Weekend Reading for Financial Planners (Apr 27-28)

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.

CFP Board Maps Out Ethics And Standards... With Charts (Ginger Szala, ThinkAdvisor) - With the CFP Board's new Code of Ethics and Standards of Conduct taking effect this October, the organization this week released a new "Roadmap" guide for CFP professionals that want to be certain they're in compliance with the new fiduciary rules and requirements. As while the core obligation to be a "fiduciary" - meeting the Duty of Loyalty and the Duty of Care, along with what the CFP Board has dubbed the "Duty to Follow Client Instructions" - applies "at all times" when providing financial advice, the CFP Board did ultimately make a distinction between "financial planning" and non-financial-planning "financial advice" - which have different requirements when it comes to both whether the full Practice Standards apply, and what information must be provided to clients in writing (as financial advice engagements have most oral disclosure obligations, while financial planning engagements require mostly written disclosures). Accordingly, the CFP Board's new Roadmap also provides additional detail about how to know when an advisor is providing "financial advice" or not (e.g., specific recommendations to a client, versus marketing and general education), and when financial advice rises to the level of "financial planning" in particular (e.g., when there's an agreement as such, the advice requires integration of multiple factors, and/or the client has a reasonable basis to believe financial planning is being received). The Roadmap also provides guidance about what is expected from a CFP professional in each step of the (now-)7-step financial planning process that also takes effect in October.

Schwab's Portfolio Connect Graduates From Early Access (Sam Steinberger, Wealth Management) - Last fall at Schwab IMPACT, the RIA custodian announced that it was moving away from its total revamp of a next generation replacement for its multi-custodial PortfolioCenter platform, and instead was pivoting to a more slimmed-down Schwab-only solution dubbed "Portfolio Connect.” Intended specifically for smaller RIAs managing less than $100M, Portfolio Connect would be free to those firms, in the hopes of enticing them to come to (and build upon) the Schwab platform. And after piloting the program with 60 advisors over the past several months, this week Schwab announced that Portfolio Connect was being opened up for use by all Schwab advisors, several months ahead of its original mid-2019 launch date. The core of the Portfolio Connect solution is to handle basic performance reporting (though it does not currently include performance by security or position level, internal rates of return calculations, nor blended benchmarks), AUM fee billing, and will soon provide a basic layer of business intelligence/"management views" of the advisory firm, with coming integrations to third-party solutions like advisor CRM. For smaller advisory firms, Schwab hopes that the "free" price point of Portfolio Connect will attract new business, especially given their own internal data that firms with less than $100M are actually adding clients and assets at a faster pace (relative to the sizes at least). Though even larger advisory firms that are still on PortfolioCenter may want to make the switch, if only to finally get out of the process of daily downloads and manual reconciliations (even as Orion, Tamarac, Black Diamond, and other performance reporting competitors vie for legacy PortfolioCenter users as well)!

How To Talk To People About Money (Morgan Housel, Collaborative Fund) - For most of its history as a profession, the ethos of medicine was that it was the doctor's job to "fix" the patient, predicated on the simple beliefs that every patient wants to be cured, and there is a right/best way to cure them (at least based on scientifically accepted practices at the time). Which, notably, meant that the patient's wishes and desires were largely viewed as irrelevant. But in recent decades, there has been a shift in medicine, away from just treating "the disease" and towards treating the patient instead - from laying out the odds of what was likely to work and letting the patient decide, and simply a recognition that different patients may have different priorities and different values about what the "best" course of action might be for them (as evidenced in a 2011 essay "How Doctors Die" that showed even educated doctors choose different end-of-life treatments for themselves than they may recommend to patients - specifically, that they tend not to opt for extraordinary measures and instead are usually fairly serene when faced with death themselves). And Housel argues that just as there's no "right" treatment plan - even for patients who otherwise have identical health issues - so too is there no "right" treatment plan when it comes to financial advice, because clients can and do have varying preferences around their financial outcomes (just as patients do around their medical outcomes). In fact, just as the preference of doctors to extend life at all costs - even though they don't necessarily choose to do so themselves - Housel notes that financial advisors often try to increase wealth at all costs... even if their clients may actually be content to simply enjoy and maintain the wealth they already have. Which leads to a "universal" prescription for financial advisors, similar to doctors - the belief that "everyone wants to make money" and that "there is a right and universal way to make it" (e.g., by investing in a long-term stock portfolio) - even though it may not be what every client actually wants. The key point, as Housel puts it: " If the appropriate path of cancer treatments isn’t universal, man, don’t pretend like your bond strategy is appropriate for everyone, even when it aligns with their time horizon and net worth." So what's the alternative? Instead, talk to people about money with a lot of questions like "What do you want to do?" and help clients figure out their own (financial) definition of "winning". Rather than relying on the advisor's own.

Financial Advisors: Are You An Explainer, Elucidator, Or Enchanter? (Tim Maurer, Forbes) - The starting point for education as a financial planner is CFP certification, which lays a foundation of technical knowledge for advisors. The caveat, though, is that just having the rote knowledge isn't enough; ultimately, the financial planner has to understand it, and be able to convey that understanding to clients with effective communication. And ideally, the advisor can internalize the lessons of the knowledge, and apply it to specific clients in the form of "wisdom" that may be life-changing. To be good at the first (the knowledge) means becoming an effective "Explainer", who teaches and shares knowledge in a (generally one-way) communication to clients. But to be good at the second (the understanding), the advisor must become an "Elucidator", who goes "beyond explanation and into illumination... transmut[ing] information into understanding" by integrating the knowledge together... which is crucial so clients understand "how" knowledge can be applied to their situation (e.g., how the risk they're willing to take on impacts their returns). But to convey wisdom requires not just explanation or elucidation, but becoming an "Enchanter", who guides and empowers clients instead of just trying to explain or tell them what to do. Yet the challenge, as Maurer notes, is that there's a lot of education about how to be an explainer (e.g., CFP programs), some about how to be an Elucidator, and remarkably little about how to be an Enchanter... though Maurer highlights programs like the Kinder Institute of Life Planning or Money Quotient, or reading materials like the Seven Stages of Money Maturity, Lighting the Torch, The Financial Wisdom of Ebenezer Scrooge, and the recently-revised Facilitating Financial Health. The starting point, though, is simply to reflect on your own style - are you an Explainer, an Elucidator, or an Enchanter?

Why Are Stories So Important To Investors? (Joe Wiggins, Behavioural Investment) - Although the label "story" is usually first associated with myths and fairy tales, stories are part of the human experience, told to one another for as long as we can trace back, for which we seem to have a natural inclination to weave anything and everything around us into a narrative. Which is important not just for the novelty of the story itself, but because a key aspect of our entire decision-making process is that we start by developing a causal model in our heads (i.e., how we connect data points to determine a cause and effect), and then decide if we want to take action ourselves based on that model (in the hopes of achieving the same effect/result). Which means stories can actually shape the mental models we use, and therefore the decisions we make (and/or at least how we rationalize and explain them)... thus why jurors are more likely to be persuaded by evidence presented in the order of a logical story than if the same evidentiary items are just shown in a random order. And it appears that the larger and more complex the decision is, the more likely stories will take on a dominant role in the decision-making process (as a way to weave together so much complex information, and sometimes to also just try to comfort ourselves by connecting perceived causes and effects so the world feels a little less random!). Thus why it seems almost impossible to just accept that price changes in the markets may be random, and instead look to the news and media to ascribe a cause to any/every market action. The significance of this, though, isn't merely that we look to (or craft) stories to help explain the events in our lives, but also that hearing stories can shape the way we interpret the information around us as well. From the advisor's perspective, this suggests that if we want to better drive clients to different actions or results, it's not enough to tell them to just ignore the news and media stories; instead, we must provide them with an alternative story (that hopefully leads them to a more-desired result) instead. On the other hand, the fact that stories can be so compelling also creates a secondary challenge - we're not always good at assessing the credibility of the story, which means that sometimes the most interesting story is more compelling (and more likely to drive action) than just the most accurate one.

The Money We Don't Talk About (Nick Maggiulli, Of Dollars And Data) - One of the fundamental challenges of both money in general, and financial advice in particular, is that we don't often talk about our money problems in the first place... to the point that most people don't even realize how common the financial woes of others may be around them. For instance, there are more children living in homes that file for bankruptcy than in homes that file for divorce... which means if you think of all the families you know that have been divorced in the past several years, there were even more who went bankrupt. But because you can hide bankruptcy (at least in social circles) far more easily than divorce, we don't realize how often money issues are occurring around us. And while talking about money issues is hard enough, it's even harder when they intersect with difficult life decisions - for instance, talking to a middle-aged couple who wants children but faces costs of $5,000 - $10,000 per fertility treatment (generally not covered by insurance). In fact, when talking to advisors, Maggiuli noted how common difficult money conversations really are - from the child of a billionaire who wants to take outsized risks to make their own billion dollars to "prove" themselves independent of the family's money, to the person whose business is almost shut down because of a business partner's tax woes that spilled over into the company. And often the conversations are even worse when it comes to talking about money and family. So what's made money such a challenging and taboo subject? Maggiuli suggests the core issue is that money is too easily equated with status... because in a world where our brains are hard-wired to evaluate our status relative to the others in the 'herd', and when there are too many people to 'know' everyone, money becomes an easy proxy for status itself. Which means talking about money isn't just about the money itself, but makes implied statements about a person's 'worth' and status in society. And so in the end, as an advisor may not believe that money is status... but if you don't recognize that this may well be how your clients feel, it will be hard to set them at ease and have a constructive conversation with them about their money issues.

Solve Their Current Problem (Steve Wershing, Client Driven Practice) - It is a staple of practice management advice that at some point, advisory firms need to focus on doing what they do best, serving whom they serve best, and saying "no" to business that is “too small” or not a good match for their (typically-more-holistic) advice services. Thus, for instance, advisory firms that start out doing tax returns, or “just” managing investment portfolios, eventually evolve towards comprehensive financial planning services, and then turn away prospective clients who "only" want standalone tax or investment advice but not the advisor's holistic financial planning advice. Yet Wershing notes that when prospective clients do have such a pressing need or issue, the reality is that they aren't likely to sign on for a more holistic and comprehensive solution anyway, because they will be “distracted” by the more pressing problem until it is actually solved. In other words, if pressed to engage in comprehensive advice, the prospect may say "No", but it's not a "not interested" response... just "not now.” So what's the alternative? Take the engagement - but make it clear that it is a temporary and limited-term engagement that you will help them with... and then can circle back to discuss your more comprehensive value proposition. Notably, engaging in this approach means only taking on engagements that can be of limited scope - thus, for instance, helping out with a tax return, or a 401(k) rollover, but not taking the prospect on as a full-time ongoing "investment-only" client (for which there is no natural end point and transition to the more comprehensive relationship). But as long as the temporary service really is finite... there's nothing wrong with getting paid for a limited-scope service as a way to solve the prospect's current client - and begin to demonstrate your own value proposition - and then move on to a more comprehensive relationship. Rather than just turning away every prospect who isn't fully ready, immediately, to buy into your whole service (or get nothing at all).

A Simple Way To Convert More Prospects (Dan Solin, Advisor Perspectives) - The top-selling real estate agent in the country in 2017 was a gentleman named Ben Caballero, who sold a whopping 4,799 homes worth $1.9 billion in a single year. And while Caballero himself dresses for the role - a well-tailored suit with a crisp white shirt and solid red tie - Solin notes that the real key for Caballero's success is his focus on "making it easy for the client.” For instance, in his work with developers, where it can take them 20 minutes to an hour to create a new listing for one of the new homes they're putting up for sale, Caballero created a system that lets them initiate a listing request in just a minute or two. In the context of financial advisors, the key point is that we often do not make it easy to work with us... sometimes asking extensive “screening” questions for prospects up front that go far beyond what is really needed to determine if they're a match, or failing to post fee or asset minimums on their websites (forcing prospects to call to find out the advisor's minimums, and wasting the prospect's time in the process if it turns out they're not a match). Similarly, some advisory firms ask prospective clients to bring extensive financial information with them to the first meeting (not realizing the burden it may place on the prospect to gather all that information in the first place, if they even can). And then, of course, there's the inevitable burden of the paperwork itself when it's time to come on board (a perhaps inevitable step since contracts are required, but a real challenge when it comes at the end of an already-arduous process!). So for any advisors who are still struggling to get the conversion rate they want from their prospects... or are struggling to get prospects to schedule or show up for meetings in the first place... consider whether you're making it too hard for the prospect to become a client in the first place (even if they otherwise wanted to!?).

The Worst Etiquette Mistakes Advisors Can Make (Jane Wollman Rusoff, ThinkAdvisor) - Etiquette is about more than just good manners; it is an expression of respect and caring about others and what they think, and a way to demonstrate core values (e.g., consideration, respect, and honesty), which is essential to building trust. Of course, the challenge is that what is considered "good etiquette" itself is something that changes over time. Some etiquette tips in the modern era, according to Daniel Post Senning, great-great-grandson of etiquette icon Emily Post and author of "Emily Post's Manners in a Digital World", include: the worst mistake you can make is to get caught in a lie, which isn't just about not telling “big whoppers” but also recognizing that white lies and being prone to exaggeration will eventually undermine trust as well; first meetings are crucial, from the look on your face to the attention in your eyes and your posture, extending to how you greet them and shake their hand (for which the accepted greeting in North America is a handshake first, not a hug or kiss [too formal for a stranger] or fist bump [too informal]); it's easy to be gracious when everything is going smoothly, but remember that your ability to extend courtesy and be gracious under times of stress are ultimately a key marker for trust and credibility; don't be tempted to use more distant technology to avoid difficult conversations (i.e., when you have to talk about volatile markets or another difficult topic, it's time for an in-person or at least phone meeting, not an email or text message); and remember that because our presence now extends to the digital realm, your "first impression" may be via a social media profile or your website, so all the rules of etiquette and putting on a good face apply equally in the digital realm as well. And recognize that there's nothing wrong with a good old-fashioned "You're welcome" when someone says "Thank You"... in fact, it's better than saying "No problem" or "It was no trouble" or something similar, which actually minimizes the person saying "Thank You" who was trying to express gratitude in the first place!

The Era of “Move Fast and Break Things” Is Over (Hemant Taneja, Harvard Business Review) - It was Mark Zuckerberg who first made famous the phrase "Move fast and break things,” which he originally stated as a way to guide his internal design and management processes, but became the motto for entrepreneurial disruption in general over the past decade. But now, Taneja suggests that the era of just racing to put products in the hands of consumers, without taking the time to develop the rest of a company's infrastructure and governance, is coming to an end. In fact, it is arguably some of the abuses of corporations, and particularly tech companies, that may be driving a rising preference towards companies that more proactively address economic, social, environmental, and governance issues (or at least are more focused of taking care of their own)... and a shift away from the "minimum viable product" and into the "minimum virtuous product" instead (new offerings that evaluate both the benefit to the consumer, and build in safeguards against potential harms). Accordingly, Taneja suggests a new series of questions that investors should be asking of companies (and especially startups) these days, including: what systemic societal change do you aspire to create with your product; how will you sustain the virtue of your product; what do you think is an optimal growth rate and how will you keep yourself accountable as you scale; what's your framework for leveraging data and AI responsibly; how do you define and promote diversity in the context of your business; and how does your company dynamically evolve in response to regulation and account for the various stakeholder your product impacts? The key point, though, is simply that we may be coming to an end of just trying to build products that get adoption and fast growth (regardless of the consequences), and instead be seeing a surge (or resurgence?) of a more responsibility-oriented approach to innovation and considering its consequences to society.

The Hidden Automation Agenda Of The Davos Elite (Kevin Roose, New York Times) - At the World Economic Forum's annual meeting in Davos earlier this year, there was extensive discussion about the potentially negative consequences to workers (and thus society at large) with the coming wave of artificial intelligence and automation, and whether we may need to create a new kind of safety net for people who lose their jobs as a result. Yet behind-the-scenes, it appears that companies are "racing" to automate away their own work forces as quickly as possible, with little regard for the impact on their workers... if only because they fear that if they don't, their competition will do it to them, using automation to cut costs and eventually undercut their own prices anyway. And the craving for the immense scale potential of automation even appears to be changing the thinking of how companies approach the problems; rather than looking for incremental 5% to 10% improvements through technology, companies are now asking questions like "Why can't we do it with 1% of the people we have today?" Already, a Deloitte survey showed that in 2017, the majority (53%) of companies had started to use machines to perform tasks previously done by humans, and the figure is expected to climb to 72% by next year, and leading to major growth for various "Robotic Process Automation" (RPA) firms like Infosys, while IBM's "cognitive solutions" unit (which uses AI to help businesses increase efficiency) is now the company's second-largest division with $5.5B of revenue last quarter. Of course, many experts have predicted that AI will ultimately create more new jobs than it destroys, as workers are freed up to focus on creative tasks over routine ones. And some companies are even focusing on the retraining, with Accenture claiming to have replaced 17,000 back-office processing jobs without layoffs (by training employees to work elsewhere in the company), and Amazon saying that more than 16,000 warehouse workers had received training in high-demand fields like nursing and aircraft mechanics (with the company covering 95% of their expenses). Still, though, the evidence is limited that such retraining efforts can work at scale, and so with a growing focus on income inequality around the world, the push for automation appears to be taking a decidedly behind-the-scenes (but persistent nonetheless) approach. Though in the end, some experts suggest the issue isn't really about automation or non-automation, but simply whether we can figure out how to use technology to create shared prosperity, rather than more concentration of wealth.

The Secret Trust Scores Companies Use To Judge Us All (Christopher Mims, Wall Street Journal) - More and more as consumers engage in online transactions, from logging into a Starbucks account to booking on Airbnb or making a reservation on OpenTable, companies are relying on a service called Sift to determine whether the person on the other end of the transaction is a malicious bot or a potentially-risky human, by using more than 16,000 data points and signals to assign every person a "Sift score"... a rating from 1 to 100 that is used to flag devices, credit cards, or accounts owned by any entities, that a company might want to block. In essence, the Sift score is like a credit score, but for overall trustworthiness... except there's no way to find out your Sift score. Which raises concerns not only about whether some consumers may unwittingly find themselves on Sift's (or competitor SecureAuth's) blacklist - without knowing why they got there, or how to get off the list - but also about how much of our online behaviors and activities are being logged and shared with third parties "in the name of security". Nonetheless, in the digital age, the challenge is significant for companies themselves, especially since the highest risk "big" transactions for fraud may otherwise be the platform's biggest customers. For instance, if someone wants to pledge $10,000 to an artist on Patreon, they're either a really big fraudster, or a really generous patron... and it would be unfortunate in either case to mistake one for the other. To avoid the confusion, the services are becoming increasingly sophisticated at identifying both warning signs (e.g., is the visitor coming from an anonymity network like Tor), and linking together concerning behavior (e.g., if a device was already flagged for a fraudulent transaction on Instacart, a subsequent purchase at Wayfair may also be flagged for review). And it's the sharing of data in particular that allows companies to identify patterns of problem behavior that make it easier to identify fraudsters (who are hard to detect one interaction at a time). Still, though, consumer and privacy advocates argue that at a minimum, companies should have some obligation to notify consumers who are flagged, and provide at least some transparency regarding what an individual's score is, and what it takes to improve it if they've already been flagged as a "risk.”

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.