2-1
MM Client RetentionAugust 29, 2002/Tape 2
PRUDENTIAL INVESTMENTS MULTIMEDIA
RW:Elliot Miller, are you with us?
EM:Yes, I am.
RO:And Rob Olcott(?), are you with us?
RO:Yes.
RW:And Patrick Brown, are you there? (Pause) We'll hang on one second, wait for him to get here.
PB:I'm here. This is Pat Brown.
RW:All right. Thank you, Pat. Okay, good afternoon everyone, this is Rich Woodworth(?) in National Sales and at four o'clock on every Thursday we have our Managed Money Client Retention SS-4 Call-In. As promoted on today's Action Daily, we are bringing you the call again here. So, whenever you're ready, Elliot, take it away.
EM:Thank you. Hello out there and thank you for joining us on the call this afternoon. As you may know, every Thursday at 4:00 P.M., our IMS group hosts an SS-4 call, which has to do with retaining business, I know a subject near to our minds at this point. Today, we've got two distinguished guests out there: Pat Brown, the Eastern Divisional Director from Lord Abbott is going to discuss how to conduct a client review. And then after that, I will introduce Rob Olcott, a Senior Vice President and Senior Consultant based on our Tyson's Corner Virginia branch. So with that, Pat Brown, can you tell us about how to conduct a client review?
PB:Sure. Thanks, Elliot. Yes, I think the title of the presentation really should be: "how to conduct a client review in a difficult market environment?" Because as we all know, in a good market environment, review means tend to go very, very well. So I think where the difficulty comes in is when the market is working in the wrong direction. And I'll give you the background.
This is a really simple story. But the back on it is we got this idea actually calling kind of a big money consultant and one of our guys went to call on him. When he went into his office he noticed that he had a plaque on the wall and generally when you see these things and they have to do with assets under management or some kind of production level. And his plaque had to do with client retention. So obviously, the question was asked, you know, "What is your secret? How did you come up with so much success?" And he came with a story that is probably familiar to a lot of people who are listening. He said "You know, it's more like trial and error in that typically what used to happen to me is I'd have a client with five different money managers. When the time for the review meeting came, I put together five beautiful booklets, one on each manager, we'd sit down with a client. The time allotted would be, I don't know, a half-hour, 45 minutes, something like that. And then everytime, the same thing would take place.
Two of the managers would be doing very well. Two of the managers would be about average. And then one manager would be under-performing. And then, we would spend the next 40 minutes of the 45 minute meeting discussing that one manager's under-performance.
And the way he put it, which I think was great, is "I'm the consultant on the account. I'm not a defender of money managers." And so, he wanted to come up with an agenda that would really answer or keep in mind three objectives and those objectives were: number one, to keep control; number two, to set a proper benchmark; and then finally number three, and maybe most importantly in the current environment we're in right now is to keep the presentation or keep the performance numbers that you're going to be discussing in context with the current environment. So basically, it works like this. You start out the meeting and it's a half-hour and you start out with five minutes. And the first five minutes is you've readdressed the strategy review, if you will, or you've readdressed the client's goals and objectives. Has anything happened or changed since the last time we met that would make something change along your time horizon? Or your cash flow needs? Or your ... whatever it might be. Liquidity.
Assuming nothing changes since the last meeting, what the consultant would do at that point would be to restate what he called the client's personal performance benchmark. Personal performance benchmark with the idea being that if we're really investing for a goal or an objective, there's an actual number we need to shoot for. It's based on how much money we're putting away, how much time we have and how much return we need to get.
And if we're doing our job the correct way, that personal performance benchmark is going to be a number somewhere in the range of six, eight, ten, maybe as far out as 12 percent. But it's not going to be a benchmark like the S&P 500. It's going to be more rational to what the client's objectives and goals are. The key ingredient there is to set the proper benchmark.
The next step over the next couple of minutes is to do a macro market overview. The key ingredient here is not to talk about the individual money managers. The macro market overview. Stocks, bonds, cash since the last time you met or since the account was established.
After you get done with that, you take the next five minutes and you go into a micro market overview. Let's say large cap versus small cap. Value versus growth. And maybe some of the different things that have happened in the different bond environments. But most importantly again, do not discuss the performance at this point of the individual money manager. This is the key ingredient for setting the proper content.
The next step is you take the composite return of the account, net of fees, and one of two things is going to take place at that point. The first thing that could happen is the composite return net of fees could beat the personal performance benchmark, and if that's the case the meeting pretty much ends at that point except for questions and answers or anything that you feel is absolutely imperative that has to be addressed at that meeting about one of the managers that you're going to discuss because you've done your job. You're the quarterback.
The other thing that could happen, which might very well be happening and will almost undoubtedly is going to happen in the current market environment, is that the performance is going to be underneath the personal performance benchmark. And in that case, you are going to have to discuss the performance of each individual money manager. But I ask the question of you: is it a tougher job to discuss the performance of a manager if you just put out the performance? You are down since the last time we met 16 percent, I want to put that in the context of what a similar market has returned in that same environment. The idea is, you put your performance numbers in context, don't spit the number out first and then have to backtrack into the reasons for it.
In other words, what it does, is it takes the onus in a lot of ways off you as the consultant and puts it again more in the place of the money manager. It seems to work very well and (Inaudible Portion) one of the money manager's side of the equation. We do a lot of client retention meetings. Obviously, I can't talk about the client's strategy review when I walk in, but in every case, we set up the meeting and we take the other steps and we follow them to the letter. We talk about what's going on in the overall market. We talk about the micro view, let's say the large cap market, the mid cap value market, or what's going on in balanced management. And then we give our performance numbers. And it seems to make the meetings go an awful lot easier.
Two quick things and I'll finish up here. To make these things work real well, I know you can get some information off your systems. If you want other places to go, one that we've found is real helpful on short notice is you go to Yahoo.finance of all things. And on that, you can take any index and you can plug in a date and it will give you the exact trading prices, high, low, and closed, all the way back over the last five years for just about any index you want to track. And that kind of makes the performance figuring pretty simple as opposed to just looking at, say, the quarterly performance numbers or yearly performance numbers. You can take it back and show them what the markets were returning or were trading out on certain dates. So that's the first thing.
And the second thing is, if you want a little help with this, one place where we can direct you to is our website and that's LordAbbott.com. And on that website, we have a section for financial advisors titled Private Advisory Services. And in that section, you can go through it and there actually is a sample agenda, or actually, I shouldn't call it a sample agenda, it's an actual agenda that you can use to format one of these meetings. You can go in and type the client's name and the date and it will actually print out an agenda for you exactly following the steps that I've just outlined. That's a simple story but I think it's one that if we follow it in the current environment it might help things go a little bit smoother.
EM:Thank you, Pat. And I do direct you all to the client retention website. It's part of the IMS, the max website on the IMS website. There's a client retention site. And we have the Lord Abbott presentation as well as some very good presentations from some other money managers there as well.
The next speaker is Rob Olcott. Rob is a
SEMA(?). For the last six years, he's a founding member of the Olcott Consulting Group at the Tyson's corner office. Rob has been in the business now for 17 years and frequently speaks on subjects from financial and estate planning to portfolio management and corporate executive services. Early in 2001, Rob was selected as one of the 16 wealth advisory teams at Prudential Securities. And Rob's, I know, been dealing with some very significant institutions and high net work individuals for all his years in the business. So Rob, take it away.
RO:Great. Thanks, Elliot. And good afternoon everyone. As Elliot mentioned, and I should preface my comments by stating that many of clients are institutional. We work with a lot of endowments, foundations, as well as nigh net worth individuals. But I think that the principles that we follow for are endowments and foundations are the same principles and procedures that we follow for individuals. It should be applicable to those of you who are listening in today.
To me, the whole issue of client retention really is not so much a part of the evaluation process. Yes, that's a component of it. But to me, client retention really begins before the first dollar has been placed in the first managed account. It begins with making sure that clients understand what is realistic and what is not. It begins with understanding the client's specific needs and objectives, their tolerance for risk, and actually putting those down on paper.
I think a lot of the problems that some people have had they're retaining at mac accounts or mac CS accounts in this kind of market environment is that unfortunately, we went into 2000 with unrealistic expectations for the managers, which obviously were unachievable.
I think it's also absolutely imperative before the first dollar is placed in the first managed account that we position ourselves as consultants. In our group, we never use the word "selling." It's important the way we position ourselves in the minds of our clients and that we position ourselves as consultants, as advisors, as educators. We are not salespeople.
I mentioned the importance of the upfront education and the importance of the process. This is the same process that we've followed for the past 15 years and it's a process that served us well and it's a process that may seem very simplistic, but it is nonetheless a process that if you follow, it does work. And again, it's got four steps. The first is the planning process. It's the setting of realistic goals, risk parameters, the time horizon for the client's assets. And then it's actually, in my mind, putting those goals, parameters, time horizon, into a written document and keeping a copy of that in the client file. And I'm not talking about just the mac document that establishes the general goals and objectives for the manager, but I believe it's a one-page summary which the client actually signs off on and establishes specific return objectives, specific risk tolerance.
And one of the things I think we've learned over the past two-and-a-half years is that clients really don't understand standard deviation. And there are tools that are available today. The technical analysts and the regions are a tremendous resource to help you present to a client that's considering a particular money manager, the potential upside and downside risks of a particular manager and of a portfolio of managers. So for example, with our clients, going into this process, they know that the worse case scenario for their particular portfolio of money managers would be a worst case one year of no worse than, let's say, eight or nine percent. So again, I think it's upfront in the process. The education, the establishment of realistic goals and objectives is absolutely critical to client retention.
The second stage in the process is the establishment of an asset allocation strategy for the overall portfolio. We never recommend a money manager as a standalone investment. In fact, our group has established a $500,000 minimum for any account we accept. And I would point out that even at $500,000 we would not recommend, or would be unlikely recommend, mac as the soul investment platform for the entire portfolio. Largely, because it would be impossible to adequately diversify the client's account.
We preach and believe strongly in the importance of diversification. Diversification by asset class, by market capitalization, by style, that is, growth versus value, by domestic and by foreign. And I can tell you that we have no client that is 100 percent invested in stocks. Our typical client probably has five to seven different money managers. If they have fewer managers, then those mac managers are balanced out by mutual funds inside of a Pru Choice account.
And we go into a relationship with a client telling them that as part of this diversification process that they should expect that every quarter when we review their portfolio's performance with them that they will be disappointed by the performance of one or two of their managers or one or two of their funds. And that that's just the nature of the capital markets.
The third step in this process is the search process. Again, we don't sell money managers, we sell a process, we follow a process. And we always conduct a search. We never tell a client that X,Y,Z manager is the manager that they should use. We show them the potential managers that we have examined, how we've screened the list to come down to finalists, and then we engage clients in a discussion about the finalists, and engage them in the decision process as to which manager is selected. I think we set ourselves up for problems if we skip that process, if we don't show them that we've gone through some sort of thoughtful search. That if we're simply telling them that they should hire a particular manager, that will come back to haunt us.
And the fourth and final step in the process is the monitoring, the ongoing monitoring, of the individual manager and of the overall portfolio. Again, retention starts before the first dollar is put into the managed account. We tell the clients upfront how we're going to monitor their portfolio, how we're going to monitor their managers. We tell them the benchmarks that we're going to establish and utilize. We tell them that we're going to measure a manager in a large cap growth area. Again, for example, the Russell(?) 1000 Growth Index. And again, I think it's important to establish those criteria upfront. We also, for each client, build what we call a personalized composite. So if a client's got four different managers, or five different managers, we create a blend on a quarterly basis, a blend of indices in the same ratio as their money managers to show them what I believe is the most appropriate apples to apples comparison.
We also tell clients upfront the criteria for terminating a manager. Things such as change in key staff, change in the manager's style. Under-performance we talk about before any manager is hired. We talk about under-performance relative to the appropriate benchmarks that we're going to establish, the peer group that we're going to use, and the time horizon that we're going to use. And we tell them going into any managed account relationship that the manager's going to get a minimum two years to perform. We're not going to terminate them short of two years unless there's been a change in staff or a variance in style and that we need to be prepared just to stay the course for two years.