MANAGING CYBERSECURITY

NexTier Consulting Solutions, LLC has developed a Cybersecurity practice to address these emerging challenges that have a particularly profound impact on the operations of small and medium sized investment management firms.

We understand your business model and the security risks facing your operations, making us the ideal trusted advisor to help your firm meet the following objectives:

·       Confidentiality and privacy of information associated with your firm, business partners, and clients.

·       Integrity of trade orders, positions, performance data and company reporting information.

·       Availability of client portals, investment management systems, business partner platforms, market data feeds, and third party outsourced services tied to your firm's operations.

COMPLIANCE: What's Coming in 2017

While the Securities and Exchange Commission’s (SEC) annual list of priorities is probably a few weeks away, the list of priorities has already started to take shape for many compliance professionals.  As we look to the new year, what appear to the hot button issues that either the SEC or the industry will bring to the front-burner?

Cyber-security.  This is not only first on our list, but is also the most obvious and will rightfully get its own post.  From the election to the SEC’s recent and frequent commentary on cybersecurity, to the State of New York Department of Financial Services ruling requiring a Chief Information Security 0fficer by the beginning of 2018, the year promises to be a busy one.  2016 ended with many people thinking that cybersecurity and “hacking” was mostly the realm of the gigantic retail firms like Target and salacious hacks like Sony and Ashley Madison.  But in 2016 we learned that hacking, phishing and ransomware can effect regular people and small firms.  2017 promises more of the same as nefarious parties continue to develop new ways to steal large and small amounts from the investment management industry.

Fiduciary Status.  For a while this issue seemed to be settled after many years of simply being ignored.  But the issue continues has new life as multiple regulatory bodies weigh in and extend the realm of fiduciary duties.  With Department of Labor regulations regarding fiduciary status going into effect in April, concerns about the effects of conflicts of interest on plan participants will remain important considerations.  In an industry that sometimes seems to be dominated by the egos of a few high profile managers, regulators are trying to keep the focus on the interests of plan participants and small investors.

Regulation.  Perhaps the greatest uncertainty in the upcoming year involves the events and appointments in Washington and how this trickles down into the industry.  Will the nominee to head the SEC  Jay Clayton, most recently a lawyer with New York firm Sullivan & Cromwell, continue the trends toward consumer and investor protection or undo some of the regulatory thicket that has encumbered the economy?

Whatever the specifics, 2017 promises to be an exciting year for compliance officer and institutional investment managers.

THE IMPORTANCE OF A MARKETING PLAN: Not Optional

Most investment firms were originally founded by people with a gift for managing money.  Their genius is understanding the financial markets overall and managing the specific investments that have been entrusted to them by their clients.  Running the business itself is typically not something that they want to spend time doing, since it is often viewed as a distraction.

One aspect of running the business is the development and execution of a marketing plan.  Usually when the term marketing plan is used, the immediate reaction is “yes, we have sales objectives.”  But “sales objectives” aren’t even a sales plan nonetheless a marketing plan.  Marketing and sales are two different (but related) animals and understanding the difference is critical to making each work effectively.

Marketing should be focused on the strategy of how you plan to grow your business – product development, pricing, distribution channels, promotion and people.  Sales, meanwhile, describes the tactics of how you plan to grow your assets under management – prospect profiling, customizing your pitch to prospects’ needs, managing the business development process and closing the sale.

Briefly, a marketing plan is a blueprint of how you want to approach your marketplace.  Done well, it represents a competitive advantage, since most investment management firms tend not to have marketing plans.

A marketing plan encompasses the following elements:

• Previous year performance
• Value proposition or edge
• Major revenue generating actions for the upcoming year
• Market environment
• Significant opportunities
• Material threats
• Key Impediments
• Upcoming year objectives
• Strategies
• Tactics
• Budget

Developing a marketing plan requires you to adopt a more disciplined approach to how you plan to build your business during the upcoming year.  Ideally, it focuses your firm on the three to five major drivers of your business that have the potential to generate significant assets under management, revenues and profits.  While it is hard work, the return on your investment is high and well worth your time.

Lesson Learned: Marketing plans are a critical component of running an investment firm.

Henry Hakewill, IV
Managing Director and Chief Marketing Officer
NexTier Companies, LLC

MANAGING YOUR BRAND: A Must

Every investment management firm has a brand; the key question is whether you are actively or passively managing your brand in the marketplace.  Actively managing your brand is critical to being successful in attracting assets under management from the institutional marketplace, since how well you manage your brand will be viewed as an indication of how well you manage the rest of your firm.

To help you gauge whether you are currently actively managing your brand, please take a few minutes to think about the following questions:

• Do you have a marketing plan?
• Does your marketing plan provide guidelines to help you manage your brand?
• Does your marketing plan include a communications strategy designed to create positive awareness of your brand?
• Do you have well-articulated values that help shape your culture?
• Do you have a clear mission statement?  Vision statement?
• Have you developed a well-defined edge that differentiates you relative to your competitors?

By having a well-thought out marketing plan, communications strategy, values, mission statement, vision statement and edge, you have the foundation for an effective brand strategy.  A brand strategy is similar to an investment strategy in the sense that it defines how you want your brand to be viewed in the marketplace and how you will manage the perceptions of your brand among clients and prospects.

A good brand strategy has three primary benefits:

• Makes it clear who you are and what you do
• Helps differentiate you from your competitors
• Enables you to generate more visibility, “shots on goal” and assets under management

Developing and implementing an effective brand strategy typically encompasses four primary steps:

• Assess:  review all current online and offline materials; determine what works well, what works OK and what is not working; conduct market research among your current clients and investment consultants to learn how your brand is currently perceived
• Strategize:  develop your values, mission statement, vision statement and edge and ensure that they are integrated into your marketing plan and communications strategy
• Translate:  using your values, mission and vision statements and edge, translate them into actionable ideas for online and offline marketing materials
• Implement:  develop relevant, useful marketing tools (online and offline) using a consistent look and feel and tone of voice

Lesson Learned: Actively managing your brand is critical for success.

Henry Hakewill, IV

Managing Director and Chief Marketing Officer

NexTier Companies, LLC

THE BURDEN OF COMPLIANCE: A New Era for Private Equity

As a former senior compliance officer for Hewitt EnnisKnupp, Inc., I’ve seen the United States Securities and Exchange Commission (SEC) steadily increased its compliance demands.  It  seemed to start slowly for private equity funds, with the majority of the initial Dodd Frank burden being carried by hedge funds.  But the day is fast arriving for private equity funds, if it hasn’t already arrived.

Registration as an investment adviser, with either the SEC or a state securities agency, requires an ongoing program of compliance.  State securities agencies, such as our own Illinois Securities Department, almost universally look to the SEC for leadership in this regard and rely upon them for regulatory guidance.  Accordingly, best practices in compliance requires following SEC guidance.  The SEC’s emphasis on the ongoing and constantly evolving nature of a compliance program is one that consistently causes trouble for newly formed advisors.  Private equity fund advisors, who are a relatively new addition to the SEC’s regulatory oversight, are particularly vulnerable to overlooking essential compliance tasks since it is not part of the industry culture. 

Along these lines, the SEC has been very vocal about its desire to investigate newly formed and/or newly registered private equity funds, including forming a special task force specifically organized and trained to perform this task.  Recently, the SEC has also spoken out about the consistent deficiencies that it has uncovered in private equity investing, publicly noting in May, with several recent enforcement actions emphasizing the point, that significant issues were found in over 50% of the funds that it had investigated.  Consequently, institutional investors have been quick to seize upon the compliance programs of potential investments as an increasingly important piece in their investing checklist.  For institutional investors, a thorough review of compliance matters is an essential way to meet their fiduciary duties to their own investors and to quickly weed out private equity firms that are not suitable. 

This twin focus, from both regulators and potential investors, on compliance issues has raised the importance of understanding investment adviser registration as much more than just an initial registration, but as an ongoing set of tasks that play a critical role in the organization and constant attention.

Lesson Learned: The compliance burden is only getting larger and it pays to be prepared.

Randy J. Heinig, Esq.

Director and General Counsel

NexTier Companies, LLC 

PIMCO: A Tale of Many Woes

Long-time rivals of Pacific Investment Management Company (PIMCO) have been tight-lipped all year about the ugly divorce that played out publicly between PIMCO founder Bill Gross and his presumed heir apparent Mohamed El-Erian.  These rivals have been some of the biggest beneficiaries of client money fleeing the firm.  The departure of these two highlights PIMCO’s succession planning failure.  Since their feud became public, the firm has had customer withdrawals totaling hundreds of billions.  Industry experts expect PIMCO undoubtedly will face further redemptions that may further unsettle staff and investors.  What went wrong?

Unresolved tensions between Gross and El-Erian are similar to conflicts encountered by founders and successors throughout the business world, and the escalation of their tensions followed a rather predictable path.  That path was described by sociologist Friedrich Glas as “becoming more entrenched in their positions, forming coalitions, then taking more public action, such as the bickering reported in financial periodicals.” 

These types of outcomes are common among firms that give short shrift to succession planning.  A successful firm attracts top talent, with that new talent expecting the opportunity to succeed its founder.  This talent may come with significant accomplishments of its own and may be or seem impatient to gain control of a company that took the founder significant time to build.  The firm is the founder’s identity, making it difficult for the founder to give up control.  Even as El-Erian left PIMCO, Gross sent out a tweet stating, “I’m ready to go for another 40 years!”  While the tweet may have been sent to instill a sense of confidence to the firm, it may also be perceived as a sign that the founder could not let go of control.

With both Gross and El-Erian gone, PIMCO’s new leadership will undoubtedly lead to a changed corporate culture.  Pension funds, endowments, foundations and consultants will keep a close eye on the new leadership and new culture, and they will look for any prolonged reductions and outflows in firm assets under management.  This turmoil will most assuredly affect portfolio returns.  In addition, when one or more executives leave a firm without the proper preparation, clients frequently withdraw assets.  Investment firms need to ensure that the future leadership is not only capable and has the confidence of clients, but also has been involved in establishing the future direction of the firm and its investment process.

Lesson Learned: Firms should plan ahead because nothing about succession planning is easy.

Michael D. Cathey, CFA

Consulting Principal
NexTier Companies, LLC

DISCLOSURE AND REDEMPTION: Attention to Compliance Details Not Optional

At a recent conference, I ran into a long-time mentor and friend, Marx Cazenave, the founder of Progress Investment Management, LLC (Progress).  He, among others, has coached me on life and the investment management business.  He also reminded me of the power of disclosure and redemption.  We are all a product of our experiences, both good and bad.  This conversation also led to some reflection on NexTier’s core values, one of which is Integrity: “We are committed to operating at the highest ethical standards with uncompromising honesty, transparency and selflessness toward our clients.”  What does this mean?

Consistent with that core value, here is my story and a source of my passion for protocol, process and accountability.  In 1996, I founded Trias Capital Management, LLC (Trias), as a fixed income advisor for institutional investors and ultimately grew it to nearly $2 billion in assets under management.  The firm was one the first of a breed of Emerging Managers.  In 1998, I acquired a money market mutual fund called Millennium Income Trust.  In 2003 as part of a routine exam, the SEC found me in technical violation of three different rules under the Investment Advisers Act and the Investment Company Act.  Importantly, no fraud was involved and no investor lost money, either principal or interest.

The first violation pertained to Millennium Income Trust where I failed to ensure that Trias repaid a receivable owed to the fund in a timely manner.  The receivable was less than $80,000.  The second violation related to the purchase by Trias of callable government agency securities that were ineligible under rule 2a-7 of the Investment Company Act.  The final violation stated that I failed to ensure that Trias kept accurate books and records stemming from carrying an investment in another investment management firm and the incorrect stating of a liability.  In essence, Trias was a small business without an appropriate investment in compliance resources prior to the dedicated chief compliance officer requirement.  We were an Emerging Manager that was not paying close enough attention to processes and procedures.  The resulting penalties by the SEC included a $25,000 civil penalty, a six month suspension from working with an investment advisor and a 12 month suspension from working with an investment company.  All three stipulations have long since been satisfied and I take sole responsibility for the actions of my firm and for the violations that were committed.

This ordeal is why I am adamant and have recommended to my clients, do not cut corners or operate on the cheap.  Compliance requires a level of rigor that cannot be compromised.  I want my clients to learn from my mistake, as I have learned from it.  Investment managers, especially Emerging Managers, must raise their level of operational efficiency to a place that is beyond reproach and adds value to their business.  Anything less will leave your firm vulnerable to regulatory action.  While difficult, this experience has made me a better investment management consultant.

Lesson learned: Attention to compliance is not optional, it is imperative.

James A, Casselberry, Jr.

Senior Managing Director

NexTier Companies, LLC