Weekend Reading for Financial Planners (Oct 13-14)

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 October 13th/14th:

Advice For The NexGen Advisor: Be Yourself - This blog by practice management consultant Angie Herbers on Advisor One provides a fascinating personal story from Herbers' own history. At a young age, she started her own business, and under the guidance of her personal mentors, molded herself into what she (and they) thought she needed to be in order to be success, being passive and reserved, conservative and compliant. And notably, the advice worked, and her business was successful... except she found that she was miserable, resented what she had, and struggled with living with "two worlds and two personalities" - professional and personal. As a result, Herbers decided to change her approach, focusing instead on being authentic to herself and her personality, regardless of what other people thought. The end result: her business grew 400% in one year. While some were clearly offended by some aspects of her personality, others appreciated it - allowing for the growth of strategic partners, clients, and friends who brought more than ever to the table for someone they felt connected with. At the same time, Herbers notes that it's important to "protect your brand" and understand the aspects of who you are that can hurt your business, and control those (but ONLY those). While this article was written with younger advisors in mind, I suspect the conclusions are relevant for all.

Financial Planning for Everyone, Regardless of Income - In his monthly column for Financial Planning magazine, industry commentator Bob Veres takes a look at a new way that the services of CFP certificant financial planners are reaching the middle market, in a world where generally planning seems to be bifurcating into AUM advisors for wealthier clients and commission-based advisors for less wealthy people (with a small base of fee-only advisors, especially under the Garrett Planning Network, lending a hand in the less wealthy space but with too few numbers to really reach the masses). Veres' alternative example is a planner named Richard Gable, who is a salaried financial planner with the Houston Police Officer's Pension System, with a job of talking to 8,000 current and former Houston police officers about their benefits, and any other financial issues that come up in their lives. Gable often meets with several people every day, and in between is on the phone and answering emails to address even more questions - where the most common questions are not about portfolios, but credit card balances, and most planning is "modular" in one bite-size chunk at a time. What about employer liability? Gable says it was managed, with a combination of E&O coverage from the employer, and a ban from selling products or referring to relatives who sell products. Veres suggests that this may be a viable alternative in the future, especially for those who aren't really interested in the burdens and challenges of building a business from scratch.

The Great Divide - In its cover article for the October issue, Financial Advisor magazine takes a fresh look at the ongoing "expectation gap" between the older generation owning financial planning businesses and the younger generation being hired into them. As the article notes, in reality there has always been a gap between younger and older generations, dating back for a millenia or two; nonetheless, the current gap appears to be especially problematic, and may be hindering the profession's growth overall, as only 20% of advisors are under age 40 and a mere 5% are under age 30. The article notes that the expectations gap is particularly problematic about the time it takes to build a career and business, as experienced advisors suggest that young people want too much too fast, and younger advisors express job dissatisfaction over the attitude "because I suffered for many years, you must suffer too" from their superiors. In fact, the article's interview with Caleb Brown of New Planner Recruiting notes that Brown is even receiving inquiries from employees of well-known planning firms because those firms simply are not providing enough growth opportunities to their employees. The general conclusion of the article is that the business models probably are changing, and that firm principals need to work harder to get comfortable with change and giving growth opportunities to their younger employees. That doesn't mean handing over the keys to the kingdom on day 1, but instead looking to build over time on the pragmatic efficiency focus that today's younger advisors often bring to the table.

Advisors Feel Pinch Of Compensation Squeeze - This article from Research Magazine provides some interesting discussion on compensation trends. It notes that broker-dealers, particularly wirehouses, are feeling the squeeze, and are passing it along to their brokers - often in the form of a long list of miscellaneous costs, like state registration fees, mobile fees, etc. - since reduced payout rates are becoming intolerable. Notably, the compression in broker compensation, especially at the wirehouses, has reached the point now where some studies suggest there is almost no gap between the top wirehouse brokers and the top RIAs - raising the question about what the wirehouse still brings to the table in today's world. Dan Inveen from FA Insight notes that in response to some of these pressures, the median AUM fee is actually rising right now, especially for amounts above $1 million (which Inveen suggests is because clients in the $2M-$5M range are demanding high-touch services that used to go to those with only $10M+ in net worth). Nonetheless, median income for advisory firm owners has finally reached new peaks (surpassing 2008 levels), and the outlook appears brightest for the RIA channel.

Can Advisors Have ‘Zero’ Conflicts of Interest? The Legal and Regulatory Record - This article by Rex Staples, Director of Investigations for the CFP Board, weighs in on the recent spat between Knut Rostad of the Institute for the Fiduciary Standard and Eliot Weissbluth of HighTower Advisors (which was covered in Weekend Reading two weeks ago). Staples starts by looking at the legislative history, pointing out that technically the Investment Advisers Act of 1940 did not create a fiduciary standard - that standard was applied later by the Supreme Court in the Capital Gains Research decision in 1963 and extended in subsequent cases. In the context of the CFP Board, Staples notes that CFP certificants have a requirement to disclose all material conflicts of interest under the Practice Standards - noting that in reality it's impossible to literally have "zero" conflicts of interest, but implying that it is possible to have eliminated all material conflicts (although materiality is still something to be evaluated on a case-by-case basis). Ultimately, Staples suggests the real challenge is to determine "how much disclosure is enough" and points out that the lines can and do shift over time between what is/isn't material as a conflict of interest and how to properly disclose.

The 10 Words And Expressions That Should Be Expunged From The RIA Business - This article from RIABiz provides an interesting list of words that, in the opinion of the author Brooke Southall, are now so "dull, dehumanizing, opaque, and even intentionally obfuscating" that they should just be stricken from our [marketing] lexicon. The 10 words are Solution, Client-centric, Excited, Platform, Boutique, Good cultural fit, Sweet spot, Tools, Synergistic opportunity, and All good. While virtually no firm likely uses all of these (so some may not resonate with you), many firms use at least a few of these. And while many of them generally are positive words (e.g., "client-centric"), Southall notes that they are becoming so widely (over-)used as to become meaningless. For instance, Southall notes that "if your big pitch for differentiation is that you serve clients, I'd say you need to think things through" and points out that in the tennis world, the "sweet spot" really is a tiny sliver of the racket - so unless you, too, are using the expression to connote just a tiny sliver of the marketing, it's "disingenuous obfuscation and useless for communicating a point." Similarly, Southall suggests that in today's world, "boutique" doesn't add any knowledge to the listener, except perhaps to imply they charge exorbitant prices, and that the term should remain used to describe a place where overpriced Italian handbags are sold. I'm sure not all readers will agree with all of Southall's points, but overall it is a good point that many of the words we use today are still loaded with other meanings, or are no longer really useful and relevant differentiators in the marketplace.

The 10 Things [Wirehouses] Could Do To Stem The RIA Tide - This article from RIABiz provides a good list of what wirehouses could do to get themselves back on track, noting that there is still much debate about whether the wirehouses can/will make changes when their backs are to the wall, or if in reality they're simply incapable of turning the ship. Nonetheless, the list itself is interesting, including: Issue a formal apology for what happened in 2008/2009; ban commissions; stop paying for recruiting (think rearranging deck chairs on the Titanic); create an RIA custodial model as a waypoint along with a branded independent broker-dealer offering; change the payout scheme (40% payouts in a world where IBDs have 90% payouts is just not sustainable); give advisors a way to build an equity equivalent so they have something to sell at retirement; play harder to the strengths (including brand, infrastructure, resources, and [good] products); get smaller (stripping infrastructure can help the payout problem too); drive towards better client outcomes; and encourage and brand superstar teams (as a lot of internal wirehouse teams could be genuinely competitive with large independent RIAs).

SEO Strategy For Financial Advisors: 5 Must-Haves - This article from Financial Social Media provides a nice list of tips to improve your SEO ("Search Engine Optimization"); in other words, how to make it easier for prospective clients to find you and your website. Start by setting a reasonable goal, like increasing website traffic by 10% per month, blog readership by 10%, or generating a 1% prospect conversion rate from your website traffic (e.g., generate 4 email inquiries about your services if you get 500 visitors in a month). As for the tips themselves, they are: 1) Start a blog; 2) Consider optimizing your site for local search (so people trying to find a local financial advisor can find you online); 3) Publish your content on social media (which helps to drive traffic back to a blog/website); 4) Be specific with your keywords (e.g., if you're looking to work with executives, have articles about 'Incentive Stock Options' and 'Non-Qualified Deferred Compensation'); and 5) Set up Google Analytics (which has fantastic and free metrics). Overall, this is a great checklist to review and consider for anyone investing a bit more time in their website/online presence.

The Unemployment Surprise - In his weekly newsletter, John Mauldin discusses last week's "unemployment surprise" where the unemployment rate toppled from 8.3% to 7.8%, which was met with a great deal of skepticism and some outright conspiracy theory accusations. As Mauldin ultimately shows, though, the number was not actually all that bullish, and in fact the underlying numbers support the conclusion that the economy is slowing; it's not a matter of a conspiracy theory, but simply that headline numbers don't tell the whole story. First of all, Mauldin notes that it's important to look at the trend, more than a single data point that can be volatile, and the trend is still very slugging growth. When digging under the hood, Mauldin further finds that most gains are in low-paying jobs and part-time work; the broader U-6 unemployment rate (which includes marginally attached workers employed aprt-time for economic reasons) remained steady at 14.7% from a month ago. Overall, we've still only regained 48% of the total jobs lost from December 2007 to the unemployment low in February of 2010, which will take another 40 months to recover at the current rate (and that's if we don't have another recession in the next 3-4 years!), and the labor force participation rate continues to decline, falling now down to levels not seen since 1980. 

Trader Turned Neuroscientist Explores Risky Highs - This article highlights some recent resaerch by neuroscientist (and former investment trader) John Coates, who finds that when people get on a winning streak (e.g., with successive investment trades) there is a hormonal mechanism that functions like a powerful narcotic high. The result is that you become "euphoric, delusional, you have less need for sleep, you have racing thoughts, an expanded appetite for risk, and less stringer requirements in the risk and reward trade-off." Basically, Coates says, "you become a rogue trader." And in fact, Coates finds that virtually every multi-billion-dollar "rogue trader" blowup at investment institutions came down to a trader's mega-loss at the end of a winning streak that fostered excessive risk-taking - a conclusion supported by Coates' physiological findings that traders actually have elevated testosterone levels on days they're winning. The fundamental point is that excessive risk-taking, especially on winning streaks, is not merely a cognitive error or a behavioral bias; it actually has a physiological basis, which makes it potentially far more difficult to break, and suggests different solutions to manage, whether in the case of an investment institution's trader or an individual investor. 

Why College May Be Totally Free Within 10 Years - This article from TIME Moneyland is a look at the Nantucket Project gathering, a recent big-think conference that had some interesting ideas about the future of education. Speakers included hedge fund billionaire Peter Thiel, who has gained recent notoriety suggesting that most students should skip college (and the cost/debt) and go right into a trade or starting a business, and Vivek Wadhwa, who painted a different picture of the future of education. Wadhwa suggested that the emerging onslaught of online courses will revolutionize higher education and cut costs down to almost zero for most who want a college education in a decade. In turn, most universities will shift to being in "the accreditation business" - which essentially means they're monitor and sanction curriculum and coursework, and teachers will become mentors/guides, not lecturers who administer tests. Wadhwa doesn't necessarily think that the traditional college experience will vanish entirely, as some will always want and be willing to pay for the experience as an investment, but the competition from an ultra-low-cost online alternative that delivers valuable education could be a very appealing alternative for many - and a natural market-based solution to the unsustainability of rising student debt and college costs. Not to mention a significant surprise (and relief?) for a lot of client financial plans!

I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!