Weekend Reading for Financial Planners (Apr 29-30)

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.

Weekend reading for April 29th/30th:

DFA And TD Ameritrade Strike Strategic Deal (Lisa Shidler, RIABiz) - Last week, TD Ameritrade announced a new "strategic relationship" with DFA that will cut transaction fees on DFA mutual funds to $9.99, a whopping 67% cut from the current cost that can go as high as $31/trade. In recent years, DFA (and Vanguard) funds have been burdened by RIA custodians with materially higher trading fees - a trade-off for the fact that DFA (and Vanguard) refuse to pay the unseen non-transaction fees that most other mutual funds pay (e.g., sub-TA fees). But now, TD Ameritrade is breaking ranks with the other custodians, and bringing its DFA transaction costs more in line with its other trading fees. The implications are significant - in a world where many advisors dedicate their entire advisory firm investment process to implementing DFA, but view custodians as interchangeable commoditized platforms, the DFA trading fee cut has the potential to attract big business for TD Ameritrade, given an estimated $200 billion of RIA assets invested in DFA funds and that DFA trades at TD Ameritrade will now cost clients 75%(!) less than at Fidelity. In the case of DFA advisors who use multiple platforms (including TD Ameritrade), such a cost differential is especially profound, as advisors would risk being disciplined for a fiduciary breach for failing to trade on the much-cheaper TD Ameritrade platform if it was readily available. Alternatively, it may be that Schwab, Fidelity, and Pershing feel compelled to cut their own DFA trading fees to stay competitive (and retain advisors invested in DFA funds) - continuing the ongoing collapse of transaction costs across the entire industry - but initiating other ripple effects, as mutual funds that do pay RIA custodians their sub-TA fees may begin to grumble if they feel DFA is getting comparable transaction fees without paying a similar sub-TA share. From the broader perspective, the new move may also be a signal that both new TD Ameritrade CEO Tom Hockey, and new DFA Co-CEO David Butler, are ready and willing to shake up the industry a bit in their efforts to grow their respective companies under their new leadership... which raises the question of what other changes might be coming in the future.

Content Marketing For Financial Advisors: Your Questions, Answered! (Kali Hawlk) - In the world of content marketing for financial advisors, it's important to focus on the "right" metrics. For instance, while it's easy to look at top-line metrics like the number of social media followers, or how many people "like" or "retweet" a post, both of which are useful indicators that at least your audience is growing and doing "something", Hawlk notes that the real measure to focus on is engagement: how often do people actually click the link, engage with the content, and come to your website to potentially engage your services. Which, notably, means an article that got no likes or retweets could still be great business, if it really engages people who click on it. On most social media platforms, reporting indicates to you how many people clicked on your article or link, but you can also use services like Bit.Ly to track how many people click a particular link across multiple different platforms. And for those who discover they've created some especially engaging content, you can even consider using Facebook's Ads - which allow you to pay and have your already-known-to-be-engaged content reach an even wider audience, beyond the people who have already Liked your Facebook page. And thanks to Facebook's depth of knowledge about its audiences, can be extremely well-targeted to your particular target clientele (at least, if you've already identified who your target clientele really are!). For those who want to try it out, Hawlk suggests simply pulling up your Page Insights section in Facebook, check out which of your posts are already getting the best engagement, and then try spending $20 - $50 on an ad or two to boost that article, and see how many more people you can reach (and whether they're engaging, too). Though be cognizant that Facebook does have rules about what you say in Facebook ads - so be certain not to make misleading or unsubstantiated claims (not just about investment performance, which your compliance might already review, but any of your services/solutions).

A Face-To-Face Request Is 34 Times More Successful Than An Email (Vanessa Bohns, Harvard Business Review) - Despite the incredible reach of email, a recent study in the Journal of Experimental Social Psychology finds that if you need to ask someone to do something, it's just as effective to ask 6 people in person as it is to ask 200 people via an email blast. Or viewed another way, a face-to-face request is 34 times more successful than sending an email. The researchers tested this by giving participants a task to make a request of their friends and colleagues to complete a survey, making the ask either in-person or via email, and using the exact same script for both. Notably, both those tasks with making the ask via email, versus in person, estimated that the results would be the same - both assuming that about 5-out-of-10 being asked would comply with the request. Even though the actual results were drastically different. The researchers suggest this outcome was a combination of the fact that people underestimate how persuasive they actually are when engaging with others in person, and also that people are increasingly distrusting of requests - especially those involving a "click here" kind of email link (e.g., for a survey) - that come via email. Which means at a minimum, if you are going to make requests via email, or try to engage people online, it's crucial to recognize the importance of substantiating your trustworthiness and legitimacy... and that you'll need to plan to reach out to far more people online to get comparable results to just asking in person. (Though on the other hand, thanks to the ease of one-to-many email, it is often feasible to contact far more people via an email than one in-person meeting at a time!)

Is Writing A Book Worth Advisers' Time And Money? (Tobias Salinger, Financial Planning) - Many financial advisors have published a book, and most report after the fact that it took a lot of time, cost a lot of money, and didn't yield much in book sales revenue to justify the time and dollar investment. Yet the reality is that aiming for book sales misses the real point of publishing a book as a financial advisor - the true opportunity is to establish credibility, or even "niche celebrity status", by clearly demonstrating your expertise and becoming a recognized authority... and using that visibility to attract and retain clients. In other words, the point of the book is not book sales, but a form of "authority marketing" for your core advisory business. For instance, the advisor-author of "Worry Free Retirement" reports that he adds about 5 new clients a year that come from his book, and one advisor in Hartford simply uses his entire marketing budget to send out 5,000 free copies of his book, and that about 3% (or 150 recipients!) end up doing business with him. Of course, the big caveat is that most financial advisors are not writers inclined towards writing a book in the first place, but services like Advantage Media offer advisors a way to "talk your book" - for about $25,000, the advisor records 12 hours of interviews over the span of 6 months, and a ghost writer turns the spoken words into a properly formatted and edited book. And for advisors who are already inclined towards writing, and just need help with the actual publishing process, there are now a number of online self-publishing services (e.g., Amazon's Self-Publishing solution) that can facilitate that part of the process for far less.

How RIAs Are Fighting The 'War For Talent' (Charles Paikert, Financial Planning) - While compensation is certainly a critical element to attract and retain high-quality advisers, the "war for [top] talent" is becoming so fierce that firms are becoming compelled to expand their appeal to be competitive. The hottest feature: a clearly delineated career path, with established performance goals that indicate how to advance up the ladder of success, and a master-apprentice model to help the quality new advisor develop their skills. For instance, Wescott Financial Advisory Group conducts two performance reviews a year for its advisors, that includes an in-depth "profitability analysis" as though the advisor was an independent business unit, subtracting out a share of office overhead and salaries and direct client sales costs from the advisor's client revenues to determine the profit margin - and then compensating the advisor accordingly (in addition to evaluating whether any clients need to be shifted to another advisor). Further criteria towards advancement includes: obtaining professional designations (e.g., CFP certification), years of experience, number of primary and secondary client relationships, ability to present subject matter expertise to clients, new business development, and management/executive leadership roles. Similarly, Buckingham Strategic Wealth treats its newer advisors as though they're in a teaching hospital environment, with opportunities for hands-on (but highly supervised) learning to gain experience. The key point, though, is that for all the firms, the structure for how advisors are compensated, and what it takes to succeed and advance in the firm, are formally established and published for all to see.

Aspire To Be The Employer Of Choice (Mark Tibergien, Investment Advisor) - One of the most crucial aspects of building an enduring business is attracting, developing, and retaining talented people, yet advisory firms in particular tend to struggle with this... as evidenced by the fact that the average financial advisor is around his/her mid-50s, and there are more CFP certificants over the age of 70 than under the age of 30. And the lack of talent management appears to be taking its toll, as advisory firms that cannot hire and retain good advisors eventually hit a capacity wall where they simply cannot handle any more new clients at all. So how can advisory firms become the "employer of choice". Tibergien notes that paying competitive compensation is important - as many employees will be swayed if an offer comes along that is at least 10% greater than their current compensation. But for younger or even "middle-aged" advisors, who still have years and decades left to work as professionals, it's more common to leave because they're in a bad-fit role, or otherwise don't feel like their current role and track will be very fulfilling. And in point of fact, our needs and desires themselves may change over time. Nonetheless, Tibergien suggests that it's crucial for advisory firms to be clear about defining the work to be done (i.e., have a clearly written job description that defines not only the role, but what it takes to be "excellent" in the role), because that's what helps to ensure that the employee is well matched to the job (and/or whether the employee needs to be paired with another job instead). In fact, Tibergien suggests it's these mismatches of job role, or upside potential, that leads to unmotivated employees, and the common attribution that Millennials don't have a strong work ethic. Or viewed another way, if you want the young advisors in your firm to succeed, it's crucial to set them up for success, in a role that matches their talents, and upside potential for them to grow... and then get out of their way and let them succeed.

Win The Talent War By Aligning Values With Growth Objectives (Angie Herbers, Investment Advisor) - Continuing the theme that "it's not just about money" when trying to hire and retain top advisor talent, Herbers notes the importance of the firm's culture and core values. The point is not simply to emphasize being a fiduciary and acting in clients' best interests; deliberately creating the firm's culture and core values is about creating guidelines of what all employees should aspire to, across the entire firm, and their entire role (not just the client-facing activity). Herbers suggests that any advisory firm owner can begin the process for themselves, if they haven't already tried to formalize their culture and core values. First, create four lists: what you envision as the core values for yourself as the owner, for employees, for the firm, and for working with clients. The idea of these lists is to describe how everyone is expected to behave towards each other, in the performance of their jobs, and in their interactions with the firm's clients. For instance, these values might include honesty, taking responsibility, or working towards success in the firm - whichever values the firm owner wants to espouse as being most critical. Initially, the lists may start out being very long, that's OK; once all the potential values have been written down, you can then begin to strike out the ones that are unrealistic (e.g., "everyone should be detail-oriented", which might not be feasible, especially if you as the business owner aren't detail-oriented yourself!), and merge together the ones that are redundant, until you end up with a high-level list. From there, Herbers suggests getting input on the core values, by taking it to employees, and seeing if they agree that the values are representative of what the firm is (or at least, what it's trying to work towards). Once the core values are determined, be visible with them - you can promote them to employees, and even to clients and prospects, to help demonstrate what's really valued at the firm.

When You're Gone, Will Your Firm Endure? (Matt Lynch, Investment Advisor) - While many financial advisors have built financially successful practices, few will be able to survive beyond the founding owner-advisor themselves. Of course, the reality is that many advisors didn't necessarily set out to build an enduring and transferable business in the first place; instead, they are "accidental entrepreneurs" who simply starting a practice to serve clients and be their own boss, but eventually built large enough that the practice might actually become a transferable business anyway. The caveat, however, is that not a lot of buyers actually want to acquire an informal advisory practice without systems and processes, even if it's generates a lot of income for its founder, as ultimately the buyer cares about the sustainability of the income in the future, not just the past, and a firm that's entirely dependent on its founder faces a catastrophic loss of income when the founder retires. The key point, then, is that for an advisory firm to create real value, it has to be capable of transferring its client relationships beyond its founder - either to an external buyer, or transitioning to an internal successor who simply takes over both the clients and the enterprise value of the business itself. But that takes time, which means starting as soon as possible (ideally, at least 10 years in advance) to begin cultivating the next generation talent, and developing that advisor's skills, to be the future owner of the business. But recognize that spending on young talent isn't just a cost to the business - it's an investment in the business' future enterprise value!

Advice For Next-Generation Advisers Looking For Ownership (Eric Leeper, Journal of Financial Planning) - Even when there's an interest and desire of a founding advisory firm owner to sell, it's often challenging to advance the conversation to the point of talking actual terms for a deal, and can then be even harder to get to the final stage of executing the transaction... a process that can be extremely frustrating for a next generation advisor looking to buy into the firm, and often results in deals getting mired in the details of valuation, deal structure, tax consequences, and the fears (from both sides) of whether the deal will work out as desired. Leeper suggests that for next-generation advisors who want to get a deal done, it's crucial to start by really empathizing with what the first generation owner is going through; the founding owner likely built the business from scratch, weathered a substantial amount of turmoil, and likely has a lot of pride in their achievement obtained through experience, leadership, and grit. Even if the business seems highly profitable and "runs itself" now, don't forget the turmoil that went into building the business to that point in the first place (because the founding owner who lived it definitely won't forget!). In fact, it's recognizing the inherent risk of building or buying a business that is crucial. For instance, as a future owner buying in, it's important to recognize that you will probably not see much of any profits coming out to you for many years even after buying in... because all of that money is going to get redirected to pay for the debt cost of financing the purchase. In fact, this is akin to what new business owners go through as well – many years of reinvesting into the business with little or no profits, until finally you get past the financing stage and the profits really get underway. And the danger that if the business doesn't grow and sustain, it may become even more challenging to handle those loan payments. If that sounds scary... well, be certain you're financially prepared to really do the transaction, and again recognize that surviving this challenging phase of becoming a business owner is not unlike what the founder once went through, too!

Got Any Spare Change? (Richard Wagner, Financial Advisor) - Despite the fact that the world is ever-changing, very little of what we're taught as financial advisors actually focuses on how to help clients anticipate and truly manage change. In fact, the typical financial plan usually projects out a remarkably stable and certain future, and most retirement software doesn't even have the ability to dynamically model how retirement lifestyle might change in the future depending on how the future itself changes. And part of the challenge is that the nature of money itself has continued to change over the years. In ancient years, it was physical and based on hard metals (gold, silver, etc.), and a "retirement plan" was mostly about having property to farm, and children to farm it; it was only in the era after World War II that money in its current form really became more plentiful, as something we would actually accumulate and retire on. Yet the transition to a more intangible money – as it literally becomes electronic and virtual – means it is becoming more ephemeral, even as we become more dependent upon it. In fact, Wagner suggests that financial planning itself still has not fully understood its relationship to money, how it changes, and the way that money changes us. In other words, it's not just that financial planners need to help clients with change, but that the nature of financial planning itself will likely continue to change, as the form and nature of money itself will continue to change, too.

An RIA Firm's Last-Minute Pivot After Near Collapse (Dave Grant, Financial Planning) - Grant is a financial advisor who, after working in the advisory industry for a period of time, went out to launch his own solo RIA... and with slow growth and client attrition, almost ground to a halt after three years, only to be saved by a complete rebrand and shift in direction (and the help of some fellow advisers and a CPA). In the process, Grant notes the positive impact that can come from finding your own self-awareness of an advisory firm owner, even taking personal time for reflection as necessary. For instance, when Grant launched his RIA, he had set aside a small business emergency fund... but then didn't realize how discouraging it would be when he actually had to draw on the account during down periods, which was both worrisome for his household finances, but demoralizing for his self-esteem while trying to grow. Yet when Grant went to look for alternatives, and narrowly missed getting a more stable salaried job, he realized he had mixed feelings about not getting the opportunity – despite his dire financial situation – acknowledging that for him, the freedom of being his own boss was still more important. Similarly, Grant realized that part of his struggles were related to his goal to achieve a certain level of income – $100,000/year – but ultimately realized that this had no connection to his own goals, which could actually be achieved at a lower level of income, and in turn allowed him to further change his business model and approach, including a decision to change his business relationship and form a partnership with a local CPA, allowing Grant to balance his desire for personal freedom as a business owner with a more stable environment that could provide a source of new clients to achieve his income goals. The key point, though, is simply to recognize that often we get stuck in a stage of the business where we may be unhappy or struggling to succeed, and that sometimes the best way forward is to become more self-aware about what we really want and need, and make our own changes to find a better path.

Stress And Comfort: Careful What You Wish For (Morgan Housel, Collaborative Fund) - The summer of 1932, in the depths of the Great Depression, was a dark time for the US economy, with almost 25% of the labor force out of work, GDP down 27% in four years, and the stock market down 89%. Yet it was also that summer that Edwin Armstrong first determined how to transmit radio signals with a new approach called frequency modulation, spawning FM radio, which subsequently transformed the radio industry, and also led to the rise of television, and the Army's superior communication abilities during World War II. In fact, the birth of FM radio during the Great Depression wasn't entirely unique; economist Alexander Field finds that "the years 1929 to 1941 were, in the aggregate, the most technologically progressive of any comparable period in U.S. economic history" and productivity growth in the 1930s was twice as fast as in the decades before or after! Other inventions and creations that emerged in the Great Depression included supermarkets, microwaves, sunscreen, radar, jets, rockets, penicillin, electron microscopes, magnetic recording, nylon, photocopying, teflon, helicopters, plexiglass, commercial aviation, most forms of plastic, synthetic rubber, nuclear fission, and more. Because the reality is that necessity and scarcity can be powerful sparks for resourcefulness and creativity. And Housel points out that this is really part of a broader phenomenon: that having some stress in our lives can actually boost our productivity, which in turn improves our happiness, too. In fact, a 2005 World Gallup Poll asked citizens of 121 countries "did you experience a great deal of stress yesterday?" and then looked to measure their happiness and wellbeing... and found that the higher a nation's stress index, the more satisfied people were, the happier they were, the healthier they were, and the greater the country's GDP and life expectancy! Because stress was effectively a barometer of how hard people were pushing towards the things that ultimately made them productive and happy – for instance, a tough project at work brings stress but also a sense of accomplishment when it's finished, and raising kids is stressful but being a parent brings meaning. Stress also focuses your attention while killing procrastination and indecision. Of course, clearly there's such thing as having too much stress as well, which isn't good either. But the key point remains that having some level of stress in your life is actually quite valuable, and can lead you to greater success in work and happiness in life.

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, if you're interested in more news and information regarding advisor technology, I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors as well.