Weekend Reading for Financial Planners (Sep 16-17)

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 September 16th/17th:

The Equifax Breach: What You Should Know (Brian Krebs, Krebs On Security) - The big news this past week was that credit bureau Equifax revealed a data breach that may have released key personal data, including Social Security numbers, birth dates, addresses, and even some driver's license numbers, on as many as 143 million Americans, to hackers who intend to sell the data to identity thieves. As an initial response to the issue, Equifax is offering one free year of their credit monitoring service, and has posted a new website where people can input their information to determine if they were affected (although initially the site appeared to be broken, and was returning different results for the same data). Notably, there was also an initial discussion that entering your information into the Equifax website would itself force you to waive your rights to sue the company, although Equifax has since clarified that identifying if you were impacted by the cybersecurity breach will not waive your legal rights regarding the incident. Yet the caveat is that even by enrolling yourself into a credit monitoring service, you will not actually stop data thieves; all the solution will do is notify you (generally relatively quickly) after an identity thief has stolen your identity and is taking actions that may impact your credit. Accordingly, the best way to actually prevent identity theft is to file for a "security freeze", which blocks any potential creditors from being able to view or "pull" your credit file, unless you affirmatively unfreeze or thaw your file beforehand – which means identity thieves won't be able to apply for credit cards or loans in your name, because creditors generally won't issue loans if they can't gauge the risk by viewing your (now frozen) credit file. In order to freeze your credit, it's necessary to notify each of the major bureaus (one at a time to Equifax, Experian, Trans Union, and Innovis), which can be done online in some cases but for others requires reaching out by telephone or by writing. Some states permit credit bureaus to charge a small fee (up to $15) for placing a freeze as well. Once frozen, each bureau will provide you a unique Personal Identification Number (PIN) that you can use to thaw your credit file in the event that you actually want/need to apply for credit in the future. A less arduous alternative is to obtain a fraud alert – rather than a credit freeze – which tells lenders not to grant credit in your name without first contacting you to obtain approval (by telephone or whatever other method you indicate in the fraud alert), and the process can be completed quickly online or via telephone, and notifying one bureau automatically propagates the fraud alert to other bureaus; however, the caveat is that fraud alerts only last for 90 days and then must be renewed (though you can obtain an extended fraud alert for 7 years, but only if you've already been a victim of identity theft and can provide a police report to substantiate it), and while a fraud alert requests lenders to contact you before granting credit, they are not legally required to do so (which makes the credit freeze far more secure).

FINRA: Who's Watching The Watchdog? (Mark Schoeff & Bruce Kelly, Investment News) - The Financial Industry Regulatory Authority, or FINRA, is the self-regulatory organization that oversees the country's 3,700 broker-dealers and 631,000 brokers (and other securities-licensed individuals). The organization is not just a voluntary association, but is vested with the authority to investigate, levy fines, and even bar individuals from the industry. Yet FINRA has grown to the point that it wields enormous power, with over 3,000 employees (paid for through a combination of "membership fees" from broker-dealers, and fines) and a whopping $1.6B cash reserve, and as a "self-regulatory" organization, has remarkably little actual accountability to the industry or the public, as the organization writes its own rules, meets behind closed doors (unlike the SEC, which must conduct open meetings under the Sunshine Act), and only releases information if/as it deems necessary (without being subject to the Freedom of Information Act). As a result, only 29% of brokers themselves actually say that FINRA is doing a good job of regulating them, and 61% express concern about the lack of transparency of FINRA's finances. After all, besides the relatively limited information in its Annual Report, it's not even entirely clear how FINRA makes its resource decisions, nor where all of its revenue comes from, and "member" firms that continue to pay in every year (as required) are chafing at still being obligated to do so even with FINRA's massive $1.6B reserve, which may only ramp up further as FINRA fines are up 85% in the past year alone (though there is no detailed accounting of how FINRA actually spends its revenue from fines, beyond claiming they are used for "capital expenditures and regulatory projects"!). Ultimately, the SEC is in charge in FINRA, and has the power to reject rules that FINRA wants to adopt, but critics note that in practice the SEC virtually always rubber stamps FINRA proposals. And even FINRA's board, which is required to have 13 "public" governors (who have no material relationship with a broker or another SRO) out of a total of 24 members, often includes individuals that have long industry careers and/or serve on the boards of other financial services firms. In the end, though, FINRA may be compelled to change, as the combination of negativity towards FINRA and industry changes have caused the number of broker-dealers to drop by a whopping 24% since just 2007; as a result, recently appointed CEO Robert Cook has begun the "FINRA 360" initiative to review the entire organization, though it remains to be seen whether in the long run FINRA will simply become a smaller and leaner organization focused on a smaller brokerage industry, move to formally join the SEC and become a part of the Federal government regulatory structure... or to the concern of some, try to expand its reach and gain even more power by trying to oversee all financial advisors (including RIAs) under a uniform fiduciary standard.

SEC Warns RIAs To Review Advertising Programs (Kenneth Corbin, Financial Planning) - Last year, the SEC adopted an RIA exam focus dubbed the "Touting Initiative", specifically focused on how advisers are using "accolades" in their marketing materials. Now, after reviewing more than 1,000 RIAs, the SEC's Office of Compliance Inspections and Examinations (OCIE) has issued a Risk Alert about what RIAs need to be doing to ensure they're in compliance with Rule 206(4)-1 under the Investment Advisers Act (i.e., the Advertising Rule). Key issues cited by the SEC include some that are already familiar - e.g., don't be misleading when discussing performance results, don't cherry-pick profitable investment selections while ignoring the rest, and remember that proper disclosures still need to be provided about fees and performance results in one-on-one presentations as well as broad-based advertising) - but also new areas, such as don't claim that the firm is GIPS-compliant in its investment performance reporting if that can't actually be verified, and beware the use of third-party rankings and awards for marketing (especially if they're either outdated or include prohibited client testimonials... and of course, don't submit inaccurate or fraudulent information in order to obtain such recognitions in the first place, or talk about professional designations that have since lapsed!).

Should The SEC Regulate The 'Advisor' Title? (Kenneth Corbin, Financial Planning) - The debate in recent years has been about whether a (uniform) fiduciary duty should apply to all financial advisors, regardless of whether they are under an RIA, a broker-dealer, or an insurance agent. But arguably, the even broader question is whether the SEC should be doing more to regulate the title of "financial advisor" in the first place - in other words, rather than trying to apply a fiduciary duty to advisors and salespeople, instead simply separate the advisors and salespeople and require the use of clear titles. The key distinction of this approach is that brokers and insurance agents would thus be able to avoid being held to a fiduciary standard... but only if they agreed not to call themselves advisors and make it clear that they are operating as brokers. And it appears that the SEC may actually be at least considering such a path, as incoming SEC Chairman Jay Clayton recently issued a request for comments that included a question about whether current advertising, disclosures, and other information provided by RIAs versus broker-dealers may be leading to investor confusion. And regulating such titles would fit neatly into the SEC's currently purview over how broker-dealers and RIAs advertise their services to the public. However, the reality is that the SEC still has a lot on its docket to address, and navigating any kind of fiduciary rulemaking is already contentious... although notably, simply regulating titles and limiting the scope of fiduciary duty might actually be a more appealing alternative to broker-dealers and insurance agents, who may prefer to relinquish the use of the "advisor" title to avoid the risk of being scooped up under fiduciary legal obligations.

Advisors Increasingly Outsourcing Portfolio Management (John Waggoner, Investment News) - A recent study by Cerulli Associates finds that outsourcing portfolio management is on the rise amongst financial advisors, and especially amongst those who hold the CFP certification; in fact, a whopping 54% of CFP professionals now outsource their portfolio management. Not surprisingly, those with the CFP marks are more likely to focus on holistic financial planning and client relationship management, rather than stake their value on investment management. The trend is actually creating two divides, though; for some, it's a decision about whether to include investment management as part of their value proposition, or outsource it and focus on financial planning instead; for others, though, it's simply a question of whether to build an internal investment team and "insource" the investment management process versus outsourcing it (because the plan is to provide portfolio management to clients either way). Other groups that commonly outsource investment management include those at insurance broker-dealers (for whom insurance sales are the focused, and investment management is not a core competency), and a subset of independent broker-dealers that have decided to outsource themselves instead of developing an in-house investment management solution. Ultimately, RIAs are the least likely to outsource portfolio management, which is perhaps not surprising given that the original purpose of the RIA entity is to provide ongoing investment management services! Though the looming DoL fiduciary rule is expected to boost interest in outsourcing investment management across the board, as both advisors and their firms seek to have more consistency in the firm's investment management process.

Advisory Firms Have To Stop Treating All Advisers The Same (Jeff Benjamin, Investment News) - Most leaders and business owners have a desire to be fair and even-handed with their employees, but advisor consultant Philip Palaveev advocates that the essence of developing future leaders of the firm is to identify top performance and not treat them equally, instead giving them more time and resources and training to turbo-charge their development. The key is to recognize that for those who really are upwardly mobile and ambitious, and could power the next stage of growth for the firm, "opportunity is the fuel" of their career, and as a result it's crucial to give the fuel to those most likely to really use it. Of course, ideally all advisors need to learn the core tasks and four skill domains that it takes to succeed as an advisor, from mastering technical competency as a paraplanner, to learning client relationship management as a service advisor, business development as a lead advisor, and management and leadership as a partner. Nonetheless, the point remains that for any group of advisors, some may be more effective than others, and have far more upside potential (for themselves and the firm); by treating them all equally, the least ambitious may be able to move up, but the most ambitious will be likely to move on.

Taking Over Client Relationships (Philip Palaveev, Financial Advisor) - Grooming future "Lead Advisors", who can both manage client relationships and develop new ones, is the core building block of advisory firms that was to last beyond their founders. Yet at the same time, it's hard to develop Lead Advisors, as evidenced by the fact that the latest Advisor Compensation studies show that the typical Lead Advisor earns $143,000/year, while the typical Service Advisor earns barely more than half that amount, or $83,000/year. After all, an effective Lead Advisor must ultimately bear the responsibility for the client relationship, often manage an entire team that serves the clients, ensure that proper communication is going out to the client, be recognized as an authority by the client, and be able to cultivate referrals (or other new business development opportunities) along the way. And unfortunately, there's really no way to learn how to be an effective lead advisor, and earn the trust of clients, than to be their advisors, and earn their trust, which necessitates both having the knowledge and expertise to be deemed credible, and the relationship management skills to develop rapport with them. Though in point of fact, Palaveev suggests that the starting point for newer advisors should be to focus on their technical competency; in a world where it may be difficult to build rapport with typically-much-older clients, technical expertise can be a valuable foundation for making a trusted connection with the client. Other key points for learning to take over client relationships as a lead advisor include: outshine your mentor/founder by going deep into a niche or specialization (so you can be fully recognized for your own expertise, and not just as the second-chair for the founder); learn to establish your "presence" in meetings by speaking up (it's difficult, but if you're always quiet sitting second chair to another advisor, clients will always perceive you that way, too); and recognize that while it's important for founders to step back to let their next generation (G2) advisors develop, sometimes as a G2 it's necessary to give the dynamic a (respectful) push, too.

A Six-Step Plan To Track Prospects (Teresa Riccobuono, Advisor Perspectives) - Given that it is easier and less expensive to keep an existing client than acquire a new one, many advisors focus on how to serve and retain their clients, and systematize processes to do so efficiently. Yet acquiring new clients is still essential for a firm to grow, and few firms actually have a clear process about how to handle and track their prospects in order to know whether they've been followed up with appropriately (but not so persistently that it feels like you're stalking them!). So what's the best way to handle it? The starting point is to recognize that few people will resent persistent follow-up, as long as it's done in a gentle and paced manner... which means it's necessary to have clear tracking in the first place. Riccobuono shares the Prospect Tracking spreadsheet that she used as an advisor, with details including the name of the client, contact information, and source of business, with color coding to remind her which clients are still missing contact information (colored red), which need a follow-up to stay in touch (colored pink), who already has an initial meeting scheduled (yellow), and who is in the process to become a new client (in green); the goal is to understand, at a glance, the depth of your prospect pipeline, and where everyone is in the process, so no follow-up slips through the cracks. It's also important to track who is responsible for the next step with each prospect, when the advisor needs to follow up next, whether the ball is in the client's court to respond (and if so, how long you'll wait before you follow up anyway), or if there's something else promised to the prospect that another team member must deliver. It's also important to recognize that eventually, you need a step in the process to end the effort with the prospect, where you reach out to them and say "It looks like you don't want to move forward, so just let me know and I'll remove you from our follow-up list" (which ironically sometimes prompts the prospect to finally schedule a meeting!). Over time, as you track this data, you can begin to develop further key metrics as well, including how long it typically takes to get a prospect through the process, whether you're having too many unqualified prospect meetings, and where your most common sources of business development are coming from in the first place.

Client Advisory Boards Vs Focus Groups (Steve Wershing & John Anderson, Client Driven Practice) - Getting feedback from clients is crucial to understand where and how to improve your business, but the actual process of how to get the right feedback from clients is challenging. Some advisors conduct Client Advisory Boards, but Anderson suggests that such an approach with a representative sample of your clients may demand too much of a time commitment from the advisory board members, may make them feel awkward about giving candid advice, and risks making the advisor look less qualified (what does it mean if you're a planner who can't plan where your own business is going?)... or stated more simply, generic advice from a representative list of clients will just create a generic advisory firm. Instead, Anderson suggests creating a "focus group" of your ideal target clients, focus in on just those clients, and ask them very directly what value they perceive they get from you, where they specifically want you to do more and go deeper, and how you can better connect with other people like them. Wershing counters, though, by noting that research shows firms that ask for more client feedback end up with more engaged clients who are more likely to give referrals - and live feedback (e.g., via a client advisory board) is better and more engaging than surveys. Notably, Wershing also suggests that ultimately, you want your advisory board to be not just a representative sample of clients, but the kind of target clientele you want to reach. Additionally, having a formal advisory board (as opposed to just a focus group) allows you to conduct consistent meetings for constructive feedback over time (as a focus group is typically a one-time affair). And while many advisors fear that asking questions of their clients may make them look weak, Wershing notes that in practice it can actually convey a sign of secure self-confidence to be willing to ask for deep constructive feedback.

Should I Create Videos For My Planning Firm? (Ingrid Case, Financial Planning) - A small but growing number of financial advisors are experimenting with videos as a part of their marketing process. In a world that is already over-crowded by investment talking heads, though, most advisors using video for marketing are trying to differentiate themselves by talking about "non-investment" topics instead. For instance, advisor Leon LeBrecque has recorded more than 100 videos, no more than about 2 minutes each, on a wide range of client-relevant topics, from how to title Kids' accounts to what to do with your excess cash, opening a Roth for your kids, and more. The goal of the process is to create something that engages prospects, and even existing clients may view and share the videos with others (which is effectively a referral of the advisor!). And it's important to remember that the advisor doesn't actually need to be the one that operates the camera and edits the videos; LaBrecque has hired an outside video editor who does it all in a couple of hours for $300 - $400 per video (although longer pieces, such as his 7.5 minute 2017 economic outlook, might cost $2,000). Although with the availability of high-quality smartphones and free video editing tools, some advisors actually do produce their own videos entirely, in just a few hours. While many advisors may fear how that will come across to clients and prospects, the key is to remember that it's all about authentically engaging your audience; in fact, it's better to show some personality, rather than just be a stiff financial advisor talking about technical topics, as clients want to understand what it will be like to communicate with you if they really do hire you as their advisor. (And you'll likely find that if you try it a few times, it gets easier and you'll feel more relaxed after the first few.) Of course, as with any other advertising and client communication, it's still necessary for compliance to review videos, but if they're scripted and recorded in advance, and the advisor is cognizant to exclude problem words like "guarantee", the compliance burden is not insurmountable (though it's advisable to get the script reviewed before recording, so you don't have to edit and re-record if compliance requests a change!).

The Best Simple Business Models (Morgan Housel, Collaborative Fund) - In a hyper-competitive world, even the smartest CEOs often struggle to figure out how to add more value and differentiate themselves from the competition, and the challenge is certainly present in the world of financial advisors as well. But Housel notes that in the end, the best business models are often very simple at their core, including: make intimidating things painless (e.g., helping prospective college students figure out whether tens of thousands of dollars of debt is really worth the potential lifetime earnings increase!); make boring things exciting (e.g., Kahn Academy made learning fun, and Mint.com made personal finance interesting again); make complicated things simple (all Lyft and Uber really did in the end was make it easier to click a button and get a ride!); make obfuscation transparent (brute-force honesty in an opaque industry is a great way to build trust!); make middlemen irrelevant (the more you narrow the gap between production and purchase, the better); and make things disappear (no more standalone cameras, casette tapes, cable TV subscriptions, physical books or newspapers, fax machines, malls, etc.). Notably, while many businesses may be tempted to try to do several or all of these at once, the truth is that businesses can often be wildly successful just by focusing in on being especially good at one simple thing. Which of these is the simple core of your business model, and do you communicate it that way to your prospects?

The Management Of Whales (Seth Godin) - In the world of online gaming, a "whale" is someone who plays far more often (and pays far more dollars) than the typical user; it's not unusual for 2% of all the players to account for 95% of all the usage (and 95% of all the profits). The phenomenon is not unique to games, though; at the local gym, some customers pay and rarely ever come in, while others are at the gym for hours every day, using far more resources than you could possibly charge if everyone did the same. As a result, the management of whales is a balancing act; those who lose you the most and use you the most often bring the most revenue but also have the most cost to service. If they utilize too much, you can't serve them profitably. But if you don't maintain a relationship with them, you can lose out what may turn out to be your most profitable customers, and also your best word-of-mouth referrers. And it's important, because whales - especially the variety that refer you actively - can't be bribed to do so, though they can be dissuaded from supporting you if you disappoint them or don't care enough to notice them. Which makes it all the more important to give more focus on how, exactly, you handle the "whales" in your business, who may generate the most revenue, sometimes also the most cost, and often generate the most referrals along the way as well. Do you spend extra time identifying the "whales" in your business, and the best way to serve them appropriately (with not too much, nor too little)?

How Irrational Labs Creates "Irrational" Bonuses (Ingrid Paulin & Evelyn Gosnell, Medium) - Irrational Labs is an organization that studies behavioral economics to apply it in practice with businesses, and in this blog post the company discusses how it structures its own bonus structure to incentive its "irrational" employees. The starting point is to recognize that the currently common bonus approach - the pay-for-performance year-end bonus - is actually remarkably ineffective as an approach to engage employees, as it can actually decrease intrinsic motivation and team cooperation while potentially incentivizing unethical behavior. Accordingly, Irrational Labs created a form of bonus where the team got a small sum to spend... but had to spend it in a manner that would truly increase their happiness, and pay (happiness) dividends over time. Which means the bonus had to be spent in a manner that fits the research on how spending money actually increases happiness, including: do something new and different to add novelty (e.g., don't just watch Netflix every night, instead do something you've never done before like seeing improv comedy or taking a pottery class); focus not just on pleasure (e.g., a relaxing massage or an ice-cream sundae) but meaning (e.g., running a marathon or writing a book); spend it on other people (which actually tends to lead to more happiness than spending on ourselves!); spend the bonus on an experience, not just a thing (and ideally find experiences that you can share with others); spend on things that save you time (e.g., cleaning, cooking, grocery shopping); and break it down to smaller treats instead of one big splurge. The fundamental point, though, is simply to recognize that if you really want to pay a bonus that actually makes employees happier, it's OK to give them a little nudge about how to spend it to actually achieve that result (and hopefully derive greater satisfaction with the work that earned them the happiness bonus in the process!). Arguably good advice for how as financial advisors we can help our clients with their spending, too!

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.