Thoughts

New Complexity with New Indexes

Last week, Mike wrote a compelling post about index investing, specifically the complexities and volatility.   I thought that was timely after reading the news that Russell Investments and a partner were creating 24 new indexes based on the Fundamental index methodology.  This method uses adjusted sales, operating cash flow and dividends plus buybacks instead of market capitalization for weighting securities within an index.  It’s a really interesting approach and seems to have numerous merits.

I’m not the right person to discuss the merits of one approach versus the other.  This different approach brought a thought to mind: we should evaluate and scrutinize any backwards looking data closely.  I have some first-hand experience with that.  … [read more]

Framing a Conversation

Earlier this week, I took a coffee homebrewing class.  While entertaining, I left the class a little disappointed.  And as I thought about it, I realized the disappointment stemmed from something many advisors say about product manufacturers (more on that in a minute).  The teacher  – while knowledgeable – wasn’t knowledgeable about my problems and issues.

 … [read more]

Subtle Ways to Keep the Client First

Where does the client fit in your business model?

You would probably say that they are in the middle of a circle that your entire firm orbits.  Maybe you even have an internal diagram like this one.   a client-centric modelIf that’s the thinking, consider these three simple changes to your Web site.

  1. Organize the site by the customer types that will visit your Web site.  For instance, if RIAs visit your site, consider a specific section of the site for them (like Nuveen).
  2. Direct your Web site users to specific sales people.  For instance, clearly list your RIA sales team on a US map with clear delineation for territories.
  3. Include case studies or examples of your customers. For instance, have articles such as “How a newly Independent FA added our funds to his asset allocation strategy.”

Enhancing your site with changes like this will truly keep the “customer” in the center of your business model.

Social Compliance

“You say tomato, I say tomato … Let’s call the whole thing off.”
– Ira & George Gershwin (from Shall We Dance)

I heard that song recently.  The chorus reminded me of the conversation we often hear between Compliance & e-Business regarding social media within investment management.

Compliance says, “set up process to archive, show us that it works and then begin with social media.”
e-Business says, “let’s start a little bit, dabble, and then begin a compliance process as we know more.”

Our perspective is to be compliant-at-all-costs.  In 2011, there’s little appetite for being out of compliance and the potential damage that can place on a brand.  So then what?

Well, archiving and organizing social media use is becoming easier.  We see tremendous value in an archiving pilot  that tries out both a leading providers (such as Social Ware or Actiance) and internal processes.  While each pilot at each firm will have different considerations, the pilot’s will include these steps:

  1. Identify a pilot group
  2. Provision their network accounts with access to Facebook, Twitter, and LinkedIn
  3. With Compliance, develop a prescriptive set of compliant posts
  4. Have the pilot group communicate the compliant posts
  5. Test the ability to prevent, delete, or retrieve posts

With numerous software-as-a-service solutions, perhaps this is a good place to give a little (to get a little) and begin with an archiving system pilot, before the first post on your facebook wall.

Does Everyone Really Understand the Complexity of Index Investments?

Third in a series of posts on the sales and marketing implications of the ongoing debate between active and passive management.  Read the first and second posts.

Back the spring of 2009, David Swensen, who oversees Yale’s endowment, gave an interview about his investment principles.  A frequently-repeated quote from the interview is:

With all assets, I recommend that people invest in index funds because they’re transparent, understandable, and low-cost.

The word that jumps out to me is understandable.  I think most investors and financial advisors would reflexively agree that index vehicles are exactly that – a tribute to the way they have been described and marketed.

But there is a variable involved in index investing that makes me wonder if everyone understands index products as well as they believe they do:  the underlying indices.  We spent some time digging into a variety of investment indices, leading us to two conclusions:

  1. Indices are Complex: An index is an easy concept in the abstract, but not so in practice.  For example, to fully digest the methodology behind the creation/maintenance of MSCI indices, you’re going to need to read 119 pages of information.  And consider how different theories have emerged on how indices can be best constructed.
  2. Indices can be Volatile: The components of indices vary regularly, and sometimes significantly.  For example, almost 700 securities were added / removed from the MSCI Small Cap indices at the end of last year.  Even the US Large Cap 300 index had 5% turnover in November 2010.

In addition, index updates sometimes occur as infrequently as every six months.  2008 did a lot to remind everyone how much can change in six months.

In the marketing of investment vehicles, index investments are presented as the simplest, most straightforward option.  As Mr. Swensen stated, they’re understandable.  But as we talk with advisors, they typically get indices conceptually but not in great detail. Data like that presented above catches many by surprise.

For firms positioning themselves and their products against index investments, this represents a way for marketing and sales teams to potentially change the conversation.