Executive Summary
Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an announcement by FINRA that it is re-proposing its rule that would require all broker-dealers to include a link on their websites to BrokerCheck so consumers can check up on the regulatory record of their prospective advisors; the move has been and remains controversial, as consumer advocates suggest it may still not be thorough enough (the links may not necessarily be required on every single part of an advisor's website and digital presence), while others note that it may increase the number of requests to FINRA for expungement of prior regulatory infractions as they receive more attention.
From there, we have several technical financial planning articles this week, including updated rules on the employer "pay or play" insurance mandate that will delay the rollout for some firms another year until 2016 (and provide some leniency to the rest on the thresholds where the penalty will apply), and a look at the recent CBO report projecting that Obamacare will reduce worker hours by the equivalent of 2 million jobs not because firms will lay off employees but because early retirees will have more financial planning flexibility to retire early with greater access to health insurance. There's also a look at whether peer-to-peer (P2P) platforms like Prosper or Lending Club might have a role in generating higher yield for clients, some research on how delaying Social Security is similar to buying TIPS bonds but at much better real yields, and how the idea of not saving for college in order to qualify for financial aid may be a myth that produces far more harm than benefit.
We also have several practice management articles this week, from some ideas about how to improve your seminar marketing approach (hint: focus more on the time you spend before and after the presentation, and not just on the presentation itself), to how to craft a "pitch book" to communicate your services to prospective clients, to a discussion of how to address clients that are being "overserviced" by not cutting the work that you do for clients but figuring out in collaboration with them how to charge more for what you do.
We wrap up with three interesting articles: the first is a profile of a new advisor CRM software called Wealthbox that debuted at the T3 Advisor Technology conference this week; the second is a profile of financial planner Harold Evensky, an advisor and advisory firm owner who has long been a leader in the financial planning profession, and is now shifting to focus more of his time developing and advocating for research that will be more relevant to financial planning practitioners; and the last is an interest discussion by industry commentator Bob Veres on whether in the end oversight of RIAs - when you include oversight of the custodians they use - may not actually be much less than the oversight of FINRA-regulated advisors after all. And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end!
Enjoy the reading!
Weekend reading for February 15th/16th:
FINRA Seeks To Beef Up Use Of BrokerCheck - On Thursday, FINRA issued a revised version of its proposal that would require all brokerage firms to include links on their websites to BrokerCheck, the FINRA database system that provides information on brokers' regulatory history (including any disciplinary events). The rule would not only require BrokerCheck links on the parent firms' website, but any member firm's website or even a broker's profile or contact information; however, the rules may not necessarily require a link to every individual broker's page, and platforms like Twitter will be excluded (as there may not even be room to include such a link given some social media platform constraints). The rule has been under consideration for more than a year now, but has been slowed by both complications of the internet hyperlink itself, and broader concerns that BrokerCheck does not adequately explain disciplinary records and for some may just be a "scarlet letter" repository of "meritless grievances" by clients. On the other hand, many consumer advocate groups are still expressing concern that too many consumers still don't know BrokerCheck even exists, and that there are brokers with a long list of infractions of which prospective clients remain oblivious. Some suggest that as the BrokerCheck records continue to become more visible, there will also likely be an increase in the number of brokers requesting expungement of their records as well.
Midsize Firms Get More Time On PPACA Mandate - Updated rules issued this week regarding the so-called "Pay or Play Tax" (the Employer Mandate that requires large firms to offer health insurance or pay a penalty) have implemented two partial delays to the law that was supposed to take effect in 2015. The first change states that employers with 50 to 99 employees will be able to wait until January of 2016 before being required to comply with the rules. A second relief provision stipulates that for employers who will be subject to the rules in 2015 (those with 100 or more employees) must only offer coverage to 70% of full-time workers next year to avoid the penalty, and only 95% of workers in 2016, allowing large firms to ease into the rules over time. There are some restrictions to prevent mid-size employers from cutting employees just to get below the 99-employee threshold for next year (unless the business can truly show bona fide business reasons for any reduction in workforce size or hours). The new rules also include some limitations to prevent employers from trying to 'force' employees into a low-quality 'skinny' plan or an otherwise unaffordable plan just to avoid the employer mandate penalties. The employer mandate was originally supposed to take effect this year, in 2014.
How Obamacare Is Creating New Pathways To Retirement - Earlier this month, the Congressional Budget Office (CBO) issued a report on the Affordable Care Act (also known as "Obamacare"), suggesting that the number of hours worked by American workers may decline by the equivalent of 2 million jobs between now and 2017. Criticized by Republicans as a sign that Obamacare is a "job killer", a deeper look reveals that the decline is not projected as a result of employers constraining or laying off workers, but instead because many families may find new financial planning and retirement flexibility to not need to work as much in the first place. The key distinction is that with health insurance exchanges, people have access to health insurance regardless of whether they are employed; as a result, many workers may now actually be considered early retirement, assured that they will have access to health insurance to bridge the years between employment and Medicare at age 65. In addition, many early retirees will have access to premium assistance tax credits and other insurance subsidies to further drive down the cost (especially given that assistance is based solely on income and not on assets). Some early retirees are even exploring income-shifting strategies to try to maximize the credits before becoming eligible for Medicare at age 65. Notably, the CBO report also found that so far, premiums on health insurance exchanges are actually 15% lower than were originally projected (though still higher compared to years ago), and there is little "compelling" evidence that firms are pushing employees to fewer hours and part-time status (to avoid employer mandate penalties).
Peer-to-Peer Lending: New Way to Find Yield? - This article from Financial Planning magazine looks at the world of "peer-to-peer" (also known as "P2P") lending, where through a central website individuals who need to borrow money are matched with those who have money to lend and are looking for attractive returns. For borrowers, the appeal is that borrowing rates are often lower than what could be obtained at a bank (if a loan could be obtained there at all); for investors, the available yields are more appealing than many other fixed income alternatives (the advisor in the article has had a 7.94% return on her own P2P lending activity over the past 2 years). Although there are now more than 50 P2P marketplaces, the leading two are Prosper (the first in this space, funded with $120M of venture capital and having now facilitated over $690M of lending investments), and Lending Club (having now funded more than $3.2 billion of loans). Although in theory the sites serve as open clearinghouses for borrowers, both do some pre-screening due diligence on borrowers and approve fewer than 10% of loan requests, requiring a minimum credit score of 640-660, and only approving loans up to $35,000. The sites rate borrowers based on credit risk, and apply the interest rate accordingly (including a small markup for their own fee). Notably, there are also requirements for investors, including either an income of more than $70,000 or a net worth over $250,000, and some states impose further requirements as well. Investors can allocate as little as $25 per loan (so a borrower might be funded by small contributions from a large number of separate investors), which allows investors to diversify widely amongst loans (which is highly encouraged) based on both credit quality and maturity. Given the prospective risks, as well as the illiquidity of the loans-as-bonds, the author recommends no more than a 5%-10% allocation, and only for longer-term funds (including IRA dollars, which can be used).
Providing Better Social Security Advice for Clients - This article by advisor and actuary Joe Tomlinson in Advisor Perspectives looks at some delayed Social Security claiming strategies, and tries to estimate the real rate-of-return "value" that clients can earn by delaying. For instance, if a client gives up Social Security benefits for 8 years from age 62 to 70, and then draws on the higher payments thereafter until reaching life expectancy, what is the (inflation-adjusted real) internal rate of return the client generates from the approach? Tomlinson finds that the benefit for males (life expectancy to age 86) is a 3.58% real rate of return; it's 4.57% for females (long life expectancy) and 5.24% for couples (age 92 joint life expectancy, assuming higher delayed benefit also becomes survivor benefit). Notably, these rates of return are dramatically higher than available TIPS real returns, implying that the decision to delay Social Security (and spend other lower return investment dollars instead) is a good investment tradeoff. Tomlinson notes that these trade-offs weren't originally intended to be so 'favorable' - the problem is simply that they were actuarially fair in an era when interest rates were a bit higher and life expectancy was a bit shorter, but haven't been fully updated to the current environment (producing an opportunity for clients).
Saving For College Hurts Financial Aid And Other Myths - This article on Reuters from Personal Finance writer Liz Weston takes an intriguing look at some of the 'myths' around the intersection between saving for college and getting college financial aid. For instance, while saving for college in the child's name can have a material impact on aid, the reality is that saving in a 529 plan counts as a parental asset with less than 6% of the balance counted towards the financial aid calculation (which can be more than covered by the tax-free growth benefits of the savings), and either way parental income has far more impact on financial aid than parental saving anyway. In addition, given that more and more financial aid these days is simply offered as a loan, the reality is that NOT saving for college to avoid hurting financial aid may really lead to little more than driving the student into massive debt! In addition, the FAFSA formulas themselves have gotten so complex, that often even people at lower income and/or asset levels (who 'avoided' saving to qualify for aid) don't get nearly the financial aid they might have expected. It's also worth noting that even when financial aid comes, it rarely covers all the need, and some personal/student savings are still necessary to bridge the gap; while students can work in college to help bridge the gap, numerous studies show that students with too many work obligations in college end out having their grades/studies suffer. Weston also notes that in today's environment, some colleges are more flexible about the tuition in the first place, and in some instances a private college may even discount tuition enough that it's cheaper than a public institution, before financial aid ever enters the picture.
Fix Your Prospect Seminars - This article from Financial Planning magazine provides some good advice for those who do seminar marketing, but perhaps haven't been happy with the results. The author's first tip is that advisors who want to speak in front of an audience have to still be their authentic selves; in other words, if you're asking "Should I tell a funny story?" in your seminar, and you're not one to tell funny stories, the answer is "no" because it's not authentic and your audience will likely be able to tell. Another important point is to remember that in the end, if your seminar marketing effort is really about growing your business, remember that; don't be too laser-like in obsessing about every last detail of the presentation materials, and instead focus on what you're doing before and after the seminar to build rapport and connections with prospective clients (which is ultimately key to establishing an initial relationship and turning them into actual clients!). Finally, the author notes that if you really do deliver a good presentation, the best time to ask for an appointment is at the end of the presentation, when you can still connect with your prospective clients face-to-face and eye-to-eye; at worst, they'll simply say no, and you'll save yourself the time of fruitlessly chasing them for weeks or months to come.
Secrets To A Perfect Pitch Book - This article from the Wealth Management Marketing blog provides a great overview of how to create an advisor's "pitch book", a series of 10-20 pages or slides of content that tries to communicate the key points and information about the firm to prospective clients. Investment banks and asset management firms often use pitch books for their investment opportunities, but the author suggests they're equally relevant for advisors to communicate exactly what they do and how they're unique. So what exactly should a pitch book cover? The author suggests breaking it down into three sections: 1) Firm overview, which provides information on the firm itself and key players (when it was founded, who the owners are, industry affiliations, clients and AUM, etc.); 2) Philosophy and Process, where you articulate your investment process and philosophy (and perhaps your financial planning philosophy as well!), and perhaps some of your results and performance information; 3) Reinforcing the Why, where you wrap up with why clients should hire you, perhaps illustrated with a case study or sample client scenario. Common mistakes to avoid with a pitch book include cramming too much onto one page/slide at a time (try to keep it to one concept per page), having too much text and not enough images and graphics, failing to include your company branding and logo, or just making it too darn long and overwhelming.
Charging Too Little? Ask Your Clients - From Financial Planning magazine, this blog post from practice management consultant Steve Wershing looks at how to handle the problem of "overservicing" clients, where you realize as an advisor that you're doing too much work for clients for the amount that clients are being charged. Of course, from the client's perspective, few clients ever believe they are "overserviced", but the reality is if you provide far more service than other advisors in the area for the same price, or simply commit to providing a certain level of service and hours of work for a certain price but routinely ignore your own work guidelines, you may be doing "too much" work relative to the price you're charging. Wershing notes, though, that the distinction between "doing too much work" and "not charging enough" is important - though both ultimately relate to "overservicing", the solutions are different, and for many advisors the easier and preferable path is not necessarily to cut back on servicing clients, but instead to bring your pricing and business model in line with the service you deliver, closing the "overservicing" gap. Wershing notes that it's also different for clients; going to clients to tell them you need to cut service is painful, but going to clients and asking for their insight about how to bridge the gap between what the firm charges and the services it provides may surprise you - sometimes clients will suggest themselves which services might be priced higher, or which the advisor could charge for separately, or that there are some services that constitute a time-consuming service that isn't really actually valued much at all!
VC-Backed RIA CRM Firm Bursts Onto The T3 Scene - On RIABiz, this article profiles Wealthbox, a new advisor CRM tool that debuted at the T3 Advisor Technology conference this past week. The web-based CRM is positioned as an alternative with more flexibility than Redtail and more simplicity than Salesforce. Wealthbox is a product of Gotham Tech Labs, a New-York-based startup funded with $1.5M of seed capital, and run by John Rourke, who previously launched another advisor CRM that failed to get traction (called Upswing CRM) after the 2008 market crash. Rourke spent the intervening years after Upswing developing another "social CRM" called Bantam (where "social" meant both providing a forum for employees to communicate, similar to but predating Salesforce's Chatter, and an activity stream of everything going on in the firm, along with also pulling in client social media information), and Bantam was ultimately bought for $15M in 2011. The Wealthbox offering is entirely new - different from both Upswing and Bantam - and is currently priced at $29/month per user, with no minimum user numbers or months. Rourke suggests that the advisor CRM space is still "wide open" to new disruption, and that Salesforce and Redtail have become too complex to use, and Junxure has been too slow to move to the cloud, and early users praise Wealthbox for its simplicity of use. However, advisor tech guru Bill Winterberg notes that with simplicity there are trade-offs, and Wealthbox is light on integrations at this point.
Harold Evensky’s New Adventure - This article is a profile of Harold Evensky, one of the long-standing leaders of the financial planning profession, who's worn a wide range of hats over the years, from being an advisor and owning an advisory firm (and being an early adopter of the fee-only business model), to working as an investment researchers and an academic, and is now working as a professor at Texas Tech working on both new research on financial planning and in developing the next generation of financial planners. In the context of research in particular, Evensky is pushing for more work that will be relevant and applicable to financial planning practitioners themselves, such as work on safe withdrawal rates (should the initial withdrawal rate be higher because spending actually declines later in retirement), how reverse mortgages may enhance retirement income (consider a standby reverse mortgage), and whether active investment shines more in bear markets (he concludes that it does not). The article also profiles Evensky's firm (which is now at $835M of AUM with 362 clients), and his successful transition/succession of ownership. Evensky is also upbeat on the potential for the next generation of financial planners, and has worked to better integrate planning software and other technology into university programs so students will be better prepared to enter the job marketplace, but notes that the schools are still not producing enough new financial planners in the aggregate. Going forward, Evensky predicts that small advisory firms will struggle more against larger firms with more resources, but also notes that technology may ultimately make it easier for large advisory firms to "scale down" and deliver more financial planning to the masses.
SEC vs. FINRA: Which Regulator Is Tougher? - This article by Bob Veres in Financial Planning magazine looks at the ongoing regulatory debate regarding the oversight of advisors, and the suggestion put forth by the brokerage industry that because FINRA examines broker-dealer home offices every 2-4 years, while RIAs are only visited by the SEC on average every 8-10 years, that FINRA is a tougher regulator on brokers than the SEC is on RIAs. Yet Veres notes that perhaps the reason that RIAs are visited less often by regulators is because their business models necessitate less oversight in the first place; independent RIAs allocating funds for clients don't pose the same threat that aggressive commission-based investment product salespeople do, and the SEC hasn't focused on RIAs because they really didn't play a role in the financial crisis. Yet Veres notes that while FINRA examines broker-dealer home offices, and their compliance departments that oversee hybrid advisors and brokers, FINRA regulators often never actually go to an advisor's office, unlike with the SEC where the advisor's office itself is subject to regulator visits (albeit infrequently, but still more than "never"!). In addition, the reality is that not only are RIA offices visited (albeit infrequently), but the RIA custodians themselves are still fully subject to FINRA's oversight, which occurs not just every other year but on a daily basis at the custodial level. In addition, Veres notes that RIA custodians themselves typically vet RIAs before allowing them onto their platforms, often even sharing information with other custodians to limit access to perceived "bad actors" that could reflect poorly on the industry. Ultimately, Veres point is that at the advisor level, advisors themselves are seen as often or more by the SEC than brokers are seen by FINRA, and at the custodial/broker-dealer level, both channels are equally and rigorously overseen by FINRA (as well as self-policing efforts of custodians and broker-dealers themselves who want to avoid liability for being sued due to actions of advisors on their platforms, where arguably broker-dealers have a worse history of taking on bad actors with questionable regulatory records). The bottom line: overall oversight of RIAs may not be less than that of registered representatives after all, and given all the complaints and arbitration complaints that do stem from broker-dealers, perhaps the "greater" oversight that FINRA claims may be much "leakier" anyway.
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! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!
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!
Thanks for the coverage about Wealthbox CRM, Michael. A point of clarification: We didn’t say that Salesforce is “error prone” in general, but, simply, that when you log in for a free trial of Salesforce and do the simple action of adding a new contact name in the contacts section, you’ll get an error (because it must first be linked to an account) and the criticism relates to older CRM business rules and logic. …We think Salesforce paved the way for CRM and the entire SaaS industry and think they have their place, as do we, in various sectors of various markets. Thx.
Thanks for clarifying – sorry if I ‘overstated’ this in my paraphrasing. I’ve tweaked the summary accordingly! 🙂
– Michael
It was nice meeting you at T3 John. I heard you mention that same example. Is that what you find to be the main drawback to the SFDC technology?
No, that example is an illustration of a rather rigid and old way that CRM, probably dating back to Siebold, was conceived and constructed in a database. The main drawback to SFDC is also its main attraction: it’s powerful. But with that power and attendant customization come the consultants, the business analysts, the trainers, the price, etc. and, sometimes, by the time it gets to the end-user, in this case, the financial advisors, it’s – in the words of advisors repeatedly – either “overwhelming” or “overkill.” …Not my words, we hear this all the time. Again, I l have a lot of respect for SFDC and I mean it when they say they’ve paved the way for the entire SaaS industry to flourish.
So, a powerful platform ruined by consultants is what you are saying?
No, I didn’t say that. What’s lacking in my view is that dominant CRM vendors built their products without much thought to design and human behavior. It’s like the designer wasn’t in the room when the product got built; design was an afterthought. The end result is that these interfaces and design interactions on many CRM systems (not just SFDC) don’t respect the end user. They’re clunky and can have convoluted workflows, or were overly thought out without user input and testing.