............. 1 Calendar of Events .................... 2 Industry News ................................ 3 Branding a New Business ................ 7 by Michael W. Byrnes, Jr. My Mind is Made Up ..................... 11 by Dave Williams, CFP® Rules, Regs and 'rbitration ............... 15 by Nancy Lininger It's About Time... You Look at Technology ................................. 19 by Nick Gudz and Phil Flakes The Future of Apps .................... 21 by Daniel Burrus

Do you MIND?

How "BUSY" Are You? Page 35

Keys to Your Client's Confidence and Your Success ........................ 23 by William R. Nelson, Ph.D. and Scott Winters 10 Key Considerations for SEC Registration ............................ 27 by William Mulligan

Industry News • Industry News

Page 3

Page 11

Veres Predicts "Golden Age" for Independents

SUBSCRIBE TODAY and receive a FREE eBook: "Valuing and Selling Your Business"

Refining Core Satellite Investing ..... 31 by Ronald J. Surz, CIMC Why Do We Admire "Busy?" ............ 35 by Kevin O'Connor, CSP Resource Directory ........................ 38 Grin & Bear It! ................................ 40

DISTRIBUTION PARTNERS Meridian-IQ™ and StarPoint Consulting Group


Check the "Letter from the Publishers" (page 1) to learn more about upcoming changes.

Transitions Magazine

From the Publishers Dear Readers,

Lyn and I have taken the name of our magazine quite literally these past few months. What do I mean? Well, we have some great news— Transitions is “transitioning!” We are taking our own advice (as well as the advice of our expert contributors and many of our readers) and are making some changes. Not only in our business model and our editorial mission, but in our ownership. Yep, that’s right. We’re pushing our baby out of the nest and it’s ready to fly! All under the direction of a new owner, RIA Central.

RIA Central will add a deeper layer of value-added benefits for Transitions magazine readers. It allows you to be truly interactive with your colleagues, to have conversations and share ideas with each other as well as with the RIA Central thought leaders. I will be accessible on the RIA Central site overseeing the publication, and contributing more articles and features as their consulting editor. Dan Kurt, the Director of Business Development, is the “face” of RIA Central under the leadership of Dan Easley, President of parent company, Fugent. Lyn and I are very excited about the new direction for Transitions and the significant benefits that RIA Central will provide. We will provide more details on how your subscription to Transitions will be converted to a membership in RIA Central in the coming month. We want to thank you for embracing and accepting our virtual publication when we launched in January of ’09 and for being loyal and supportive subscribers. Your feedback has been exceptional and important to us, and we plan to continue our tradition of offering meaningful information and guidance to you. We also thank our advertisers for believing in our message and our audience, and for their continuing support. Much success to all of you — we’ll see you next month in the community at RIA Central. With gratitude,

From the Publishers s

So, here is all the news that’s fit to print. (Actually, all the news that fits, we print!) Most of you are already familiar with RIA Central, a great online community for RIAs and aspiring RIAs. So let me tell you a bit more about them and what the future holds for Transitions. RIA Central has been “live” for almost a year now (having been launched in 2009 in beta stage) and membership is growing. It is free to join, but all prospective members are “vetted.” The site is filled with robust content, podcasts, forums, blogs, webinars, discussion areas, a due diligence marketplace (DDM) and much more. Their DDM feature is an online directory of memberreviewed products and companies in a variety of categories ranging from alternative investments to mutual funds to custodians. I love the service because it facilitates your own due diligence. If you have used a product or a service (whether it has been a positive or a negative experience) you can share your thoughts with other members. RIA Central allows you to provide a written review and give the product/service a star rating.

Syd and Lyn

September 2010


Transitions Magazine

Industry News Publishers Lyn Fisher & Sydney LeBlanc Editor-in-Chief Sydney LeBlanc

In the News

Managing Editor Cami Miller


ADVERTISERS INDEX First Allied ..............inside front cover Truth Concepts ................................ 4 Meridian -IQ™ .................................. 6

Contributors Daniel Burrus Michael W. Byrnes, Jr. Phil Flakes Nick Gudz Nancy Lininger William Mulligan William R. Nelson, Ph.D. Kevin O'Connor, CSP Ronald J. Surz, CIMA Dave Williams, CFP® Scott Winters


IT Directors John Weeks Shane Hansen ................................... 25

Advertising Sales • Stephanie Kunz 435.750.0062 x3 • Lyn Fisher 435.750.0062 x1

Impact Communications, Inc. .......... 13

— 2010 —

CALENDAR OF EVENTS SEPTEMBER Sept 11-14 NAIFA Career Conference & Annual Meeting Seattle, WA Sept. 22-24 NAPFA Practice Management and Investments San Diego, CA

StarPoint Consulting ...................... 14

OCTOBER Financial Forum Bookstore ............ 18 DarkTwin Marketing ......................20

T3 Conference .............................. 26 EqisCapital .................................. 29

Oct. 9-12 FPA Annual Conference Denver, CO Oct 17-19 REISA National Conference Las Vegas, NV Oct. 26-29 Charles Schwab's Impact 2010 Conference Boston, MA

Certified Wealth Strategist® .......... 30 .................... 30

Director of Business Development & Strategic Alliances Marty Jensen 949.929.7140

Gregg Financial Network ............... 34

Financial Forum Inc. 550 North Main, Ste. 221 Logan, UT 84321 435.750.0062 •

For Advertising information, email or call 435.750.0062 ext. 1.

Resource Directory ................... 38-39

September 2010

To include your upcoming events, please email the info to:

Transitions Magazine

Industry News

Controversial white paper says retail brokerage business model on steady decline

Bob Veres, Publisher of Inside Information

A new industry white paper, entitled The Future of the Advisory Profession, has been published by the Inside Information newsletter service—a well-respected publication that follows key trends and practice management innovations in the independent RIA world. Its conclusions are provocative: it says that we are just now entering a period of remarkable opportunity for independent RIAs, comparable to, but more dramatic than the early 1990s, when smaller RIA firms experienced rapid growth in client assets, revenues and

owner compensation. At the same time, the white paper predicts that the retail brokerage business model will become less robust and relevant in an increasingly fiduciary world. At some point within the next five to ten years, these larger firms will have to decide whether they want to support and maintain their system of customer-facing brokers when they are held to a standard that makes it increasingly difficult to recommend in-house products, separate account providers who share revenues with them, or investments out of the brokerage firm’s own account. The prediction: at some point, these firms will decide that the liability is greater than the profit potential for their retail divisions. They will keep their more profitable investment banking and institutional services, and today’s brokers will be left to fend for themselves. “Those who are prepared to make the transition from broker to RIA will survive this difficult transition,” says Bob Veres, Inside Information editor and author of the report. “In fact, many will thrive, because their teams will be able to leave as full-fledged planSeptember 2010

ning firms, with more marketing and internal management expertise than many of their RIA competitors.” The first half of the paper offers an overview of the practice management issues of the future, and predicts a phase transition in the RIA world from practices to businesses, as a result of several drivers: 1. Advisors entering the shadow of retirement, and needing to create transferable value in their businesses before they sell internally or to external buyers. 2. The need for more scale to meet greater compliance requirements. “The independent RIA world will still have far less compliance issues to deal with than brokers regulated not only by FINRA but also by their own sometimesparanoid compliance departments,” says Veres. “But they’ll have to have documented procedures in place to show that they’re making sound investment recommendations in light of the fiduciary standard. Many advisors right now are recommending funds with above-average performance in the past, and charging asset management

In the News

Industry Influential, Bob Veres, Predicts Golden Age for Independent Advisors


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Transitions Magazine

Industry News

3. The sudden emergence of online practice management advice and services, which greatly democratizes the information needed to run a profitable practice. The white paper specifically references the ActiFi organization in Minneapolis, MN and Quantuvis Consulting in Redmond, CA, both of which allow RIA firms to compare their business metrics with other firms, and to track their own progress in areas like costs, profitability (and profitability per advisor), and top-line growth. 4. Better implementation of professional software, and more user-friendly software programs and platforms— offering unprecedented levels of scale and staff leverage, far beyond even what was available before the market downturn. 5. The market downturn itself, which caused many RIA firms to reassess their own profitability, and address issues of systematization, efficiency and client selection.

The white paper notes that today’s RIA universe is highlyfragment and dominated by one-person practices. But it envisions a period of consolidation, leading to a distribution of practices sizes not unlike that found in the legal or accounting world, where we find organizations filling every ecological niche from the solo practitioner to the large local presence to the regional firm to the large national organization with multiple branches and multiple areas of specialty. As these firms become larger and more sophisticated, and as they increasingly recruit the more astute and clientfocused members of the retail brokerage community, they will effectively become the local brokerage office’s worst nightmare, says Veres. Unlike many of today’s smaller solo practices, they’ll have the size and scale and (local) market presence to go headto-head with a large branch office for desirable clients, plus their clients/customers will be able to shake hands with and work across the table with the principals of the firm. In addition, the former brokers will be showing prospects and potential clients some of the sales agendas that are not easily visible in the brokerage world, and perSeptember 2010

haps also offer a breakdown of hidden costs. And finally, these larger RIA firms won’t have to share their revenues unequally with the larger entity, meaning they can charge significantly less to the end client, and still be more profitable for their advisors and principals. Along the way, The Future of the Profession white paper looks at the metrics of larger RIA firms vs. smaller firms, compares some of the results of various compensation and staffing studies, identifies a powerful new marketing message for RIA firms, hypothesizes how RIA firms will move their service package—profitably—into the middle market, and shows how some firms are already doing it and actually benefiting their higher-end service division in the process. It posits that effective regulation of the entire financial services industry is about to move into the civil courts, and looks at how democratized, online marketing services and training programs are increasing the marketing sophistication of RIAs around the country. The full white paper—111 pages in all—can be downloaded for free at the Inside Information web site:

In the News

fees of up to 1.25% of client assets. In the future, they’ll have to show how they’re controlling management and custodial costs, and I would expect the client’s all-in costs to be under 2% a year.”



Transitions Magazine


September 2010

Transitions Magazine

Branding a

NEW BUSINESS By Michael W. Byrnes, Jr.

When advisors start their own businesses, they often underestimate the importance of building an exceptional marketing strategy. Whether it be a wirehouse advisor going independent, an IAR transitioning to an RIA, or some other type of transition, creating the foundation for the new brand is vital to achieve future success. Imagine if you built a three-story house and then realize the foundation has to be replaced because it was not constructed properly. It ends up being much more work than if it was done right from the start‌ and in some cases it is easier to just tear down the house and start again. This is a common lesson advisors learn if they rush to get started with their business and do not invest the resources in the groundwork of their firms’ brand.

Cover Story

Build a Solid Foundation

This article is intended to be a blueprint of how to get started building a brand strategy, and in some cases,

September 2010


Transitions Magazine

Cover Story

how to repair a brand foundation that was not built right from the start.

• Differentiate the firm from the competition in a meaningful way

Determining Your Brand

It’s All In the Name

To create a strong brand, advisors must first know their value proposition (aka: brand strengths). To do this there are three clear steps:

Once all the brand components are determined, it is time to pick a name — this is maybe the most important decision in the branding process. Too often advisors pick something that “sounds good” without ever putting much thought into it. When they later realize the name is not a good fit, they can end up spending thousands of dollars to rebrand, which includes:

STEP #1: • What are the strengths?

They need to first asthemselves …

• What are the weaknesses?

• Updating marketing materials (e.g. business cards, letterhead, brochures and other collateral), signage, the website, etc.

• What is the purpose of the business? • How is business conducted?

STEP #2:

Next, advisors should look for external input …

• What differentiates the firm from the competition? • What are the benefits delivered, seen through the clients’ eyes?

Advisors need to research their clients (and prospects), as it might be surprising what branding elements are the most important to them. Too often advisors think their products and services are what make their brand, but this research exercise often shows the benefits delivered are much more important in the clients’ eyes.

STEP #3:

The final step is to determine what are the three to five brand pillars on which the firm is going to be built. The following ingredients are key to creating successful value propositions. Together, all the brand pillars should: • Create and support the overall brand • Help achieve the overall business goals • Be important to the target market(s) • Be believable • Be consistent in all communications 8

• Communicating to clients, strategic alliances, centers of influence and vendors to retain their business and partnerships • Re-building awareness and reputation with prospects and the community It is best to get the name right up front, so here are…

Ten Questions To Consider When Creating A Strong Brand Name 1. What does the brand represent? (e.g. an individual, company, department, product, service, etc.)? 2. If you are considering naming an organization after a person’s name, what impact does that have on the staff, partners and future succession or sale of the business? 3. What is the mission of the organization? 4. What are the core values of the organization? 5. What benefit is being delivered (from your eyes and the eyes of your clients)? 6. What target market(s) are benefiting from this service

September 2010

Transitions Magazine

Cover Story and will other target markets be served in the future? 7. What expected short-term and long-term changes might impact the name? 8. Is the name easy to say, spell and remember? 9. Are there other competitors using a similar name? 10. Are there other companies in unrelated industries that use the name that might create confusion? A few precautions: • Alphabet soup. As a general rule, avoid abbreviations and acronyms. It took a long time for IBM’s brand awareness to be created. • The conservative approach. Too many cooks in the kitchen can ruin a great soup, so do not feel that it is always necessary to pick a name by consensus.


• Doing it blindly. Avoid making a name decision without any input. It is good to have a sounding board on name ideas (especially if a person has had experience creating other successful firm names.) Also, survey your best clients (and prospects) on what names they like best and why. Here Are Steps To Take When Creating A New Brand (Or Enhancing An Old One)

• Pick a name. Research your top three choices to see if any of those ideas are already being used. Work with an attorney to finalize the best available name to make it your own. • Update core branding tools: a logo – the saying “a picture tells a thousand words” is true, so work with a talented designer to make sure the image conveys the brand message. a tagline – it is an additional opportunity for messaging to support your brand, with more flexibility for updates when needed. • Define it. Create a style guide that supports the

brand identity (e.g. design elements, tone of communications, etc.) so all are on the same page. • Put it in place. Ingrain your brand into the day-today workings of your organization. • Share it. Push the brand out to the public through all interactions (e.g. marketing communications, personal contacts, etc.) • Conduct ongoing research. Know the impact your brand is having. Track (new business, retention, etc.) and maximize the benefits of your branding efforts. • Protect it. Monitor your brand reputation and improve it if needed. • Keep it fresh. Reinvent your brand, as needed, to keep top of mind and adapt to internal and external change. Just remember, consistency is a good thing.

A Good Brand Is Your Best Friend A strong brand will be one of your most valuable intangible assets over time, as it will bring in new business, retain clients, allow for a premium to be charged and even retain good staff members. To learn more, watch this video about the importance of a strong brand. For those transitioning to a new business, make sure to get it right the first time. uuu

Mike Byrnes founded Byrnes Consulting in April 2008 to provide business planning and marketing strategy consulting services to help advisors become even more successful. Read more at Look for future articles from Mike Byrnes to help your business become more successful.

September 2010


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September 2010

Transitions Magazine

Don't Confuse Me With the Facts —

My Mind's Made Up!

In a previous article, we discussed how the Reflexive Brain rapidly reacts intuitively to selective input, without the time-intensive reasoning of the Reflective Brain. The Reflective Brain then processes the input, often being overwhelmed by the response of the Reflexive Brain. In essence, the Reflexive Brain is what keeps us alive while our Reflective Brain thinks.


Behavioral Finance

By David Williams, CFPÂŽ

ognitive psychologists have identified ways that the Reflexive Brain reacts intuitively. While these intuitive behaviors are good for many parts of our lives, they can cause us to react illogically when our finances are involved. Cognitive psychologists refer to these intuitions as biases, and they label them: heuristics, overconfidence, mental accounting, framing,

September 2010


Transitions Magazine

Behavioral Finance

ness, conservatism, and disposition effect. This article will introduce the first two.

Heuristics Rules-of-thumb allow for quick decision-making. However, they generalize on generalities—they may be a good place to start the reasoning process, but they are rarely the best answer in themselves for financial issues. An example of a rule-of-thumb is the 1/N rule. With N choices, you select 1/N of each of them. If the retirement fund has 3 investment choices, the first inclination is to put 1/3 into each one. In financial practice, a portfolio with 1/3 bonds, 1/3 U.S. stocks, and 1/3 International stocks would be appropriate for a small segment of all participants in such a retirement plan. We find corollaries to the 1/N rule. The first is “option overload.” We like choice; it lets us allocate 1/N where possible. However as N increases in value, we become overwhelmed. For example, watch a young child in a bakery who is told he can have only one choice—I have actually seen children break down and cry because they can’t make a selection. When the child makes a choice, he often regrets the decision once he receives his chosen pastry. So, too, retirement plan studies demonstrate that the percentage of participation goes down as the number of investment options go up. Another corollary is the “urgency imperative.” If we are told that we are about to lose a choice, we react irrationally. This is what hucksters count on when they tell you that “if you decide in the next 20 minutes, you get a bonus.” We instinctively want to act so we don’t lose the bonus. Or, current investors will consider putting more money into a mutual fund because it is closing. We don’t want to miss the opportunity to invest.


Overconfidence Jason Zweig, author of “Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich” (Simon & Schuster; 2007) makes the observation, “One of the most fundamental characteristics of human nature is to think we’re better than we really are.” He includes the following example in his book: in 1965, psychiatrists Caroline Preston and Stanley Harris published a study in which they asked 50 drivers in the Seattle area to rate their own skill, ability, and alertness the last time they drove. Just under two-thirds of the drivers said they were at least as competent as usual, describing their ability as “extra good” or 100%. However, these 50 drivers were all interviewed in the hospital—they were there because their last drive ended in an accident. The Seattle police reported that 68% of these drivers were directly responsible for their crashes, 58% had at least two past traffic violations, 56% totaled their vehicles, and 44% would ultimately face criminal charges. They suffered concussions, facial trauma, a crushed pelvis and other broken bones, and severe spinal damage. Three of their passengers had died. These drivers are not delusional. We naturally think we are better than we really are. Preston and Harris also interviewed people with a clean driving record—93% believed themselves to be above average drivers. Statistically, only 50% can be above average. Overconfidence demonstrates in a number of ways. First, we overestimate our chances at success, leading us to take risks we regret down the road. Second, we have “home bias.” We trust in what is familiar. Therefore, an investor tends to overinvest in their company’s stock, and invest too little outside their industry, region, or nation.

September 2010

Transitions Magazine

Behavioral Finance Third, we have the “illusion of control.” Investors demonstrate this by putting too little effort into planning ahead, and are overcome by surprise when their investments don’t meet their objective. We see it in the husband who won’t buy life insurance because his wife’s best policy is her own good looks. Fourth, we have “hindsight bias.” We laugh when the clueless person on the sitcom says, “I knew that.” In reality, once we learn what did happen, we look back and believe that we knew it was going to happen all along. For example: Psychologist Baruch Fischhoff ran a study on hindsight bias. Right before Nixon’s trip to China, dozens of Israeli university students were asked to predict the probability that his visit would be a success. Then, at two intervals after his trip, they were asked to recall their earlier forecasts of what would happen. The trip had as much chance of turning out a disaster as a success. In fact, it was wildly successful beyond all imagination. Less than two weeks after Nixon’s visit, 71% of the students remembered predicting a higher probability of success than they actually had. Four months after the visit, 81% claimed to have been more certain it would succeed than they really were at the time.

the traps of overconfidence. We will discuss other Behavioral Finance biases in future articles. uuu

David Williams, CFP®, Partner of Business Enhancement Associates, LLC, helps business owners and corporations grow, protect, and transfer wealth. Dave is also a Registered Investment Advisory Associate with Wealth Strategies Advisory Group, Inc. Prior to establishing his business consultancy, he was Director of Financial Planning for Regions Morgan Keegan Trust. As a CFP® since 1985, and with more than 25 years of financial planning experience working with business owners, Dave also has expertise in advanced estate and charitable planning, employer stock option planning, and qualified plans. He is a Past President of the Financial Planning Association of the Mid-South. Dave can be reached at:

The intuitive shortcuts of heuristics and overconfidence can trip up an investor who is unaware that they exist. Such biases lead to financial mistakes such as overconcentration or failure to act. Worse, it can cause our clients to forget how they failed to follow our recommendations and wrongly give them the impression that they foreknew downturns and blame us for not acting. It is important for advisors to document their recommendations, use an Investment Policy Statement that specifies diversification, and review these documents regularly with our clients. Even more important, we must check ourselves to make sure we don’t fall into

September 2010



September 2010

Transitions Magazine

Going Independent Rules, Regs & 'rbitration The 3 "R's" in the Financial Services Industry By Nancy Lininger

When we were kids, we learned reading, writing, and ‘rithmatic. As financial services professionals, we are now faced with rules, regs, and ‘rbitration. If you don’t pay attention to compliance, you will be forced into legal battle (arbitration or court judicial system) with your customers or even the regulators.

• Regulatory reform was just signed into law July of this year. We await the rules that are sure to follow. • Advisors need to adjust the ADV II to fit the new ADV 2 narrative style and ensure the document speaks plain English. • Will BDs add the fiduciary moniker? Only time and the SEC will tell. • Pay-to-play rules mean prohibiting payments to politicians. • Inadvertent custody is a cause for concern. • Will we maintain the ability to arbitrate, or will regulations compel us to court? • The Red Flags Rule has been stop and go... will the December 31, 2010 compliance date stick? • Regulators are fuming over 12b-1 fees. • How secure are you in your data security? • Are you a socialite stymied by the social media restrictions?

Compliance Savvy


re all the laws we have to abide by a good thing? Or are you concerned about overregulation and regulatory reform? Here are some of the current issues that have our heads spinning:

• $100 million is the place to play with the big boys; other advisors drop down to state supervision. Regulators don’t feel that financial advisors are going far enough in disclosing all that we can disclose to clients. The old Form ADV II is now deemed inadequate, and thus, we will be handing out a new narrative

September 2010


Transitions Magazine

Compliance Savvy

brochure document (ADV 2). This is on top of all the other documents already piled on clients: • New Account Form • Prospectus • Client Agreement

What can you do to simplify your business life? Is there a way to be efficient at balancing your obligations to regulators, clients, and your operations? Here are 8 tips to get you started. 1. The first step is to overcome your fear of complying.

• Privacy Notice

Be accepting of the environment you work in, and

• Anti-Money Laundering Notice • Business Continuity Plan Summary Customer Notice • Margin Agreement

that things are not really as difficult as they seem. It

is a very highly regulated industry. The regulations (for the most part) make sense.

2. Although it’s the rule, have Written Supervisory

• Option Agreement

Procedures (“WSP”) (aka Compliance Manual or

• Penny Stock Disclosure

Policies and Procedures) that are customized for

• Investment Policy Statement

your operations. Whether you are a one-person

• Mutual Fund Fees and Breakpoint

shop or part of a larger organization, it will give

• Variable Annuity Risk Disclosure Document

you a reference document that tells you what you need to do to stay in compliance. When you draft

• Switch of Investment Form

the WSP, you need to consider requisite rules, but

• Solicitor Compensation Disclosure

also specific procedures that are reasonable for your

• Investment Objectives Definitions I’m sure you can name a few more. Those are just at account opening. In case clients forget what we gave them, we must also provide the Privacy Notice on an annual basis; provide the Form ADV 2 annual summary of material changes (no longer just an annual offer); and Registered Reps must update the new account form once every 36 months. I’m a very rules-oriented person. This is why I chose compliance as my profession. But even I am overwhelmed at the velocity of the changes. I respect that investors must be protected. I also respect that a businessperson must focus on what he or she is in business to do, and can’t make compliance a full-time job or allot an over-proportionate share of the budget to compliance.


8 Tips to Simplify Your Business Life

type of operations. Do not plagiarize boilerplate language that has no applicability to what you do and who you are.

3. Full disclosure to clients is important. While we all

believe we tell the clients everything they need to

know about the investment vehicle and our conflicts (yes, fee-only advisors have conflicts too), it is im-

portant to get those disclosures on paper and in plain English. A specific disclosure (e.g. privacy notice or

mutual fund charges) should not be more than one

page each. Having standardized forms for clients will make your disclosure job easier. And having an

internal checklist in each client file to track disclosures given will help you in your compliance job.

September 2010

Transitions Magazine

Compliance Savvy Business Development

4. Think of compliance as marketing done right. Your

You (as producer or rainmaker) need to focus on

requisite amount of disclosure. Don’t use puffery,

vising. In smaller firms you may need to retain the

marketing must be fair and balanced and contain the

implied guarantees, or superlative language claim-

ing you are the best, largest, or oldest (unless this can be substantiated). You can make high-impact marketing statements without exceeding the limits. Remember too, to add marketing sizzle to your disclosure documents (Form ADV). Full disclosure does not have to be dry.

5. Communicate well and often with your clients. If you think that a quarterly performance report along

with a general market commentary is regularly com-

municating with clients, you are wrong. If you think you are doing better because you have a canned

monthly newsletter, you’re not. Have you decided to forgo client letters for the more expedient e-mail

(and because it’s only e-mail, you can be less for-

mal)? While this may be higher-touch, the quality may leave much to be desired. If you deliver regularly scheduled letters to clients on letterhead (and I

mean with their name and address actually merged

meeting with clients and doing the investment adtitle and responsibility of Chief Compliance Officer (because you make all policy and have the authority to hire and fire), but the Compliance Officer (or

Manager) under you needs to be a knowledgeable, independent thinker.

7. Keep reading this magazine for future editions. This

story was a broad overview of compliance and marketing issues affecting you. Future articles will explore particular topics in more detail.

8. Finally, there are resources to assist you. Did you know that there are templates out there for Written Supervisory Procedures, Code of Ethics,

Business Continuity, Client Agreements, Solici-

tor Agreements, Investment Policy Statements, Form ADV disclosure, and oh so much more?

You don’t have to start drafting from scratch. These resources are easy to customize to meet your needs. Order online. uuu

into the salutation), then you are hot. (Send forms to

help them track important papers to heirs, seasonal messages about the start of summer, and customer

satisfaction surveys.) You are doing a great marketing job. And by maintaining personal communications with clients, you are avoiding potentially angry clients and, thus, potential complaints.

6. One person (or small ops) shops means that individ-

uals in the firm wear many hats. Don’t short shrift the compliance job. Entrepreneurial skills may not be the right skill set for Compliance Officer. Your

CO should be someone with an attention to details.

Nancy Lininger is Founder/Consultant of The Consortium® in Camarillo, CA. (www.liftburden. com) The Consortium is a compliance, practice management, and marketing consulting firm for RIAs and BDs. Nancy is author of “Go To CEO! How to Start Your Independent Investment Advisory Firm” and publishes the monthly CompliancE-News. Order online.

September 2010


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Transitions Magazine

IT’S ABOUT TIME … …. you look at TECHNOLOGY! By Nick Gudz and Phil Flakes


n the flip side, new technology in the absence of proper training can be costly, frustrating, and downright time-consuming.   Every advisor should take into consideration the type of technology offered at their respective broker-dealer and what kind of dedicated training they have to support it.  With new technology being created daily, how quickly can a firm adapt to new technology offerings to meet marketplace needs? Recently we helped an advisor change broker-dealers and this was his story: This financial advisor had been with the same broker-dealer for approximately 10 years.  Over the last 24 months, the broker-dealer made a conscience decision to create and implement new technology and simultaneously downsize their back office support.  This midsized broker-dealer that always seemed to have such a personal “someone-there-to- answer-your-call” touch, seemingly became the technology powerhouse.  It helped them attract new financial advisors, but left the long-time loyal reps feeling displaced, untrained, and frustrated.  The advisor we worked with made every attempt to learn the technology and adapt to the broker-dealer’s culture changes but, in the end, the firm simply would not meet him half-way.

September 2010

sTechnology s

As we continuously survey the world of broker-dealer options for advisors, it seems many firms try to establish a point of differentiation through their technology offerings— both proprietary and non-proprietary. The right technology can often help an advisor run his or her business far more efficiently than one has ever thought possible. 


Transitions Magazine


The Result: the advisor left the broker-dealer for a firm that had comparable technology offerings, but also maintained its personal touch. This allowed the advisor to be properly trained on the new technology to make it a better resource instead of a stumbling block. What is technology without training? In this advisor’s case it was a cost (both hard dollar and opportunity cost) with no added benefit, which I am sure we would all agree, simply doesn’t make business sense. It is important that a broker-dealer know and implement new technology in the event that it is useful for the advisors they serve, but the firm must be prepared to help their advisors make that change. It begins with properly training the advisors (and their team) and the support staff at the home office. The support staff will eventually be the advisor’s first phone call when things go wrong. If done properly, technology can be a great resource for advisors and, ultimately, make their business more successful. In the iPod generation, ruled by social media, it is easy to praise and assume that all new technology is good technology. However, in the financial services

industry, where a face-to-face conversation and a handshake still go a long way, firms should be very careful of forcing technology too quickly without proper support. uuu

Nicholas Gudz is responsible for maintaining client relations and the overall management of StarPoint Consulting Group and its employees. Phillip Flakes is responsible for the overall management of Starpoint Consulting Group’s advisor placement division. StarPoint Consulting Group, LLC, is an advisor placement firm specializing in Broker Dealer and RIA transitions. The firm assumes responsibility for the due diligence and negotiations with potential firms so that financial advisors can focus on their business and clients. They research hundreds of independent, regional, bank, and wirehouse firms and look at variables such as technology, payout, culture, compliance, flexibility, product differentiation, and business development. For more information, contact Nick or Phil, managing partners, at (858) 456-5564 phillip.flakes@,, or visit their website at

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September 2010

Transitions Magazine

The Future of Apps


o one can deny that the original telephone Alexander Graham Bell invented in 1876 has changed significantly. From a luxury item proudly displayed as the centerpiece of the home to something small, portable, and powerful that people keep within arm’s reach 24/7, the humble telephone has evolved into a mini personal computer capable of much more than traditional voice phone calls. Today, with the advent of various Smart Phones, such as the iPhone, Blackberry, and Droid, phones have gotten … well … smarter. People can now download apps (short for applications) directly to their phone to help them with a number of everyday tasks. Whether you want to check flight schedules, create a to-do list, convert currency, track your daily caloric intake, relax to soothing sounds, or do any number of business or personal things, chances are there’s an app for it.

Is creating apps a smart thing for businesses to do? Of course. Just as the phone has evolved, so has business. Having the ability to “touch” your customers when they’re not in your store or on your website is vital to stay competitive. However, as technology and Smart Phones continue to evolve (which we know without a doubt that they will), it only makes sense that the apps companies create would have to change, too. And that’s exactly where many companies are missing the mark.

Where We Go From Here While creating apps with a mass-market appeal is good (such as apps for finding a good restaurant or creating action lists), few companies are thinking about the evolution of apps and what the next generation of apps will be. So what exactly will tomorrow’s apps look like? The natural progression will be for apps to be enterprise level. In other words, there will need to be apps for purchasing, for logistics, for supply chain management, for lead generation, for patient care, etc. Tomorrow’s apps will be like having a virtual assistant by your side. These apps won’t just make you more productive with your work; they’ll actually do some of the work for you. For example, in the medical field, we’ll see apps for disease management, for patient records, and for remote diagnostics. The app will be more like an essential tool to perform a specific function rather than an ancillary item.

Technology Update s

As a result, businesses in every sector have been creating apps directly related to their core offerings. Some would even say that companies are “scrambling” to enter the apps market, believing that attracting additional customers and revenues is directly related to their app offerings.

Aside from the app itself, the future of apps is also about where that app will be used. With Apple’s launch of the iPad and soon competing smart pads by other manufacturers, apps are already finding new homes outside of the phone.

September 2010


Transitions Magazine

Technology Update

Some Smart Phone apps are compatible with Smart Pads. But even those companies aren’t thinking big enough … both literally and figuratively. Since the Smart Pads have bigger screens and more processing power, why should they do the same thing as the phone app? Why not take advantage of that extra space and power and come up with a new class of apps that can do things the phone apps can’t? These are key questions companies must think about and address if they want to be serious players in the future app market. But that’s just the beginning. The next evolution is apps for the television. Today’s newer televisions are Internet enabled. (And, by the way, all our devices will be Internet enabled one day.) That means the processor and the television browser are built into the TV set so you don’t have to plug a computer into your television; the TV is the computer. With this comes the wide-scale use of Internet Protocol Television, or IPTV for short. It’s essentially TV over the Internet versus on cable and satellite. In fact, many Millennials use IPTV service for all of their television viewing rather than cable or satellite. Knowing this, it’s only logical that we’ll also see apps for TV. Some new models already have them - television level apps. Flat panel displays provide even more visual real estate and will most likely have faster processors. Many new televisions are also 3-D equipped, meaning that your apps will be 3-D too. As you can see, in the app world, this is a game changer. Smart companies need to stay ahead of this evolution and create their apps accordingly.

Stake Your Claim in Tomorrow’s Apps If you look at the types of apps currently available in the app stores, you can see that most of the companies developing apps don’t see the future of apps. They’re doing simplistic and basic apps that don’t take into account future needs and they certainly aren’t enterprise level apps. In fact, if you look for business apps in iTunes, 22

the largest app store, you’ll find numerous apps on such things as document scanning, creating to-do lists, and document sharing. Such apps are so common that some could argue they’re commodities. Standing out in the business world requires you to be more than a commodity — you need to be a unique solutions provider. Tomorrow’s apps will do precisely that. Realize that apps are a major tectonic revolution in computing. We went from servers, mainframes, and terminals to having our own desktops and PCs to having our own laptops. Our main computing device is now becoming our Smart Phones and Smart Pads that enable us to connect to the world from anywhere. By making the Smart Phone and Smart Pad a multimedia PC powered by dozens if not hundreds of apps, people can now have a powerful computer with them at all times. As result, people from all walks of life and every industry have the ability to do some amazing things they couldn’t do before. That’s a giant shift in thinking about phones and apps … and one your company needs to be a part of. uuu

Daniel Burrus is one of the world’s leading technology forecasters and business strategists, and is the author of six books, including the highly acclaimed Technotrends, which has been translated into more than a dozen languages. He is the founder and CEO of Burrus Research, a research and consulting firm that monitors global advancements in technology-driven trends to help clients better understand how technological, social, and business forces are converging to create enormous, untapped opportunities. Burrus also founded of Visionary Apps, which seeks to utilize the constantly evolving Smart Phone, Smart Pad and Smart TV to bring never before seen opportunities designed to engage and empower the user in new and exciting ways in the fields of real estate, healthcare, purchasing, logistics, supply chain, sales, marketing, energy, security and many more. For more information please visit

September 2010

Transitions Magazine


Keys to Your Client's Confidence and Your Success


By William R. Nelson, Ph.D. and Scott Winters

Fear and greed motivate most investors’ decisions, causing a herd mentality and poor performance. Greed causes one to buy when the market is high and keeping up with the Jones’s becomes important. Not a good strategy, but not nearly as costly as fear. Fear causes one to sell low, meaning that investors are unable to hold their portfolios long enough to benefit from the long-term trend of increasing equity values. The antidote to fear is confidence. A large part of investment advisors’ jobs is to supply and support investor confidence, thereby helping clients stay in the market rather than selling when equity prices are low. How do advisors attract and maintain a flock of investors who have enough confidence in the advisor and his/her advice that they stick with the plan during bull and bear markets? Advisors who accomplish this ambitious goal typically implement the following four steps: 1. Find a strategy in which to truly believe. 2. Perfect a simple way of conveying the wisdom of the strategy to investors by using non-technical language and stories to convey the main message without getting bogged down in details. 3. Deliver investments via a solution that makes you appear individually important and backed by significant institutions that establish you as secure. 4. Provide an impeccably professional, yet “real” persona that clients can relate to and trust. STEP #1: Finding an investment strategy one can have confidence in is a very personal journey. Our opinions have changed over the years because with age comes wisdom and humility. As ambitious college students designing automated trading systems, 30% annual returns were uninspiring. We wanted more. Now, with more experience and realistic expectations, 15% with limited risk is more than can be expected. In addition, our skepticism of track records built on small sample sizes of independent decisions increases the attractiveness of humble, strategically-allocated portfolios that, while over the long-term are unlikely to earn more than 10% per year, are also unlikely to fall in value. Many investors have confidence in

September 2010

Practice Management s

he greatest impediment to investing success is investors’ lack of confidence in their asset management philosophy, as demonstrated by the low average returns of mutual fund investors. For example, a DALBAR study found the average mutual fund investor underperformed the S&P 500 by 62%, 4.38% versus 11.4% between January 1, 1986 and December 31, 2006. Behavioral finance studies have found that the largest source of this under-performance was selling low and buying high, exactly the opposite of what investors intend.


Transitions Magazine

Practice Management

a particular portfolio manager which can also work well. The key is to have realistic expectations. All strategies and managers have their ups and downs, meaning that if you sell during a downturn, you are unlikely to experience the upside. Selling low and buying high will become a demoralizing road to the poor house for your clients and yourself. STEP #2: The wisdom of your strategy is worthless if you are unable to persuasively explain how it will help investors accomplish their goals. You must convince investors to test you with their money and to continue paying for your guidance. An example of such a presentation, specifically for a globally-diversified strategic allocation, is to ask the following set of leading questions: “Have you read about well-regarded money managers losing money? Or, have you ever followed investment advice that lost you money?” “Yes.” “So, do you recognize that well-intentioned experts can make mistakes?” “Yes.” “Realizing that all humans make mistakes, how do you feel about risking your entire retirement in one security, in one asset class, or on the asset selection decisions of one person?" "Not so comfortable.” “Neither do I. That is why I guide all of my clients toward a diversified approach where one mistake will not have too big an impact on your retirement. We will invest in many asset classes, equity styles, and foreign markets managed by different experts to ensure that you receive expert, specialist advice, but without putting all your eggs in one basket. How does this approach sound to you?” Guiding investors to a conclusion with a carefully-planned 24

set of questions is a consultative and convincing conversation advisors should know by heart. STEP #3: Advisors must choose vendors and strategic partners with which to run their advising practices. A web site from which you buy leads is merely a vendor, but the system you use to manage clients should in contrast be a strategic partner because your valuable relationships depend on the partner performing well. Risking your livelihood on a single vendor is unwise. A good strategic partner, however, will do everything you should not be doing, because only by dealing with a single partner can you be sure who is responsible for any errors. For example, if you are working with a number of software products that are supposed to talk to one another typically these companies will blame each other as you spend hours on the phone complaining rather than building relationships. We recommend using a solution that has already integrated as many of the tools and functions you need to run your business as possible, including: proposal generation, account opening paperwork, document archiving, compliance help, billing, performance reporting, etc. Otherwise, you will likely spend more of your time on operations rather than clients. STEP #4: Don’t judge a book by its cover! How many times were you told this and why? Because people constantly judge books by their covers and people by their appearances. Accordingly, to attract clients you have to have an appearance that inspires trust and confidence. Appearance includes you personally, your staff, your web site, your investment solution, and your communications. Every interaction between you and an investor shapes that investor’s perception of you and for you to keep a client, his perception of you should be higher than his/her perception of any other advisor. You are managing a person’s money meaning that you should be responsible, reliable, intelligent, and trustworthy. Your investment solution should convey togetherness by being branded to you personally. Your name should

September 2010

Transitions Magazine

Practice Management be on every page. Your picture should be on every brochure. You must be critical to the solution being provided rather than dispensable. After all, isn’t this why you are independent? By implementing these four practices you will be ahead of most advisors and poised to grow a profitable long-term career. Again, the key to attracting and retaining clients is to manage their perceptions in a way that clarifies your value to them. When clients have confidence in you, they will have confidence in the investment solution you guided them into, making it more likely that they will stick to the plan during bull and bear markets. uuu Scott Winters is National Sales Director of Eqis Institutional, and Dr. William R. Nelson is the Chief Financial Strategist of Eqis Capital. Dr. Nelson’s acclaimed origi-

nal research has been published in the American Economic Review, The International Conference on Information Technology ITCC 2004 Proceedings, the Journal of Economic Behavior and Organization, Latin American Finance and Capital Markets, among many others. Eqis Capital provides a turnkey asset management platform that delivScott Winters ers enhanced power, flexibility and efficiency. Based in San Rafael, California, the company enables Registered Independent Advisors (RIAs) and Registered Representatives (RRs) to engineer portfolios that combine diversification, sophistication and world-class insight. Eqis provides pioneering technology with a global reach. For more informa- Dr. William R. Nelson tion, visit them at

September 2010


Transitions Magazine

Practice Management

Advance Your Practice Through the Smart Use of Technology Attend T3: The Conference and learn how to build a more efficient and profitable practice. Feb 16-19, 2011 – Grand Hyatt in Weston, FL

Brought to you by conference producers, Dave Drucker and Joel Bruckenstein, select sponsors and media partner, Financial Planning


For registration details, Sponsors Application and more visit September 2010

Transitions Magazine

10 Key Considerations for SEC Registration With the signing of the Dodd-Frank Wall Street and Consumer Protection Act, fund advisors need to determine not only IF they are required to register but WHEN they are truly qualified. Fund advisors need to set in motion the proper processes in order to be compliant before they actually commence with registration. Register too early and your firm could be in violation of important Adviser’s Act rules within a week and half of the SEC receiving your application.1


reparing for and being in compliance ahead of actual SEC registration can take up to two months - to think through and plan out your firm’s compliance process, in particular: your compliance manual; the code of ethics; the rules; allow for training; and the creation of the ADV parts one and two. 2 Here are Ten Key Considerations for your firm when considering SEC registration and setting up a culture of compliance:: 1. One size does not fit all. A compliance program needs to suit the particular needs and investment strategy of an individual firm. The needs of long short equity firm will be different from that of a fund of funds as it relates to trading, best execution, counterparty reviews, etc. Customized manuals that have not been thought through can be very dangerous. 1 The SEC works has 45 days to act on the application but it can happen at anytime within those 45 day – it could be three days, it could be 30 days. 2 Form ADV Part 1 comprises Inputting online, information regarding your firm, including the firm’s business practices, persons who own and control the firm, persons who provide investment advice on behalf of the firm, the firm’s affiliates and the firm’s regulatory disciplinary history. ADV Part II (Brochure) is Principal document that advisors must provide to clients and prospects and includes descriptions of qualifications, investment strategy, fees, business practices and important disclosures.

September 2010

Regulatory Update

By William G. Mulligan, Jr.


Transitions Magazine

Regulatory Update

2. Talk to others who have gone through the process. There’s no need to re-invent the wheel on the actual process. We encourage people to talk to colleagues who have already registered for a variety of business reasons. Who did you work with? Did you use in-house counsel or an outside law firm? Did you use a consultant, if so what kind of consultant? Find out how it worked well for other people, and most importantly, ask them where they may have gotten surprised in the process. 3. Assign Ownership. Assign ownership for every piece of the puzzle right out of the gate. We see this as absolutely key. Various parts of the team will be responsible for different parts of the process at different times, be it personal trading reviews, marketing disclosure requirements, or email reviews. We find that it’s absolutely key as part of the compliance culture to create a matrix or calendar of what needs to be done at your firm each month and who is going to be responsible for each task. 4. Culture of Compliance. Demonstrating a culture of compliance to the SEC is immensely important. This has to come from the top down; senior management has to buy into the process. This process is so much more successful with fewer hiccups when out of the gate senior management is part of what’s going on. They need to demonstrate to the rest of the firm that this needs to work and is in the best interests of investors, the clients and the firm. To create the tone and the systems the compliance team also needs to be easily able to report up to senior management on a variety of compliance issues. 5. Disclosure can protect you! Disclosure is a very important shield. There are certain material items about your business, your ownership, your fees, redemptions, the operation of your firm that must 28

be disclosed to prospective clients and investors before they hire you. So one of the key aspects of your compliance program should be a regular review of disclosure vs. practice. You are going to explain in the ADV how certain procedures work, how do code of ethics work, what are your proxy voting procedures, your marketing reviews, are there any inconsistencies or gaps between what you say you are going to do and what is actually occurring. Key areas of disclosure centers around conflicts such as personal trading and transactions between affiliates as well as risk associated with the operation of your firm’s investment strategy. 6. Personal Trading Rules. Open up the process when you are about to enforce personal trading rules that are associated with the rule. Explain to employees what are the minimums (to compliance) and why large clients may want to see more and how the firm can participate and why it will be good for the firm and employees in the long run. 7. Importance of IT Controls. Right at the outset think of the elements of IT controls. There are very practical elements such as: • Email retention needs to be live • Record-keeping needs to be rock solid, backed up and back tested. • Information security controls on: • Passwords/locking • Access to investor data • Transportation of data outside of secure environment 8. Adopt a System of Reminders and Regular Checks. Upfront, you need to create a system that checks in with employees on a regular basis on compliance requirements that are organized and welldocumented.

September 2010

In the Spotlight

Transitions Magazine

Regulatory Update 9. Train your Staff. Talk to them, or have someone come in and talk to them, about the issues surrounding registration, why you have adopted this manual and this code. Get staff involved in the process and fully understand the obligations, for example receiving shares as a gift or inheritance. Hold annual training sessions and keep documentation so that you can easily demonstrate to the SEC that you are holding these training sessions. 10. Be Ready to Prove it! We recommend that firms not only adopt a reporting process and a workflow monitoring process, but also get ready for the auditor to walk through the door. Run through an audit checklist on a periodic basis, every six months or once a year, as though you were been audited. Tell your own story – how would you describe to an auditor what your firm does, what are your procedures, how do you comply with certain requirements such as trade allocations, personal trading, marketing reviews. By preparing a detailed audit process memo, a client can be 60% to 65% prepared in the event of an audit.

Bill also represented both registered and unregistered investment advisers while assisting clients in addressing CFTC-related matters. He handled the listing of private investment funds on both U.S. and non-U.S. exchanges, advising clients about ongoing SEC filing requirements, as well as providing overall securities, corporate and tax advice to the firm’s clients. Bill received a JD degree from Cornell Law School in 1995 and a BA from Boston University in 1991 and is certified as an Investment Adviser Certified Compliance Professional (IACCPsm) by National Regulatory Service’s Center for Compliance Professionals. He currently serves as Chairman of the Board of Managers of the Alternative Investment Compliance Association. Please visit for more information.

Finally, compliance is a lot of little tasks that you need to stay on top of; if you stay on top of them as they occur they don’t turn into big problems. uuu

William G. Mulligan, Jr. is the Managing Partner | CEO of HedgeOp Compliance. Prior to founding HedgeOp Compliance, LLC on January 1, 2001, Bill was an associate in the Investment Management Group of Seward & Kissel LLP for approximately six years. At S&K, he specialized in the formation and structuring of private investment funds and private equity products.

September 2010


Transitions Magazine

Refining Core Satellite Investing


By Ronald J. Surz, CIMC

nvestors have a renewed interest in portfolio construction, due in large part to the current crisis, so core-satellite investing is regaining popularity. Both Vanguard and Putnam recently announced the addition of “core” products to their suite of funds. So why the interest in core? It could be for either of two reasons. Some view core investing as a hedge against making active manager mistakes; core is ballast to keep the investment ship steady. The best core for this purpose is the entire market, like the Wilshire 5000, although the most popular choice is the S&P500. The intention is to dilute the active managers because the investor lacks confidence in them. In this context core is a compromise for those who are on the fence about the activepassive decision. Add some cheap passive core to the expensive active manager mix to simultaneously lower costs and guard against the risks of surprises by reducing the tracking error relative to the broad market. The amount in core is a reflection of the lack of confidence in the active manager roster and structure. The more in core, the more market-like the performance. Allocation to ballast core is a confidence barometer. By contrast, the original core idea was to diversify while simultaneously encouraging active managers to give it their best shot. The original core concept emerged from confidence in active managers, rather than concern about making mistakes, so it was a completeness fund that complemented active value and growth managers by adding what they are not – the absence of value & growth. The absence of value or growth is the stuff in the middle that neither value nor growth managers hold. “Core” in this context means “center.” This provides license for the active managers to be undiversified, concentrating in their areas of expertise. This concept, introduced in the 1980s, gave way to style-based equity specialists and has evolved into an insistence on style purity today. There is a premium placed on adherence to style, and a corresponding necessity to fill in the void left in the middle between value and growth. Both the hedge and the completeness versions of core improve diversification, but with different motivations related to confidence in active management. In this article we address the application of core for completeness, which was the original intention. The definitions of “core” are: center, heart or hub. Because it encompasses most of the market, the S&P meets none of these definitions. The good news is that there is an efficient completeness core, and it’s easy to understand why it works best in diversifying portfolios of multiple active managers. The S&P500 and other broad market surrogates may make good ballast for those who are concerned about their active manager decisions, but we need something more specialized when it comes to completing allocations to real talent. Allocation to completeness core is derived from the overlap among the active managers.

Portfolio Construction

Ballast or Completeness?

Welcome To The Real World Adherence to a style requires a definition of that style. Although there is disagreement on the specifics of

September 2010


Transitions Magazine

Portfolio Construction

style classifications, most concur that the real world is not black and white, with all value stocks clearly differentiable from all growth stocks. As shown in the graph below, there are stocks that are in a gray area, having characteristics of both value and growth; these are the “fuzzy” stocks, or the stocks in the middle that I call

“Centric” stocks are assigned to both value and growth by Russell, MSCI and others. These index providers apportion the weight of a centric stock between the two styles. S&P ignores centric in their traditional indexes, but acknowledges it in their “Pure” indexes. PPCA maintains separate Surz Style Pure® Centric indexes for large, middle and small-sized companies. Centric is what should be used in completeness investing.

New And Improved Completeness Core The S&P as core dilutes the decisions of the satellite value and growth managers because it includes value and growth, as well as centric. You can see this problem for yourself by using an asset allocation optimizer. For example, returns-based style analysis can be used to solve for allocations to an active-passive team of managers. Ask the optimizer to solve for the blend of managers that best tracks the Wilshire 5000. If the passive core is the S&P500, the optimizer will ask for 80% in the S&P, whereas it will settle for only 20% in centric; the same diversification with less passive core. Less core is more if you believe your active 32

managers will add value. If you don’t believe they’ll add value you’re better off all passive. Why does the optimizer want so much S&P? It wants the centric part of the S&P but has to take the whole package in order to get the centric. You have to buy the entire Oreo cookie to get the sweet center. In a similar vein, research conducted by Dr Frank Sortino of the Pension Research Institute and Sortino Investment Management indicates that allocations to active value and growth managers systematically underweight the middle of the market, i.e. centric. This is understandable in light of the scrutiny that most managers are under to maintain style purity. Managers are incented to sell companies that drift toward the middle, away from their declared style. The result is an unintended bet in multiple manager portfolios away from centric. This is a diversification mistake. This is an easy mistake to remedy: add centric. Our definition of centric is the 20% in the middle – it’s 20% of the market. It’s a simple matter to merge the current managers with a model centric core to constitute 20% of equity holdings. Sometimes the simplest solutions are the most elegant. And this list is only 45 stocks, so it’s easy to implement. The constituents of the current Surz Style Pure® large cap centric core index are provided in the Appendix.

September 2010

Transitions Magazine

Portfolio Construction Evidence

In summary, Centric is a better complement to active value and growth managers because (1) it does not dilute active manager decisions and (2) it fills a large company centric void in most multiple manager programs. The following graph provides statistical evidence to support these assertions. The measure of a good diversification complement is low correlation. Centric is substantially less correlated to value and growth stocks than is the S&P500. Also, Centric has about the same return and risk as the S&P, so filling the void does not sacrifice performance or increase risk vis-à-vis the S&P. uuu

Appendix: Q3, 2010 Centric Core composition (Values are Capitalization in $Billions) ADP AMGN APA




11.37 47.72 24.3 15.78




11.48 27.37
















September 2010

30.98 METLIFE INC 17.36 MOSAIC CO 22.04 MARATHON NORFOLK 19.56 SO 11.31 NOR TRUST 62.66 OCCID PETE 97.09 PEPSICO INC PROCTR & 172.74 GM 23.25 PRAXAIR INC QUALCOMM 52.84 IN 27.14 RSH IN MTN 13.9 STAPLES INC TARGET 36.33 CORP 17.11 TJX COS PRICE 11.42 GROUP 16.75 50.14 34.74 56.44 60.31 19.06



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Transitions Magazine

WHY DO WE ADMIRE ‘BUSY?’ By Kevin E. O’Connor, CSP

Do you find that these days when you ask a friend or colleague how they are, they frequently respond, “Busy, really busy.” Sometimes it is hard to tell if they are exasperated or proud. Our lives are demanding. Could it be that “busy” is the description for many facets of our life? Do we really admire all of this busy-ness? Busy people? Should we admire them or pity them? Are we the “really” busy ones?

I wonder if our emails, voice mails, and endless to-do lists really deceive us. I’ve heard many men and women literally brag about the 50, 75, 100, and 200 and more emails they receive each day. Is this productive or the appearance of productivity? In short, if I can’t be productive, do I settle for being busy, and mostly, responding that “I’ve been really busy.”

Is It Better to Be Useful? I recently surveyed three groups of high level managers with a simple question. “What percent of your meetings are really a total waste of your time?” The majority responded that 40-50% of their meetings were a waste of time; one responded, 20% but then told us he was “new” and only had to attend two meetings per month! How about you? What has your life been like lately? And who do you feel is in charge of it? I did some research last month, reading, questioning, talking and thinking. Here is what I learned.

Time Management

Consider this: Do you want your physician to be “busy” when she sees you? If you are in the wirehouse environment, how about your branch manager during your performance appraisal: Do you want his complete attention or is it okay if he “multi-tasks” in your presence?

It is easier to be busy than to be productive. When is the last time a friend or colleague answered “Productive” to your question? There may be a very good reason for that. In fact, a financial advisor I know always has a short story or example or quote from a client that he uses instead of the word ‘busy’ when he

September 2010


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Time Management

is asked. So when the question comes, “How are you doing?” his response is “I had a very interesting conversation this morning….” He keeps it brief and is often focused toward the person he is speaking to. This is better than any “elevator speech” and definitely better than any one-word response! Email is addictive. We say it is good and annoying and too much, but how much time did you spend today staring at your screen? Worse, how many others did you automatically “copy” with everything on your screen? Worse still, after hours of cleaning out your email, did any of it make any money, uncover a prospect, and give you a reason to contact that difficult client? Returning voice mail is an adult form of “tag, you’re it” Do you play the game? Or do you give every voice mail a headline up front, along with a concise, thoughtthrough answer to what they might want next, and the best way to get back to you? The cell phone is often unnecessary (and usually completely rude) in restaurants; seated next to me in an airline terminal; heavy traffic; in another’s presence, at your child’s school conference; meetings; and especially in any public washroom. Are any of us so important that we need to be that accessible? And must the rest of us listen to you while you think you are that important? What’s accomplished by speaking so loudly is that those around you feel you don’t need a phone for the person on the other end to hear you. Especially for financial advisors, where every person you contact could be a potential client…be very careful not to color their impression of you by being busy, loud, or unaware. Would any of us fall below an acceptable performance level if we were monitored and judged on productive time vs. busy time? In some organizations, looking and being busy gives you a lot of leeway. The most important thing to explore is how do the two serve us differently? How does it feel when 36

you are just being busy vs. the feeling of being at your productive best? This is also the evaluation some of our superiors have, more importantly, some of our clients. When we are late, regardless of the reason, we are probably kidding ourselves as to the reason. Author Dan Kennedy advises that we should trust only punctual people. We are late because what we were supposed to be on time for was simply not as important as it should have been. The leader’s job is never to look busy, but rather to be inquisitive, interested and competent. In fact, if your branch manager is a “busy boss” does that really feel like a good thing? If I can’t connect with you within 24 hours, one of us is way too busy…Or we think we are. Make it a plan to return all calls and emails within 24 hours. For financial advisors and their clients, 6 hours is even better. Your quiet time today at work and at home will probably be your most productive time … and truthfully, few of us use it enough. What if you scheduled some right now? And not a “close the door and work” session, but a “close the door and reflect” session. Scheduled just as you do any other meeting, promptly ‘showing up’ just as you would, too! Don’t kid yourself, your family or even your clients; you are neither irreplaceable, nor are you so important that life won’t go on without you. What are you racing to do right now to the exclusion of other equally important things had better be important to you, to them, and to the enterprise…or it means very little. The famous paradox of St. Augustine still holds true…What I am doing right now is the most important thing in the world, but should I die momentarily, its meaning is nothing. What we all do from time to time is very important…the question is: Is what I am doing now important or is it urgent, addictive and perhaps misguided?

September 2010

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Time Management In short, am I admiring the busy part of me or the productive part of me? What are we to do? Here is some advice from the experts: Author Dan Kennedy suggests that we link everything we do to our most important goals. What are your 3 or 4 (maximum) goals in your life? If you have to achieve anything with this life you have, what is it to be? Alan Lakein, author of the classic, How To Get Control of Your Time and Your Life, recommends that we always ask ourselves the golden question: What is the best use of my time right now? Try asking yourself that question often during each day…the answers will be surprising. Physicians have long suggested that we listen to our own natural circadian rhythm: when are we at our natural best? Some of us truly are “morning people;” others really do “wake up after dark.” Rather than trying to fit things and people in to a schedule, how can you build your activities around your own natural best? For financial advisors, your written word can often be misinterpreted. Write all of your emails and letters for reading, not writing. Don’t send important emails too quickly. Use the “draft” folder to keep them a while; re-read them, re-work them, re-tool them before they’re sent. Watch the tone, the language. Even when it’s a simple request, stick to your goal for this communication. Consider the reader. Who is she? How will he perceive it? What questions will they have after they have read it? Better yet, pick up the phone? Do the same with your voice mails. Get a spiral notebook and jot down notes to yourself about the voice mails that you send. Don’t just call and talk; be purposeful about your voice communications. Don’t hang

up after you have left your message. Listen to your message after you leave it. How do you sound? A little long winded? How many “uhms” and other useless words are in your message? Re-record for most effectiveness. Your are being judged on the way you communicate—verbal, written and non-verbal. (A simple technique, call your own voice mail and rehearse your message, listen to it, and adapt.) Work from fewer goals rather than more. Don’t confuse goals with your “to-do” list; they are vastly different. Author and university president Nido Qubein recommends that our “stop doing list” is just as important, often more so, as is our “to do” list. How about your personal mission statement? Does your staff know it? Remind yourself early each day what is the very most important part of your vision…task…focus. Meet briefly with your staff each day and review the why of their work, who it is for, and what is most important. This builds teamwork and loyalty. And what if all this ended today. Who are you without your work? What is currently inside of you that will remain no matter what happens to the market, to your job, to your outside security. What can the world never take away from you? For those who sell disability insurance, you can probably tell us stories of those who thought it would never happen to them. R. Buckminster Fuller, the physicist, philosopher and gadfly genius believed what we think about is largely the result of the outside; a combination of what others have thought, what we think in relation to that, our perceptions of the world; But Fuller said, “What we feel—that is our contribution to the universe. It is our unique stamp on the world: coming from our core being.” Feeling, then takes center stage. Yes we need our

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intellect — but our uniqueness lies in our ability to feel. Consider any of the great leaders you admire — did they reach greatness only because of what they thought? Or did they reach greatness because they could stamp the situation with great thinking and great feeling?


My question: How do you feel about your world and your work and your life? It may sound trite, but for us, life truly is what we make of it. And it is possible that this is all about time. If we stay busy—we’ll miss it all. REISA currently has over 700 members from across the country in various real estate professions including attorneys, CPAs, broker-dealers, sponsors, lenders, mortgage brokers, qualified intermediaries, real estate agents, registered investment advisors and registered representatives.


Kevin is a faculty member of Loyola University in Chicago and Columbia College. The author of 6 books, His latest book, Ten Tips for Time Management is to be published this fall by the American Society for Training and Development. Two of his most recent books are Present Like A Pro: A Field Guide to Mastering the Art of Business, Professional, and Public Speaking and Speak Up: A Woman’s Guide to Presenting Like A Pro. He also has been awarded the CSP, the Certified Speaking Professional, by the National Speakers Association. This coveted designation has been granted to fewer than 590 professional speakers in the world for speaking and presenting excellence. For more info, go to 38


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Kevin O’Connor, CSP, is a consultant and professional speaker, specializing in technical professionals leading teams of their former peers. His main work is team building, communication and customer relationships for financial professionals and those they serve. Kevin has consulted widely with organizations across the United States, Canada, Europe and Dubai.

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