Weekend Reading for Financial Planners (July 20-21) – Practice Management & Technology Edition!

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Read all of Michael’s articles here.

(Editor's Note: Want to see what I'm reading through the week that didn't make the cut? Due to popular request, I've started a Tumblr page to highlight a longer list of articles that I scan each week that might be of interest. You can follow the Tumblr page here.)

Weekend reading for July 20th/21st:

How To Fix The AUM Fee Model - In Financial Planning magazine, industry commentator Bob Veres sounds off regarding a survey he conducted of 150 advisors and their astonishingly wide array of fee structures, and suggests that the "standard" 1% AUM fee may not actually be all that standard and that an increasing number of advisors are starting to rethink how they charge for planning services. From 119 fee schedules he reviewed, ongoing fees ranged from 50 basis points to almost 200 basis points on the first dollars under management, with little consistency in breakpoints as assets increase, a wild range of upfront planning fees, and some retainer schedules that were so complex they required supporting charts and graphs just to be explained. But perhaps the greatest issue was the fact that not only do fees vary wildly, but so do the underlying services, though it's not clear that consumers entirely understand the difference between higher cost providers with more value and "lower" cost providers who are investment-only. In addition, when firms provide the same financial planning services for any clients that meet a certain minimum, there's the risk that clients will "cherry pick" by giving the advisor just enough assets to get the bundled financial planning fees, and then replicate the rest of the portfolio design themselves in a discount brokerage account (at least, if the advisor doesn't otherwise provide active management services). Notably, many advisors report retainer fee structures are as unsatisfying as the AUM fees, as clients may still be unprofitable early on and then drop the advisor as their lives become simpler (and at the point that the clients were actually going to become more profitable). One highlighted advisor was actually happiest going to an hourly based model, but structured as an ongoing subscription where clients buy a range of bundled hours every year. Accompanying the article is a full copy of Veres' special report on advisor fees, which can be viewed here.

Are Advisors Really 'Stealing' Clients? - This article looks at the increasingly competitive landscape for clients, and raises the question of whether advisors have reached the point where they must steal clients from other advisors just to survive and grow. The general conclusion, backed by some interesting statistics, is that advisors may not be outright stealing clients from each other, but that it is definitely an increasingly competitive environment, and there are fewer and fewer "unattached" clients available. 30 years ago, only 5.7% of households had a mutual fund and there were about 200,000 brokers; by the early 2000s, there were 745,000 registered representatives with FINRA and 45% of households held mutual funds. In fact, in anything the number of advisors overshot, as the industry has actually attritioned advisors over the past 10 years. The problems are even worse when recognizing how concentrated wealth really is; 77% of wealth is controlled by the top 10% of households, which advisors had largely reached by the early 1990s, which means if anything the industry has already overreached past investors that have meaningful assets to invest. When looking at millionaire households, there are about 5.5 million families but only about 300,000 true financial advisors (a subset of all those who are registered representatives) accordingly to Cerulli; still, that means on average there are only 20 millionaires per advisor, and given the concentration of millionaires with some larger firms, the number of available clients for the rest of the advisors is even narrower. So how should advisors proceed from here? The first key is simply to recognize that it's a different, and more competitive, landscape at this point, and growth will no longer happen automatically just by providing comprehensive advice and good service. Truly finding a way to differentiate will be key, and marketing and growth will have to be more intentional than just waiting for referrals to show up.

Follow The Money In Succession Planning - From Investment Advisor magazine, practice management consultant Angie Herbers takes an interesting look at how not-so-savvy many financial advisors seem to be when it comes to business finance and the purchase and sale of advisory businesses. For instance, in one deal Herbers recently saw proposed, two junior advisors would purchase 75% of the practice from the founder over the span of 10 years (the current owner was in his early 50s and intended to keep working for many more years, but wanted to begin transitioning the bulk of the ownership gradually) at a multiple of about 2.5 times revenue. The problem, though, was that in order to make the purchase affordable, the junior advisors' salary was increased and the owner's was reduced, under the auspices that the owner's total compensation would be leveled out by the payments for the purchase of the business. Except the reality is that also meant for the same payments, the owner could have simply kept his current salary and still had all his equity in the practice; the deal was basically the equivalent of the owner-advisor giving away his firm for free once the salary adjustments were included! And perhaps the most problematic part of the arrangement is that it was actually proposed by an outside succession planning "expert" and the client may well have moved forward on it were it not for having the perspective of another consultant! Ultimately, Herbers emphasizes that while it's important to get outside expertise for succession planning - this definitely isn't something to be performed as a do-it-yourself exercise by advisors with no experience in buying and selling practices! - it's also crucial to get second opinions and take a thorough look at how the deal works out for both parties from start to finish, including all compensation. As for the problematic deal itself, Herbers recommended that the deal be adjusted so that the equity is financed not by the original owner's salary cuts, but by the future growth of the firm that the junior partners bring to the table to help finance themselves.

The Career Track - In Financial Advisor magazine, practice management consultant Philip Palaveev looks at the importance of having a career track in your advisory firm, as a key aspect of attracting and retaining the quality staff that are so crucial to building a successful practice. But ultimately, having a career track isn't just about having a path to try to attract good staff; it's also crucial to setting reasonable staff expectations about how quickly they can (and cannot) advance. The point is not to guarantee advancement, but to set the standards of what's necessary in order for them to advance, which means the career track can also serve as a motivator for staff to stretch for greater success. So what should the career track itself look like? It will vary a bit by firm, but for most larger firms there are an increasingly standard series of positions, from an entry level analyst to a service advisor to a lead advisor to a partner. The key is not just to designate the compensation available at each tier, but the key job responsibilities, and the skillsets that are necessary to advance to the next level (and Palaveev notes that tenure and experience alone should not be major criteria, to recognize that some staff are capable of advancing faster than others but any pace should be acceptable as long as the key skills are learned). Setting responsibilities and expectations are especially important, as not all firms treat the tiers the same; for instance, some firms expect business development from lead advisors, while others focus business development activity at the partner level. And in the end, while having a career track with clear expectations is important, recognize that there should always be a human element to the evaluation as well, to recognize the potentially unique skills and contributions that the staff bring to the table.

Tech Review: New Digital Content Services - From Financial Planning magazine, technology consultant Joel Bruckenstein reviews two new platforms designed to help advisors do digital content marketing online: Vestorly, and AdvisorDeck. In essence, the idea of the platforms it to help advisors draw in a feed of ongoing content (either automated, or a list of popular articles you can choose from yourself), let them select what they wish to share, and then feed it out to social media channels, and provide ongoing metrics to identify what's generating interest and what kind of activity is resulting from it. You can segment the sharing between clients and non-clients. With Vestorly, you actually create a private network for people to receive your content on an ongoing basis, and your social media outreach directs people back to that private network (where they can join to get ongoing updates); in addition, your readers can refer your content to their friends and family so those people can follow your private network as well. AdvisorDeck is similar, though its goal is primarily just to push content out directly to social networks (not to a Vestorly-style private network). Both platforms have tools to facilitate compliance support/oversight, and appear to have a strong focus on helping advisors quantify the metrics of their activity so they can see what's working, what's not, and what activity is resulting. The bottom line is that while both platforms are very new, and likely still iterating on a lot of details, they offer a promising potential solution for advisors who want to begin to engage in social media in a time-efficient and cost-effective (and compliant) manner.

The Advisor's Answer To Popular Personal Finance Management Tools - In Morningstar Advisor, technology consultant Bill Winterberg highlights a solution for financial planners who wish they could get their clients access to a "personal financial management" (PFM) software application similar to Mint.com, that will allow them to aggregate not just investment accounts (which advisors often track and report to clients using their own portfolio management software) but also banking, credit, and loan accounts together, for clients to monitor using a web or mobile app. The solution is financial planning software eMoney Advisor, which behind the scenes has a robust series of data connections directly to financial institutions, but unlike the other PFM solutions it is built integrated into the rest of the financial planning software, even while capturing information down to individual banking and credit transactions for those who want to help clients monitor their individual spending. In addition, eMoney Advisor is capable of serving as an "all-in-one total office" solution, as it includes a contact manager (albeit a bit lightweight and not a full scale advisor CRM), portfolio management tools, and even a document storage offering for clients to keep their electronic information in a virtual Vault (though it's not a full advisory firm document management system), in addition to the core financial planning software itself that is very cash-flow based. Again, though, Winterberg notes that the key to eMoney Advisor is not just the capabilities for the advisor, but the accessibility of the PFM tools for clients, on a platform that is still designed to emphasize and reinforce the value of the advisor. While the software is not cheap - basic pricing is $2,400 per year for each user and $3,600 for the Pro version with additional features - discounts are available through a variety of partnerships, and the software includes a lot of unique tools (especially the PFM capabilities) that advisors can use to differentiate themselves.

The Last Frontier - This article from James Picerno in Financial Advisor magazine takes a look at the current landscape for rebalancing software, which is becoming increasingly accessible for all advisors as competition amongst the providers drives the price down, although currently it's estimated that no more than 10% to 15% of advisors use some of the more sophisticated "intelligent" rebalancing software available; even with costs down (in fact, iRebal is now free in a web-based version for advisors using TD Ameritrade), many of the platforms still have some real expense, and the cost in terms of time to set up and integrate into the practice are high as well. While some have also objected to rebalancing software on the basis that it leads to speculative trading or turns portfolio management into a black box, Picerno notes that these are misconceptions, and that ultimately the goal is not to rebalance more often or more aggressively necessarily, by just more intelligently by properly locating assets in the right location, taking into account the tax consequences, coordinating with cash flows the client may need, and grouping transactions together to minimize costs while maximizing the potential rebalancing value for the client... and letting the software do the heavy lifting calculations. In fact, Picerno notes that it's likely that rules like quarterly or annual rebalancing became popular specifically because rebalancing was so inefficient using spreadsheets or older technology, but the capabilities of today's software allows for a far more proactive and dynamic process, while turning rebalancing from a multi-day spreadsheet effort into a quick 2-minute exercise. And notably, research shows that with a greater number of asset classes, and more market volatility - two common trends of the past decade - the benefits of rebalancing are even greater. Notwithstanding the benefits, though, it's important to bear in mind that the efforts to configure rebalancing software to the needs and investment philosophy of the practice, from tolerance ranges for asset weights to minimum dollar amounts for trades to tax-related parameters, do require a significant investment of time up front.

Your Office Apps In The Cloud - From technology consultant Bill Winterberg, this article looks at the use of "office" applications (think: documents, spreadsheets, and slideshows) at advisory firms as software shifts to the cloud. The two leading solutions are Microsoft Office 365, which costs $6 per user per month to access the suite of Microsoft tools (Word, Excel, Powerpoint) online (rising to $15/month if you want a local desktop version of the software as well), or Google Apps, which costs $5 per user per month (in addition to Gmail and the online Google calendar solution). Both solutions can run entirely through a web browser with no other software installed (though as noted Microsoft does have the option to download and install locally), and no software updates are necessary because the web software is updated automatically. With Google Apps, everything can be viewed offline, but only documents and slides (not spreadsheets) can be edited offline; with Microsoft Office 365, all documents can be edited offline but it requires an upgrade to the more expensive $15/month version. Both platforms offer cloud storage with files synchronized to your local computer (Google Drive and SkyDrive). One of the most significant advantages of web-based office software, though, is the ability to have multiple people editing the same document simultaneously, which can significantly enhance productivity when multiple staff members in the office handle the same document (sometimes at the same time). Not surprisingly, Winterberg notes that the biggest caution to moving exclusively to web-based office programs is the need for reliable internet access, but leveraging the offline options should help to manage productivity even when the internet is unavailable; also, it's worth noting that both online cloud solutions are somewhat less capable than the full-scale local versions of Microsoft Office, though advisors using just the standard features probably won't notice any difference.

A Little Less Automation, A Little More Personalization - In the Journal of Financial Planning, marketing consultant Kristen Luke talks about the benefits of automating some of your marketing, with a focus on finding the balance between what's a good idea to automate, and what should not be automated and instead retain your personal(ized) involvement. Especially given how relationship-driven financial planning is, Luke recommends focusing automation on non-relationship-building activities, such as handling large numbers of people (e.g., when you're hosting a big marketing event), or engaging in wide-reaching lead-generation activities (e.g., e-book giveaways on your website to generate interested leads, scheduling social media posts for promoting events or recent blog posts). On the other hand, activities like more intimate events should have a more intimate and personalized touch (for everything from invitations to confirming participation), and most aspects of social media should be personalized (not automatic or canned, which leaves you undifferentiated), and Luke suggests reaching out to clients for major milestone events (e.g., retirement, significant birthday, anniversary, etc.) should be very personalized as well. At the same time, though, Luke also points out that sometimes automation of some parts of the process can help better personalize others (as discussed previously on this blog, standardizing parts of your financial planning firm can actually allow for better customized personalization later); for instance, while your outreach to a client for a major milestone might be personalized, you can create a series of automated reminders in your CRM for every upcoming client milestone birthday.

Advisor Owners: Lose Some Control to Empower Your Employees - This article from the Advisor One blogs by Angie Herbers notes how the U.S. military found in recent decades that trying to exert too much central control over soldiers in combat isn't always a good idea, and that instead it's better to turn over some of the key control decisions to those on the ground with real-time information to make those calls. Herbers suggests that the analogy can apply similarly for advisory firms, as many small business owners - including financial advisors - have difficulty giving up control, and as a result are getting inferior results. In a smaller firm this may be manageable, but as the firm grows, this becomes very problematic, as eventually the owner gets overwhelmed as each and every employee comes to the owner for every decision, and eliminating the operational leverage that hiring staff was supposed to create. Accordingly, Herbers suggests that more advisory firm owners need to transition away from acting like "supervisors" and treating their employees like "laborers" who just carry out instructions, and instead train the staff to make effective decisions and then empower them to do so. And Herbers notes that because most employees want to do a better job, the training part isn't the challenge; usually, the blocking point is the owner not being willing to let go of control to let them do their jobs their way. The fear, not surprisingly, is that employees will make mistakes, yet Herbers notes that ultimately making mistakes is part of the point; nobody is perfect anyway, but employers can use mistakes as learning opportunities to leave staff better trained for the future.

Succession Planning For An Entire Industry: Why Study Groups Are Critical - This article explores the benefits of having a study group, based on a case study example of the XCelsior study group, one of several that grew out of the FPA NexGen community. While some have been critical that study groups just become an echo chamber of like-minded advisors reinforcing each other (including their bad habits and behaviors), XCelsior attributes much of its success to the diversity of its members, with different types of firms and careers and business models (from solo practitioners to employees of large firms to partners of multi-advisor practices and even a consultant or two), providing a rich perspective for group members to bring their problems forward for discussion. The group meets in person once per year, and maintains electronic discussion threads to keep the conversation going for the rest of the year; it formed initially as the group members, who had all met through NexGen, decided to continue their involvement thereafter. The article notes that FPA is encouraging further study groups to form, seeing it as a progression for newer planners to go from beginning their career to joining NexGen to getting involved in a study group as they 'graduate' out from NexGen. (Notably, NAPFA supports study group formation as well, for similar reasons.)

Client Of The Future - In his monthly Investment Advisor magazine column, Pershing CEO Mark Tibergien looks at financial planning clients of the future: specifically, those under the age of 50 who already hold as much wealth as those over age 50, and are poised to save, grow, and inherit their fortunes to a much larger size in the coming years. Yet Tibergien notes that currently the financial advisory world is incredibly retirement-centric, and accordingly is almost entirely baby-boomer-centric, even as the baby boomer base transitions from being net savers to net spenders and create an increasingly difficult headwind for organic growth in advisory firms, and this is further exacerbated by today's low-return environment that slows the growth of AUM even further. But making a transition is not as simple as just making a commitment to attract younger clientele; the reality is that prospective clients of younger generations have fundamentally different beliefs and expectations around financial advice and their needs and goals, and the advisory firm must adapt in order to serve them effectively. Tibergien discusses the recent release of Cam Marston's "The Gen-Savvy Financial Advisor" which highlights many of these differences; for instance, Generation Y (those born from 1980 to 2000) are the most educated generation in history, but as a result are tending to delay marriage and children, which in turn will shift the timing of their investment needs and patterns throughout life. The younger generations also interact with advisors differently, as less tolerant of paternalistic advice, and more inclined towards collaboration. And Tibergien points out that this isn't only a matter of the clients you serve, but also the younger advisors who may be your employees, business partners, and successor owners. In the past, advisory firms tended to evolve slowly as they aged and adjusted to the needs of their aging clients; making a jump to serving an entirely different age demographic will require not just more evolution, but possibly a revolution from the way things are currently done.

And although it's not specifically included here for Weekend Reading, I'd also highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors, including his weekly "FPPad Bits And Bytes" update on tech news and developments!

I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!