Executive Summary
Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the industry news that the CFP Board is reversing its prior decision to remove compensation disclosures (e.g., "fee-only") from its Let's Make A Plan website and soon will begin to include even more information to consumers about how they will be charged for the advice they receive (e.g., commissions, AUM fees, hourly fees, subscription fees, etc.), after an internal consumer research study affirms that the most important factors for prospective clients evaluating an advisor are how they pay, whether they can afford it, and what the value will be (i.e., whether the service is worth the cost).
Also in the news this week is the unfortunate announcement that the SEC is tabling its long-anticipated proposed changes to RIA advertising rules that would have expanded guidance around the use of social media and (finally!) permitted advisors to use at least limited client testimonials (pushing any potential changes to a future yet-to-be-determined SEC Commissioner under Biden?), and the release of the Department of Labor's final new fiduciary rule that would for the first time allow ERISA fiduciaries to receive commissions (but has been issued so late that it will not take effect until after Biden's inauguration, raising the possibility that the controversial new fiduciary rule will be delayed and killed before it can be fully enacted).
From there, we have several articles around investment trends, including a look at the rise of "custom" direct indexing as an alternative to ETFs and mutual funds, an announcement that mega insurer Transamerica is halting all sales of fixed indexed annuities and variable annuities with living and death benefit riders due to the limited opportunity to offer compelling products to consumers in a low-interest-rate environment, and a fascinating look at the emerging work of Ole Peters who is challenging the traditional view of economics by taking a hard look at the "ergodicity" assumption and suggesting that perhaps investors aren't actually irrational but simply using a different framework to evaluate decisions than what economics has long presumed.
We've also included some articles on client retention, from a look at how clients may actually want to connect with each other through their advisor (from in-person social events to the virtual world of online networking or even message forums for clients), how driving client retention often isn't about having all the answers for clients but being able to ask better questions that engage them and make them feel understood, and some research on what really drives client retention that shows even very small increases in retention can have an outsized impact on the economics of an advisory firm (and suggests that advisors may still be "under"-investing in retaining existing clients over trying to get new ones?).
We wrap up with three interesting articles, all around the theme of advisor burnout and taking time off to rejuvenate (as we enter the holiday season!): the first looks at how often advisors can only recover from burnout by making a substantive change in their work (from taking on an entirely new role at the advisory firm, to leaving altogether and starting their own firm to better control their own time and focus); the second explores the rising phenomenon of employees not even using all of their vacation (and the potential ramifications of trying to "force" employees to take more time off in a busy work environment); and the last explores some of the data-driven research into the impact of taking vacation on the ongoing productivity of a firm's top employees.
Enjoy the 'light' reading!
CFP Board Launches Redesigned Find-A-CFP-Professional Website (Mark Schoeff Jr., Investment News) - This week, the CFP Board announced the launch of its newly overhauled "Let's Make A Plan" website, after a controversial decision earlier this year to remove advisor compensation disclosures (i.e., "fee-only") from its search tool in which the CFP Board maintained that what really mattered was the CFP professional's duty to act as a fiduciary and that a description of the advisor's compensation was "not helpful to consumers". Yet, while the CFP Board noted that only 6% of the 500,000 searches on its Let's Make A Plan website in 2018 included the "fee-only" filter, NAPFA noted that in 2019 there were more than 2.6 million visits to its Find An Advisor site specifically to seek out a fee-only financial planner. And now, after conducting further consumer research, the CFP Board has acknowledged that in reality, the most important factors for consumers in the selection of an adviser are how they pay, whether they can afford it, and what the value will be (i.e., whether the service is worth the cost). Accordingly, CFP professionals will now be able to indicate whether the client will compensate them in the form of commissions, AUM fees, hourly or project fees, or subscription or retainer fees, and, in the second phase of the relaunch, the CFP Board will provide filters that allow consumers to search by that criteria (e.g., to filter for advisors charging only fees, if they so desire). Notably, the updated Let's Make A Plan site will also include direct links to the advisor's regulatory history via both FINRA BrokerCheck and the SEC's IAPD and will include additional educational material for consumers on how to evaluate and select an advisor. And to ensure consumers only reach out to advisors who can work with them in the first place, the updated version of the CFP Board's "Let's Make A Plan" website will also include the advisor's area of focus/specialization and their AUM minimums as well. (In the meantime, advisors who want to update their CFP Board profiles for the new listings should log into the CFP Board's website directly to fill in their details.)
SEC Tables Long-Awaited Ad Rule Changes (Melanie Waddell, ThinkAdvisor) - To the dismay of the advisor community, this week the SEC dropped from its open meeting agenda the plan to adopt its proposed changes to the advertising rules under the Investment Advisers Act, which was expected to not only modernize the advertising rules for the current social media era but also to introduce for the first time the ability for investment advisors to use client testimonials (at least in limited cases). Notably, the update to the advertising rules had been delayed once already - after having been tabled from the SEC's last meeting in October as well - though with the coming change in administration and the already-announced resignation of SEC Commissioner Clayton at the end of the year - it is suddenly unclear if or when the advertising changes will be adopted at all, which will depend on the regulatory agenda and focus of the next SEC Commissioner to become appointed under President Biden. In addition to the advertising rules update, the SEC also delayed proposed amendments to Form ADV that would have allowed the SEC to gather more information about RIA marketing practices (to better understand potential areas for regulatory oversight in the future). Nonetheless, ADV disclosure requirements to include social media profiles that were implemented back in 2016, already show an ongoing rise in the adoption of social media by financial advisors... suggesting that some revisiting of the social media and advertising compliance rules for RIAs may still come at some point in the coming years.
Department Of Labor Finalizes Fiduciary Rule Updates But It May Already Be Too Late (Mark Schoeff Jr., Investment News) - This week the Department of Labor officially released its final regulation to update the fiduciary rules for retirement accounts, which controversially will for the first time allow fiduciaries to receive commission-based compensation (including 12b-1 fees and various revenue-sharing payments) as long as the advisor can otherwise demonstrate that they were acting in the retirement savers' "best interests", effectively aligning the Department of Labor's fiduciary rule with the SEC's own controversial non-fiduciary "Best Interests" Reg BI. In addition, the new Department of Labor rule would roll back the expanded scope of ERISA fiduciary obligation that was previously implemented in the 2015 DoL fiduciary rule (before it was vacated by the courts), reverting back to the "old" 1975 definition of fiduciary created for a world where retirees didn't have defined contribution plans and only held retirement assets in employer-managed retirement plans (e.g., pooled profit-sharing plans or defined benefit plans). However, with the new rule just now being published, it will only become effective 60 days from now... which means the effective date will cross the point that President-Elect Biden takes office, and presents the possibility that Biden will immediately issue an Executive Order or otherwise direct the Department of Labor to delay (and ultimately withdraw or further modify) the rule.
Custom Indexing Is THE Investing Mega Trend Of 2021 (Josh Brown, Reformed Broker) - For the past decade, the dominant trend in investment management has been the rise of ETFs, as advisors have either shifted to a more passive investment approach or more commonly have been using ETFs as the building blocks to create more customized portfolios than what mutual funds alone could provide. But the rise of so-called "rebalancing" software to manage model portfolios is now beginning to extend beyond ETFs, making it possible to disaggregate mutual funds and ETFs, buy the underlying stocks directly... and then begin to adjust and customize those holdings for the advisor's or client's preferences, from applying factor tilts (e.g., small-cap and value) to clients' ESG preferences or even building around clients' existing holdings. Accordingly, Brown notes that his firm has begun using Canvas, a "customized indexing" tool built by O'Shaughnessy Asset Management, to begin building even-more-customized portfolios for the firm's individual clients. And now, after barely a year, Ritholtz Wealth Management is now managing almost 20% of its assets - or more than $250M of client AUM - in various Canvas-managed customized index portfolios for clients. Notably, this doesn't mean that the firm envisions customized indexing for all clients; instead, ETF/mutual fund models may remain "core", but customized index versions may exist either at the fringes for more specialization allocations, or to deal with (an admittedly wide range of) unique client scenarios (e.g., concentrated or appreciated positions that clients can't/won't sell, or in specialized cases like using the tax-loss harvesting of a direct-indexed allocation to offset the embedded capital gains of an appreciated holding the client wants to unwind).
Transamerica To Halt Sales Of Fixed Annuities And VAs With Guarantees (Emile Hallez, Investment News) - After years and years of low interest rates that are expected to continue for the foreseeable future (given commitments of Federal Reserve policy accommodation in the aftermath of the pandemic), the 9th-largest issuer of variable annuities, Transamerica, announced that it will stop all sales of fixed annuities (including fixed-indexed annuities) and also variable annuities with living benefit riders (and also its standalone long-term care insurance), following on the heels of Prudential that made a similar announcement to exit the variable-annuities-with-guaranteed-benefits market last month. As in the end, all insurance works on the principle that policy owners pay insurance premiums over time, which the insurance company holds in reserve and grows, and then uses the reserves plus growth to pay future claims; yet when interest rates remain persistently low, the cumulative benefit of growth on insurance reserves is reduced, leading to a need to either reduce benefits and guarantees or raise premiums... potentially to the point that the product itself is no longer viable or saleable, contributing to what LIMRA collectively reports as an 11% decline in variable annuity sales in 2020 over 2019 (which would be down 20% but for the rise of "buffered annuities" that have been increasingly popular this year). Accordingly, Transamerica announced that it will remain only in the so-called "IOVA" (Investment-Only Variable Annuity) product line, which includes no living or benefit riders and simply provides a tax-deferral vehicle for tax-inefficient investments as an asset location tool.
Everything We've Learned About Modern Economic Theory Is Wrong (Brandon Kochkodin, Bloomberg) - One of the most common criticisms of modern economics in recent years is that it assumes that human beings are more rational than they appear to be in practice... leading to an entire body of research known as "behavioral finance" that identifies these "anomalies" where human behavior differs from what the economic models would have predicted. The fundamental assumption that underlies all of these models is one of "ergodicity" - that the average of all possible outcomes in any given situation informs how any one person might experience it and make decisions - but a physicist-turned-economist named Ole Peters is now challenging this assumption and instead is rethinking economics using mathematics commonly applied in thermodynamics (where no one assumes that the individual atoms know what all the other atoms are doing to make their own decisions!). A case in point example is a simple coin flip game... where you start with $100, gain 50% every time you flip heads, and lose 40% whenever you flip tails. Given that flipping heads is equally likely as tails, but the payoff is bigger (+50% instead of -40%), traditional economic theory predicts that the investor should want to play (at least/especially as long as they will have enough coin flips for it to average out). Yet in practice, most people decline the bet - which economists blame as a function of irrationality, but Peters points out actually is the rational decision, because given the actual mathematics of compounding, if you played the game 10 times and got heads half the time, your $100 would have dropped to just $59 (because a 50% increase grows to $150 but a subsequent 40% decline drops to just $90, the next increase grows to $135 but the next 40% decline drops to $81, and the balance just keeps winding lower). In fact, if 10,000 people each played the game 100 times, the average payout would be $16,000... but over 50% of players would actually finish with less than $1(!) as the negative compounding takes hold (offset by one extraordinarily lucky winner who gets a favorable sequence of heads and finishes with $117M and more than 70% of the entire pot of wealth!). Of course, the coin-flipping example is a relatively simple one... but one where Peters' "Ergodicity Economics" correctly predicts the outcome and human behavior, in a way that traditional economics never has... which is leading to an immense amount of debate within the economics community about whether Peters 'just doesn't get it', or is actually recognizing a superior way to understand how humans make actual (investment and other) decisions in the face of uncertainty.
Clients Crave Connection With One Another, And Advisors Can Bring Them Together (Michael Thrasher, RIA Intel) - Every year, Northern Trust's Global Family Office group publishes an annual report about its clients (450+ of the wealthiest families in the world, with an average of $900M of AUM per family with the firm), highlighting trends in wealth management and serving ultra-HNW clients... which this year included an emerging preference of 83% of its clients to participate in an online discussion board with other clients. In part, this appears to be a function of the pandemic which has limited many other forms of socialization and networking but also appears to highlight a broader opportunity for advisory firms to use technology, not in lieu of human interaction, but to facilitate human interaction with one another. From one advisory firm that organized a live Q&A answer session for its clients to connect with the advisory firm (and each other) in the midst of the pandemic, to others that have been creating open Office Hours for clients to come together, or other types of virtual networking sessions or virtual client social events. The key point, though, is simply that in a world where advisors have historically tried to firewall clients off from one another - if only for the sake of client privacy - that it is clients themselves who appear to be seeking more social interaction with other clients... especially, perhaps, for advisory firms with a focused type of clientele, where other clients of the advisor might be people those clients would genuinely have wanted to network with anyway?
Are Clients Leaving? It's Not The Answers Advisors Give, It's The Questions They Ask (Gary Stern, RIA Intel) - A recent survey by Natixis revealed that the two major factors that drive clients away from their current advisors is when the firm does not meet the clients' expectations when it comes to communication... and when the firm fails to (truly) listen to the clients' needs. In other words, it's not just about the frequency and promptness of communication for advisors interacting with their clients, but also whether the advisor is actually addressing the needs and concerns on the minds of their clients. Which in practice suggests that some advisors still aren't doing enough to really listen to what clients want... especially in a world where, as financial advisors, we often feel pressured to "show value" by bringing the answer to the table. Bernard Ferrari, the author of "Power Listening", suggests that this is actually a misunderstanding about the core value of being an advisor, though, and that, in the end, competency is revealed not in the answers provided, but in the nature of the questions that are asked of the client in the first place. For instance, instead of just asking about "retirement goals", asking more directly "what are your cash needs going to be in 3, 5, and 10 years?", and instead of asking about "risk tolerance", asking more directly "what are the risks you are most concerned about?" Recognizing that sometimes our assumptions about what clients want may be off and that the only way to find out is to ask. Accordingly, Ferrari suggests as a starting point to aim for an 80/20 rule - that clients talk 80% of the time, and the advisor only 20% of the time. But stated more simply, perhaps the key point is simply that the ultimate mastery for financial advisors is not becoming the best at providing the answers, but at asking the best questions?
The $71,000 Email And The Art And Science Of Client Retention (Advisor Voice) - It's expensive to get new clients, with research showing that the cost of acquiring new clients can be at least 5X the cost to retain existing ones (with an average Client Acquisition Cost of over $3,000 for financial advisors!), and even just a slight increase in client retention rates leads to drastic increases in the lifetime value of a client... as increasing retention rates from just 95% to 97% increases the average client tenure from 20 years to nearly 30 years, an almost 50% increase in the cumulative fees that client may generate over their lifetime of working with the firm! Yet despite this, arguably advisors still don't put as much effort and focus into retention as they should; in fact, Spectrum research shows that the most common reasons that clients leave their advisors are still relatively "answerable" issues like failing to promptly return phone calls (61%), not promptly responding to emails (46%), and not proactively contacting the client at all (53%). More generally, a separate Trusted Advisor study found that the most common reasons that clients actually leave their advisor are not related to technical competence, but to communication and other interpersonal skills. And notably, retention rates over time show that the low point of client retention is after 3 years when the "honeymoon" period is over, and clients may become dissatisfied (whereas retention rates are higher in the first 3 years, but also much higher after 10+ years, implying that if advisors can maintain through the more challenging middle years, clients are likely to remain 'for life'). Which ultimately means that the most important meeting for financial advisors to focus on and improve is not the financial planning process with new clients, but having a maximally productive annual review process with existing clients, where relatively small investments in process improvement could lead to substantial returns on investment even with relatively modest improvements in client retention rates!
A Cure For Advisor Burnout (Ingrid Case, Financial Planning) - Burnout is a challenge in many industries, and financial planning is no exception. Beyond just a string of bad days, burnout is a form of ongoing/chronic stress that leaves someone feeling as though they have nothing left to give... and often can't be fixed with anything short of a substantive restructuring of work so that it occupies less time and/or involves more satisfying tasks. For some, burnout is a function of boredom - when even-once-interesting tasks become dull and repetitive, to the point that the work is no longer enjoyable. For others, it's about working too many hours, or feeling unable to get away from work (especially in a work-from-home pandemic environment!?), which results in a cumulative layer of ongoing stress that erodes health and happiness. In some cases, burnout can be resolved by a conversation with an employer that leads to a change in role and responsibilities; in other cases, as Case notes, advisors only resolve their burnout issues with a more substantive change, such as going independent to create a more lifestyle-oriented practice with fewer work hours, or to be able to more directly control which clients they serve (or don't have to serve any more). Though at the same time, sometimes the biggest key to alleviating burnout is simply for us to take a hard look at what we're choosing to do ourselves, and considering whether we can either get more efficient in our day... or simply find more things to say "no" to in order to better enjoy what's really worth saying "yes" to instead?
Companies Fret As Vacation Days Go Unused (Anne Steele & Chip Cutter, Wall Street Journal) - For decades, the average American has been taking less and less vacation, and the trend seems to have only accelerated in the past year as the pandemic has taken hold and further blurred the lines between work and home. The situation has become so noticeable for some major firms that they're enacting changes to try to 'force' more vacations, from conducting a company-wide "mental health day" where everyone is off, to offering floating holidays for employees to use (for anything from Juneteenth to Good Friday to Yom Kippur), and a trend towards reducing traditional holidays (e.g., Columbus Day) for even more floating holidays in the future. Yet for those who still can't seem to take their vacation, a debate is growing about whether it's better to allow employees to carry over more vacation - recognizing the constraints of a busy year - or instead to require the lapse of vacation that effectively "forces" employees to use the vacation (or risk losing it altogether). Overall, a study by Willis Towers Watson finds that nearly half of all employers have made or are making changes to paid-time-off and vacation-/sick-day programs, with 24% planning to increase rollover limits, 16% requiring employees to take days off to reduce end-of-year buildup, and 22% planning or considering such a requirement (with 15% considering whether to allow employees to donate unused vacation days for others instead). Of course, the challenge to some extent is simply that with pandemic travel constraints, it's hard to take a vacation anywhere in 2020, and for many just sitting at home isn't necessarily a rejuvenating vacation from anything. Still, though, interest in "staycations" appears to be on the rise as workers look to use end-of-year vacation time while they still can.
The Data-Driven Case For Vacation (Shawn Achor & Michelle Gielan, Harvard Business Review) - 20 years ago, the average American took almost 3 weeks of vacation per year (20.3 days), but as of 2016, the number had fallen to just 16.2, a decline of nearly one week's worth of vacation. Which is concerning not only from a general perspective of mental health but also that those who take vacation are actually more likely to climb the ladder and be promoted over time, (as 65.4% of those who took 10+ vacation days received a raise of bonus, compared to only 34.6% of those who took fewer days), raising the concern that employers may be burning out their best and brightest by not facilitating enough vacation opportunities. One of the first questions, though, is simply why vacation is on the decline. It certainly isn't a function of job security, as the vacation rate was 20.9 days in 1982 when the unemployment rate was 9.7%, while it was down to 16.2 days in 2015 when the unemployment rate was only 5.3%. And throughout the intervening years was a boom in technology innovation, most notably the rise of the internet and the now-ubiquitous cell phone, which in theory was supposed to improve productivity, but instead appears to have reduced the ability to disconnect from work. Accordingly, more than half of all Americans are now leaving vacation days unused, and many fail to enjoy their vacations because of the stress of trying to disconnect and leave. But ultimately, Achor and Gielan suggest that doesn't mean vacation should be impossible; instead, it simply means it needs to be planned further in advance (as one of the key predictors of vacation ROI is simply the amount of stress caused by not planning ahead!?). The key point, though, is simply that taking time off is healthy, and the fact that technology makes it easier than ever to stay plugged in doesn't mean that it's healthy (or even work-positive in the long run) to do so.
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.
Nerd’s Eye View remains my most important tool for keeping up with developments in financial planning and portfolio management. Thank you Michael (and team) for your ongoing thought leadership. Best wishes for the holidays and for safe and healthy 2021. Aloha, J.R.
Thanks so much for the kind words, J.R.!
– Michael