Weekend Reading for Financial Planners (Dec 12-13)

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.

FPA Names Patrick Mahoney As Permanent New CEO (Jake Martin, CityWire) - This week, the Financial Planning Association announced that Patrick Mahoney - who had taken over leadership of the FPA on a temporary basis in May after the departure of Lauren Schadle - would become the new permanent CEO of the beleaguered membership association, which saw its membership decline by nearly 10% to 21,000 since its ill-received attempt to dissolve and consolidate its chapters and is now no longer reporting its membership count at all in its public statements. Yet as the total number of CFP certificants that the FPA professes to serve continues to rise - now to more than 87,000 - the hope is that under Mahoney's leadership, the FPA may once again get its growth engine underway. As while for decades, the FPA promoted leadership only from within, Mahoney comes with broad executive experience outside the financial services industry, including 12 years at S&P Global in product and operations roles, and 9 years at the Institute for Electrical and Electronics Engineers (IEEE) as the Chief Marketing Officer and then the CEO of the international 400,000+ membership association... which means Mahoney brings a unique combination of Product, Operational execution, and Marketing, that the FPA has long struggled with. And while some may raise concerns about whether Mahoney can learn quickly enough to take up the unique issues of the financial services industry, the reality is that NAPFA (in hiring CEO Geof Brown) and the CFP Board (in hiring CEO Kevin Keller) have both thrived over the past decade specifically by hiring executives from outside the existing world of financial advisors who had the strong executive experience that could be applied to the new organization they would lead. In fact, the FPA hired Vetted Solutions, which ran the aforementioned executive leadership searches for the CFP Board and NAPFA as well, in the process of identifying and hiring Mahoney. Though, in the end, the question will simply become: can Mahoney really execute and (hopefully!) turn around the FPA and its waning market share of CFP certificants to finally become the thriving membership association it was promised to be when it was first created as a merger of the IAFP and ICFP more than 20 years ago?

Inside The Successor's Mind (Brett Davidson, FP Advance) - One of the biggest challenges of succession planning in advisory firms is simply that owners and successors often come from very different perspectives. Not only because of what is often a significant age/generational difference, and the varying life experiences that result, but also a different mental mindset that leads one person (the owner/founder) to launch a new advisory business from scratch, and another (the prospective successor) to choose to become an employee and work in an advisory business (rather than taking the entrepreneurial leap themselves). Accordingly, Davidson provides an interesting perspective on the mindset of a prospective successor, in the form of a letter written to the founder. Key points include: yes, a retiring founder risks "their retirement" and harvesting the value of their business if the succession plan goes badly, but the prospective successor risks losing the best/peak productive years of their career as well ("let's call it even"?); a successor might not necessarily quite pay the "top dollar" of a competitive bidder, but as someone steeped in the culture created by the founder, is far more likely to actually provide the continuity of service that the founder would hope and expect for their lives (so that "if you get to see your clients in the street 5 years hence, [you won't] have to cross the road with embarrassment at what's happened to the service they receive"); yes, a new and 'less experienced' owner still has lessons to learn, and will likely make mistakes... but with a buyout and debt on the line, recognize the successor isn't likely to make any "bet the company"-sized gambles anyway, so don't worry more than is really necessary! But recognize as well that ultimately, a successor doesn't buy the firm for what the founder built, but for what the successor thinks it can become... which means, in the end, successors will ask and expect that the founder ultimately allow them to make their own decisions and take the business in the direction they want to take it in the future (but again, see the prior note about not sweating "bet the company"-sized gambles!).

RIA Succession Tips For All Seasons (Todd Resnick, Financial Planning) - When it comes to succession planning, the bizarre reality is that the best succession plans are both concrete and flexible. They are concrete in that if they must be executed - e.g., in the event of an untimely death or disability - they can be executed (ideally with the appropriate contractual buy-sell triggers and the requisite insurance necessary to facilitate that transition). As even a less-than-optimal succession plan structure (and associated valuation?) will be a better outcome than no succession plan and watching the remaining value vanish altogether. Yet, at the same time, the ideal succession plan must remain flexible, because it's not always clear - especially early on - who the ideal successor may be, and the optimal path for transition can (and likely will?) change as the years go by... if only because a firm that is planning for succession may recruit more than one prospective successor over the years, and the person that is first in line to be the successor may consequently change over time! Similarly, the valuation of the firm may change over time, as will the deal structure (e.g., in the not-so-distant past, virtually all deals were 100% seller-financed, but now it is increasingly feasible for successors to obtain bank financing so sellers can take more risk off the table more quickly instead). Thus, ultimately, the goal is to always have something concrete to execute upon, while recognizing that the details can and will change over time.

Succession Planning Strategy For Brokers: Convert To An RIA First? (Shad Besikof, ThinkAdvisor) - The market for mergers and acquisitions of RIAs continues to heat up in recent years, from high-profile deals like Goldman Sachs acquiring United Capital for $750M in cash, to a recent analysis by Advisor Growth Strategies showing the EBITDA multiple paid for advisory firms has risen nearly 29% over just the past year (to 6.6X, up from 5.1X in the 2015-2018 time period), and after a brief pause in the first half of the year (due to the pandemic) deal volume for RIAs continues on a record-setting pace for 2020. Yet advisors who work at broker-dealers do not necessarily have the opportunity to participate in the same economics, lacking an independent legal advisory business entity they can actually sell, and the reality that legally "their" clients are actually clients of the broker-dealer. Of course, many broker-dealers recognize this risk and have created their own internal buyout programs, which a few years ago were quite generous (reaching as high as almost 3X revenue when RIAs were more commonly selling for 2X), but competition and declining margins amongst broker-dealers have reversed this balance, with broker-dealer (particularly wirehouse) transition programs declining to 'just' 1.5X - 2X trailing 12-month revenue and often paid out over 5 years, while multiples for larger RIAs are increasingly rising above the 2X revenue multiple and as much as 2/3rds or more upfront (as opposed to a broker-dealer 5-year earn-out/payout), in addition to the fact that at least part of the RIA acquisition deal is often eligible for capital gains treatment (while broker-dealer transitions are virtually always 100% ordinary income). As a result, advisors at broker-dealers eyeing retirement in 5+ years are increasingly looking at a transition to the RIA channel as an exit strategy, to set up for a future sale with more favorable terms.

Onboarding New Clients After Taking Over A Retiring Advisor's Business (Jon Luskin) - Given the challenges of building a new clientele from scratch, one of the most appealing ways for new financial advisors who have some personal financial capital to deploy is not to spend it on the 'startup costs' of their own advisory business, but to deploy the capital to actually acquire a retiring advisor's clientele and make it their own. The starting point, though, is to find a retiring advisor who aligns philosophically with the buyer in the first place - after all, it's hard to buy an advisor's book of business if their clients are used to individual stock selection and you prefer a passive Vanguard portfolio, or if their clients are focused on investment management but you're offering financial planning services as well, or if their clients are used to compensating their advisor with commissions and aren't used to paying upfront advice fees. When it comes to handling the transition itself, though, Luskin highlights an 18-month transition process that entails multiple meetings, including 1) an Introduction meeting, typically 2-6 weeks after the transaction closes, which is attended by both the retiring and acquiring advisors to set expectations and explain the transition process to each client; 2) an Investment Review meeting, to go over each client's current portfolio and their comfort level with it (and identify if any transitions may be necessary to the new advisor's investment philosophy/process); and 3) a Recommendations meeting, where the transition plan is explained, including where/how investment changes may be made as a part of the transition. Even with a process that builds incrementally to the change and transition, though, it's important to recognize that human beings by nature don't generally like change and that it may well take 18-36 months for clients to really get comfortable with the new acquiring advisor. In any case, though, the key is to understand that while, in the end, the whole point is to transition the retiring advisor out of the practice, having them involved with the transition plan and the transition meetings is crucial to help confer the retiring advisor's client trust to the acquiring advisor.

Communicating Fiduciary (Bob Veres, Inside Information) - Last month, the CFP Board released a model Client Engagement Letter that CFP certificants can use with their clients to explain the nature and scope of their engagement and the standards to which the advisor will be held, in accordance with the new requirements from the CFP Board to Provide [Required] Information to new clients. Accordingly, the model Letter explains the 7-step financial planning process, points clients to associated regulatory disclosures like Form CRS and Form ADV, outlines various financial planning services the firm might offer (e.g., cash flow planning, investment planning, retirement planning, etc.), provides sample fee disclosures, and offers templates for some disclosures regarding common conflicts of interest. Yet Veres notes the irony that the one thing the CFP Board's template does not include is any mention of the fiduciary standard that the CFP Board so prominently highlighted when first released as a key feature of its new Standards of Conduct (and continues to imply with its public awareness campaign that CFP certification is the 'Gold Standard'). Of course, the caveat is that just being a "fiduciary" still isn't necessarily clear to clients, in part because it is a term of legal jargon that consumers don't necessarily understand, and in part because simply stating an obligation to "put the clients' interests first" isn't really specific enough to convey the true meaning. In ancient times - dating all the way back to the Code of Hammurabi - fiduciaries who were entrusted with the assets of others have very specific obligations, including potentially severe consequences for failing to do so (e.g., "Item 265: If a herdsman, to whose care cattle or sheep have been entrusted, be guilty of fraud and make false returns of the natural increase, or sell them for money, then shall he be convicted and pay the owner ten times the loss."). Similarly, "If a medieval Japanese samurai was found to have harmed others or society through ethical lapses, or behaved in a shameful way by benefiting himself over others, he was expected to ritualistically end his life. (Commit seppuku.)" To say the least, "disclosure" was not a part of historical fiduciary standards. Which suggests that perhaps in the future, the best approach is not to try to parse out fiduciary language and the associated disclosures of conflicts, but simply to delineate what is not permitted at all (e.g., the advisor will only be compensated by the client, and not by product providers in the first place). With the caveat that in this framework, firms compensated on an assets-under-management basis for implementing their own standardized investment models are arguably an asset-gathering "internal product" conflict unto themselves.

What's Wrong With Offering Peace Of Mind? (Steve Wershing, Client Driven Practice) - For financial advisors trying to convey the value of their services, one of the most popular value refrains is that we provide "Peace Of Mind" to our clients. Yet as Wershing notes, "Peace Of Mind" is actually not a very distinguishing value proposition, in a large part, because we find "Peace Of Mind" from a wide variety of sources, from our church or synagogue, to a doctor, a home security system, or a yoga or meditation class. (And at least most financial advisors don't intend to communicate that they're in the meditation business!?) Not that it's bad to talk about the improved mental states that clients can achieve by working with the advisor, but Wershing suggests that first and foremost, it's necessary to do so in the context of being a financial advice provider in the first place. For instance, we don't provide "Peace Of Mind", instead of helping our clients "make confident financial decisions", or "develop confidence in managing their money after losing their partner", or helping clients "have a healthy relationship with money and how they handle it". The key point is that while these are mindset-oriented outcomes, they're ones that prospects would likely associate with a financial advisor (and not a home security system or a yogi), thereby making the financial advisor and their services more distinct and memorable.

Who Are You Talking To? (Josh Brown, Reformed Broker) - The financial advisor industry has long put growth on a pedestal, suggesting that bigger is better, the more the merrier, and that the goal forever and always should be getting more, more, and more clients by casting the net wider, and wider, and wider. Yet in practice, at some point an advisory firm often reaches a balanced capacity and limiting point, where its growth slows, because it has - knowingly or not - saturated the market of prospective clients it is currently communicating with, is facing a moment of diminishing returns, and has to figure out "what's next" on the horizon. Which in turn raises a key question: whether to make changes to broaden the potential audience of prospects and get more of them, or instead to double down on those the firm is already connecting with and go deeper with them instead; in essence, do you want a service of 'mass' appeal, or one with a more targeted and committed following? Ultimately, there isn't necessarily a right or wrong answer - businesses can and do succeed with both - but there does come a time when making the decision becomes necessary, to be boutique-y and exclusive or generalized and affordable, to be scaled for the masses or bespoke for the discerning. In Brown's case, he notes that having gone bigger and broader for many years, he's now increasingly finding it more rewarding to instead go deeper with those that most resonate with the firm and its message, aiming instead to reach an audience of clients that is not everyone, but is still more than big enough for the firm to be successful. More simply, though, the core question for any and every advisor is: do you really know who your target audience is in the first place? (And if not, how will you ever figure out what delights them?!)

How To Create Your Ideal Client Avatar (Lindsey White, XY Planning Network) - A "client avatar" is a detailed, lifelike description of someone who embodies all the characteristics of the target clientele the advisor aims to serve. In other words, beyond just saying "we serve retirees" or "I work with dentists", a client avatar goes deeper; after all, working with dentists fresh out of school differs greatly from working with dentists who are approaching retirement, who differ from dentists in their peak earning years trying to build and grow their dental practices. Which is important, because - depending on the exact client avatar - the advisory firm might use different buzzwords to describe their services and connect with their clients, might use different social media platforms or other marketing channels to reach their prospects, and might use different pathways for advertising and promoting their services. The starting point is simply to identify who is really the firm's ideal type of client to be working with - is it Retiring Ron or Graduating Grace? - and begin to really detail out what they face at their current age and stage of life and situation. For instance, what's really on their mind (finding a new job as a starting dentist or finding a successor for their dental practice?), why are they seeking out a financial advisor (navigating student loan debt from dental school or seeking a bank to finance their dental practice succession plan?), what are their top needs and pain points, and what kind of content might the firm publish to attract and connect with them? The key is that by being specific about the client avatar, it actually becomes easier to figure out exactly what kind of marketing messages will resonate - depending on whether the firm is trying to reach Ron or Grace - which ultimately makes it easier to have marketing and client communication that really works and resonates with the types of clients the firm ideally wants to attract and serve.

What If You Could Outsource Your To-Do List (Nathan Heller, New Yorker) - Historically, "The Assistant" was a support person only available to the busiest (and highest income-earning) of executives, in many ways a status symbol unto itself, and not accessible to most. Yet the reality is that personal assistants are not only the domain of executives; in fact, everyone from Mark Twain to Malcolm X and even Mother Teresa had personal assistants (as Heller puts it, "her good deeds seemingly did not extend to paperwork"), yet nonetheless the number of people in the U.S. employed as executive secretaries and administrative assistants is down by more than 50%. In part, this is because many tasks once done by an assistant are now increasingly facilitated (or entirely automated) with technology. But at the same time, the rise of technology and the internet is making it possible to hire an assistant - both virtually, and not even a 'whole' assistant but just an incremental one for the exact tasks needed. Unfortunately, though, doing such tasks - and in small increments - is still an intensive human business, which in turn is leading a new generation of virtual outsourcing businesses, like Invisible Technologies, to arise spanning the globe... taking advantage of differences in cost of living across countries to help Americans outsource tasks to distant parts of the world where labor is still cheap and outsourced tasks are a 'great' work opportunity at $5 - $10/hour. Particularly since technology is making it possible to split tasks up - akin to how Henry Ford revolutionized car production with the assembly line - allowing a wide range of people to each do a small share of work to get the task accomplished. In the end, though, the key point is simply that as technology has spent the past 20 years breaking down geographic barriers in a wide range of industries... is the expansion into virtual assistants making it possible to even outsource our personal tasks overseas at a low cost, too?

How to Better Manage Your Life Admin (Brett and Kate McKay, Art Of Manliness) - For many people, particularly in professional services jobs, the "administrative work" ends out being the least favorite part of the job, the 'necessary' tasks that must be done to support the rest of the more engaging tasks like working with clients and growing the business. And the never-ending list of tasks rarely ends when work does, as going home just entails stepping into another series of tasks that need to be done, or the "Life Admin" tasks that aren't just chores but require some mental work to get done (e.g., paying bills or parking tickets, filling out applications for school or tax returns for the IRS, managing health care and health insurance matters and making appointments with doctors and dentists, planning for social events and managing household supplies, etc.). The challenge in practice with such Life Admin tasks is not that they're difficult to do, but simply that there are often a lot of them. The cumulative workload can be tiring or tedious or mind-numbing, but it's also very hard to get motivated on and is easy to procrastinate from. So what's the best way to handle and manage the Life Admin tasks? The McKays suggest that a good starting point is to set a weekly time for yourself just to brain dump all the tasks that may be looming, so you can at least get them out of your head and down onto paper (for which they use this Getting Things Done Trigger List), and then track them to completion by loading them into a To-Do task tracking tool (e.g., ToDoist). To ensure the family is on the same page, the McKays suggest a weekly family meeting (or at least a couples meeting for the parents) to plan out what's coming up that needs to be done (and perhaps delegate to the kids some tasks that they can support on?). To further reduce the mental load, consider trying to set certain routine times for regular tasks to get done (e.g., review bank statements the first Sunday of the month, review estate planning every January, clean up and back up the laptop every Sunday, etc.). Other tips include: use a version of the Getting Things Done "2 minute rule" (if you can do it in under 2 minutes, just do it now and don't delay/procrastinate); automate as many tasks as you can (e.g., bill paying in particular?); consider the weight of life admin when making decisions about whether to do so or not (e.g., it's not just about acquiring a new car or appliance or pet, but the Life Admin load to support it on an ongoing basis!); and consider outsourcing Life Admin whenever you can (e.g., an accounting to do your taxes, a travel agent to plan your next vacation, etc.).

Outsourcing My Life: Why I Pay Others To Do Tasks I Could DO Myself (Miranda Marquit, Get Rich Slowly) - One of the classic rules of thumb when trying to save more and manage household expenses is to be a DIYer and Do It Yourself to the extent possible, from changing your own oil to fixing things around your house, growing your own garden to cleaning your own home. Yet ultimately, Marquit notes - as the personal finance writer who often highlights these cost-saving strategies - that in practice she often delegates and outsources tasks that she can do herself (and incurs the expense of doing so)! In part, this is because often she could make even more by delegating and outsourcing than she can by holding onto the task - e.g., if you can get another client or contract or hour of billable work and earn $200 or $500 or more, it's simply a far better deal to spend $20 or $30 or $50/hour to delegate that task and free up the time for higher-earning activities (from oil changes to meal delivery). In other cases, it's not about earning more money with the time that's freed up, but simply having the time to spend with family (e.g., instead of spending time with the kids cleaning the house on a Saturday, hire a housekeeper and form memories with the kids going to a museum or riding your bikes instead!?). And sometimes outsourcing a task is just about the mental self-care of having a little more free time to rest, relax, watch a movie, or just breathe. Because ultimately, dollars are something that we can continue to earn more of... but time is fixed and limited, and once spent isn't something we can ever get back again!

I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!

In the meantime, if you're interested in more news and information regarding advisor technology, I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors, and Craig Iskowitz's "Wealth Management Today" blog as well.