Weekend Reading for Financial Planners (Dec 14-15)

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.

Tech Survey: Advisors' Favorite Tech Tools (Sean Allocca, Financial Planning) - The latest Annual Financial Advisor Tech survey is out from Financial Planning magazine, which surveys 100s of advisors to identify the most popular technology tools in various categories. When it comes to CRM, the dominant player is Redtail (34%), followed by Salesforce (16%), Wealthbox (8%), Junxure (5% between Cloud and Desktop), and a slew of other small players, though notably 9% still report "Microsoft Outlook" as their CRM (effectively just using their email Inbox for CRM tracking!). When it comes to portfolio management, the most popular tools include Orion (14%), Envestnet's broker-dealer platform (14%), Morningstar Office (11%), Envestnet's Tamarac (9%), and Albridge (9%), with the waning Schwab-now-Envestnet Portfolio clocking in at only 6% and Black Diamond at an estimated 5%. In the financial planning software category, MoneyGuidePro remains the dominant player (at a whopping and almost-questionable-survey-sampling market share of 65%), followed by eMoney at 13%, RightCapital at 5%, and others at 2% or less. When it comes to risk assessment, 27% use Riskalyze, 20% use Morningstar, and 7% use FinaMetrica, along with 9% who use B-D-supplied tools, and 27% who don't use any formal tools at all. Of particular note given recent industry trends, though, is that when it comes to "robo" solutions, only 4% use Schwab's Institutional Intelligent Portfolios, 2% use Betterment for Advisors, 1% use each of Fidelity Go and FutureAdvisor, and overall 89% don't use a "robo" solution at all... which is actually up from 85% not using robo solutions in 2018, suggesting that not only is robo-advisor software still not popular with advisors, but the advisors who are using it are not finding success with it and are actively abandoning the approach now! Instead, going forward, advisors are predicting that "Behavioral Finance" software will be the tech most likely to change wealth management in the future, surpassing prior popular categories like "digital platforms" and "mobile apps" and "robo-advisors" themselves.

House & Senate Bills Would Ban Mandatory Arbitration In Broker And Adviser Client Contracts (Mark Schoeff Jr., Investment News) - Last week, the House introduced new legislation dubbed the "Investor Choice Act" that would end forced arbitration provisions in broker-dealer and RIA contracts, in addition to banning firms from trying to prohibit class-action lawsuits against them via their contracts. The legislation accompanies similar legislation introduced earlier this year in the Senate - the Forced Arbitration Injustice Repeal (FAIR) Act - which would similarly limit the use of upfront mandatory arbitration clauses in an even wider range of scenarios (than just the financial services industry), which itself has also already passed the House. The caveat, however, is that it's not clear whether the Senate will take up the FAIR Act to a final vote, or whether the Senate Banking Committee will take up the Investor Choice Act at all. At the same time, Congress' Dodd-Frank legislation also granted the SEC authority to ban mandatory arbitration in broker-dealer and RIA contracts (though the SEC has not yet acted on that authority either). The large-firm financial services industry (i.e., broker-dealers) continue to maintain that allowing lawsuits will just drive up costs to consumers and that arbitration is preferable because of the expedited time and cost to proceed. On the other hand, it's notable that the proposed legislation would still permit large financial services firms to pursue mandatory arbitration where it is agreeable by both parties to do so; the new rules would merely ban firms from unequivocally requiring mandatory arbitration in all scenarios (as they typically do today).

Wells Fargo Advisors Signs Up More Than 1,000 Advisers For New Succession Plan (Bruce Kelly, Investment News) - Earlier this year, Wells Fargo launched a new internal succession plan offering for its senior and next-generation brokers, dubbed the "Summit Program", that both offers a bonus to experienced brokers who stay until retirement and then gives financial help to younger brokers acquiring the practice of that retiring broker. The core of the program is a payout of up to 225% of the broker's trailing 12-month revenue upon retirement (but subject to a 5-year vesting period), while next-generation brokers receive financial support for the transition. The move is seen as both an attempt to incentivize experienced brokers to stay at the firm and retire there (rather than going independent and trying to subsequently sell as an independent) by offering a competitive-to-independent-RIA payout (of 2.25X revenue) directly from the brokerage firm, while simultaneously offering terms to next-generation brokers that both facilitate the transaction but also more directly tie that broker to the firm (given that Wells Fargo has seen a net decrease of more than 1,300 brokers since its series of public scandals over the past 3 years). Which is notable both as a retention strategy for existing advisors, and potentially a way that Wells Fargo is trying to get ahead of the potential for next-generation brokers to break away (with their newly acquired practices) in the coming decade?

Behavior Gap Between Fund Performance And Investor Returns Has Narrowed (Michael Fischer, ThinkAdvisor) - According to Morningstar's latest 2019 "Mind The Gap" study, which compares the time-weighted performance of mutual funds against its dollar-weighted performance (which reflects the timing of investors adding dollars to and withdrawing dollars from the funds), found that the investor return gap in the U.S. has narrowed to just 45 basis points per year since 2017 (based on rolling 10-year return periods) as the 2008-2009 financial crisis volatility begins to roll off the trailing data. Notably, though, the return gap does vary significantly by fund category, whereas the behavior gap in alternative funds was a dramatic 144 basis points, investors in asset allocation funds actually showed a positive behavior gap (i.e., investors moving dollars in and out of the funds outperformed the funds themselves) of 22 basis points. And the behavior gap also showed up as positive in the U.K. (where investors beat their funds by an average of 27 basis points) and Australia (where the behavior 'gap' was a positive 65 basis points of outperformance!). Of course, to some extent, the increasingly positive results of the behavior gap research is simply a reflection of a 10-year bull market where on average investors continue to save and add assets (which have continued to rally as the bull market continues), and not necessarily a sign of proactive market-timing trades in mutual funds performing well. Nonetheless, the results do highlight that the growing availability of broad-based funds does appear to be supporting more positive investor behavior than narrower and more speculative investment alternatives (including, literally, the alternatives category that showed the largest behavior gap!).

SEC Gives 4 Firms Final Approval For Non-Transparent ETFs (Bernice Napach, ThinkAdvisor) - The SEC has given official approval for asset managers T. Rowe Price, Fidelity, Natixis, and Blue Tractor to launch "non-transparent" ETFs that do not disclose their holdings on a daily basis, a key requirement for them to offer "actively-managed" ETFs (where the non-transparency limits others from mimicking the managers' trades or trying to front-run their trades if a series of big trades are observed). The SEC's approval for these 4 asset managers comes on the heels of a separate approval for Precidian's ActiveShares' own non-transparent ETF structure. Under the approved structure, the funds will disclose their holdings on a quarterly basis, with a lag, and publish a "proxy" basket of holdings in the meantime so investors (and arbitragers) can at least approximate the ETF's value. Given the prior/existing limitations on non-transparent ETFs, which have made active managers wary to launch them, only about 2% of ETF assets are currently managed actively within the ETF, though the growing wave of approvals has led almost half of ETF issues to state that they are currently developing or planning to develop nontransparent active ETF products. Notably, though, some doubt remains about whether actively-managed ETFs will really gain traction, as mutual fund managers have aggressively pushed for non-transparent ETF approval under the belief that if their strategies were available in ETF form their funds would stop losing market share to ETFs... yet in the end, it's not clear whether the trouble for mutual fund managers has really been the mutual-fund-vs-ETF wrapper, or simply whether advisors and investors are increasingly showing a preference for either passive strategies or to actively manage a basket of ETFs themselves instead.

Advisors Bypass Zero Expense Ratios For Brand-Name ETFs (Jeff Benjamin, Investment News) - With both investors and advisors increasingly showing a preference for low-cost investments, and Morningstar itself updating its fund ratings approach to give an even heavier weighting to (low) cost, mutual fund and especially ETF ratios have continued to grind lower and lower, to the point that over the past year several ETFs have actually begun to offer zero or even negative expense ratios in an attempt to compete and attract (cost-sensitive) market share. However, as the end of the year approaches, those new funds have seen combined net inflows of just $67.3M through November, as compared to three more-established ETFs from brand-name providers charging ('just') 4 basis points, that have generated combined net inflows of $3.9 billion over the same time period. Even the Salt Low truBeta Market ETF, which pays investors 5 basis points to invest in the fund, has seen only $6.1M of inflows since March! The struggle of zero- or negative-cost startups to attract ETF market share is now raising the question of whether there really is a floor of "how low expenses can go" before they're no longer the driving factor in ETF selection... or at the least, that there comes a point where the expense ratio is low enough that the established brand trust and credibility outweighs the potential for a new-slightly-less-expensive ETF from a new asset manager that lacks a track record and recognized brand. On the other hand, even the providers of such ETFs have acknowledged that the zero/negative expense ratios are temporary and a "gimmick"... which means it's also simply possible that advisors and investors are looking past and unpersuaded by teaser rates and are waiting to see what the true expense ratios will end up being.

Survey Reveals Clients Love Good Ol' Communication (Asia Martin, Wealth Management) - In a recent study entitled "How Can Advisors Better Communicate With Clients?", investment research platform YCharts finds that 64% of clients state that they only hear from their advisor "infrequently" (and 28% stated "very infrequently"), including 46% of households with more than $500,000 of assets managed by the advisor. And of those complaining about infrequent communication, 66% said that having more engagement with their advisor would give them more confidence in their financial plan (suggesting that they do in fact want to be communicated with more frequently), with the rate of desiring-more-communication even higher amongst those clients who are under age 50. On the other hand, what "ideal" communication looks like can encompass a wide range of channels, with the communication channel of choice for the advisor sharing financial planning tips actually being email first (71% for older clients, and still 62% for younger clients), followed by phone calls (47% for older clients and 41% for younger), then face-to-face meetings (39% for both groups), and then other social media channels (with text message, Facebook, LinkedIn, and Twitter all scoring well with clients under 50 in particular). Clients also showed an increasing preference for more personalized communication (75% overall, and 83% of those under age 50). Overall, the research found that 85% of clients state that the advisor's frequency and style of communication are relevant when deciding to retain or fire the advisor (rising to 87% for more affluent clients), and that the advisor's communication style is even more relevant in deciding whether to refer (88% take the advisor's communication skills under consideration).

Advisors Need To Regularly Reassess Their Fees (Jacqueline Sergeant, Financial Advisor) - As advisory firms evolve the services to their clients, so too should the advisor's pricing structure, according to TD Ameritrade's Vanessa Oligino (their Director of Business Performance Solutions). In some cases, the problem is simply that the advisory firm expanded the services it offers to clients (e.g., from five core services to 10), but hasn't updated (i.e., increased!) their pricing to recognize the deeper offering. In other cases, the problem is that the client doesn't necessarily fit the advisory firm's "core" pricing model, from younger clients who don't fit an AUM fee structure but might adopt subscription-based pricing, to a client going through a divorce that needs substantial additional assistance as the advisor works with the attorney (where perhaps an hourly or flat project fee might be appropriate for the beyond-core service and support). Of course, the fundamental challenge to changing and updating pricing is that clients may not accept the new pricing and that the advisor could lose the client, though Oligino's research finds that in practice clients rarely attrition in response to a price/fee change. Notably, pricing adjustments can be especially important for "small" clients, which for many firms don't even generate enough revenue to cover their share of the business overhead (where a minimum asset size or at least a minimum fee can be helpful to right-size the pricing). When communicating a price increase, be certain to still be proactive in the communication, announcing the fee increase upfront, and explaining that it is fair because of the (increased) value the firm is delivering.

The Angst Of Selling An Advisory Firm (Melanie Waddell, ThinkAdvisor) - According to a recent study commissioned by RIA aggregator HighTower Advisors entitled "Beyond the Paycheck: The Emotional Aspects of Selling", a whopping 70% of RIAs feel anxious or worried about partnering with an acquirer, and 64% are concerned about losing operational control (even while also recognizing that the benefit of tucking into a larger firm are advantages of size and scale). In addition, 45% expressed anxiousness about losing or diluting their brand identity, 36% were worried that clients would react negatively, and 32% expressed concern about having to change aspects of their investment approach. As a result, good matches are driven primarily by whether the buyer can provide it is a firm with "human beings [the seller] can trust to shepherd them into the future". In other words, dealmaking is ultimately driven not by valuations and the legal paperwork, but getting a read on the prospective buyer and the culture of the firm. Ultimately, though, the research found that the need for a founder to exit is still the primary driver of transactions, with 50% citing a need to recapitalize the firm (e.g., to buy out a founder), 41% citing the ability to streamline succession planning, with only 27% citing access to capital for growth, 27% citing better technology, and only 23% noting the benefit of outsourcing back-office operations.

The Top Job Billionaires And Multimillionaires Held Before They Got Rich: Sales (Catey Hill, Marketwatch) - According to research conducted by sociologist and historian Rainer Zitelmann in his recent book "The Wealth Elite" on the psychology of the ultra-affluent, 2-in-3 specifically cited their talents as salespeople as a "significant" factor in their financial success (with half of them stating that they owed 70% or more of their success to their sales talents). In turn, most cited that their sales skills were developed in early-career sales roles in a wide range of businesses, from selling costume jewelry to cosmetics to used car radios and wheel rims. In fact, a separate study from thousands of CEOs via LinkedIn also recently found that "Sales Manager" was one of the five most common first jobs for CEOs (and the top job was "consultant" which also typically requires sales skills to engage). After all, whether selling the company's products or services to clients, or simply their own initiatives to the company, or even just "themselves" in their own career progression to negotiate salary increases and promotions, sales skills (or more simply, the ability to persuade others) is arguably a foundation for almost everything. Accordingly, for those who don't have sales experience, consider the benefits of being in a commission-based role - at least for a period of time -to get that experience, or consider finding a "side gig" to practice the skills (even as a barista, bartender, or in a retail store), or seek out courses or books on the topic as well (as research finds that sales skills really are able to be taught and learned, and can improve with practice!).

You Can Overcome A Long Gap In Your Resume (Sue Shellenbarger, The Wall Street Journal) - The traditional view is that having a "resume gap" may impair the ability to get a job in the future, as employers wonder and worry whether the gap is a sign of job problems. However, as resume gaps become increasingly more common for a wide range of reasons (from starting a family to simply discovering that the original career choice wasn't the right path), and the overall labor market tightens, they are also becoming more accepted, with a recent study from ResumeGo finding that gaps as long as two years don't appear to be problematic anymore (as contrasted with just a decade ago when a 6-month resume gap could be 'deadly'). In fact, even resume gaps of 3 years still generated responses from employers (albeit at about half the rate of a 2-year gap). And some research finds that working mothers, who take as many as 5-7 years out of work to raise family, are increasingly finding it feasible to return to work after such career breaks, with more and more companies willing to work with them. Accordingly, the acceptability of resume gaps is leading to a shift in how job seekers should handle them, with the advice now not to try to avoid the conversation or 'apologize', but instead simply to assert with confidence the reason for being out of the workforce, and then to shift the focus to future contributions you plan to make... recognizing that over what may now be a 40- to 50-year working career, being out for a few years is really just a drop in the bucket to develop strong long-term career skills!

Personal Brand As Moat, Personal Brand As Soft Landing (Cedric Chin, Commonplace) - Years ago, Warren Buffett set forth the notion of an "economic moat" to describe businesses that have a sustainable competitive advantage (e.g., by having a strong brand that is hard for competitors to replicate and leads to sustained pricing power in the marketplace). Yet as Chin notes, having a good brand that supports pricing power isn't unique to companies in the commercial marketplace... it can apply to your "personal brand" that gives you career pricing power as well! The essence of developing a personal brand is simply around creating a set of expectations in the marketplace around your skills, your behavior, your values, and your world view, where the key is not necessarily even excellence but simply consistency (e.g., McDonald's burgers aren't the best burgers, but everyone knows exactly what they're going to get at any McDonald's they walk in to across the country or around the world!). Of course, having a good "reputation" has always been relevant in the career world, but in the modern era of the internet and social media, anyone and everyone can become a publisher and a broadcaster, creating the ability to turn a good reputation into a great personal brand, and effectively building a "career moat" with your personal brand to ensure that you can remain employed and command strong 'pricing' (i.e., salary and job opportunities) in the marketplace. And remember that when careers can last 4+ decades, even if you didn't start building your personal brand already and are in your 30s, 40s, or even 50s, there's still time to get established and gain traction to have a better chance at making the leap to whatever may come next!

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.