In PracticeMarch 14, 2007

Wirehouse Clients Come With Problems

Independent advisers claim that new clients who previously worked with brokers lack proper planning documents.

Reported by Adrien Martin

Respondents to a new poll by Schwab Institutional say that most of their new clients who were previously advised by brokers come to them without investment guideline statements aligned with their financial goals (75%) or appropriately structured estate planning documents (52%).

According to Schwab’s Independent Advisor Outlook Study, advisers said the top three concerns for their clients – nearly half (49%) of whom came from full-service brokerage firms – were retirement (79%), financial security for their family (63%) and paying too much in taxes (47%). Less than 10% of advisers cited long-term care and health expenses as top client concerns.

The most common problem with the portfolios of these new clients was an inappropriate risk profile for client goals (40%), followed by ownership of mutual funds with very high expense ratios (17%), too many proprietary products (16%), overweighting in one stock (14%), and overweighting in one sector (13%).

In terms of client expectations of their portfolio returns, 51% said their clients were somewhat realistic and 24% said somewhat unrealistic.

Investment Predictions

When it comes to creating portfolios, advisers have an affinity for Large Cap Equities over the next six months, and plan to decrease their holdings in Small Cap Equities, according to the survey.

The greatest percentage of advisers (39%) plans in increase their investments in U.S. Large Cap Equities over the next six months, followed by 31% who plan to increase their investments in International Large Cap Equities, 16% in Fixed Income, 16% in International Small Cap Equities in Developed Markets and 11% in Cash.

The largest number of advisers (25%) plan to decrease the amount they put in International Small Cap Equities in Emerging Markets; 19% plan to decrease investments in Cash and 17% expect to decrease the amount they put in International Small Cap Equities in Developed Markets.

Hedge funds are already being used by one-third of advisers, but the survey also asked advisers how they expected the Securities and Exchange Commission’s (SEC) increased vigilance over the funds would affect their investment decisions, and 26% said that greater oversight may prompt them to invest more into the funds, but the majority (64%) said it would no influence on their investment decisions.

Advisers are less enthusiastic about REITs and real estate, with 25% of those who now invest in REITs planning to invest less or discontinue their investments in the next six months and 17% of those who now invest in real estate reserve the same feeling.

The survey found that advisers were more optimistic about the healthcare, information technology (IT), and the financial sectors over the next six months, with 41% predicting healthcare as the top performer, followed by 38% who say IT and 34% who say the financial sector.