Executive Summary
Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the announcement that NASAA has finalized its model rule that, as states adopt the rule, will require state-registered investment advisers to create a written "succession" plan for their business.
From there, we have a number of practice management articles this week, including: strategies to effectively delegate tasks to staff; why it's best to build out the staff infrastructure supporting your advisory firm by building roles around people, rather than trying to fit people into roles; a profile of several advisory firms that have been successful in creating a strong culture that supports the firm; a guide of what to do if you find out you're being terminated by your broker-dealer; and a look at where advisors get their best ideas (from peers and conferences) and how they create the accountability to follow through on them (using coaches and study groups).
We also have a few marketing-related articles, from a look at how being less available to prospective clients can actually help to close them, to strategies to invoke an emotional connection with prospective clients to get them interested in doing business with you, and a discussion of how the world of wealth management is changing as the (younger) emerging affluent have different expectations of what they'd like to see in a "good" wealth management service in the first place.
We wrap up with three interesting articles: the first looks at some of the ways that investment advisers misreport investment performance (from skewed benchmarks that create an illusion of alpha to buying premium bonds that make yield appear higher than it will be over time); the second is a message from a Millennial working in financial services about how mismatched most of today's providers are to the true needs and desires of younger investors; and the last looks at the CFP Board's public awareness program after nearly five years, and the progress the CFP Board is really making in advancing awareness of the CFP marks.
Enjoy the reading!
Weekend reading for April 25th/26th:
Got a Succession Plan? State Regulators May Soon Require It (Kenneth Corbin, Financial Planning) - The North American Securities Administrators Association (NASAA) has just published a model rule that would require state-registered investment advisers to adopt a formal business-continuity and succession plan, addressing issues like backing up books and records, and putting in place an alternate communications plan to reach clients and employees in the event of a major disruption of the firm (from a natural disaster to the death of a principal) as well as a plan for which personnel would assume key responsibilities. Notably, the model rule is just that - a model rule - and not an actual law, so states will still have to formally adopt the rule themselves for it to actually impact RIAs in the state; nonetheless, given that many state securities examiners have already been observing these issues in the field (from advisors who pass away, to recent events like Hurricane Sandy), the expectation is that the rule will be adopted soon in many states.
Smarter, Easier Ways to Delegate (Kelli Cruz, Financial Planning) - Learning to delegate is crucial to running a successful business and maximizing the use and value of your own time, but unfortunately most of us are not trained in how to delegate effectively and struggle to do so. First and foremost, though, it's important to determine what should be delegated in the first place; it may be because the task really isn't all that critical (so you don't really need to do it yourself), or alternatively that it's important enough that it will provide a good learning opportunity for someone else to hone their skills, or simply that someone else really has better experience and skills to get it done. Next, it's important to delegate effectively, which means defining what needs to be done, the associated requirements, and set realistic expectations for the outcome; it's also important to explain to the employee why the task is being delegated, and where it fits in the overall firm, to help the employee take ownership of the responsibility. Ultimately, remember that the goal is for the task to get done, not necessarily to dictate exactly how it will be done (the essence of micro-managing), and in fact letting the employee craft their own method and process to getting it done can further help to boost their ownership of the task. Similarly, remember that initially someone else who is doing the task may take longer to do it or be less efficient, but that's still a learning/growth opportunity for him/her, the efficiency will get better with time, and it may still make sense if it frees up your time for you to accomplish more of what you need to do for the business.
Stay In Your Lane Part 2: Creating Infrastructure (Angie Herbers, Investment Advisor) - As Herbers noted in her Investment Advisor column last month, a significant challenge for many advisory firms as they grow is getting employees to "stay in their own lane", focusing on their job and responsibilities and not overlapping or conflicting with others, which can often occur when the firm and everyone's role in it is not well focused. Continuing the theme, Herbers provides some additional tips and strategies on how to effectively build a staff infrastructure for an advisory firm, including: while it's great to have job titles to define roles, be ready to adapt the job titles and description to the skillset of the person (and then build around him/her as necessary), rather than forcing the person into the job title can result in mismatches; similarly, beware an overly deep or complex organizational chart that just isn't necessary in most advisory firms (given their size), as if you do a good job matching the right person with the right skillset into the right position he/she shouldn't need all that much supervision and management anyway; as you move away from job titles and org charts, do focus on job descriptions, which are essential to ensure that each member of the team is doing what they really do best, identifying where roles can be swapped/switched with other team members, and that identifying any gaps between their job descriptions that can be and need to be filled in; and make the team itself part of defining the titles, roles, and job descriptions, as having them be a part of the process helps with the buy-in to achieve it, including asking them to step up to the less-than-ideal-but-sometimes-necessary compromises that arise.
The Secret Sauce of Successful Firms (Ellen Uzelac, Research Magazine) - As advisory firms grow, recognizing - and trying to manage - the culture of the firm is increasingly becoming an important part of success. And ultimately, the culture of a firm is defined by its leaders at the top, as the entire business becomes a reflection of their beliefs and preferences at least to some extent. Accordingly, the article profiles three large and successful firms, and the notably-Gen-X leaders in charge of them, who are creating cultures very different from the 'traditional' ones in financial services. For instance, Adam Birenbaum of Buckingham Asset Management wants everyone on the team to feel they are a critical part of it; as a result, their "Our Team" page puts everyone on an even playing field, where a receptionist is seen at the top of the list, Birenbaum's CEO profile is mixed in the middle, and co-founder Bert Schweizer is simply listed as a "wealth advisor" near the bottom of the page. Ultimately, though, the point isn't just that Buckingham's "Team" page is a gimmick, but reflective of their culture, that also includes a program to recognize exceptional service within the firm, offers wealth management services for free to its own members, and allows everyone in the tech department one day per quarter to work on any project they wish. Another example is Cheryl Holland of Abacus Planning Group, which has a strong culture of active listening, reflected in everything from the work they do with clients, to the fact that every new hire gets a pair of giant Mickey Mouse ears to accentuate their listening culture. The last example is Ted Jenkin and Kile Lewis of oXYGen Financial, who wanted to create a small firm culture that focuses on Gen X and Y, which is now reflected in everything from a lobby that includes board games and a video game station, supporting technology that allows the firm's advisors to meet with more than 2/3rds of the firm's 2,300 clients virtually using Skype or GoToMeeting, and a casual atmosphere where "dressed up" means jeans and a sport coat. And notably, the other key thread that flows through all these firms: they are large, and growing rapidly, supported by a loyal and highly engaged staff who have bought into the culture they're a part of.
An Advisor's Guide To Surviving Termination (Mindy Diamond, Wealth Management) - With the ever-changing regulatory environment, broker-dealer firms are looking with increased scrutiny at their representatives in recent years, and even some high-profile $1B+ advisors and teams and found themselves suddenly terminated without notice and receiving a security escort out the door. So what should advisors consider if they face a termination? Diamond notes that the biggest issue is the Form U-5 that the broker-dealer files with FINRA, which is a public disclosure form that will contain the reason for the termination; as a result, if a termination event happens, it's crucial to retain an attorney immediately who can help negotiate the specific language that will be used in the U-5 regarding termination (which has some flexibility regarding wording even while remaining truthful). Diamond notes that it is also highly preferable to work with a attorney specifically familiar with FINRA rules and regulations (and ideally with a relationship with the broker-dealer in question), to ensure a prompt and correct handling of the situation. And time is ticking, as the U-5 is generally filed within 30 days, and once filed is extremely difficult to alter after the fact, and a U-5 with a report of sales practice violations could block you from being hired by other broker-dealers in the future. Alternatively, Diamond also notes that some terminated brokers decide that it just doesn't make sense to keep working in the broker-dealer environment at all, and use the event as an opportunity to transition to becoming an RIA instead.
Where Did Your Last Great Idea Come From, And What Did You Do About It? (Julie Littlechild) - Littlechild recently conducted a study looking at where advisors go to get their best ideas; the results revealed that the #1 source for most advisors is a conversation with other successful advisors, followed by attending (live) conferences, and media articles. However, the caveat is that just getting ideas alone isn't enough; ultimately, the most successful advisors have a process to hold themselves accountable for actually following through on the idea, such as working with a business coach, or participating in a study/mastermind group. In fact, the best coaching and study group relationships have a structure around them (regular set meeting times, agenda/ground rules around the discussion, etc.) to ensure an environment of accountability. And notably, coaches and study groups often help by creating accountability around all areas of our lives; Littlechild found that those who use coaches do so for both professional and personal (and even 'spiritual') reasons. But again, the fundamental point is that success relies not just upon getting out there to meet with peers to get ideas, but also having a network of peers (or a coach) to create the accountability to follow through.
The Key to Attracting New Clients: Be Less Available (Dan Richards, Advisor Perspectives) - The research on persuasion has long observed a "law of scarcity", where the demand for an item increases when it is (or is expected to soon be) in short supply. And while Richards doesn't literally advocate a "Buy NOW While Supplies Last!" approach to clients, he does not that there are legitimate ways to limit your availability, that can help invoke the law of scarcity to support the sales process with a prospective client. For instance, you might limit yourself to only X new clients per quarter, and communicate that to a prospective client - e.g., "I only accept four new clients each quarter; if you're not interested right now, that's fine, so I'll touch base again in 3 months." Now, if the prospective client wants to work with you, the onus is on him/her to step up to work with you in the limit time window (or at worst, it's a good excuse to contact the prospect again in 3 months!). Similarly, you might also (legitimately) communicate that you're not the right fit for all potential clients and that you only work with certain types; only schedule prospective client meetings on a certain day at a certain time, and if the prospect has to schedule 3 weeks out to get onto your calendar, that's ok because it's communicating that you're busy too and your time is scarce and valuable (and worth paying for!); and when conducting events with prospective (or current) clients, limit the size of the event (and communicate it as such) to convey the exclusivity that makes it more desirable to attend.
7 Hot Buttons Your Ideal Financial-Planning-Prospect Desperately Wants You to Push (Ronald Sier, See Beyond Numbers) - Ultimately, when we buy a product or service, we're not really buying the 'thing' itself, but the feelings it creates; for instance, Kodak founder George Eastman famously noted that they were not in the business of selling cameras, but in creating recorded memories. Of course, while that conclusion sounds simple enough, recognizing it as a camera company was a significant challenge, and similarly Sier notes that many financial planners also get stuck in trying to figure out what's really valuable to clients and what they really want - which is important, because in the end, most buying decisions are driven emotionally, and not logically (even when we think we're making a logical decision). So how can you figure out what to focus on and deliver? Sier recommends the book "Hot Button Marketing", which makes the point that by identifying a prospective client/customer's "hot button" issues, you can create a solution that fits it directly (and will essentially 'sell itself'). For instance, for many people their hot button is that they want to feel in control, so you can focus the messaging of your planning solutions around helping your clients feel in control; alternatively, we all like to feel special, so you might brand your business around its exclusivity and the uniqueness of its clients. Other hot buttons include helping people feel respected, feel smarter, feel like self-achievers, or feel nurtured. The ultimate point - by crafting not just your services, but the language you use in and around your business to appeal to these hot button issues, you can better connect with prospective clients on an emotional level and draw them in to doing business with you.
The Changing Face Of Wealth Management (Jamie Green, Investment Advisor) - Industry trend research suggests that independent advisors have been gaining market share of wealthy clients and offering "wealth management" services, compared to wirehouses, although the latter still provide the bulk of wealth management as measured by assets. Yet underlying these trends is that the definition of what is "wealth management" has been in flux as well, from shifting definitions of what "wealthy" means, to a wider range of services and solutions called "wealth management" (from the traditional mahogany-paneled advisor office, to working with clients virtually or offering partially-self-directed technology solutions). According to the data, there are now 200,000 "ultra-high-net-worth" households (more than $30M of assets), with about 1/3rd of those living in the U.S. Amongst those with $5M or more of net worth, almost 1/3rd consider themselves self-directed investors. Given these constraints, many wealth management firms have actually been lowering minimums and going "down market" looking for opportunities to expand the firm and capture the future wealthy, since there are only so many available today - a challenge, since the emerging affluent seem to be particularly inclined towards using technology to be self-directed. As a result, the pressure is on for wealth management firms to truly justify their value proposition over technology solutions, which is driving growth in programs like IMCA's Certified Private Wealth Advisor (CPWA) program; notably, though, market studies suggest the emerging affluent do still want contact with a human, and that robo-advisors alone will not be their holistic solution.
4 Advisor Moves That Shouldn't Be Legal (Allan Roth, Financial Planning) - When it comes to investment performance and results, Roth notes that unfortunately a lot of advisors are still using some 'questionable' tactics to convey their value. For instance, many investment advisors still benchmark themselves purely to the S&P 500, which excludes mid- and small-cap companies, and therefore gives a natural bias towards the advisor's portfolio that captures a more diversified blend that includes the small cap premium, giving the appearance of alpha that wouldn't be present if benchmarked to a more proper total stock market portfolio. Even worse, some advisors benchmark only to the price of the S&P 500, implicitly ignoring the dividend component and creating an easier benchmark than a more proper S&P 500 total return benchmark. Another problem is advisors showing investment performance gross of fees, rather than net of fees that clients have to pay in the real world. A more subtle problem occurs when advisors buy premium bonds that are callable, which provide a higher stated yield and appear to have a superior bond return... except that when the bond gets called at par, it will be marked down in value, and the ultimate yield-to-call is much lower than the ongoing yield implies (but is masked until the callable event occurs). The last problem area is with many of today's income annuity products, that offer guaranteed "income for life" in the form of ongoing withdrawals (e.g., at 6%/year), even though the reality is that for the next 16 years, the client will simply be getting his/her own money back and producing a true income return of 0%!
Millennials To Financial Advisers: #DoingitWrong (Jessica Lynn Rabe, Investment News) - Written by a millennial who works in financial services, this article is essentially an "open letter" to financial advisors about the challenges they will face in working with Millennials, analogous to a situation where the industry is trying to sell a Pontiac to a generation that wants a Tesla (yes, Pontiacs aren't made any more - that's the point). For instance, key issues for Millennials include advice about student loans (the average person in the Class of 2014 owes $33,000, and 70% of last year's bachelor's degree students had some student loans), guidance about entrepreneurialism (the success of startups like Facebook has inspired Millennials to pursue a similar path and risks), a wariness about capital markets after watching their parents/family lose a lot of money in the 2008 financial crisis (and a preference to bet on sports over stocks!), and a world that is increasingly passive-centric where the value of any active/portfolio management is questioned more and more every day. Notwithstanding these challenges, though, Rabe also notes that Millennials may actually be more inclined to seek out education and support from advisors (in part because of their limited-and-scary experiences with markets), will be very interested in working on non-portfolio short-term and long-term financial goals, value transparency (and therefore may be more inclined towards transparent independent advisors), can appreciate the convenience of working with an advisor (as long as it actually is a convenient experience by leveraging technology, as opposed to just sitting in an office), and need the opportunity to work with an advisor on a standalone fee basis since AUM doesn't work (as they just don't have portfolios/assets to manage yet!).
Building Awareness, Building A Profession (Kevin Keller, Journal of Financial Planning) - The CFP Board's public awareness campaign is now entering its 5th year, an idea that first came forth from CFP professionals themselves who complained that consumers were not often aware of the significance of the CFP marks. And thus far, the campaign is working; since 2011, unaided awareness of the CFP marks amongst the "mass affluent initiators" (the CFP Board's primary audience target, those aged 35 to 64 with $100,000 to $1M of investible assets who are willing to seek out expert advice) has nearly doubled from 17% to 30%, and awareness amongst the entire mass affluent group from 20% to 28%. And notably, the CFP marks are the only to grow in awareness over the past several years; the CFA, CLU, ChFC, and PFS have either remained flat or declined. Given its success so far, the CFP Board anticipates the public awareness campaign will continue from here, with periodic reviews by the board of directors to affirm that progress is still being made.
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!
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.
For the client who is looking for investment management advice or guidance ONLY, the CFP is worthless. One course on investing does not an expert make.
Steve,
I don’t know that I’d quite say the CFP is worthless in that regard. We can reasonably debate about how much of an ‘investment expert’ one is with a CFP, but it’s still a heck of a lot better than the tens of thousands who give investment advice (or sell investment products positioned as ‘advice’) with nothing more than a Series 6 or 65!
– Michael
Michael,
None of these designations make a broker an investment expert. Including the CFP. It may be better than not having the one investment course, but it’s clearly not a heck of a lot better.
Steve,
Worthless? Provide some data to justify ridiculous comments. I also like your comment, “None of these designations make a broker an investment expert.” Just like one practices medicine or law, a financial planner or investment advisor practices too. So a question back to you…what makes an expert, Steve?
I’ll repeat what I said. The investor looking for investment management expertise isn’t going to get it from someone who has taken the one course on investing in the CFP program. Are you saying the CFP designation is equivalent to the studies of a doctor or a lawyer? CFP’s by training are not investment experts.
The CFP provides an individual with ability to identify a client’s goal and to also implement an investment plan based on their goals and risk tolerance. It is not one class as your comment earlier suggested. I would say that the CFP designation is the leading standard in financial planning. CFPs by training are better than most registered representatives as they have a fiduciary responsibility to the clients they serve. They are experts in helping clients achieve financial goals and investments are need to do that. We can easily put together a portfolio of investments (usually mutual funds and ETFs) and help change the lives of clients. I think your “worthless” comment was where I disagree with you. So, Steve, again I respectfully ask to list what constitutes as an expert. Thanks for the dialogue.
I misread your comment earlier about the class…I see what you said.
You don’t have to be a CFP to help clients put together a portfolio of mutual funds and ETF’s to help change the lives of clients. Any broker can do that. Yes, CFP’s are fiduciaries, not by law, but by the CFP creed. Many work on commission also though. Fine line there. And I do not agree that CFP’s are experts in helping clients achieve their financial goals. Individuals may be experts, and they may have a CFP designatin, but it’s not the one investment course they took that made them an expert. Are you saying the one investment course offered in the CFP curriculum makes one an expert? Of course it doesn’t. Why do so many financial planners put their clients into money managers? The answer is obvious. Many investment management firms have tremendous resources, including research analysts, usually CFA’s, and trading staff. The answer is apparent. You don’t need a CFP to run a Monte Carlo analysis and then invest in mutual funds or ETF’s. On the job experience, studying on your own, reading investment books, reading the abundant material written by Kitces, Wade Pfau, Bernstein and all the others enable those in the business to understand how to establish goals and put together a portfolio of passive investments. There is nothing wrong with the designation, but it doesn’t make one an investment expert, which is what I said. Many major brokerage firms encourage, and even pay for their brokers to get the designation. Why? Because the CFP company sells it to the public as that leading standard you refer to. That allows the broker to use the designation To gain credibility, and then sell their products. Now, if it was the CFA, then I’d say that’s much more helpful for investment management. What constitutes being an expert? Look at the great who have written many investment books over the past few decades and are recognized as experts in the industry, and whose approaches are touted by many. What makes them experts? Maybe formal college experience, graduate level or PhD level studies, mentors, experience, and so on. But they are not CFP’s as a rule.
Steve,
Thank you for giving me some insight into what you believe is an expert. I have some final points.
1. A CFP isn’t “worthless” (your words…not mine) when it comes to investing. That is just dangerous language and it appears you don’t fully understand the designation, the requirements, and the process of personal financial planning.
2. Your earlier statement said that “None of these designations make a broker an investment expert. Including the CFP.” However, you say the CFA helps. Which one is it? No designation helps or the CFA helps? The CFA helps, but the CFP doesn’t help at all?
3. Formal college coursework is a requirement for CFP professionals.Many of which have graduate level degrees in economics, financial planing, finance, etc. I think the real definition of an expert is about formal training above the minimum required by the state/federal authorities AND years of experience working in the area of investments. So I guess we agree on experience and mentorship, but again, and to Michael’s point, I would say that a CFP is more of an expert than someone holding a 66 or 6/63 licenses.
Fiduciary standard of care is always required by a CFP whether or not they are “selling products.” You can be under FINRA and if you have the CFP then you are a fiduciary. If the CFP Board of Standards, Inc doesn’t pay close attention to their certificate holders and the practices of these professionals then they could lose their relationship with the SEC. This relationship is that the CFP designation can allow an individual to not have to take the SEC series 65 exam if they have completed the CFP requirements. This tells me that the SEC believes there is some worth to the CFP.
4. I love articles by Kitces and Pfau, but I don’t think ALL smart individuals can just take that information and be as successful as working with a CFP professional. We all need hlep with things in our lives. We need people to coach us and we need guidance and someone to take away the emotion.
When my pipes burst at my house from freezing temps, I don’t grab the toolbox and watch a how to video on youtube. No, this is serious and I need a professional expert so I call a plumber who can give me my options and provide repairs. I based their expertise on experience, but formal training (like a CFP) is awesome too.
5. I heard an awesome analogy at a conference this weekend. “Having a drivers license allows you to drive, but it doesn’t make you a good driver.” I compare that to having the CFP. Yes, having the CFP allows you to be a better financial planner and investment professional for your client, but it doesn’t mean your good at it or have the experience needed. I think we both agree that experience is what makes an individual an expert.
Finally, A newly minted PhD doesn’t mean one is an expert in investments…they are just specialists on one topic…their dissertation which is specific and varies. You can’t blanket a statement saying all PhDs in a finance related field are experts.
I think where I got a little confused/frustrated was with your comment as the CFP is “worthless” those were a poor choice of words in my opinion. I am glad we can agree on experience, but if you would ever like to talk about the CFP designation and what it requires, please let me know.
Best of luck and I am glad Michael’s article can bring two opposing views together for dialogue.
Jared,
1. I’ve been in this business over 30 years. I did financial planning with IDS/American Express long before it was Amex and now Ameriprise. I took a few CFP courses but thought they were a waste of time, way back before they even required the final exam. I am no longer involved with them but still in the business. Worthless is a strong word, but I still feel that just taking that one CFP course on investing doesn’t make one an investment expert.
2. I said none of these designations make a broker an expert. I was referring to what Mike said about the 6 and 65, and I included the CFP. I mentioned the CFA in response to your question of what might make one an expert. The CFA is in a different universe when compared to the CfP regarding investments. Not even close.
3. Many who hold the CFP have no formal financial college majors. Some do. Many who hold the CFP are strictly salespeople. But the one course on investing doesn’t make any of those folks an expert on managing investments. Anyone with industry experience can diversify a passive portfolio for clients, but I contend if someone wants investment management, they should lol elsewhere. If you want comprehensive financial planning and investment guidance, then a CFP will do.
Remember, my first comment was simply that if one wants only investment management, that one CFP course doesn’t mean that advisor is the expert. I still believe if the CFP wants to be a financial planner and that’s what they do, that CFP investment course is worthless. You need lots more than that to become the “expert”.
5. I still don’t think the CFP practitioner is the plumber equivalent of an “expert” for the investor who simply wants an investment expert to mange his portfolio. You want life or DI insurance, and a comprehensive financial plan, then see a CFP.
I would feel a lot more comfortable with someone with a relevant graduate major or a relevant PhD managing my money than a CFP who took one investment course, assuming all else is equal, from experience on down.
To sum it up, my point is that the one CFP course is an introduction to investing, and by itself, does not an investment expert make.
And my comment is that the term “worthless” is unfair and a bad choice of words (not a strong word) given today’s CFP standards.
Of course you feel that way. You have the designation. I don’t thinks it’s unfair. The CFP has 1 course on investing. That’s not enough if you want someone to direct your financial future. At least for me.
Everyone has the right to an opinion. We have different ones.
And you must not feel that way because you don’t have the designation? Seems to me there is quite a bit of data that shows a whole building full of CFA’s and reams of analysis can’t do much better than an appropriate index fund. And as far as self learning–that can apply to EVERY profession, Jared makes a great point–we hire experts to help with parts of our lives where don’t want to take the time to self learn, from physicians on down. But your original comment seemed to equate someone with the CFP as being a red flag towards hiring them for investments vs. taking that into consideration along with all the other factors (experience, etc) in a screen for hiring.
Nope. I don’t feel that way because I don’t have the designation. I didn’t want the designation because I only wanted to be involved in investing, not financial planning. Read my initial comment. I didn’t say having a CFP is a red flag. I said having a CFP doesn’t make them an expert in investing. That’s why using the analogy of hiring experts….physicians as you say….isn’t apples to apples. This is just my opinion. You all can have yours. Don’t take it personally. Go out and do your business.