Financial Advisors Defect to Indexing By Will McClatchy October 11, 2001

Financial advisor firms have found it hard to transition from actively managed, commissionable products to indexed, fee-based services, but another important defection to the indexing corner recently took place.

Brecek & Young Advisors, a U.S. brokerage firm with a network of 500 investment advisors and 55,000 clients, has thrown its full weight behind a discretionary money management program based on low-cost index ETFs. In its marketing pamphlets, sales training and educational outreach, the firm will be stressing indexing over active management for the first time. The firm expects the program to make it easier to sign up new investors and to retain them longer as clients.

"We have jumped into indexing and ETFs at the same time," said Hal Young, CFO of the firm, which is based in Folsom, California. "We are fairly new to both."

The program is designed for clients with as little as $50,000 to invest and offers full financial planning, advice on asset allocation, custodial arrangements, reporting on performance, and individual consultations with a local financial advice representative. Fees range from 1% to 1.6% of assets.

"Not only do you have less turnover in the portfolio but it is tax advantaged," said Young. Use of low-cost ETFs removes as much as ½% in annual expenses and allows small investors to afford full-service advice and planning. "The bottom line is that we can sell this to the average person."

A major feature of the program is the close matching of clients to an appropriate portfolio allocation that is constantly re-examined and occasionally re-balanced to keep the client on track with their goals and risk tolerance. This portfolio construction system is maintained by long-time indexing advisory firm Levitt Novakoff & Co., of Boca Raton, Florida.

High client retention due to investor satisfaction is the main attraction of indexing for brokerage firms, said President Jim Novakoff. Investors tend to stick with indexed portfolios and the firm that recommended them more than active ones, especially during tough times. For the retail market the portfolios are often constructed around well-known indexes to reflect expectations by clients who follow the markets through the popular media. "We began to change the models for the modern realities of CNBC," he said. This tends to re-enforce client satisfaction and retention.