RW:Good Afternoon Everyone. This Is Rich Woodworth(?) in National Sales. As Mentioned In
September 12, 2002
PRUDENTIAL INVESTMENTS MULTIMEDIA
RW:Good afternoon everyone. This is Rich Woodworth(?) in national sales. As mentioned in today's action daily every Thursday at 4:00 p.m. we are bringing you managed money client retention calls. And to kick off today's client retention call we do have with us IMS regional coordinator for our southwest region, Charlie Moore(?). So Charlie, take it away.
CM:Thanks, Rich. Good afternoon everyone. It's my pleasure to host this week's client retention call. It's also my pleasure to introduce our two speakers for today. First, we have Craig Dexheimer(?) from Lazard. As you know Lazard has a number of value disciplines in our max(?) program. Craig is with us today to discuss client retention strategies, which obviously are of key importance to us in these markets. It reminds me of what Voltaire once said, which is that "medicine is the art of amusing the patient while nature cures the disease." I think in these markets we find ourselves struggling to keep clients in place while the market cures itself.
My second speaker is my good friend and fellow SEMA(?) designate, Jim Stanford, from Ft. Worth who is going to talk with us about some of his personal experiences in client retention over the first year or so. But first, let's start with Craig Dexheimer from Lazard. Craig, take it away.
CD:Thank you, Charlie. Charlie, from a manager's perspective we have kind of an interesting viewpoint in that we get to work with numerous consultants and advisors around the country, and not necessarily viewing the same strategy working everywhere but kind of picking up the best practices of the trade and kind of seeing different perspectives of what's working.
What I would say is that since we went into very difficult territory, really going back to March of 2000, that ... I would say the first basic of what's working is going back to the basics. What I mean by that is going back to the process, going back to investment policy, going back to proper asset style allocation. There is one consultant that we work with down in southeastern, Pennsylvania, who has said that in 1998 and 1999 he had a very difficult time with clients because for those that he was recommending taking money off the table from the hot growth managers, maybe moving to the value managers. But those that did it were sorry a year later, because those growth managers still had a great run, whereas the value managers continued to struggle. Clients didn't forget that. For those that didn't fire him, you know, a year or two out, they benefited, but he said it was a very difficult road to how. For those who ignored his advice but stayed with him ended up really feeling the pain a few years later.
What he has done is gone back and in his investment policies he's now written in and demands clients to choose one of the three techniques for re-balancing. He educates them from the start. What works ... I'm sorry, not what works, but what are the three kinds of styles or processes for re-balancing a portfolio, and then says, Look, it's your investment policy statement. You choose which one works best for you. Whether it's a calendar year, whether it's a percentage, or he has a third one of percentage based on the original allocation, kind of a percentage two(?) strategy that says each one of the them has their pluses and minuses. What we need to do is determine which one works best for you. We're going to put it into your investment policy and then we're going to follow it.
The other thing that ... or success strategy that we've seen is the client review meeting, or client, you know, client appreciation meeting of making sure that you're doing it with every client at least once a year, and also beating them to the punch. Meaning that when those quarterly statements come out, instead of waiting until they've gotten it and then getting the call from the client, that's actually strike one. You want to beat them to the punch and maybe be calling them up, having a conversation about the capital markets, maybe tying it a little bit into history just to kind of drive home the point of how difficult this most recent environment has been.
But he has taken his strategy back to the client review meeting and this agenda. He says, If you come in to a client review meeting with the quarterly statement, and our planning on reviewing each manager versus their benchmark. He said every quarter, any point in time, whether it's as good market or a bad market you're going to have a manager that's underperforming its appropriate benchmark. And then your job becomes defender of the manager that you recommended or one of the managers within the program that you recommended.
Hew said, I don't want to be in that position. So he has devised this schedule and says that it has really driven his account retention. That is every client meeting he sits down first and reviews investment policy. Goal(?) for the money changed, has the time horizon changed, has the required way to return changed, has the risk tolerance that you're willing to take, has that changed? If any of those four elements have, which he says in this most current environment a lot of them have, he is going back and rewriting investment policy or tweaking the investment policy, which usually then leads to a change in the asset or style allocation.
However, let's assume that we're back in good times, because we believe that they're coming. You get through that first step and there's no issues(?). He then does a very quick macro review of the market. What's going on with stocks, bonds and cash the last quarter or the last six months or the last year since we met last? Then he spends a few minutes on styles, what happened with large cap value of large cap growth, small cap value of small cap growth.
Next and probably most critical is how is your portfolio done net? Net of fees, net of taxes, et cetera, et cetera, versus what your objective is? And just to keep the math simple let's say I have a million dollars in year one, I want to have ten million in year ten, we're in year three, I should have three million. Well, let's just say again we're in better times and the account statement shows we've got $3,250,000. He says basically the meetings over. We're going to set the agenda for the ... the date and the agenda for the next meeting and move on, maybe answer some questions.
However, being more realistic, in this time period, let's say that account is $2.5 million, or $2 million or god forbid lower than that, he said, Now, in the words of (Inaudible, Audio Drop Out) ... we've got some explaining to do. So we now have to start looking at the asset style allocation, then we have to review the managers and how they've done gross versus the index. And again, potentially making some changes in asset ... in style or manager allocation.
And the, (Inaudible) is Q&A and then lastly setting the date and the time for the next meeting.
Those strategies have worked very well. Do I have time to add one last one?
M:Sure.
CD:Again, one other consultant that I have worked with actually very recently, and I'm going to borrow three ideas from this consultant. The first one is in our hand-out. I don't know if everybody has a copy of that. But he starts out every one of his meetings, and most recently I actually did a public seminar with him and he started the seminar with this also, and that is do you believe in the fundamentals of capitalism? He asked four basic questions. Do you believe the economy will recover? Do you believe share prices will be higher in five years? Do you want to participate? Can you afford to watch?
He then reviews the current market reality, what the S&P, the EFA, the Nasdaq, are down for the year. He poses two questions, says, What do we do now? Do we cave into fear? Do we move to cash, do we move to bonds, or do we exercise discipline and stay the course? And he spends a little bit of time reviewing the whole consulting process, the setting of the long-term objectives, the building of the investment policy, the asset style allocation.
But then he does take some time to look at the alternatives. What if we did go to T bills or to CDs or to cash? What can we expect there? In making that decision we're making a market timing decision. Obviously you can imagine in this environment those kind of returns are quite sparse. But in this type of environment we're making that a market timing decision. He goes back to something that I've seen you folks put out many times, and that is the drawbacks of trying to market time and a market that's been up x percent for how many years, and if you start removing some of the best days or worst days, you know, what that does to your returns.
But then he gets into something which I think is kind of interesting. After showing a couple slides on market recoveries and how they are usually fast and furious in the time period after the bottom, he uses a series of slides that show going back to '73, '74, what would have happened if you went to cash for six months, 12 months or 18 months, and how that extended your recovery. And then takes it even a step further, what happens to the long-term costs of moving into cash, and how that affects the portfolio value. And then lastly, he extrapolates what if we're at the bottom now, or what if we're even not, what if we've got another 10 or 15 or 20 percent on the downside, but let's just assume that right now we're pretty much at the bottom and we move to cash for six, 12 or 18 months, what does that do to our recovery period?
What it does is it moves you out to March of '05 if you go into cash for six months, August of '05 if you go out for 12 moths, 18 months all the way out to July of '06. And then extrapolates what that means by July of 2012 based on historical returns in the market. So you have to be a little bit careful with those but I just think it tells an interesting story.
Lastly is the worst case scenario, which is something that I use in many servicing meetings. That is that, you know, Mr. and Mrs. Client, I came to you two years ago. We put together an asset style allocation of 60 percent US large cap, 25 percent international, 15 percent US small cap, all evenly divided between value and growth. Over the last ten years that allocation would have returned you 13 percent, let's say.
Now, wouldn't you know that as soon as you go and you hire me we go into an 18-month or a two-month time period where that allocation doesn't do well, and all of a sudden you've lost your money. And then the second slide in this piece shows that that diversified portfolio is providing a negative rate of return.
However, if you look back to the worst case time period, which in this case we ... you could have gone back to the depression, but we find that that was very depressing and also the ... you know, there were some usual circumstances there that kind of didn't tell the story as well. But we went back to that '73, '74 year time period and looked at a three-year rolling quarterly statogram(?) for that allocation, running basically through ending in 12/131/75, showing quarterly performance and risk, using standard deviation.
What you see is that, yes, there are quarters where you've had negative rates of return. However, to get to that long-term average what we need to do is the premium are those negative quarters to enjoy the premium returns in the good years, to bring you back to that long-term average. And yes, we could pull the plug right now, move over to cash, move over to bonds. However, you're doing it right at the bottom. This last page of the presentation I'm looking at, which has that scatogram(?), it's very visual. You could point to any of those quarterly observations that are below zero, and say, Look, you know, I'm not sure whether we're here at the bottom. We might be up here right around zero.
But the point here being is all these observation points below zero, although they're tough to endure, they're no fun, again, back to the premium you need to pay in order to enjoy those very positive returns to get you to that long-term average.
Taking it right back to the investment policy, if your time horizon hasn't changed, if the objective of that money hasn't changed, the time horizon hasn't changed, your required rate of return can change, your risk tolerance obviously can change, but by staying the course, by having a disciplined process, by having a well diversified portfolio, and then for that equity portion sticking to the plan, you can come through very difficult environments and succeed.
CW-:Craig, thank you very much for those thoughts. I think those were insightful. I would also say, for those of you who are thinking about the upcoming quarterly review, just remember on your consultant's compass you have the ability to pull up a snapshot, which we update monthly, which will give you a quick review of what's going on. It will also allow you to preempt the quarterly monitor that arrives in the client's mail, so that if you want to pull this off of your consultant's compass and have a look at it and maybe make the phone call in advance, be sure and do that.
Craig, thanks again for your insight. I appreciate your comments. I'd like to turn it over now to my friend, Jim Stanford. When Jim and I were going through the SEMA course I think we agreed afterwards that one thing that we came away with was a consulting discipline. Today, we call it the client advisory process. But it is a discipline, it is something that if you stick with it through thick and thin even in the bad times you're going to be able to at least on an intellectual level keep your client in place. It doesn't help with the emotions but at least the sound theory behind what you're recommended is in place. So Jim, if you don't mind, I'd just like ... in light of what Craig just had to say, what are you doing on your side personally with your clients to help keep them patient while the market cures itself?
JS:Sure, Charlie, thanks. I think one thing that Craig mentioned that is so valuable and we need to make sure we are doing it, and that is being proactive, we need to meet with clients, or be calling clients, contacting them ahead of some of the mail that they might be receiving, the quarterly monitors, et cetera. so we can address things that they're about to read before they get them. And so, I think that being proactive is vital in especially this market.
One thing that Craig mentioned, and he was referring to one of the consultants, he said that he doesn't like every quarter comparing a manager to a benchmark, because somebody will always be out of favor. I tell clients up front, If we do our job properly as consultants and develop a very good prudent asset allocation for you, eery quarter we could look at this, or every year, any time period, and one manager in any time period will be out of favor compared to others. But that is all part of the asset allocation process.
Now I don't go into that each time we have a meeting. But I do let them know that up front and that's part of having a long-term allocation. So in one market, you know, in one time period, in one market cycle ... or not one market cycle, but in one time period, one manager will do well. That manager may do poorly in another market period. So I would kind of lay that out up front.
I think right now ... and this is the most difficult time for new clients. Clients that I've had for the last two years, they're having a hard time understanding, but ... you know, why things are the way they are and they think that it's our fault and the manager's fault. They're trying to find somebody to blame for it, when really it's the market. It's partially the asset allocation that they have. Maybe they were more aggressive than they wanted to be. I think right now clients need to understand risk. I've made many comments to clients.
Two years ago we couldn't even talk to anybody about risk because everything that they owned or everything that they heard of, or everything that their neighbor had, went up. Now they're willing to talk about risk, when in fact they were taking the same risks then as they are now. It's just that, as I refer to in some meetings with clients, they understand this pretty well, back then we had all good risk. Now we have the bad risk. Jamie Fowler(?) with Nicholas Applegate, now with DCW(?) said that losses hurt clients more than gains make them feel good. That's so true. All you have to do is throw out some different risk scenarios and clients will understand and believe that. But when markets are going up they have a hard time believing it.