Executive Summary
Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a fascinating new report from Morningstar, finding that the industry's shift to adopt T shares and Clean shares under DoL fiduciary could improve mutual fund returns in the aggregate by as much as 0.50%/year, through a combination of cost savings and the anticipated pressure of advisors to adopt lower-cost fund choices (over comparable higher-cost ones). Also in the news this week was the announcement that front-end advisor software provider Oranj was purchasing portfolio rebalancing software provider TradeWarrior, and the blockbuster deal that private equity firms Stone Point and KKR were buying a 70% stake in Focus Financial valued at $2 billion (and helping to validate that the RIA aggregation/roll-up model is far from dead).
From there, we have a few articles about advisor technology this week, including a Joel Bruckenstein review of the new FinMason risk tolerance assessment tools, a head-to-head comparison of Redtail CRM versus Salesforce Financial Services Cloud, and a brief review of new advisor screensharing software app ScreenMeet.
We also have a number of marketing and sales related articles, including: why meetings with prospects should always include two people from the advisory firm, ideally with different and complementary sales styles (e.g., one "charmer" and one "analytic"); why the presentation of an advisor's physical office space really matters (and when it makes sense to invest into an interior designer to get help!); and how to handle the looming "marketing wars" that may soon emerge in the increasingly competitive advisory landscape.
We wrap up with three interesting articles, all on the theme of big data: the first is a look at how a number of tax prep services offered free tax preparation this year, from TurboTax to H&R Block and even Credit Karma, as the providers are realizing that not charging for tax preparation, and using tax filers' big data, has even more income potential, whether to recommend tax strategies, credit cards, or loan refinancing deals; the second looks at the recent launch of USAFacts, a new initiative from former Microsoft executive Steve Ballmer, that brings together Federal, state, and local government data to understand where tax dollars go, and the results they achieve, in a way that no one has been able to produce before; and the last is a discussion of behavioral economics professor Dan Ariely's new "Common Cents Lab", that is partnering with FinTech software providers to run behavioral finance "experiments" and harness the value of big data to understand what it takes to actually help consumers change their financial behaviors for the better!
And be certain to check out the video at the end - the start of a new video series being offered from journalist and financial consumer advocate Dan Solin, that provides simple 1-minute video tips for consumers, and can even be embedded by financial advisors directly onto their own websites for free (just be certain to include proper attribution back to Solin!).
Enjoy the "light" reading!
Weekend reading for April 22nd/23rd:
New Mutual Funds Under DoL Fiduciary Rule Could Save Investors In Returns (Greg Iacurci, Investment News) - A new report from Morningstar this week, entitled "Early Evidence on the Department of Labor Conflict of Interest Rule", estimates that as 3,500+ A-share mutual funds issue new T-share classes instead – with a front-end load capped at 2.5% and a 25bps 12b-1 fee – and a growing number of fund companies also roll out "clean shares" (an advisory share class with no upfront commissions or 12b-1 fees at all), that investors may gain upwards of 50bps/year in improved returns. The improved returns would draw from a combination of 20bps of long-term return enhancement from the outright reduction in costs (in the form of a lower up-front commission paid, and reduced commissions and trails on clean shares), plus another 30bps by reducing or eliminating conflicts of interest (i.e., by not incentivizing brokers to sell funds that may pay better commissions but have inferior performance, and as broker-dealers cut higher-cost funds from their product shelves altogether). The new share classes are being rolled out as a part of the Department of Labor's fiduciary rule, which requires that firms either operate as a Level Fee Fiduciary (and thus would use Clean Shares), or at least levelize their commissions across a particular product type (where T shares would have a uniform commission for all commissionable mutual funds). Notably, there remains some uncertainty about whether the DoL fiduciary rule will still take effect on June 9th – though it appears likely – and whether it may be at least altered further before the end of the year; as a result, asset managers have been in a "wait-and-see" holding pattern on the new share classes, although their rollout is expected to be underway again at some point this year.
Oranj Buys Majority Share In Rebalancing Software Firm TradeWarrior (Liz Skinner, Investment News) - This week, advisor portal platform Oranj announced that it had purchased a majority stake in portfolio rebalancing software TradeWarrior. The deal comes as Oranj, with 47 employees and serving nearly 500 advisory firms, has grown its adoption as a "robo-for-advisors" front-end platform, providing advisors with capabilities to do digital onboarding of clients and share documents securely, offer a client portal with account aggregation, and manage a growing number of internal operational tasks; now, TradeWarrior, with 13 employees and 150 advisory firms, will be integrated to allow Oranj to offer more of a "full stack" solution, including the back-end trading and rebalancing execution. Or stated more simply, the deal represents a combination of front-office advisor software being merged together with back-office advisor software. Each software solution will remain available separately going forward, as well as together in a future bundled solution (once the acquisition is completed). Notably, both Oranj founder David Lyon, and TradeWarrior founder Damon Deru, are former financial advisors turned FinTech entrepreneurs, a part of the growing trend of advisors building businesses offering solutions to other advisors. Though the terms of this deal in particular were not disclosed.
Stone Point And KKR Buy Focus Financial For $2B In Private Equity Deal (Brooke Southall, RIABiz) - Just four years ago, Focus Financial was valued at $750M, but now the RIA roll-up firm, with its 45 partner firms and affiliates (total AUM is unreported), has been bought out by private equity giants Stone Point and KKR, which bought out a 70% share at a whopping $2B valuation. The news comes in the aftermath of rumors last summer that Focus Financial was considering an IPO (at a valuation of "just" $1 billion), which will now be definitively off the table for at least 4-7 more years as its current buyers seek a return on their own capital before another transaction may occur. For those who have questioned the viability of the RIA aggregator/roll-up model, the fact that Focus was able to attract "top quality" private equity interest, and at such a substantial valuation, helps to validate the legitimacy of the RIA roll-up approach (with intense recent industry focus on similar players like HighTower Advisors on whether they would be able to monetize successfully). On the other hand, the deal also raises concerns as to whether Focus itself can maintain the growth rates necessary to sustain what is likely a 20%+ expected return for its new private equity investors; Focus did complete 20 acquisitions in 2016, and has already announced 6 more in 2017 (in addition to increasingly participating in the "sub-acquisition" market, where its underlying firms like Buckingham and Colony buy smaller local firms, as well), but it will be increasingly difficult to sustain growth rates on an ever-larger AUM denominator, especially while the firm must also service what is reported to be $1B in debt financing as a part of the deal. Nonetheless, most are taking it as a very positive sign for the health and positive expectations of the RIA business model and the wealth management industry more generally.
FinMason Enters The Portfolio-Risk Field (Joel Bruckenstein, Financial Planning) - Historically, the use of third-party risk tolerance assessment tools has been rather limited, with most firms relying on questionnaires provided by their compliance departments, and a small subset of firms using tools like FinaMetrica. Since the financial crisis, though, the combination of more awareness and concern about the risk and consequences of bear markets, plus the increasing capabilities of technology itself, has led to an explosion in risk assessment tools, from Riskalyze to PocketRisk for questionnaires and RiXtrema and Hidden Levers for portfolio risk analytics. Now a new player – FinMason – has entered the fray, aiming to combine both a risk tolerance assessment process and portfolio risk analytics and monitoring capabilities. The risk tolerance questionnaire, dubbed FinScore Pro, asks clients questions about their investment knowledge, special circumstances, stock market experience in 2008, and basic details about their planned retirement (time horizon, Social Security payments, contributions and available assets); advisors can add in their own supplemental questions as well (which aren't included in risk scoring, but can be used for supplemental data gathering). Using the preliminary data the client enters, FinMason then suggests portfolio choices to clients, framed in terms of the monthly income they could generate and the potential percentage they could lose in a crash (e.g., $15,084/month with a 30.4% loss potential, or $15,291/month but a 35.1% loss potential in a crash), and more-and-less aggressive choices are repeated until the client narrows to a specific choice. Once tolerance is determined, the advisor can then create a portfolio proposal (using a FinMason model, or the advisor's own), which is presented to the client (along with his/her risk score) to approve. In addition, FinMason also offers "FinScope" – which continuously monitors the client's portfolio and its potential loss exposure, flagging any portfolios that run afoul of the client's risk tolerance threshold at any point in the future – and also offers a Lead Gen tool, which allows advisors to embed the FinScore Pro assessment directly onto their website for prospects to engage directly. Currently the software is priced "aggressively" at $49/month for a single user for FinScore Pro (which includes the Lead Gen tool for free), while FinScope only available to enterprises so far; further information is available on the FinMason website.
RedTail Vs Salesforce Financial Services Cloud: Best CRM For Financial Advisors? (Craig Iskowitz, Wealth Management Today) - CRM software forms the hub for most growing advisory firms, but owners must face the challenging decision of whether to use industry-specific CRM solutions like RedTail, or rely on a company like Salesforce – the world's largest CRM provider – and its industry-specific "version", dubbed Financial Services Cloud (FSC). According to advisor tech surveys, Redtail currently dominates, with a nearly 40% advisor market share, but Salesforce is up to 13% market share, and growing most rapidly amongst the largest RIAs managing the most assets. Iskowitz compares the two in depth, noting that Redtail has a straightforward and intuitive UI, but one that has lagged behind some newer offerings (and an attempted revamp in 2015, dubbed "Tailwag", deployed with an unusually large number of bugs and generated substantial advisor complaints), while Salesforce FSC has a stronger dashboard design and more customizability (but may require extra work setting it up to pull data properly from your full technology stack). Similarly, Iskowitz notes that Workflows and Reporting are 'sufficient' and capable under Redtail, but that Salesforce FSC's "next generation" shines as more intuitive and more deeply integrated (though Redtail is actually stronger in integrations to industry-specific tools, especially financial planning software providers). The big caveat, though, is that for Salesforce FSC's more modern design and capabilities, advisors will pay a substantial price; while Redtail costs just $99/month for a firm with up to 15 users, while Salesforce FSC costs $150/month per seat (which means an office of 15 advisors would have to buy 15 licenses!). As a result, Iskowitz suggests that RedTail is a strong solution for "smaller" firms with fewer than 20 employees, given its reasonable capabilities and incredible price point, though larger advisory firms (as well as banks and broker-dealer platforms) that are more concerned about the depth of capabilities, customization, and enterprise reporting features, will likely skew towards Salesforce FSC.
ScreenMeet: An Alternative To Join.Me Or GoToMeeting (Joel Bruckenstein, T3 Technology Hub) - As meeting with clients virtually becomes increasingly popular for financial advisors, some form of video conferencing or screensharing software is becoming an essential part of the advisor technology stack. The caveat, however, is that the most common tools, like Join.Me and GoToMeeting, can be challenging to get clients to adopt, particularly in the case of GoToMeeting where clients are forced to download a piece of software before they connect to their advisor (raising fears of cybersecurity and malware, not to mention the risk that the client simply can't figure out how to open/use the software once it downloads). An alternative newcomer for financial advisors is ScreenMeet, which is built specifically to allow clients to connect for screensharing without needing to download anything (although the advisor still needs to install software to use); instead, clients simply click on a hyperlink to a website, and can instantly view the advisor's screen (or if the advisor prefers, a login name/password can be required before viewing). The interface is designed to work across desktops, laptops, tablets, and smartphones. The biggest caveat, though, is that ScreenMeet is just for screensharing, and not video conferencing; there is no ability to view the client through a camera (or vice versa), as the only thing that the client sees is the advisor's actual screen. And the software does not support a voice connection; the advisor must separately call the client to talk (at the client's normal phone number). Nonetheless, a solution like ScreenMeet may be sufficient for advisors who simply want to visually share a retirement projection or portfolio report with a client and then talk through it as they look together, and for that ScreenMeet offers an easy interface, and a very competitive pricing of just $25/month. Further details available on the ScreenMeet website.
Expedite Your Sales With An Organizational Revamp (Amy Parvaneh, Investment News) - Sales and business development is a growing challenge at most advisory firms, and Parvaneh suggests that part of the problem is that most advisors approach prospects solo, and don't bring along colleagues... who might be able to help close the prospect by bringing a complementary skillset. For instance, Parvaneh segments advisors doing business development into four different types: the Charmer (who has natural charisma and energy to connect with the client emotionally); the Analytical (who can demonstrate technical competency to put the prospect's mind at ease); the Harmonic (who has the natural ability to talk to just about anyone and quickly strike up rapport); and the Rhythmic (who pursues business development with a steady process, persistently contacting prospects at least seven times if that's what it takes). Notably, the reality is that any of these business development types can succeed, but not all prospects respond to all types, and most advisors don't have the ability to excel in any approach but the one that's natural to them. Which means bringing a second advisor – and one who has a different business development skillset – can dramatically improve the likelihood that at least one advisor makes a good connection with the prospect, and doing what needs to be done. For instance, a charmer could bring along an associate who is more analytical, to help support on the technical questions... or a harmonic could bring a partner who is a rhythmic, and will ensure that the follow-up gets done to actually close the prospect after the harmonic makes the initial connection.
Why Your Office Space Matters (Joni Youngwirth, Commonwealth) - The reality is that first impressions do matter, and can be hard to overcome the initial impressions we have in the first 7 seconds. And when it comes to first impressions with a prospect in their initial meeting, it's not just about how the advisor looks and acts, but also the physical office space itself. And as Youngwirth notes, because the office environment can "erode" gradually over time, you might not even realize that the front lobby has become cluttered, that the firms' "vintage" furniture has passed its expiration date, and that rugs might be fraying while the baseboards accumulate a layer of dust. Ideally, though, the advisor's physical office space should not just be clean and tidy, but help communicate the overall vision and the experience they want the clients to have. For instance, one advisor who really wants the firm's clients to feel like family, redesigned their conference rooms to be more like the family den, with leather upholstered sofa and chairs and a coffee table, and a big monitor mounted above a fireplace where documents can be viewed. Other firms engage interior designers, to ensure that the space is visually coordinated, laid out in a clean and clear manner, and helps to truly make clients feel more peaceful and comfortable. To say the least, the starting point is just ensuring that the office space is clean and has reasonable space to accommodate the needs of the firm, but ideally, it should reflect the vision of the firm, and the desired experiences that clients (and/or prospects) should have when they visit.
5 Steps To Prepare For The Marketing Wars (Gail Graham, Financial Advisor) - For most of our history, real financial planners haven't had much competition, attracting both do-it-yourself clients who had never worked with a real advisor before, or clients who worked with another "advisor" who was really just a salesperson and didn't offer much ongoing advice and value. Now, however, with the entire industry converging on the AUM model and providing financial planning and wealth management services, the landscape is becoming increasingly competitive, and Graham suggests that a "marketing war" is looming on the horizon. And the competitive challenges will only be amplified by the fact that the next generation of clients – Gen X and the Millennials – are much more likely to comparison-shop advisor value propositions and pricing, and are more demanding about their client experience expectations. And to the extent the younger generations have any familiarity with the industry, it's likely through big national brands (e.g., wirehouses, custodians, and asset management firms), which means the average independent advisor is already starting point behind. So what should advisors do to remain competitive? Graham suggests five key steps: 1) create a razor-sharp message (which needs to be a lot more specific and compelling than "we help people live richer lives", which isn't realistically compelling to a skeptical prospect); 2) have the courage to choose a target client (as the reality is that a casting a wider net doesn't capture more clients, it just causes more prospects to fall through the net!); 3) make your offering more tangible (as it's challenging to sell the invisible intangibles of financial planning, so specificity matters wherever possible); 4) package your services into "products" you can show and tell (e.g., a physical investment proposal, financial plan, meeting agendas, etc., as "proof points" of your services); and 5) Confront pricing head on (and really break down what your costs are, what they pay for, and how it's valuable for the client).
The Real Reason Everyone Offered You Free Tax Prep This Year (Peter Rudegeair & Laura Saunders, Wall Street Journal) - The tax prep business is in the midst of a major shift, which it's no longer about making money from tax preparation software, but instead charging little or nothing for the software in order to get the rest of the individual's information. As a result, Intuit (maker of TurboTax) offered free tax prep to millions of Americans with simple returns, and H&R Block countered with a similar offer, as did personal finance portal Credit Karma (that also offered a free tax-prep service this year). The shift comes as Americans appears to be increasingly comfortable filing their taxes online; in the past decade, the number of households using H&R Block (in person preparation) has hovered consistently around 20 million, while paid professionals overall continue to prepare about 82 million turns, but TurboTax filings have exploded from 23 million a decade ago to over 40 million last year. But the explosion of competition means tax prep firms need to find new revenue streams, and that shift is beginning to become apparent. Companies like Credit Karma have already proven there's big business in giving away some services to monetize with others, having built itself to a $3.5B valuation primarily by giving away free credit scores (when other services at the time were charging $80) and using the data and connections it makes to consumers to recommend new/better credit cards to them (for which credit card companies pay an affiliate fee). But now, TurboTax has partnered with Earnest, to make recommendations on student loan refiling, and H&R Block partnered with IBM's Watson to try to analyze tax return data to come up with tax planning strategies (delivered on the spot in the H&R Block office, which is set up with two computer screens, one for the preparer to see the tax return, and one for the client to see the planning opportunities).
Steve Ballmer Serves Up A Fascinating Data Trove (Andrew Ross Sorkin, Dealbook) - After Steve Ballmer retired as the chief executive of Microsoft in 2014, he tried to decide what he would do next, considering some of his wife's philanthropic endeavors but ultimately declaring that the government already provides the social safety net for the poor, the sick, and the old (or so he presumed, given all the taxes he's paid!). Yet that statement eventually led him to start a new endeavor, that would aim to quantify what, exactly, the government is really doing with tax dollars, and the outcomes that are being achieved. Having built for the last 3 years with "a small army of economists, professors, and other professionals", and spent an estimated $10M (and likely another few million per year going forward to maintain it), this week USAFacts went live, and it's a veritable treasure trove of data that fully integrates revenue, spending, and measured outcomes across Federal, state, and local governments. For instance, the tools make it possible to compare how many police officers are employed in various parts of the country, and compare that against actual crime rates. Or determine how much revenue is brought in from parking tickets, versus the cost to collect. What's truly unique about USAFacts is the potential for big data insights once all the Federal, state, and local government data – revenue and spending – is integrated together. Ballmer has dubbed the initiative "the equivalent of a 10-K [disclosure filing] for the government", and is making it directly available to consumers (as well as researchers) as a source for hard non-partisan data and facts (and to ensure objectivity, the site relies only on actual government data, and no outside sources that could themselves be accused of bias).
How Behavioral Economics Can Help You Retire Rich (Suzanne Woolley, Bloomberg) - While there is already a substantial amount of research about the various types of behavioral biases we have that impact our financial behaviors, the new Common Cents Lab established by behavioral economics professor Dan Ariely is now aiming to collaborate with FinTech providers, and their big data sets, to actually determine how to effect positive (financial) behavior change. For instance, given that tax season is the one time of the year that almost everyone focuses on their holistic financial lives – and represents an ideal saving opportunity, as tax refunds are dollars that the typical consumer didn't have already and can therefore more easily set aside – a collaboration with savings app Digit tested to see if texting people before they got their refund and asking them to save it would help them to save more (answer: it did, as people were willing to pre-commit 5% more of their refund to savings when they didn't already have it in their checking account!). A similar experiment with EarnUp found that telling people to "earn money back from a mortgage" was more effective than telling them to "save money on a mortgage" when deciding whether to prepay (and was actually what led the company to rename itself EarnUp, from its prior name APASave). Another initiative, with micro-lender Kiva (which facilitates 0% interest rate loans for small businesses), found that just adding a deadline to the application (even for a 0% rate loan) increased the number of completed applications by 24%. The key point – historically, we've relied on small-scale studies, folk wisdom, and personal anecdotes, to figure out how to help people improve their financial behaviors, but now the combination of experimentation plus FinTech is making it possible to engage in much more large-scale experiments that can really help to determine what does, and doesn't, help people to improve their financial behavior!
I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!
In the meantime, check out the new video series below by journalist and financial consumer advocate Dan Solin – designed to provide financial tips and guidance for consumers, and permitted to be embedded (for free) directly onto an advisor's website! (Just be certain to embed the full video with attribution, and include a link back to Solin's YouTube channel!)
A robo-advisor that was built by Advisors is something to believe in. Your practice will have a more streamlined workflow, and you can trust that everything you do was built with you as an Advisor in mind. AdvisorEngine is another great cloud-based wealth management platform to look into if you are looking for something that is centered around your needs.