Weekend Reading for Financial Planners (Dec 29-30)

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.

Industry Trends Predictions For 2019: The Rise Of The New Nationals (Tony Sirianni, AdvisorHub) - Historically, the industry has been segmented into channels, from the wirehouses and the regional broker-dealers to the independent broker-dealers and the RIAs, with shifting market share (of both advisors, clients, and assets) over time. In recent years, arguably the most dominant trend has been the rise of the RIA channel, and the (relative) declining market share of the wirehouses. With his broad-based industry perspective, Sirianni predicts that in the coming year, the wirehouses will continue to lose market share to the RIAs (both with clients switching to independent firms, and advisors themselves breaking away to the independent channel), while the wires circle the wagons to reduce their dependence on independent-minded advisors by both embracing technology (e.g., AI/robo models) as an advisor-alternative to service smaller clients and also an ongoing shift to the "European model" of paying wirehouse brokers a salary plus bonus (rather than unlimited-upside grid-based production), while leveraging Temporary Restraining Orders (TROs) to combat their brokers who do try to break away (sometimes regardless of whether the firm is in the Broker Protocol or not!?). But the 'real' trend that Sirianni predicts emerging in 2019 is the rise of the "New Nationals", which can include both super-regional and independent broker-dealers (e.g., Raymond James, Stifel, LPL) and also standalone independents like Dynasty, that are weaving together the mid-point for independent advisors between wirehouses (that are reducing advisor independence) and standalone independent RIAs (who are sometimes "too" independent and lack the size and economies of scale to run efficiently). The key distinction from many broker-dealers of today, though, is that Sirianni predicts the New Nationals really will have to let their brokers own their client relationships (and not try to keep them captive), and to support independent-minded advisors will have to make their own platforms increasingly independent.

Surging Upfront Recruiting Checks Carry Significant Risks For Independent Advisors (Jeff Nash, Investment News) - In the past, the primary "recruiting wars" were between wirehouses, that offered incredibly lucrative deals (sometimes paying as much as 300%+ of trailing twelve-month revenue, making wirehouse recruiting deals more lucrative than RIA business sales!), while regional and independent broker-dealers offered far less. But recently, recruiting deals from independent broker-dealers are becoming more and more lucrative... to the point that some are even competing with the wirehouse deals of old. However, the caveat is that most of these recruiting "deals" are not just paid in cash or guaranteed terms (as RIA purchases often are); instead, they're commonly structured as "forgivable loans", where the broker receives an upfront lump sum of money in exchange for committing to remain at the new broker-dealer for some period of time (e.g., 3-5 years), over which that upfront payment is forgiven. If the broker leaves early - or in some cases, if the broker doesn't also meet additional annual production requirements - then the remaining balance of the upfront cash must be repaid (as a loan would be)... which means the broker must be cautious to choose a platform that he/she actually will plan to stick with! Recognizing as well that many broker-dealers engaging in larger upfront recruiting payments are doing so because they're publicly traded or private-equity funded, and feeling the pressure to show top-line revenue growth - for which "paying for" new revenue from recruited brokers is an effective strategy - but if the firm is trying to boost its revenues through aggressive recruiting, it may also end out being put up for sale, resulting in a change-in-ownership after the broker is recruited that the broker may not be happy with! Which means, at a minimum, it's a good idea to really do due diligence on the platform doing the recruiting (and paying the upfront forgivable loan), and even see whether/how much of the terms (and the risks) are negotiable in the process.

Step One: Withdraw From The Broker Protocol (Bruce Kelly, Investment News) - Just over a year ago, Morgan Stanley and UBS made the highly controversial decision to withdraw from the Broker Protocol after nearly 13 years, having concluded that the program (which makes it easier for brokers to change firms and take limited client information without legal liability exposure) was causing them to lose more brokers to external recruiters than they were gaining in inbound recruits (which themselves were increasingly costly as recruiting packages inflated). At the time, pundits predicted that the strategy would backfire, and that Morgan Stanley and UBS would lose their ability to attract and retain quality talent if being hired by the firm meant the doors would be "closed" to leaving in the future. But now, looking back over the past year, it turns out that the decision is largely working out for the wirehouses. While both are still losing the occasional high-producing broker to competitors, their attrition has slowed (with the number of breakaways from Morgan Stanley down by almost 50% year over year, and reportedly down similarly from UBS as well) and retention has improved, while those wirehouse firms are also redirecting their prior upfront recruiting bonuses more towards supporting organic growth of their advisors' existing books of business (e.g., through investments in technology) and hiring and developing young (and less-expensive-to-recruit) talent instead. In other words, the calculated gamble from the wirehouses - that a combination of increasing the risk and fear about leaving by dropping out of the Broker Protocol, plus reinvestments in technology to make it more appealing to stay in the first place - appears to be working as part of a larger coherent strategy (of which withdrawing from the Broker Protocol was just a part). In the meantime, the wirehouses are engaging in other strategies to further boost retention, including attempts to make their employment agreements more restrictive (although one such initiative from UBS earlier this year was taken back off the table after a broker backlash), a rising number of Temporary Restraining Order (TRO) filings to make an example of those brokers who do leave, and a shift to team-based planning for clients (which makes it harder for one broker to leave, because the entire team has to be willing to leave as well).

Regional Broker-Dealers Quietly Making Comeback Now, But The Future Remains Uncertain (Bruce Kelly, Investment News) - While the focus of the wirehouse "breakaway broker" trend has been on large broker teams launching their own independent RIAs, regional brokerage firms like Janney Montgomery Scott, Hilliard Lyons, Raymond James, Stifel, and RBC have also been aggressively recruiting wirehouse brokers, promising an environment that has the capabilities of a full-service brokerage firm but with greater flexibility and less frustration with large-firm lowest-common-denominator compliance challenges and big institutional bureaucracy. In fact, according to InvestmentNews data, regional brokerage firms have seen a net increase of almost 400 advisors or teams and nearly $120B of AUM... of which 75% was recruited from one of the four wirehouses, leading the regional broker-dealers to outpace the growth of their larger wirehouse counterparts (albeit on a smaller advisor/asset base in the first place). The trend may have been accelerated by the DoL fiduciary rule, which led wirehouses to start pulling back from recruiting, and has only amplified in 2018 as the withdrawal of both Morgan Stanley and UBS from the Broker Protocol (and a concomitant decline in their own recruiting efforts) created a void for departing wirehouse brokers looking for new destinations that regional broker-dealers have increasingly filled (while offering higher grid payouts than wirehouses and also paying nearly-wirehouse-competitive recruiting deals of 150% to 300% of trailing 12-month revenue). Nonetheless, the long-term outlook for regional broker-dealers is still unclear, as they don't train new advisors at the same scale as wirehouses, face their own aging-advisor issues... and if more wirehouses leave the Broker Protocol as well and the breakaway broker trend slows further, it's not clear where many regional broker-dealers' growth will come from next.

How Indie Brokers Can Get More Love (And Service) From Their Firms (Derek Bruton, ThinkAdvisor) - It's not a new phenomenon that brokers "always" want more from their broker-dealers, but Bruton suggests that as broker-dealers have grown (which inevitably forces more standardization and bureaucracy for which it may be harder to navigate exceptions and customization), brokers are not necessarily adjusting to the best ways to get the accommodations they want and need in a large-firm environment. Thus, instead of just asking for an exception or accommodation or a more customized arrangement on its own, Bruton suggests instead to: 1) contextualize requests by making a meaningful business case (e.g., take the time to reinforce your annual product/GDC, assets, recurring fee-based revenue, and especially the growth in those numbers, as broker-dealers of all sizes are most focused on the 20% of their advisors who provide 80% of the profits, so if that's you, make sure the broker-dealer realizes it!); 2) correlate your ask with the broker-dealer's own strategy and solutions (e.g., if the firm is strategically focusing more on fee-based accounts, it may be easier to get exceptions that will help you grow your fee-based accounts, and one of the indirect benefits of going to your broker-dealer's national conference or top-producer/networking events is to better learn the firm's strategy so you can better tie your requests to the firm's goals); and 3) don't be afraid to find third-party organizations that may be able to help, and introduce them to your broker-dealer, as a growing number of middleware technology and service providers may be able to help fill the gap (in a way that solves your problem as the broker while also making it easier for the broker-dealer to 'accommodate' if the broker-dealer doesn't have to do the work!).

On Their Websites, All Advisors Look The Same (Christopher Robbins, Financial Advisor) - To better understand how consumers really shop for financial advice, Pershing conducted a survey of more than 1,000 investors with at least $1M in net worth, and the results (published in a study entitled "Advisor Value Propositions: How Advisors Showcase Their Value To Investors - And What Investors Secretly Think") show that in the end, a whopping 63% of investors believe that all advisors are simply making the same promises to all clients and prospects. In fact, a deeper dive revealed that most advisor websites concentrate on the firms themselves (e.g., discussing the firm's business and revenue model, investment management style, types of services available, etc.), but saying little to nothing about the benefits of the firm to the client, or setting forth any kind of rational argument or emotional connection that really engages prospects. And while most firms did emphasize the nature of their tailored/bespoke solutions to individual client needs (along with assurances of their trust, integrity, and accountability), the fact that virtually every firm made similar promises meant none of these "differentiators" were actually differentiating. Nor, apparently, even believing, as nearly 50% of high-net-worth investors stated that they didn't believe their advisors would be working in their best interests anyway (website promises notwithstanding!). Other key insights from the research included: 41% use Google to find information about potential advisors (the most popular source, followed by various social media channels); 33% of HNW investors look at an advisor's personal Facebook page (and over 50% decided not to work with an advisor because of something they saw there!); and financial planning and investing themselves were not actually very important to prospects, who instead were more likely to desire "lifestyle planning" aimed at maximizing their current and potential happiness instead, and 75% of HNW investors were seeking financial advice that could reflect goals beyond just their personal finances alone. Of course, those issues may be specific to high-net-worth investors in particular (who by definition may already have enough income and net worth to not be as focused on purely financial issues)... but that also makes the key point of the Pershing stud, which is that advisory firms are failing to tailor their messages to the specific client base they really wish to target by being too general (which results in a total lack of differentiation from all the other advisors doing the exact same thing!).

Ten Subject Line Tips To Get Your Emails Read (Crystal Butler, Advisor Perspectives) - The good news about email is that it has become a nearly ubiquitous form of communication. The bad news is that it's so commonly used by most, it's also become a marketing channel... one so overwhelming to many that it's difficult to even get marketing messages noticed amidst a sea of other spam your prospects may be receiving. Which means, even if the email itself is compelling in conveying the advisor's value, it's crucial to set the right subject line to ensure he/she ever opens and reads the email in the first place. Accordingly, Butler sets forth a series of 10 email subject lines for marketing emails that are most likely to actually get opened and read, including: "How can I help?" (who doesn't want to receive some help!?), "I really enjoyed...", "Tomorrow" (makes you curious to know what's happening tomorrow, eh!?), "I'd like to get your thoughts on..." (as we're more likely to open the email when we feel like it's something we're supposed to respond to in order to be helpful ourselves), "[Mutual connection] mentioned you to me..." (introductions from familiar names still work!), "Will you be attending [event]?" (as a way to form a common connection point), "Congratulations on..." (we all want to be congratulated!), and "Saw this and thought of you" (makes you wonder what they shared in thinking of you!?). Of course, if the email itself doesn't have value when it's opened, and doesn't follow through on the subject line, the breach of trust is even more likely to make someone disconnect and unsubscribe - so be certain to follow through on the subject line - but the point remains that the first challenge in marketing is not what you say in the marketing message itself, but merely in getting it noticed, opened, and read in the first place!

Describe Your Process As A Series Of Accomplishments (Steve Wershing, Client Driven Practice) - The growth of financial planning as a key value proposition for advisors is a testament to the value it creates for clients... yet while the outcomes of financial planning are positive, it doesn't necessarily mean clients enjoy the process of financial planning, with the avalanche of numbers, analysis, and often difficult clients it entails. To address the challenge, Wershing suggests trying to create some kind of benefit or other "prize" that clients can earn or feel they accomplished for getting through each step along the way. For instance, instead of just describing the financial planning process as a series of chronological activities - data gathering, goal-setting, create the plan, present the plan, implement the portfolio, etc. - try reframing each step in client terms. For instance, the "data gathering" meeting is for the advisor, while for the client it's really about a "Get Organized" meeting and/or a "Personal Vision Creation" meeting; a meeting about spending and budgeting is a "Get control of your cash flow" meeting; presenting the plan is really about protecting against unexpected risks, tailoring the portfolio, and reducing taxes. Ideally, this is also an opportunity for an advisor to differentiate with unique services they provide to their particular niche clientele as well - the "pension maximization" meeting for advisors who specialize in clients from a particular local company that has a pension, or a "retirement plan maximization" meeting for clients who are small business owners trying to select the right small business retirement plan. Because ultimately, all of those are outcomes that actually benefit the client... and therefore increase the odds that the client themselves will be more excited about, and actually engage with, the financial planning process itself! (All of which can then be shown with a process graphic or flowchart to further illustrate the advisor's value proposition!)

To Succeed With Content Marketing, Get Out Of The Financial Planning Business (Kali Roberge, FPA Practice Management Blog) - The rising popularity of digital content marketing has more and more advisors joining social media platforms like LinkedIn and periodically publishing blog posts and articles there... but as Roberge points out, merely being on social media platforms and occasionally hitting the "publish" button on content does not itself produce any business results, unless it's part of a larger marketing strategy. Because the essence of content marketing - that generates real business results - is not just about producing content for the sake of it, but specifically about creating content relevant for the exact clientele you want to reach in a way that positions you as an authoritative expert in that particular domain of knowledge. Thus, for instance, just publishing an article like "How To Do A Backdoor Roth Contribution" just doesn't work; it's not unique content (as other blogs and most major consumer finance media websites like MONEY or Forbes have already covered the topic); it doesn't communicate your value (because almost any advisor can help someone contribute to a Roth account!); and it doesn't provide any kind of specific message to a specific group of people (instead, it's a generic message that could apply to millions of people... which is why other consumer media sites have already covered it before you did in the first place!). So what's the alternative? Roberge suggests that the best approach is to pretend your firm is a mini publishing company, that is literally in the business of selling its unique content. To succeed as a publishing company, it's crucial to create genuinely valuable and truly unique content to stand out and sell books/magazines/whatever (because publishing the zillionth book on the same topic others have written on doesn't produce results). Of course, most advisors aren't trying to be in the publishing business and want to get clients - not sell books - but ultimately Roberge argues that the value proposition to the readers you're trying to attract is the same... the only difference is how you happen to monetize their attention to the quality content you're creating.

Do We Value Attention Properly? (Seth Godin) - If you were to discover an employee who every day, took home a computer from the office, sold it on eBay, and pocketed the money, you would undoubtedly take action as a business owner. Yet Godin notes that in practice, it's probably far more damaging to have another employee that repeatedly queues up emails that spam your mailing list of clients and prospects. Because a computer is a single item that be replaced, but a client's or prospect's attention is an even more valuable asset, and one that is even more difficult to replace once lost. And once you take a moment to consider the best ways to respect someone's attention with emails or other (marketing) messages you're sending... it quickly becomes clear how important it is to try to customize messages to what those people really care about (because communicating the same thing to everyone, when everyone's preferences aren't the same in the first place, will inevitably waste attention). In addition, repeatedly wasting someone's attention eventually undermines their trust in you altogether, and lost trust can be even more damaging to a business than lost attention. The starting point, though, is simply to recognize that while "attention" may be intangible and ephemeral, it is in fact a tremendous asset... so value it accordingly with any client or prospect you send messages to, and recognize how much intangible-but-highly-valuable business value can be lost by not effectively respecting the value of someone's attention.

How To Overcome The "Scarcity Mindset" (Khe Hy, RadReads) - Whether it's not having enough money to do what you want, or enough time to do it, most people feel as though they're surrounded by scarcity. And the phenomenon isn't limited to just dollars and time... it's also a scarcity of sleep, of opportunity (when a co-worker gets the coveted promotion), of having enough space in the house, or racing towards Inbox Zero. Of course, for most of our history as a species, resources really were scarce (think: hunter-gatherers that were continuously in search of food just to survive), and thus evolutionary psychologists have long noted that our tendency to want to pursue and obtain scarce resources (despite the fact they are persistently scarce and hard to achieve/retain) may be a difficult reality but was good for our survival and natural selection in the first place. Yet arguably, we unduly inflict a scarcity mindset upon ourselves more than is necessary, especially in a world as abundant as it is today; thus, we're forever anxious about making a mistake at work that causes us to miss the next promotion, even though we already make more than enough to put food on our tables and shelter over our families; and we're constantly on the hedonic treadmill of believing that "more is better" even though there's little research to validate that more income/wealth/dollars actually increases happiness (at least not beyond a point of meeting basic needs). So what's the alternative? Try taking just a few moments to recognize that what you have might really be "enough" to meet your needs, and practice the "abundance mindset" of recognizing how rich the world has really become... and then consider what you really want and need that would make you happier, beyond just worrying about the next scarce thing that you might not really need more of in the first place?

The Spacing Effect: How To Improve Learning And Maximize Attention (Shane Parrish, Farnam Street) - While the fundamental purpose of school for children is to teach the necessary information to be a productive member of society, in practice it often becomes an exercise of rote memorization of relevant facts that can be recited for a test, rather than really learning and internalizing the information in a way that makes it relevant and useful. In fact, recent research into how our brains learn has found that cramming information through rote memorization is a particularly ineffective way to learn; instead, the better approach is with a "spacing effect" where we learn information or concepts in multiple spread-out sessions instead. In other words, instead of fast repetition of information to learn, spaced out repetition instead. For instance, one program teaching second languages found that practicing flash cards for 30 minutes a day for four months resulted in learning 3,600 flashcards of foreign words with 90% to 95% accuracy. The approach works in part because of how our memory itself decays over time; by repeating the learning process over time, we interrupt the natural forgetting curve and ultimately retain more information (while cramming upfront just means there's more upfront information to forget when the forgetting curve takes hold). The effect is further enhanced by the fact that we remember better when we can truly focus our attention on the task at hand... which is also far easier with shorter bouts of repeated learning that are spaced out (allowing time to rest and recover) than trying to cram all at once. And the more effort given to the learning process, the more the information becomes cemented (which is why practice tests are a better way to learn than re-opening your books and re-reading the highlighted passages). So whether you're seeking professional education, trying to study for the CFP exam, or simply trying to enhance your personal knowledge in some area, the key is to not try to cram it all in at once, but instead to repeatedly apply the information on a regular basis over time, cementing the concepts in your memory with spaced repetition!

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.