Executive Summary
Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the industry buzz that there's some new retirement legislation winding its way through Congress, known as the SECURE Act, that is showing promising signs of passing later this year, and would make a number of notable changes to retirement accounts, from eliminating the age limit on IRA contributions, pushing back Required Minimum Distributions from age 70 1/2 to age 72, and curtailing stretch IRAs as a revenue-raiser to "pay" for the other changes.
There were also a number of regulatory news headlines this week, including the death (at least for now) of Maryland's proposed fiduciary rule, a new simple one-page Fee Disclosure form under consideration in Massachusetts (even as debate continues over the SEC's proposed four-page Form CRS disclosure), a discussion of whether the recent fiduciary momentum at the state level means that it may actually be a better way to enact improved regulation of advisors (if only to eventually force federal regulators to then create a uniform national law), and a fascinating (and painful) look at how the rise of forgivable-loan recruiting bonuses amongst broker-dealers may be causing consumer harm (and a rising number of broker bankruptcies).
From there, we have a number of articles around practice management, including: what advisory firms should focus on if they're struggling with growth; how to better measure a firm's AUM and revenue over time to ensure the firm will know if/when it has a growth problem; how advisory firms are shifting from revenue-based compensation to team-based and firm-based compensation to promote a more team-oriented growth environment; and what owner-advisors should be thinking about to increase the valuation of the business if there's a plan to sell the firm in the coming decade.
We wrap up with three interesting articles, all around the theme of repetition and breaking the boredom routine: the first looks at how adopting deliberately repetitive habits is a key to helping us change our behaviors for the better (and to simply make it easier to do what we know we need to do, without being forced to spend so much time and energy thinking about it!); the second looks at how we as human beings tend to bond by sharing our stories... except when our stories get too repetitive that no one wants to hear them, though ironically acknowledging the repetitiveness of our stories can actually still build trust after all; and the last explores how to relieve the boredom that often comes with routines, not by ending the routine behavior itself but simply by recognizing the benefits of choosing to deliberately break the routine (or as the saying goes, "everything in moderation... including moderation!").
Enjoy the "light" reading!
Lawmakers Push New Retirement Legislation (Anne Tergesen & Richard Rubin, Wall Street Journal) - In the past week, the House introduced new legislation, dubbed the "Setting Every Community Up for Retirement Enhancement" or "SECURE" Act, itself largely a re-introduction of the Retirement Enhancement and Savings Act (RESA) which was previously under consideration in 2016. Notably, though, the updated SECURE Act has significant bipartisan support as well, and RESA did have unanimous approval from the Senate Finance Committee back in 2016 (and in fact, the Senate has already re-proposed its own updated version of RESA for 2019, matching the SECURE Act), suggesting that it is actually feasible for the legislation to pass Congress later this year. So what would the SECURE/RESA Acts of 2019 actually change? Key provisions include: removing the age-limit on IRA contributions (so workers could continue to contribute even after age 70 1/2); increasing the onset of Required Minimum Distributions from age 70 1/2 to age 72; making it easier for 401(k) plans to offer annuities (with reduced risk of employer liability if the annuity carrier turns out to have financial issues in the future); allowing parents to withdraw money from 529 plans to pay for certain homeschool costs, apprenticeship programs, and up-to-$10,000 for repayment of student loans; penalty-free distributions of up to $5,000 from retirement accounts within a year of birth or adoption of a child to cover associated expenses; and to help pay for all the changes, a reduction in the so-called "stretch IRA" limits that would force most non-spouse beneficiaries to liquidate inherited retirement accounts more quickly. Also on the docket for SECURE - though not in the legislation yet - would be the introduction of "open MEPs," a new kind of multi-employer defined contribution plan that would make it easier (and less costly) for employers to join an existing MEP rather than each firm needing to create and set up its own 401(k) plan. Ultimately, it's still unclear whether the legislation will actually come to pass in 2019, and/or whether any of the proposed sections will be altered or eliminated in the final version, but expect to hear more about the SECURE/RESA Acts as they make their way through Congress in the coming months!
Maryland Fiduciary Bill Killed In Committee (Mark Schoeff, Investment News) - This week, the Maryland Senate Finance Committee voted down its "Financial Consumer Protection Act," which would have imposed a fiduciary duty on financial advisors in the state of Maryland... and given that the Maryland legislature is scheduled to adjourn at the beginning of next week, the failure of the bill to pass signals its death (at least for the near-term future). Industry associations like the Insured Retirement Industry had opposed the fiduciary measure, as it has opposed all fiduciary legislation for financial advisors in recent years, insisting that a fiduciary standard would "drive up compliance costs", "restrict choice to consumers", and impose "added costs and risks," such that it was better to allow the SEC's ongoing-but-not-fiduciary Regulation Best Interest proposal to proceed instead. However, fiduciary advocates have noted that there is little actual evidence that smaller investors would be curtailed by a fiduciary rule - in fact, the country's largest RIA, Edelman Financial Engines, has a $5,000 minimum. In addition, the ongoing impact of the Department of Labor's fiduciary rule, before it was eliminated, had already been an industry shift towards lower-cost products for consumers - not towards higher costs. On the other hand, even some fiduciary advocates had noted that creating a "state patchwork" of fiduciary rules isn't necessarily ideal, in a world where not only do large advisory firms typically operate in multiple states, but even small/solo advisors often end out with clients across multiple states (and therefore could be subject to multiple different fiduciary rules). Nonetheless, as the SEC continues not to implement a full-fledged fiduciary rule for advisors, state momentum for fiduciary rules continues... raising the question of whether Maryland itself may try to resurrect the bill in a future session of the state legislature if the SEC does not act in the meantime.
Massachusetts Beats SEC To Punch With One-Page Fee Disclosure (Tracey Longo, Financial Advisor) - While there continues to be substantial debate about the SEC's proposed Form CRS, which was intended to provide disclosure to consumers about the nature of their relationship with their brokers or advisors and how they will be charged (which critics have suggested is just confusing instead), this week Massachusetts "beat the SEC to the punch" by proposing its own version of a disclosure form to highlight the fees that consumers would be charged, and the services that will be provided for those fees. Created in response to the proliferating range of advisor business models, beyond what was historically a rather "standardized" industry AUM fee, the simple one-page form simply lists out the various types of fees that an advisor might charge - including AUM fees, hourly fees, subscription fees, fixed fees, performance-based fees, and commissions - and allows the advisor to specify the amount of the fee (in dollars or % where applicable), the frequency of the fee (e.g., monthly, quarterly, annual), and the services provided for that fee (e.g., investment management, financial planning, etc.). The one-page form also includes a section to specify whether any additional fees and costs might apply (e.g., brokerage fees, commissions, custodian fees, trading mark-ups, underlying mutual fund/ETF fees), with a simple "Yes/No" response as to whether those costs may apply, and if so who they are paid to (e.g., the advisor, his/her firm, his/her platform, etc.). Notably, though, the proposal would apply to any investment advisers registered in Massachusetts (and not to broker-dealers). The proposed disclosure form is currently in an open Public Comment period through May 3rd of 2019, and interested parties can submit their own comments here.
Catch The [State Legislation] Updraft (Bob Veres, Inside Information) - The "consensus" view of regulatory reform for financial advisors is that state regulation would be a disaster, because too many advisors have clients across multiple jurisdictions and would potentially be buried under the compliance burdens of states with varying (or potentially conflicting) fiduciary rules. For which there is already some evidence, as the evolution of new advisor business models (e.g., retainers and monthly subscription fees) has already created a split across state regulators about what is and isn't permitted state by state (even as the SEC has not limited their use by federally-registered investment advisers), and some states (but not others) have raised concerns about whether it's appropriate for advisors to pay their own clients' trading costs out of pocket (and whether it gives the advisors too much incentive to not trade and potentially lead to negligent portfolio oversight). Yet at the same time, federal fiduciary legislation has continued to struggle, while the states are actually showing signs of life, with various proposals being considered or having actually been passed in Nevada, New Jersey, Maryland, and Massachusetts. Which raises the question from Veres: could state lobbying for fiduciary action really be any worse than the status quo of failed fiduciary regulation in Washington? Especially since the reality is that it's quite hard for the industry to stop efforts in all 50 states at once, and once a single state passes a rule, the pressure is amplified on other states to explain why they are not providing their citizens similar protections. A case-in-point example is the legalization of marijuana, where just a few initial states (Colorado, Oregon, and California) took action, which then led other states to similarly consider legalizing marijuana and conforming to the first few states that took the leap, and now federal regulators to throw up their hands and backed off federal enforcement that would conflict with the emerging state laws. In other words, is it possible that getting the foot in the door with state fiduciary regulation could actually be what leads to federal regulators finally creating their own (conforming-to-the-states) fiduciary rule?
How Brokers' Bonuses Can Lead To Ruin (Jeffrey Meitrodt, Star Tribune) - The increasing competition amongst broker-dealers to recruit successful brokers has led to the rise of various "recruiting bonuses" to attract top talent. The challenge, though, is such bonuses often come with strings attached, and are usually payable not as upfront cash-to-keep, but "forgivable loans" that must be repaid if certain terms and conditions aren't met. A case-in-point example is a recent broker recruited to Raymond James, who received a $150,000 recruiting "bonus," but had to subsequently repay $7,500 of the bonus every quarter that he failed to meet his sales goals; the end result was that 6 months later, the broker was $15,000 in the hole, started making secret trades in client accounts to reach his sales targets, and then ultimately was fired altogether for the unauthorized trades. In fact, this investigative article by the Star Tribune found that "hundreds" of brokers have lost their careers since 2012 and caused financial woes for customers as a result of such loan-based recruiting bonuses, with a review of 500 dispute cases finding that brokers had to repay an average of $236,472 and that a quarter of them ended out filing for bankruptcy. Ameriprise, Wells Fargo, and three other large investment firms spent at least $40M in the past five years alone to settle complaints (mostly in private arbitration) by investors against brokers who had accepted such bonuses to change firms. In one extreme scenario, Wedbush Securities recruited a broker and paid him $2.1M to move his clients, with a $135,000 bonus if the broker could generate $2M in commissions in his first year at the new firm... which ultimately led to inappropriate trades, a dozen clients filing complaints, and nearly $2M of settlement claims that Wedbush had to pay on behalf of the broker to damaged clients. Yet at the same time, proposals to limit such bonus payments have failed, and brokerage firms have blocked efforts by the regulators to require such bonus payments - and the risks they entail - to be disclosed to clients in the first place, which makes it difficult to even estimate the scope of the problem, given the lack of public information and how much is hidden behind the closed doors of arbitration. Still, though, the growing visibility of the issues that "bonus" forgivable-loan recruiting payments are causing may bring a fresh regulatory look at whether the practice needs to be altered, or at least better disclosed and tracked to fully understand its consequences.
The Growth Dilemma (Mark Tibergien, Investment Adviser) - The fundamental challenge for any business, including advisory firms, is that "if you're not growing, you're dying," as a failure to grow can not only erode profits in the face of rising costs, but reduce opportunities for employees, which, in turn, can eventually lead to turnover and difficulties in recruiting as well. And Tibergien suggests that there is a growing challenge of growth for advisory firms, which has been largely masked by the rising markets that have lifted AUM revenues by double-digit growth year after year, even as real organic growth of new clients and assets for the average advisory firm has now dipped below 5%, and aging clients may demand more attention (as their elder needs get complex), but their fees decline (as portfolios decrease with retirement spending). So what can be done to (re-)invigorate growth? Tibergien highlights that the first issue is simply to recognize that growing requires the capacity to grow in the first place; in other words, do the firm's advisors truly have enough room to add a material number of clients without being overwhelmed, and do they even have enough time between the service demands of existing clients to market and do business development? In fact, the recent 2018 Investment News Pricing & Profitability Study found that the #1 "growth tactic" for advisory firms was to hire new staff, followed by allocating more time to new business development. The second issue to deal with is "positioning" and differentiation - in a world where most firms now states that they are "holistic" and "tailored to your needs" and "using a planning approach," does the firm have a clear way to distinguish from the competition of other advisory firms all saying the same thing? And thirdly, does the firm actually have a strategy to market, or is it solely relying on referrals; and if referrals are the plan, does the firm at least have a clear way for clients or Centers of Influence to explain the firm so that it is differentiated when a referral occurs? The starting point, though, is simply to recognize that characteristics like investable assets may be a good way to define what it takes for a prospective client to be financially viable... but creating clear differentiation, positioning, and messaging requires going deeper into who the firm's ideal client really is (which then makes it easier to figure out how to reach them!).
Why It's Time To Redefine Advisor Success (Angie Herbers, ThinkAdvisor) - For many advisors, the perceived complexities of what it takes to run a large advisory firm is one of the primary reasons that they choose to stay "small" and keep the business simpler. Yet Herbers notes that, in practice, running a small business isn't necessarily easier than running a larger one. In part, this is because large firms tend to have the depth to be able to hire professional management to help run the firm in the first place, while smaller firms have to be run by owners who usually first and foremost wanted to be (and were trained to be) financial advisors, not business owners. And in part, it's also because small business owners tend to get "comfortable" with their businesses as they exist, and the reality is that, large or small, businesses have to keep iterating and adapting to survive and thrive. Herbers suggests that the starting point, though, is simply to get a better handle on the Key Performance Indicators (KPIs) that help track the success of the firm in the first place, especially given that traditional measures - like top-line revenue - are actually not very effective to track progress (given that under the AUM model, revenues often rise and fall based on the markets alone, and not the underlying organic growth and retention of the advisory firm itself). Or at a minimum, if the firm is going to track revenues and AUM, start by backing out any change in AUM and revenues due to market growth alone, to truly understand the health and growth rate of the advisory firm.
The Great Compensation Shift: From Solo Stars To Team Players (Charles Paikert, Financial Planning) - The traditional compensation model of the industry, dating back to the days of wirehouses, is to pay advisors based on the amount of revenue that each partner brings in and manages, and is still the dominant model in both broker-dealers and the RIA community. The caveat, however, is that compensating each advisor based (solely) on his/her client revenues creates an incentive for advisors to just focus on their clients, and not the overall firm and the team environment in which they work. Which is leading to a shift in advisor compensation amongst more team-based firms, to use a more salary-based approach that ties to years of experience, and expectations for the specific role in the firm, with subsequent bonus structures (from one-time payments for new clients to profit-sharing distributions for overall firm success) that incentivizes everyone towards supporting the growth of the firm (but more together, as a team). In essence, team-based firms are beginning to shift from an "eat-what-you-kill" approach to a more one-for-all-and-all-for-one approach and realigning compensation structures to match, with a particular focus on firm performance (as opposed to just advisor performance) as a key component of compensation and bonuses. From the firm's perspective, the more team-based approach also binds clients more directly to the entire team and firm - reducing sensitivity to and risk of a single advisor deciding to leave. Though firms are still experimenting with the balance between completely eliminating advisor-level incentives - to promote a team-based approach - and leaving some incentives in place for those who are still highly motivated by such incentives to grow (both their client base, and the firm's).
Want A Higher Valuation For Your Advisory Business? Take These Steps... (Jerilyn Bier, Financial Advisor) - When it comes to maximizing the value of an advisory firm, the good news is that there's a lot that can be done over time to increase the value; the bad news is that it often takes time, measured in years, to effect those changes. The key starting point is simply to set a target on what the exit plan may be in the first place. Is the goal to end out still being one of the business owners and have partners, or stay the sole owner until the end, and will the exit be a sale to internal successors, or externally to a third-party buyer? The distinction is important, because finding a successful successor is itself a significant challenge, and it's not uncommon for firms to try to groom three potential successors for everyone one founder who must eventually leave and exit. More generally, though, the key for a prospective buyer of an advisory business is to be reasonably assured that the business will continue to run smoothly after the founder is gone, which means not only an ability to transfer relationships but the operationalization of the key processes in the firm in the first place. Which means establishing standardized processes and procedures, and hiring team members in key roles - from advisory to investment management, operations to service - who can continue after the founder is gone. For those who want to sell externally, it's also important to recognize that there are two types of buyers - financial (who focus primarily on assets and cash flow), and strategic (that hope to leverage the acquired firm into their existing infrastructure), with the latter tending to pay a higher price but also often being more difficult to find the exact right strategic fit in the first place. Accordingly, don't be afraid to interview a lot of firms to try to find the right fit in the first place; it's not uncommon for prospective sellers to interview a dozen or two potential buyers to try to find a good match.
The Art Of Repetition (Ben Carlson, A Wealth Of Common Sense) - Business guru Peter Drucker once famously said "Don't make a hundred decisions when one will do"... the idea being that business (and life) becomes easier if you can make one big decision that can effectively be repeated/replicated over and over again. In the personal context, Carlson suggests that this leads to a key in success: trying to make decisions that you can subsequently repeat, easily, in order to make a change and stick with it. For instance, if you're trying to diet, don't keep trying to adapt what you eat to the new/latest diet fad; instead, figure out a few healthy meals you enjoy, and then just eat them repeatedly, which in turn makes it easier to plan them out in advance. Of course, endless repetition can get monotonous - so it's not a bad idea to plan for a "cheat day" (or weekend, or vacation) as well - but if the routine has been planned out in the first place, it should be both easy to break, and easy to return to. And notably, there's some research validation for this approach, as well, as the recent book Happy Money highlighted how "avoidance abundance" can actually increase happiness. In other words, being able to eat whatever you want, whenever you want, eventually takes away much of the joy of finding new things, while finding repetition (and avoiding abundance) and then occasionally breaking the routine can actually make us happier. (Thus why we savor the "cheat" meal even more when we're otherwise on a routine diet.) The key point, though, is that lasting habits does mean you need to have - or develop - a relatively high tolerance for repetition in the first place, though.
You've Told That Story 100 Times. Please Stop. (Elizabeth Bernstein, Wall Street Journal) - Storytelling is usually a bonding experience for people, where we share something personal about our lives that in the process discloses something about our values, or our history, or our outlook on life, which in turn becomes a signal of faith and trust (in the willingness to be vulnerable and make such a self-disclosure) that builds more closeness in the relationship. Yet the challenge is that not everyone is good at storytelling in the first place, with a painful tendency to repeat the stories we've told before or to tell tales that don't have a point, or choosing stories that don't really connect with or have relevance to the listener. Thus, while people who tell stories - as opposed to just delivering facts or opinion - are judged by other to be more warm and likable, those who tend to repeat the same stories over and over are viewed as less sincere and authentic. (Though notably, acknowledging the repetition, such as by saying "As I always say..." at least does usually get a pass from listeners, for being authentic about the repetition.) And the phenomenon isn't just one of idle interest; neuroscientists have shown that the well-told story actually triggers the release of key neurochemicals, including dopamine (which focuses our attention), and oxytocin (which helps us bond). So how do we become better storytellers with less repetition? Key tips include: "open hot" (with something that captures the attention initially); flesh out the characters (i.e., acknowledge the emotions/feelings of the people in the story); build some tension, but don't exaggerate; disclose something about yourself; and above all else, have a point, which makes it so much more interesting for the listener!
What To Do When You're Bored With Your Routines (Juli Fraga, New York Times) - One of our biggest challenges as human beings is a phenomenon known as hedonic adaptation: our tendency to get used to things over time, to the point that they eventually lose their novelty, intrigue, or outright enjoyment. Thus why a special dessert we eat sometimes becomes boring if we have it all the time, why momentum for a new workout class (or other New Year's resolution) peters out after a few months, and why overall a 2016 study found that 63% of people suffer from boredom at least once over a 10-day period. And notably, boredom and a tiring over repetition can happen to anyone (contrary to the sometimes popular view that "only boring people get bored"). In other words, according to a recent book entitled "Yawn: Adventures in Boredom," by researcher Mary Mann, boredom (or being frequently bored) isn't a character flaw, but simply part of the human condition and our capability for hedonic adaptation. Of course, our tendency to adapt is often also a good thing - it's what also makes us able to overcome adversities from losing a loved one to divorce or downsizing. But the "upside" version of hedonic adaptation also leads to the phenomenon known as the "hedonic treadmill," where our lifestyle creeps higher and higher as we grow accustomed to what we have and then end out wanting more and more. The key point, though, is that if hedonic adaptation is the challenge, we can choose to break out own routines, at least from time to time, in order to break the cycle. For instance, one study found that just eating food in unconventional ways makes it feel more novel (e.g., try eating lunch with chopsticks!?). Or try mixing up your work environment a little, from working in a coffee shop or library instead of the office, or at least mixing up the setup and layout of your desk and office space. And notably, changes don't have to be large to have an impact; even just accessorizing your desk with fresh flowers, or trying a new approach to a work project, can have a positive impact. The same applies to relationships and marriages as well; doing something new as a couple, or mixing up your social relationships, can infuse fresh energy and break up the boredom. Even the boring commute can become less boring by mixing it up, whether that means taking a new route to get to/from work for a change of scenery, or listening to a new podcast instead of the same old radio show every day.
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.
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