Weekend Reading for Financial Planners (Aug 20-21)

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Read all of Michael’s articles here.

Weekend reading for August 20th/21st:

Social Security Drops Cell Phone Mandate (Mary Beth Franklin, Investment News) - Earlier this month, the Social Security Administration announced that it was adding an extra layer of security to the online MySocialSecurity portal: a form of two-factor authentication, where users cannot log into their online account until they enter a confirmation code that would be sent via text message to their cell phone. The caveat, of course, is that not all seniors even have cell phones (or if they do, they're not phones that can receive or have text messaging enabled); the Senior Citizens League estimates that as many as 75% of people age 56 or older wouldn't have reliable access to text messages to meet the new login requirements even if they wanted to. In addition, the system had glitched on rollout, where the text codes were only valid for 10 minutes but users on some cell phone networks like Verizon weren't even getting the text messages in a timely manner. Accordingly, the Social Security Administration has now partially backed off, leaving the extra security of multi-factor authentication as a choice, but not a requirement, while beginning work on an alternative authentication option besides text messaging (to be rolled out in the next 6 months). Nonetheless, the Social Security Administration appears to still be struggling to keep up with the rising demand on its services as Baby Boomers reach eligibility en masse, even as SSA's core budget has shrunk by 10% since 2010 and caller wait times now average more than 15 minutes. Accordingly, the SSA is still trying to push more of its services online, and seniors are still urged to claim their online Social Security accounts, both for faster and more expedited service, and because once the account is claimed, it's easier to prevent identity theft and fraud in the future.

Vanguard Files For Transparent Active ETFs (Jeff Schlegel, Financial Advisor) - This week, Vanguard filed for exemptive relief with the SEC to create a new series of transparent actively-managed ETFs. The proposal would mark a significant shift in Vanguard ETF strategy, which thus far has focused primarily on creating index ETF share classes of its existing index funds (through a unique method that Vanguard patented). Notably, Vanguard had filed back in 2014 to turn some of its existing actively managed stock and bond funds into transparent ETFs as well, but the latest filing hints that Vanguard is looking to now create entirely new forms of ETF-only offerings that aren't simply ETF versions of its mutual funds. Vanguard's transparent active ETF approach would be a departure from other asset manager efforts to launch actively managed ETFs, such as Eaton Vance's NextShares or the recent Fidelity active ETF proposal, which both feature non-transparent active ETFs that would only have to disclose their holdings occasionally (e.g., monthly) as a way to prevent front-running. On the other hand, Vanguard does acknowledge that not all strategies would be appropriate for this kind of transparent active ETF; the company suggests that it would only adopt strategies that could reasonably accommodate a daily portfolio holdings disclosure (e.g., some model-driven strategies that have a large market capacity). In any event, it will likely still be a while before any solution actually comes forth; the current SEC request doesn't reference any actual proposed funds, which means the Vanguard may still be in the early stages of considering the product for a future launch.

Finding The Perfect Client Fit (John Bowen, Financial Planning) - Bowen's organization surveyed over 2,000 successful advisors last year, and found that the majority (56%) have some kind of specialization into a niche. The stated benefits included a whopping 97% indicating that specialization had led to better income, 98% reporting it had a positive impact on business growth, 91% saying that it had a positive impact on establishing strategic alliances with other professionals, and 96% stating that it was helpful to attract more affluent clients. Advisors who specialized also reported they were able to better service clients (easier to do a good job servicing a consistent type of clientele), and had more satisfied and loyal clients. Notably, though, Bowen defines specialization fairly broadly, and that a viable client specialty area must simply share five key characteristics: a distinct market with shared client traits (which could be a similar profession, same employer, comparable stage of life, or even the love of a similar hobby), a strong potential for growth (be certain to pick a big enough marketplace that you can grow into it), a good potential for income (make sure you specialize in clients who can pay for your services!), a group where you have the specialized expertise (or where you can learn it and become qualified), and a group that you actually enjoy working with (since you're going to be spending a lot of time with them!). Bowen also points out that while the idea of specializing or finding an advisor niche is often discussed as a path to greater business success, advisors who have specialized also report a greater enjoyment of their work, as juggling the disparate needs of a wide range of clients as a generalist can cause the advisor to feel stressed, overworked, or even burn out (while a niche focus helps to avoid this).

11 "Must Haves" For Your [Advisor] Website (Crystal Lee Butler, Advisor Perspectives) - When designing a good financial advisor website that can actually turn visitors into bona fide prospects, there are a number of "must haves", including: your services (be clear about what you offer, and make it easy to find!); a page about you (prospects want to know the people behind the brand, so make it easy for them to connect with you, and include information about your personal life that humanizes you); video of you (since people connect with people, a video that lets prospects actually see and hear you can go a long way to establish initial trust); credibility markers (while you can't include testimonials, you can share information about events where you spoke, media appearances, awards you've been presented, etc.); ways to engage prospects to stay connected with them if they're not ready to contact you yet (e.g., a compelling sign-up for a newsletter list, or offering white papers or even a sample online risk tolerance questionnaire); contact information so prospects can reach out when they're ready (does your website actually clearly explain how people should contact you when they want to do business?) along with links to social media profiles to stay in touch; a blog that shares your expertise for those who want to learn more;  and key legal information including your privacy policy and a copyright statement.

The 7 Reasons Financial Advisors Struggle Attracting Leads (Kirk Lowe, Iris.xyz) - While most advisors generate the majority of their new clients from referrals, that doesn't mean all advisors are getting as much new business as they want. Lowe suggests that the reason is at least in part due to the problematic ways that advisors market and position themselves. For instance, despite the fact that most people like to hear stories to connect, too many advisors simply try to sell their financial products, financial plans, or other financial services, without ever really conveying a clear story of how their solutions actually benefit their clients. In other cases, the problem is that the advisor tells a story or communicates their solutions well, but lacks credibility, and hasn't taken sufficient steps to enhance their credibility (from obtaining professional designations and certifications, to crafting a professional-looking website, and establishing themselves as a clear expert in a niche). Other typical problems of advisor marketing include: too much "ask" (e.g., 'contact me today for a free consultation!') and not enough "give" (here's my free blog and podcast content so you feel like you're getting value from me already!); asking for too much too fast (most prospects aren't ready to book a meeting with you the first time they visit your website, so what are you doing to begin establishing trust with them to make them come back to do business later?); to many half-hearted efforts and not enough that are sustained to the point of success (marketing is a slow process, so even strategies that work will take time); and no clear focus or niche (it's hard to differentiate and attract leads when you provide the same generalist service as everyone else).

Do Sponsorship Deals Pay Off For Advisors? (Jeff Schlegel, Financial Advisor) - In a world where most advisors spend little on marketing and rely on (passive) referrals for new clients, it's interesting to see what happens when advisors actually try to do bigger spending in the form of advertising sponsorships. For instance, One Capital in Los Angeles is spending over $100,000 on a high-profile sponsorship with CJ Wilson Racing, which gets their firm's name plastered across the hood and doors of a Porsche Cayman GT4 that will compete in the IMSA Continental Tire SportsCar Challenge circuit. The effort is part of a "sports and entertainment group" within the wealth management firm, one of several niche practice areas of the firm, and notably a key part of the approach is not merely to attract prospects who might call directly based on the sponsorship, but also because being a sponsor gives the firm access to other high-powered individuals in the racing industry, allowing for deeper relationships to be formed with affluent prospects (and the firm is already finding the sponsorship has helped to open new doors to some promising business opportunities). This indirect form of business development, though, makes it hard to quantify "success" from a sponsorship deal; as a result, other firms quoted in the article note that they are happy to do some sponsorships simply for the good of the community, but have struggled to substantiate the ROI. At a minimum, though, be certain that it's clear what the business will get from sponsorship, as at least one advisor notes a $5,000 sponsorship 'investment' fell flat when the foundation event being sponsored failed to even prominently feature the firm's name as a part of the sponsorship!

4 Personality Tests For Hiring Advisors (Caleb Brown, ThinkAdvisor) - As a recruiter that hires new financial planners himself, Brown shares some of the assessment tools that he uses when evaluating prospective hires on behalf of advisory firms, recognizing that while it's great to know if a potential hire has their CFP marks (or can pass the CFP exam), in most advisory firms the best indicators of success are the softer attitudinal factors like motivation and coachability, communication skills, and work style. Fortunately, there are a number of psychological assessment tools that can help with this, and at least increase the likelihood of hiring a good fit. The four assessment tools that Brown highlights are: DISC, which cost about $40, takes candidates 20 minutes, and evaluates candidates on four scales (Dominance, Influencing, Steadiness, and Compliance) to understand how they might fit into the firm and what their 'natural' work style is; StrengthsFinder, which has a varying cost (less than $100), takes about 40 minutes for candidates to complete, and focuses on the person's five top personality themes (e.g., Achiever, Focus, Learner, Competition, etc.) to understand what they do best; Caliper, which costs about $195 and takes up to 90 minutes, but provides a wider-ranging assessment that delves into hard-to-evaluate areas like abstract reasoning, ego resilience, and urgency; and Profile XT, which costs the most ($250), takes about an hour for candidates, and similar to Caliper offers both cognitive and attitudinal measures. Another plus for Caliper and Profile XT is that the hiring firm can enter details about the job being hired for, to create an 'ideal profile' for the prospective hire, against which the candidates are then scored for job fit. All of the companies also have trained staff (e.g., clinical psychologists and PhDs in industry psychological) who can help further interpret the results, though this can have an additional cost as well.

RIA Sellers Guide: Who's Buying, And What They Want (Charles Paikert, Financial Planning) - If an RIA firm is willing to sell, there are a lot of buyers out there right now. The majority of buyers are "strategic acquirers", though notably different acquirers are buying for different strategic reasons, and provide different types of service and support. The first category are the "Integrated Platform Providers" (companies like Dynasty Financial, HighTower Advisors, and FinLife Partners from United Capital), which technically don't actually acquire the equity of advisory firms at all, and instead simply allow RIAs to outsource their back office, compliance, research and portfolio management needs, with the idea that if these functions are outsourced there may be less reason to sell the firm. The second category are "Passive Investors" (firms like Fiduciary Network), who buy a stake in the firm and may provide capital for additional growth or acquisitions and tuck-ins, but generally are otherwise "hands-off" and don't provide any operational support (and thus are best for already-well-managed firms looking to grow and needing help to facilitate the exit of founding owners). The third category are the "Financial Acquirers" (like AMG Wealth Partners), who buy large wealth management firms (e.g., $1B+ in AUM) in whole and let them continue to operate independently (but with the acquirer as the new owner). The fourth are "Strategic Aggregators" (such as Focus Financial Partners), which buy into RIAs and provide a combination of capital and other support for operations, growth, and acquisitions, but RIAs maintain autonomy within the network of other aggregated firms. And the last are the "Branded Acquirers" (e.g., United Capital, HighTower Partners, and Mariner Holdings), which acquire RIAs and fold them into the company's single unified brand, which can be great for firms that are looking for an exit and willing to give up control to a centralized brand and resources.

Why A Sponsor Program For Employees Is Even Better Than Mentoring (Schwab Advisor Services) - For growing advisory firms, developing employee talent is a key to sustain growth, and there's a risk that top employees who don't feel like they're developing and moving forward may leave. Accordingly, Schwab's research suggests that firms should consider a "sponsorship" program to support staff development. A sponsorship program is where a senior leader of the firm (the "sponsor") is matched to a more junior employee (the "protege"), advocating on their behalf for stretch opportunities and promotions. This can be distinguished from mentorship, which is simply about providing advice and career guidance; sponsors are expected to actually act within the company to advocate on behalf of their proteges (in addition to pushing their proteges to step up). For instance, in one firm, senior advisors sponsor new advisors as proteges, bringing them into client meetings, and encouraging them over time to not just take notes, but begin to make presentations, form client relationships, and establish client trust. Another firm rolled out a sponsorship initiative specifically to be more inclusive of the future female leaders in the firm, who it turned out were being less engaged by the firm and therefore had higher turnover. And a third firm's sponsorship efforts helped to redirect an employee from an investment research role into a client-facing role for which she was better suited (thus benefitting both her, and the firm). More generally, the idea of sponsorship programs is to help top employees more effectively navigate the firm's career ladder, which can reduce turnover, strengthen the firm's leadership succession, and provides a path to improve diversity and inclusiveness. For firms that want to build out a sponsorship program, start by looking at current employees, identify a few top performers, and look to current leaders of the firm who might be willing and interests to sponsor them; the article also recommends Sylvia Ann Hewlett's "Forget A Mentor, Find A Sponsor" book.

New Research Suggests Banning Investment Advice In The Media (Liz Skinner, Investment News) - While as financial advisors we've long counseled our clients not to watch as much salacious financial television (or as some advisors call it, "financial pornography"), a new study by Donald Dale and John Morgan entitled "The Welfare Effects of Public Information Under Proper Priors" further substantiates this advice, finding that even when people know the quality of the information is low, they still give it more weight than it deserves. In other words, the research finds that when the media offers a barrage of information, people are really more likely to act, and of course their actions can just lead the media to cover the phenomenon more, in a positive feedback loop that can distort market prices. Which means it's not enough to just admit that the financial media often has poor information; instead, it may actually be essential to turn off the financial media news for investors to stay the course. And in the aggregate, the research implies that the volume of financial media news could be driving investor herd behavior (given how we disproportionately overweight media information), and that less financial media could help market prices to stay more firmly connected to the underlying company fundamentals!

FINRA Shifts Unwelcome Spotlight Away From Itself By Training It On The Brokers It Oversees (Irwin Stein, RIABiz) - As the world of financial advice continues to transition towards its fiduciary future, FINRA - the overseer of broker-dealers and their registered representatives - is doing its part to clean up the ranks of its brokers, increasing the pressure on broker-dealers to report negative information about brokers (e.g., felonies, litigation, bankruptcies, and tax liens) on their Form U-4. In turn, reported issues are then made available to the public via BrokerCheck, which is now being amplified with a new rule that requires firms to verify the accuracy and completeness of disclosures made by new employees within 30 days, to monitor employees on a continuing basis, and brokers are required to include links to their BrokerCheck records from the homepage of their website. In the meantime, FINRA is spending $3.5M on a national advertising campaign to promote BrokerCheck as a resource for consumers. Yet while the consumer-oriented effort should be a positive, especially given a recent study finding that there's a high rate of repeated broker misconduct offenses (which means making it easier for consumers to avoid brokers with problematic BrokerCheck records could significantly reduce consumer harm), and another finding that the most problematic brokers seem to concentrate in a small number of high-risk broker-dealers, critics suggest that FINRA's effort is more about making itself relevant than actually helping consumers. After all, the BrokerCheck system does not fully verify complaints before they're posted to BrokerCheck, nor give them any context for investors, and some brokers have "complaints" where they were merely named amidst a large number of parties and weren't even involved in the final arbitration. Yet at the same time, many more serious transgressions end out being expunged from BrokerCheck altogether. Which again raises the question - is FINRA making a push to promote the problematic complaint records on BrokerCheck to protect consumers, or itself?

10 Reasons To Take A 10-Day Vacation (Tim Maurer, Forbes) - For many busy advisors, it's difficult to take a vacation at all, much less a long one. But Maurer makes the case for why it's especially important and valuable to take a long vacation. The first reason is simply that a 10-day vacation gives you time to truly "vacate" and step away from work (whereas if you only go on vacation for a week, but the time you start to relax on your trip, you're already getting tense about returning to work!), especially when you recognize that the time to travel (i.e., the plane, train, or automobile ride) is a smaller percentage of vacation time when you take a longer trip (as opposed to several shorter ones). A longer vacation also forces more actual planning to occur (in a good way), as being gone 10 days means you really have to learn to offload some work duties, and that you need to actually plan for and budget the vacation itself (a good family exercise!). In addition, a longer vacation provides more opportunity to have positive experiences that create the real memories that last, and a chance to actually find and create new habits and rhythms of life that suit the vacation. And Maurer notes that with a long vacation, by the end you may actually be starting to hunger for and be ready to return home, which turns the return trip into a welcome transition back to 'normal' life, rather than an abrupt vacation ending that gives a post-vacation hangover. So the bottom line: if you're going to take two weeks of vacation in the coming year, don't just split it up in pieces throughout the year, and instead try to take a "real" 10-day vacation all at once.

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!

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. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read "FPPad Bits And Bytes" on his blog!