risk management

Advisors: How Risk Management and Wealth Preservation Can Raise AUM

Can an analyst who has a vested interest in the outcome of his/her forecast do the best job? Are they working for investors or for their bank?

Advisors these days are up against multiple factors affecting their practice. Technology can level the playing field in many ways. Take aggregation software, for instance. Morgan Stanley recently rolled out WealthDesk to their advisors. It seems to have a ton of functionality and one piece is the ability to aggregate held-away client accounts. Aggregation is not a new technology but think about where we are going. There are multiple eyes on the accounts that you manage. People are watching you. It reminds of the song from 1984 by Rockwell called, “Somebody’s Watching Me” with Michael Jackson and his brother Jermaine on the background vocals. Smart advisors can and will re-tool themselves with software to help monitor held away assets, especially individual stocks.

Why? That’s simple, because only a handful of advisors are doing this.

Having been a sales trader where I covered middle market hedge funds, a part of my service was monitoring their holdings and alerting them to changes in trend or unusual activity on the stock. I had institutional tools back then and, with today’s technology, it’s a breeze. Today, advisors are all delivering a lot of the same investment management allocation, and rightfully so. Full diversification according to risk tolerance and time frame is an industry standard; it’s expected. They differentiate through other avenues, holistic planning, tax loss harvesting, etc., and that is a good thing for the investors.

I think advisors need added focus on risk management of held-away assets in order to gather new AUM by preserving wealth in this competitive industry.

Wealthy clients or clients that have entrusted you with all their wealth, no matter the amount, feel the same way. They’re both deeply attached to their money! Even if you’ve done everything correct, the markets can deliver a different outcome from that which you have proposed.  You’re not responsible for every hiccup the market makes, by no means. However, how do you know if your clients are over-exposed in a sector that is underperforming? Do you have a repeatable process to objectively alert you when things change? How about on an individual stock? What’s the tool that tells you things are changing?

Scenario to Consider:

Client “A” uses your aggregation software and because you did a proper fact find, he/she told you that they have a large holding in XYZ stock that equates to more than what you are managing in their core allocation. Here’s the issue; most advisors don’t have the time to learn everything about an individual company. Imagine if you had to monitor 50 stocks, how would you do it? Can you rely on sell side analysts to get you out of the stock in a timely fashion? You’ll need to use a tech platform that will alert you if the stock starts to change trend.

Here’s an idea that a few advisors used to gather new AUM. I’ll use Whirlpool (WHR) stock as an example. Our Chaikin Power Gauge rating was in tune with the trend change and way ahead of other Analysts. Our Chaikin Power Gauge rating changed to Bearish at a price near $172 per share. Since then the stock had a low of under $100 and it  trades below $110. That’s a loss between 30-40% that could have been avoided.

The idea here is to make a confident, objective call to those who own a stock like WHR and let them know that the trend is changing. Advisors who’ve used this idea have done a few different things.

  1. You could flat-out sell the stock.
  2. Implement a protective option strategy like a zero-cost collar or just buy a put.
  3. One advisor protected the stock and was able to do some estate planning and even lent money against the protected position as a bridge loan that helped the client move residences.

The table below that shows Wall Street analysts ratings vs. our Chaikin Power Gauge Rating.

Source for Ratings: Market Beat

Our Power Gauge clearly shows the breakdown occurring, in an objective manner, while the analyst ratings seem to completely ignore the risk that the Technicals are signaling. In defense of the analysts, that’s not their job, but if you aren’t aware of the Technicals how can you do your job effectively? How about the clients who go by these recommendations to make decisions on what and when to buy? And these rating changes get a ton of press.

This is just one example. There are dozens more that we can show you and the system can be automated to alert you by email.

Chaikin can give you the edge you need to make the tough calls that will differentiate you from other advisory firms. It seriously levels the playing field.

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