Weekend Reading for Financial Planners (Oct 5-6)

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.

Interactive Brokers To Offer Free Trades (Samuel Steinberger, Wealth Management) - At the close of last week, Interactive Brokers announced a new commission-free service for its retail investors, dubbed "IBKR Lite", that would provide investors the opportunity to make unlimited trades of US-listed stocks and ETFs at no cost, with trades routed to market makers for execution, while converting Interactive Brokers' core platform to "IBKR Pro", which would continue to have trading costs but receive (ostensibly better) execution support through IB's "SmartRouting" (order routing) system. The new IBKR Lite platform will have no account minimum and no activity fees and pay a 1.5%-below-Fed-Funds rate on any cash balances. Customers will have the option to move between IBKR Lite and IBKR Pro as many as 3 times, and then once per quarter thereafter (to limit customers from switching back and forth from paying trading fees for better order routing on some trades, but then switching back to avoid trading fees by routing to market makers for others). Industry commentators suggested that the IBKR move was intended primarily to compete with Robinhood, the zero-trading-commission app that similarly makes much of its revenue from payments for order flow and has attracted over 4 million users (and has already spawned other no-commission copycats like JPMorgan Chase's "YouInvest" platform), along with industry players like Vanguard that announced no-commission trading on nearly 1,800 ETFs last summer. Though notably, as the first major discount online brokerage firm to go 'full Robinhood' on the rest of the industry, the move was/is widely anticipated to put pressure on other large retail discount brokerage firms to cut their trading fees as well.

Schwab Cuts Online Brokerage Fees To Zero (Jeff Benjamin, Investment News) - Following fresh on the heels of last Friday's announcement from Interactive Brokers that it was launching its zero-trading-commission IBKR Lite platform, this Tuesday, Charles Schwab announced that it, too, was eliminating trading commissions for online trading of US-listed stocks and ETFs, effective October 7th and coinciding with the launch of Schwab's new book "Invested", eliminating their current $4.95 trading fee (and also reducing their trading fee for options contracts down to $0 + $0.65/contract, though trading commissions will still apply for foreign stock transactions, large block transactions requiring special handling, restricted stock transactions, futures, fixed-income investments, and transaction-fee mutual funds). Notably, Schwab announced that its cut in trading commissions would apply for both direct retail investors and RIAs using their Schwab Advisor Services platform (while Interactive Brokers thus far has only indicated IBKR Lite as a retail platform). Ultimately, though, the cut is not anticipated to have a significant impact on Schwab itself, as trading commissions only represent less than 4% of Schwab's total net revenues in the first place, or 'just' $90M to $100M in quarterly revenue (in part because of the magnitude of cuts in trading costs that were already implemented in recent years), and can feasibly be made up by gaining market share thanks to its zero-commission costs (as Schwab grew from $2.9T to $3.7T in just the last 2.5 years since it cut trading fees to $4.95 to gain market share back in February of 2017). On the other hand, competitors like TD Ameritrade and E-Trade that rely more heavily on trading commissions for revenue were more impacted, with those companies declining 23% and 17%, respectively, within hours of Schwab's announcement, and all eyes turned to whether the companies would match Schwab's move to zero-commission trading.

TD Ameritrade Fires Back At Schwab By Cutting Commissions To Zero (Jeff Benjamin, Investment News) - Within hours of this week's announcement that Charles Schwab was eliminating trading commissions, TD Ameritrade announced that it would not back down and it, too, was cutting trading commissions on US stocks, ETFs, and options contracts (plus the same $0.65/contract execution fee) down to zero effective the very next day (October 3rd), stating that it had been "taking market share with a premium price point [at $6.95/trade compared to Schwab's $4.95/trade]... and with a $0 price point and a level playing field, [is] even more confident in [TDA's] competitive position". Similar to Schwab, the TD Ameritrade price cut will apply for both its retail platform and the RIAs using TDA Institutional. However, the impact is projected to be more significant for TD Ameritrade, which generated more than double the trading commission revenue of Schwab ($220M to $240M per quarter vs Schwab's $90M to $100M) and relied on it to a larger extent (approximately 16% of TDA revenues, compared to only 4% of Schwab's), and raised questions of whether TDA may have to engage in some aggressive cost cutting to staff going forward to handle the impact... or alternatively, whether the size of the trading commission cuts to the RIA custodial platform may sooner, rather than later, compel it to shift to a basis-point fee for custody services to generate sufficient revenue going forward.

E-Trade Joins Rivals In A Race To Zero Commissions (Sean Allocca, Financial Planning) - Continuing the trend of this week's 'race-to-zero' for online stock trading commissions, on Wednesday, E-Trade announced that it, too, was eliminating commissions on all US-listed stock, ETF, and options trades, which will result in an estimated $75M/quarter revenue drop for the firm. With E-Trade adding itself to the mix, the collapse of trading commissions and the hundreds of millions of dollars they generated resulted in a Fitch Ratings report putting the entire retail brokerage industry on a credit negative watch, and raising questions of whether the moves may force some online brokerage firms to either be sold for consolidation, or at least lead to potentially significant staff cuts to make up for lost revenue. Alternatively, though, some commentators noted that the decline in trading commission revenue may simply accelerate the push of brokerage firms to shift towards offering managed accounts that charge an ongoing basis-point management fee (or alternatively, a basis-point custody fee for the advisors on their platform), and/or to push more deeply into providing their own financial advisor services to their retail investors (as companies like Schwab, Fidelity, and Vanguard have already increasingly done in recent years).

All Eyes Turn To Fidelity To See If It Cracks In All-Out Price War Over Trading Commissions, But For Now Abby Johnson Is Stubbornly Refusing To Buckle -- Bolstered by RIA Reassurances (Brooke Southall, RIABiz) - With the widespread collapse of trading commissions across major RIA platforms Schwab and TD Ameritrade, it was viewed as only a matter of hours (or days) before Fidelity, too, would cut its trading commissions to zero (especially since Fidelity led the price cutting to $4.95 back in February of 2017, which Schwab matched within 24 hours of Fidelity's announcement). Yet as the tumultuous week comes to a close, the word from Fidelity thus far is that it's standing firm on its $4.95 trading costs, with Fidelity Institutional RIA chief David Canter suggesting that its RIAs are more concerned about the risk of cutting staff and a resulting decline in service than seeing the last few dollars of trading costs go away (or are otherwise assuming that the RIA custodians will just end out making up the lost revenue elsewhere, and that the long-term cost impact to clients may still be the same anyway). In addition, Fidelity notably announced back in August that it would begin to sweep investor cash into more favorable money market funds (at least compared to RIA competitors that sweep to their affiliated banks, though Fidelity's change initially didn't apply to advisors either), which suggests that Fidelity may be strategically shifting to generate less revenue from cash and keep its trading commissions in a gamble that advisory firms will ultimately care more about the former than the latter. Not to mention that for buy-and-hold oriented RIAs anyway, Fidelity's trading commissions don't necessarily represent a significant or problematic cost to its RIAs and their clients, further suggesting that Fidelity may be honing its strategic focus on a certain subset of RIAs.

Learn To Love Delegating (Scott Hanson, Investment News) - Delegation is not a natural skill set for many advisors, but the reality is that in the early years it's not necessary, either. As in practice, when advisors don't have very many clients yet, they tend to have plenty of time to do all the necessary tasks of the business themselves. As the firm grows and clients accumulate, though, eventually the advisor becomes the bottleneck if they don't begin to delegate (an ever-increasing amount of) key, time-consuming tasks. As Hanson notes, this is especially challenging when it comes to the most important and meaningful work being done for clients, where it may be harder to trust another team member and the consequences for making a mistake can be more severe. Yet in practice, the only way to effectively delegate in the long run is to fully trust the team member who will be responsible for the task. And fully delegating ultimately gives team members the real opportunities they may be seeking to prove themselves and rise up in their own careers, in addition to freeing up the advisor/founder to do the things they prefer to do and/or are truly the best at doing in the firm. Not to mention ultimately giving clients themselves a wider range of people in the firm that can develop relevant expertise and provide more services.

How To Pick The Best Successor For Your Firm (Kelli Cruz, Financial Planning) - As the average age of financial advisors continues to rise and approaches age 60, more and more founders are looking to hire associate advisors and begin the process of implementing a succession plan. However, in practice, there are two major caveats. The first is that actually shifting ownership - and client relationships themselves - to create transferrable value requires institutionalizing the firm's core business processes and procedures, so they can be replicated and sustained after the founder is gone. And the second is that firms have to actually find their future successor associate advisor who can someday take over. Cruz suggests that the first key step in this process is to consider how the firm must be (re-)structured to make it a compelling opportunity to join and grow within in the first place (i.e., creating a career track). From there, it also helps for employees to become more targeted and specialized in their job functions, as more concretely defined role specialization makes it easier to find someone with a similar skill set to replace those duties if an employee leaves (as making employees more replaceable is also a key aspect of transferable value). In fact, more sizable firms may deliberately develop multiple successors in different aspects of the business (e.g., one successor to take over managing the firm's investments, another for managing the firm's advisors, and a third for managing the firm's marketing and growth in the future). In terms of actually finding the right people to fill those roles, Cruz urges to focus first on Character, Culture Fit, Shared Vision, and Leadership (more so than just which prospective advisor may bring their own revenue or be technically competent), and to recognize that cultivating a future successor owner will take years, at the least to develop them, and potentially just to determine if they're really the right fit in the first place (another reason to have more than one prospective successor in parallel). Other key factors to watch for in identifying future leaders include spotting those who can establish focus, foster teamwork, empower others, manage change, develop others, manage performance, have good attention to communication, and build collaborative relationships.

Why Associate Advisors Are Being Paid 4% Less (Paola Peralta, Financial Planning) - The growth of "employee advisors" that take entry-level paraplanner and associate planner roles in advisory firms has grown significantly in recent years, thanks both to the continued growth of the AUM model (that needs a flow of additional advisors to serve those clients), and the high average age of financial advisors that necessitates firms in the aggregate hiring a significant number of new advisors just to replace those who are leaving. The problem, however, is that there appears to be a shortage of young talent coming into the industry, which in recent years has led to increases in associate advisor compensation well above the general level of inflation. But in the latest TD Ameritrade FA Insight benchmarking study, the trend suddenly appears to be reversing, with lead advisors getting a 6.1% increase in compensation but associate advisor compensation dropping by 4.3% over the past year. The reason, though, is not that the talent shortage is resolving itself, but instead that firms are struggling so much to find young talent that they're eschewing hiring experienced (and more expensive) talent and instead are increasingly hiring entirely new and inexperienced candidates into associate advisor positions (and offering less in compensation commensurate to the reduced experience requirements), with the overall average experience level of associate advisors dropping from 8 years to 6 years since 2017. In turn, advisory firms are then expanding profit margins by leveraging that talent, increasing the amount of face-time that associate advisors have servicing client needs, and freeing up lead advisors and founders in the process to do more business development to continue to grow the firm.

Questions You Can And Cannot Ask (Caleb Brown, New Planner Recruiting) - One of the biggest challenges for advisory firms hiring associate advisors is just figuring out who to hire in the first place, and what questions to ask in the interview process to identify the right/best candidates (and sometimes to suss out whether the candidate may have overstated their qualifications on their resume!). Brown suggests that the best starting point is to ask questions that go directly to the new advisor's practical experience, such as "How many financial plans have you done from start to finish?", "How many financial plan updates have you done?", "Do you present the plan recommendations to the client?", and "How many clients do you work with where no other planner is involved?" Notably, it's also important to evaluate technical and software skills, which can be assessed with questions like "When you aren't sure how to enter something into the financial planning software, what do you do?" and "When a client asks you a technical question you don't know the answer to, how do you handle it?" If business development skills are relevant, firms can also ask "How many prospect meetings have you been involved in? What contribute did you make?" and "How many client relationships has someone else initiated, where you got the client to sign up and where the client sees you as their planner?" On the other hand, it's important to note that in the hiring process, there are also a number of legal restrictions on what firms are allowed to ask (even in casual conversation at the beginning or end of the interview), which generally fall under the categories of (not) asking about Nationality, Religion, Age, Marital and Family Status, Gender, and Health and Physical Abilities. However, Brown does suggest a number of relevant questions that can still be asked.  For example, instead of "What are your religious beliefs?", you can ask "Are you able to work our required schedule"; instead of "How much longer do you plan to work before retiring?", you can ask "What are your long-term career goals?"; and instead of "Do you have children, or plan to have children?", you can use "Are you available to travel or work overtime occasionally?"

The Practice Of Gratitude (Joni Youngwirth, Investment News) - For many advisors who are service-minded to clients, it's especially hard to accept a compliment, where clients share a nice comment about the advisor's services or a client event, and the advisor responses with "It was really nothing", or "You have the team to thank for that - not me", or "If we could do it over, we would have made an even bigger impact". In many cases, the driver is simply that our parents often teach us to be modest and humble, but as Youngwirth points out, it can also be a sign of not holding yourself in high regard or, more generally, a difficulty in believing good things about ourselves. Which is problematic not just personally, but also for the person doing the complimenting, as from the other person's perspective, thanking/praising someone is like giving a gift... and declining or deflecting the compliment can come across as being dismissive of the gift they just offered. So what should you do? Citing research from Mark Goulston on "What To Do When Praise Makes You Uncomfortable", Youngwirth suggests that we don't have to eschew modesty and humility, but that it's still crucial to acknowledge recognition as a gift back to the person giving it. So the next time you're complimented, "practice gratitude" by simply looking into the giver's eyes, and saying "Thank you" (which is not only kind to the person offering the thanks, but good for your own self esteem, too!).

Should You Broadcast Your Charitable Side? (Deborah Small, Jonathan Berman, Emma Levine, and Alixandra Barasch; Behavioral Scientist) - In the social media world in particular, it's increasingly common to see pictures that family, friends, or colleagues post that highlight their charitable deeds (e.g., that posed photo with the children at the local orphanage where they volunteer, with the #blessed hashtag). In the behavioral science world, this proactive effort to go out of one's way to inform others of their good deeds is known as "virtue signaling", and has become especially common in the realm of social media. But does such virtue signaling actually raise others' views of your virtue? The answer appears to be that "it depends"... as when virtue signaling reveals something new and positive to others it tends to produce a positive lift of the image that others have of you, but if the virtue signaling is repeated, it is increasingly perceived as being done for more self-interested motives (i.e., self-aggrandizement that makes others perceive you as less virtuous). Which, ironically, means virtue signaling may be most effective for those with less virtuous reputations, where it really would be surprising news to others to learn of their virtuous activities. For instance, one study actually found that virtue signaling from an investment banker was viewed more positively than virtue signaling from a social worker, as the latter was already perceived to be in a more virtuous profession in the first place! More generally, the implications of the recent research on virtue signaling suggest that if you are going to advertise your good deeds - and not do so too repetitively - it's best to only advertise the (infrequent) big ones... and ideally, keep it focused on promoting the cause itself, rather than just your own contributions to it. Though notably, virtue signaling also does increase the likelihood that others will engage in similar activity as well... which means from the broader societal perspective, it is still positive to share your own good deeds as a way to encourage others to do the same (even if you adversely impact your own image in the process!).

How To Accept A Compliment -- Even If It's From Yourself (Micaela Marini Higgs, The New York Times) - Accepting compliments is difficult for many, especially when those compliments are from ourselves to celebrate our own big wins (and not wanting to come off like a jerk or seem arrogant in the process). Notably, though, neuroscientists have found that getting credit for your work does give us good feelings and helps us accomplish more (thus why companies use praise to try to boost productivity, and we compliment our children to encourage their good behavior as well, sometimes even helping them to discover new talents they didn't realize they had), which means giving (and receiving) praise is important. In fact, Dr. Teresa Amabile, author of "The Progress Principle", finds that it doesn't even have to be a big breakthrough for some appreciation of the success to help people feel terrific. The key for most to accepting such praise (graciously) is to do it simply, by just saying "Thank you, I'm glad you said that" or "I appreciate your noticing, thank you for letting me know" (and without undermining yourself and your accomplishment in the process!). But given that someone isn't always around to give praise, Amabile suggests that it's similarly important (and rewarding/reinforcing) to celebrate our own small wins, with one recent study finding that when we celebrate our successes, we're more likely to be able to follow through on and stick with a key behavior change. So if you're not already being thankful - for praise from others, or even giving it to yourself - consider taking a few minutes at the end of the day to write down a reflection (i.e., journal) about your successes for the day that were accomplished... and consider accumulating them into a 'brag file' for yourself, which can help with long-term self-confidence as well (especially since our brains otherwise have a tendency to focus on the negative and the challenges and discount the successes we've already had!).

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.