Weekend Reading for Financial Planners (Jan 23-24)

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.

New SEC Commissioner Gensler Expected To Put Teeth In Reg BI But Not Overturn It (Mark Schoeff, Investment News) - This week, the Biden transition team formally announced former CFTC chairman Gary Gensler was being nominated as the new Commissioner of the SEC (while Allison Herren Lee was separately named by Biden as Acting Chair of the SEC this week until Gensler's nomination goes through the Senate confirmation process). Notably, although Gensler comes 'from' the industry (he is a former Goldman Sachs executive), he is best known for enacting tough reforms on Wall Street during his years leading the CFTC (Commodities Futures Trading Commission) and is widely viewed as an investor advocate who happens to bring 'insider' industry experience and expertise. Which is important when it comes to the world of financial advice, as Regulation Best Interest is still in its first full year of enforcement (having taken full effect last June 30th of 2020), and the enforcement policies that are implemented in the coming years will have a significant impact on whether or how much Reg BI actually reforms the brokerage industry going forward. Notably, though, Gensler is anticipated to focus on Reg BI enforcement and work to make it live up to its "Best Interest" label, rather than potentially overturning it and expanding the political capital to start a fresh rulemaking regulatory battle all over again.

RIA M&A Reaches New Heights In 2020 (Karen Demasters, Financial Advisor) - According to the latest RIA Deal Book from DeVoe & Company, 2020 ended out being a record-breaking year for mergers and acquisitions amongst advisory firms, despite the turmoil of the coronavirus pandemic. In the end, there were 159 RIA transactions in 2020 - up 20% from the 132 deals in 2019 - with a surge of 48 deals in the 4th quarter alone as early year deals that were initially delayed by the pandemic were ultimately consummated. Notably, though, advisory firm mergers and acquisitions appear to be moving further "upmarket", with 46 deals in 2020 involving firms with $1B+ of AUM (compared to only 25 in 2019), which in turn were driven primarily by 'mega-acquirers' like CI Financial, Hightower, and Creative Planning. In turn, LPL executives reported a similar uptick in merger and acquisition activity amongst brokers at the independent broker-dealer as well, with some advisors deciding that they didn't want to have to be responsible for their firm's back-office anymore (in the midst of the pandemic stress), others lured by rising valuations for advisory firms, and some simply deciding they wish to "take a few chips off the table" and de-risk a little given how market volatility impacts an advisory firm's own business value.

Advisors See More Revenue As Planning Fees Soar 50% And Separately Billed Plans Jump 70% (Oisin Breen, RIABiz) - Envestnet-MoneyGuide recently released a new white paper finding that financial planning fees are now averaging $2,482 for a comprehensive financial plan (similar to a recent Kitces Research study showing an average of $2,500, and up 50% from MoneyGuide's last study in 2015), while the average hourly rate that financial advisors charge is now $257/hour (up 25% over the same time period). Notably, though, the MoneyGuide study found that financial advisors aren't necessarily eschewing AUM fees in order to charge planning fees; instead, 72% of financial advisors are charging financial planning fees separately and on top of their AUM fees (with 2/3rds charging on a flat-fee basis, 18% on an hourly basis, and 8% using monthly subscription fees). On the one hand, the significance of rising financial planning fees is that advisory firms that reinvest into more and deeper financial planning capabilities for clients really do appear to be able to command higher pricing from their clients (in the form of financial planning fees in lieu of or on top of their AUM fees). On the other hand, the rise in financial planning fees - in the midst of rampant industry discussions about fee compression - raises questions about whether or how much more room they have to grow. Especially since the study also shows that 28% of advisors continue to offer free planning deliberately because they believe it is already compensated by (and will be able to win them more) AUM fees. Still, though, the growth in financial planning continues to power the growth of technology supporting financial planning, with MoneyGuidePro reportedly now serving roughly 80,000 financial advisors, eMoney Advisor claiming to support 77,000 advisors, RightCapital reporting 30% growth in staff to support all the new advisors in the past year, Orion acquiring Advizr for $50M in 2018 to power its own financial planning solution, and AdvicePay reporting 104% growth in financial planning fees billed through its payment processing system for financial advisors in Q4 of 2020 compared to the same quarter in 2019.

37% Of U.S. Advisers 'Consider' ESG Factors In Every Portfolio (Lottie McGurk, Investment News) - A recent new study from Last Word Research entitled "Competing In An ESG World" finds that ESG investing continues to rise amongst financial advisors, with 33% of advisors considering ESG strategies if their clients request it but 37% now reporting that they at least consider ESG factors for every client's portfolio (with only 30% of financial advisors stating that ESG factors play no role in portfolio selection). Notably, though, US financial advisors actually 'lag' in ESG adoption, with the study finding that globally, 61% of advisors indicated they consider ESG factors for every client's portfolio. Still, though, there is a clear uptick in ESG interest amongst US financial advisors, with 77% reporting they put more money into ESG strategies than 3 years ago, 62% reporting that their clients are demanding more in-depth ESG reporting (i.e., advisors cannot just say they have more of an ESG focus; clients increasingly expect performance reporting and other information from their advisory firm to substantiate it), and 31% stating that they spend more time researching ESG funds directly in order to implement such strategies.

Mutual Fund Assets Continued To Decline In 2020 (Jeff Benjamin, Investment News) - In the aggregate, mutual funds still hold more than $18 trillion in assets (more than triple the total AUM of all ETFs), but last year mutual funds showed a largest-ever outflow of $289B as investor (and advisor) preferences continue to shift, driven by a $241B outflow from U.S. equity funds in particular (more than 4X the previous record of $58B in 2015), while ETFs showed a record $502B of inflows (led by taxable bond ETFs with $195B of inflows). The shift was particularly notable to have occurred in 2020, a year when markets were especially volatile and, in theory, actively managed mutual funds 'should' have shone, but instead ended the year with record-setting outflows. And the shift appears to be especially pronounced amongst asset managers that have not had an ETF offering, with DFA (which only just started to offer ETFs) seeing $37B of outflows in 2020, T. Rowe Price (which also only just recently moved into ETFs) experiencing $33B of outflows, and American Funds (which has announced it plans to enter the ETF space in 2022) suffering more than $32B of outflows, while ETF leaders Vanguard and Blackrock drew in $140B and $122B, respectively. However, at this point, the question still remains as to whether financial advisors are really shifting from 'active' mutual funds to passive ETFs, whether they will adopt an emerging crop of active ETFs, or if the reality is that financial advisors are actually becoming active managers themselves and using ETFs as the building blocks for their own portfolios instead?

DPL Financial Partners Raises $26M To Bring Fee-Based Annuities To RIAs (Oisin Breen, RIABiz) - This month, DPL Financial Partners announced a whopping $26M fundraising round of private equity capital to scale its rapidly growing marketplace for no-commission insurance and annuity products for RIAs. The move follows on the heels of last year's private letter ruling from the IRS that annuity carriers can allow RIAs to draw out their advisory fees directly from a client's annuity without triggering a taxable distribution, opening the door to a new crop of 'fee-based' annuities that allow advisors to charge AUM fees on annuities they hold in client portfolios alongside the rest of the client's investment holdings. Modeling itself after the original Schwab OneSource program - which created the first no-load mutual fund marketplace in the late 1990s and was compensated by the 12b-1 shareholder servicing fees that mutual funds would have otherwise paid to agents - DPL similarly is building a marketplace of no-commission annuities for RIAs, for which it is compensated by an "administrative fee" directly from the annuity carrier. From the broader industry perspective, the ramp-up of providers like DPL, along with competitors like RetireOne and Envestnet's Annuity Exchange with FIDx, is part of a fundamental shift in how annuities are made available to consumers by moving away from the 'traditional' commission-based annuity agent and towards a fiduciary RIA distribution of alternative no-commission versions of annuity and insurance products. Notably, though, thus far the distribution of fee-based annuities is still small - amounting to less than $6B in 2020, in a world where annuities alone typically draw in more than $200B of new assets every year.

Time To Do Your 'Top Referral Source' Year In Review (Steve Wershing, Client Driven Practice) - Year after year, advisor marketing studies show that the #1 source of new business for most financial advisors is "referrals". Yet the reality is that there are still many different types of referrals, from client referrals to center-of-influence referrals, and in practice, most financial advisors receive the majority of their referrals from a relatively small number of particular sources who are especially active and engaged referrers. Accordingly, Wershing suggests that it's a good time for financial advisors to look back at 2020, and figure out where their referrals were actually coming from, and ask key questions, including how many different people referred you? (Does the firm have a broad base of referrers or a few that it is especially dependent on?) Who were the top referral sources? (And have they been thanked appropriately?). Which new clients were actually referred? (And are your referrers actually referring the types of clients you want to be referred?) Are there any referral sources that have worked in the past but have since dropped off? (A sign of change, or perhaps a relationship to reinvest in to and reignite?) What is your plan to further nurture relationships with your top referral sources? The key point, though, is simply to recognize that if you don't take a step back to really understand where your referrals are coming from - or not - there's no way to focus on improving them for the future!

Realigning Your Practice For RAVE And CORE Clients (Billie Joan Christiansen, Russell Investments) - Over the years, most advisory firms end out attracting a wide range of clients, including some "top tier" clients, and a core of clients that form the foundation of the firm's client base (and revenues). Yet while it's typical for advisors to segment their clients and do/give more for their top tier "A" clients, Christiansen suggests that in the end most advisors still don't focus properly on their top clients that in the end tend to generate the bulk of the firm's profitability and financial success, and should instead try to create a "RAVE" experience. In this context, RAVE is an acronym for Rare (what do you do for your top clients that is rare and would be difficult for other advisors to imitate?), Advocacy (are you turning your top clients into advocates?), Value (are you focused specifically on what your top-tier clients value most, that may be different than the rest?), and Experience (do top clients get a memorable experience that they will be inclined to share with others?). For instance, advisors might offer top tier clients faster turnaround times (a level of service that is Rare and literally impossible to do for 'everyone'), or personalize events (e.g., take them out to their known-to-be-favorite lunch spot) or gifts (e.g., golf balls for the avid golfer, chocolates from their favorite chocolatier), or better capture attention with handwritten notes and personalized tokens. Unfortunately, though, some advisory firms are so overwhelmed by the bottom segment of their clients - the lower 50% that may only drive 5% of the profits but dominate the service workload - that Christiansen notes in practice the starting point is not actually to build the RAVE offering for "A" clients, but first to clean up the CORE which includes culling out clients that really aren't a good fit, formalizing the schedule of contacting clients, and systematizing and even simplifying the firm's service model so it's more repeatable and easier to implement (and allows more time to serve the top clients that in the end drive the bulk of the profits that allow for growth and financial success).

Do I Have To Give Up All Commissions To Start An RIA? (Brad Wales, Advisor Perspectives) - The services and solutions that financial advisors can provide to clients are limited by the licenses they do (or do not) hold, of which one of the most fundamental is the Series 6 or Series 7 license (and associated affiliation with a broker-dealer) that permits the advisor to earn a commission for a product, as contrasted with the Series 65 license (and associated affiliation with/as an RIA) that permits the advisor to earn a fee. In fact, technically, an advisor must have a Series 65 and RIA affiliation in order to be paid a financial planning/advice fee, and in turn, must have a Series 6 or 7 and a broker-dealer affiliation to earn a commission. Which for advisors looking to transition from a broker-dealer to the RIA channel raises the question: is it necessary to go 'cold turkey' and give up all commissions in order to become an RIA? From the perspective of 'pure' RIA status, the answer is "yes" - as legally, an RIA doesn't have a license to accept a commission for an investment product. However, Wales notes that this does not necessarily mean that the advisor has to walk away from commission-based business entirely, or all at once. Alternative options include finding a (new) broker-dealer that is "RIA friendly" and will allow the advisor to have an outside RIA while still putting their commission-based business through the brokerage firm; sell off the commission-based assets/clients (i.e., instead of simply walking away from them, the advisor can sell those clients and product trails to another broker, ideally one who will also commit to not otherwise solicit the client if the advisor otherwise wants to keep that client relationship); or convert the client to fee-based solutions that can be held in RIA status (e.g., from A- or C-share mutual funds into the fund company's RIA no-commission share class). In practice, what the advisor chooses will be a function of both how they want to build the business in the future (e.g., if new clients will be only fee-based it may be easier to sell old commission trails, while the firm that intends to remain commission-and-fee in the future may prefer a hybrid B-D/RIA relationship), and how fee-based the practice already is (as the lower the percentage of commissions or trails already in the practice, the easier it may be to simply transition quickly and walk away from the little commissions that remained anyway).

Financial Services Conferences Have A Diversity Problem (Sonya Dreizler, Morningstar Advisor Insights) - The financial services industry has long been recognized as having a significant diversity problem, with respect to both its gender and racial diversity. But Dreizler notes that the industry's diversity woes are not just a function of the representation of advisors themselves, but also how the industry's conferences do (or do not) highlight diversity from the podium. For instance, in looking at an (admittedly non-scientific) sampling of 10 major industry conferences (from custodians to trade associations, individual financial services firms to certain investment-focused sponsors), Dreizler found that the median conference lineup was 65% men and 35% women (a ratio that does appear to have improved recently at some events that have focused on it, with 3-in-10 conferences showing more women speakers than men), and was nearly 90% white (despite white people being 'just' 60% of the broader U.S. population, while more than half of the conferences did not have a single Black or Latino keynote speaker). Though ultimately, Dreizler notes that the significance of this isn't merely a function of conferences themselves showing more diversity on the podium, but that a diverse speaker lineup is a key element of creating inclusion for a (more) diverse base of financial advisors themselves (as it's hard for women and advisors of color to feel included when 'only' white male speakers are on the stage). Which in turn requires a focus from conference organizers to make diversity part of their speaker lineup in the first place (otherwise, the only diverse speakers end out being token additions to otherwise-all-white-male panels, or leading the 'diversity' panel but not otherwise included in the main conference agenda!). Though Dreizler also notes that sponsors, other speakers, and attendees, all have a role to play in asking conference organizers to support a diverse speaker agenda.

Can Recruiting And Company Culture Shifts Boost CFP Diversity? (Tobias Salinger, Financial Planning) - At the recent Virtual Diversity Summit hosted by the CFP Board's Center for Financial Planning, there is a growing awareness that improving advisor diversity may necessitate more than 'just' attracting more diverse advisors, but also a shift in the career tracks by which they are brought into the industry. In particular, there is concern that the industry's historical "eat what you kill" approach to hiring, by requiring all new financial advisors to build their own books of business, may be limiting, especially for those diverse advisors who don't necessarily have strong natural markets and simply need more time to establish their business development skills over time. In addition, advisory firms themselves need to be cognizant that more diverse advisors coming from more diverse backgrounds means supporting a more inclusive culture within the firm or risk that more diverse candidates don't feel welcomed and accepted within the firm and leave, anyway. Though in the end, being more culturally accepting of a wider range of advisors doesn't 'just' make the firm more accepting of diversity internally, but can ultimately help it better connect with a more diverse client base as well!

CFP Diversity Is On The Rise But Is It Sustainable? (Jessica Mathews, Financial Planning) - In its latest report on CFP demographics, the CFP Board is reporting that representation amongst Black and Latino CFP professionals was up 12.6% in 2020 (from 3,274 to 3,688), which itself follows on the heels of a 12.3% rise in CFPs of color in 2019. However, the total number of Black and Latino CFP professionals is still only 1.7% and 2.5%, respectively, signaling that the industry still has a long way to go to achieve a more representative CFP population. To support the growth of CFP certificant diversity, the CFP Board has launched scholarship programs, hosts an annual diversity conference, and began to publish its demographic data of CFP certificate holders in 2018. Though some advisors of color suggest that the problem, in part, is that the CFP marks themselves still aren't known in communities of color, which means young professionals don't see financial advising (and CFP certification) as a potential career pathway, and diverse consumers are not necessarily asking about whether their advisors of color have the CFP designation, either. Still, though, with numbers trending in a more positive direction, the question now is whether advisor diversity can continue to trend higher, as awareness of the CFP marks and the career opportunities of being a financial advisor continue to gain more public awareness?

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, and Craig Iskowitz's "Wealth Management Today" blog as well.