Weekend Reading for Financial Planners (Feb 22-23) – Practice Management & Tech Edition!

Author: Michael Kitces

Team Kitces

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

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

Read all of Michael’s articles here.

Weekend reading for February 22nd/23rd:

SEC Unveils Details of New Advisor Exams - Late last year, the SEC indicated that it planned to significantly ramp up the pace of examinations for advisors who have never been visited before, and this week the SEC revealed further details on this "Never-Before Examined Initiative" for those who have been registered with the SEC for three or more years. The new initiative will incorporate two primary approaches: a risk assessment that includes a high-level examination of the advisor's overall business activities (with a particular focus on their compliance program), and a focused review that will dig further into the higher-risk areas of the advisor's operations. The SEC also included a "sample letter" that might be sent to a firm coming up for examination about what it will focus on, including: its compliance program (overview of firm's written policies and procedures, review of advisory books and records for identifying and disclosing conflicts of interest, etc.); filings/disclosures; marketing (do materials include any false/misleading statements about business or performance, make untrue statements of material fact, omit material facts, etc.); portfolio management (including portfolio decision-making process, allocations of investments, etc.); and safety of client assets (especially whether advisors with custody of client assets have taken appropriate measures to protect assets from loss or theft). The SEC also announced there will be a series of regional meetings later this year to which unexamined SEC-registered investment advisers will be invited to learn more about the examination process.

If You Can’t Build It, Buy It - This article from Wealth Management profiles a young advisor who decided that it would be easier to purchase a practice to start his career, rather than build one, after kicking off his career at a wirehouse and recognizing that he wouldn't likely be able to organically attract the kinds of $1M+ clients that the firm was encouraging him to pursue and then switching to a bank where he built up a moderate book of business but then plateaued. Accordingly, at the age of 31, he decided to buy a firm to jump-start his career, an appealing option given the upcoming wave of anticipated advisor retirements. Yet in practice, there's some debate about whether buying a firm is a good way to start one, and it appears that there may still be more buyers than sellers in the marketplace (David Grau of FP Transitions suggests only 8%-10% of independent advisors actually sell their practice, Succession Link currently has 70 sellers and over 1,000 registered buyers!), and it can be difficult to both gain agreement on the valuation of the firm, and line up financing to purchase it... at least, at this point. Undaunted, the advisor networked around for three years(!), meeting prospective sellers through local recruiters and networking with other advisors, and eventually met a 60-year-old with a $75M AUM practice to sell; they're going through a two-year transition process now. Because financing is difficult, right now many acquisitions have actually been larger firms buying small ones half or 1/3rd their size, with about 30% paid in cash at closing and the balance seller-financed over about 4 years. The advisor in the story, though, paid a bit more than the typical multiples (about 2.15X trailing 12-month revenue), but with only 25% up front (which itself was financed from a local bank) and the remainder seller-financed stretched out over 7 years to help manage the cash flow obligations.

Training Advisors to Serve Special-Needs Clients - This article from Financial Planning magazine profiles Mary Anne Ehlert, a financial planner who specializes in working with special-needs clients, a niche that emerged for her after growing up with a sister with cerebral palsy, a son who is mentally ill and blind, and having both of her parents develop disabilities later in life. In addition to running a firm that, with two other planners, serves about 450 clients with $146M of AUM (of which about 60% have a special-needs family member in her niche), Ehlert has also created Protected Tomorrows, a separate membership-based firm that provides resources and specialized training for advisors who want to work with special-needs clients (and also some direct-to-consumer resources). The cost for advisors is a onetime $395 upfront fee, plus $10 per quarter for online access to videos and references, or $50/quarter for live webinars as well (which covers topics including annuities for special needs situations, taxation, special-needs trusts and Federal benefits, and more). In addition to just the educational resources, Protected Tomorrows also recruits advisors into a franchise-style system where they become "advocates", trained to offer a comprehensive advisory service called a "Future Care Plan" specifically for special needs clientele for which clients are charged $1,000 to $3,000/year (depending on the complexity of their situation); for advisors, the cost is $5,000/year to be in the program, and the advocates can use the Protected Tomorrows name, participate in a 3-day on-site workshop, and receiving ongoing support, and client referrals via their website, as well as training, presentations to use with groups, marketing materials, and an overall business plan. The article also highlights a few other similar advisor-niche-training services, including Susan Bradley's "Sudden Money Institute" with its new "Certified Financial Transitionist" training, and Joy Kirsch's "Widow's Journey" program.

Direction Finder: Tell Your Employees Where You’re Headed - In Investment Advisor magazine, practice management consultant Angie Herbers makes the point that the most common employee issues in advisory firms all share the same root cause: an owner who cannot/does not articulate where the firm is going, often because the owner themselves lacks direction. While the stated concern might be about a partnership track, or a career track, or simply a raise/promotion and more money, Herbers suggests that it's rarely ever the case that this is the true underlying problem, and instead is usually just a symptom of the lack of direction in the firm and the uncertainty it causes for employees. It's important not to underestimate the (negative) power of uncertainty; Herbers notes it can be even worse than long hours, unfriendly coworkers, or a micro-managing boss, and likely accounts for why so many people stick with large corporations despite all their other well-known negatives (their futures are more certain). To some extent, a level of uncertainty is unavoidable in an advisory firm; that's just the reality of having a job in a small business. Yet that makes an articulated vision of the direction of the firm even more important, as while the exact path and success will remain uncertain, a clear vision of where the firm is heading does make it easier (and more certain) for employees about where/whether/how they can fit in; even more important, articulating a vision is something an owner can do, even in the midst of so much else that cannot be controlled. Of course, the problem remains that for many advisory firm owners, the real reason no direction is articulate remains that there is no clear direction for the firm in the first place, as the advisor themselves hasn't decided whether or to what extent they want to make the continued reinvestments of time and dollars necessary to grow the firm to the next level. What should be done in this scenario? Herbers suggests that the best solution is simply to explain that reality to employees (which is definitely better than allowing the uncertainty to remain, or coming up with answers that aren't serious and just keep changing), and then invite them to be part of figuring out what the next/new direction may be.

Compensation Golden Rule: Money Can’t Buy Happiness - From Investment Advisor, this article by Mark Tibergien notes that one of the most common management mistakes is using money as a substitute for actual more (pro-)active management of employees. Yet the reality is that while compensation helps to keep people engaged in their roles, it is not a motivator to get people to work harder, faster, and smarter. Or at least, not in the long run; while there are some studies showing financial incentives can have short-term performance benefits, there is also considerable evidence that a singular focus on money eventually creates unfavorable adverse consequences, too. Similarly, for those employees who are negative and disillusioned, throwing money at them will not make them happy; at best, it just ameliorates their pain/frustration at work. By contrast, witness the incredible motivation of those in professions like teaching, the clergy, or the military, where top performers are highly motivated, but generally not by money; similarly, Tibergien notes that in a recent visit to Japan, service from everyone from doormen to waitresses was extraordinary, despite the fact that they don't work for tips (which are actually frowned upon), and instead simply because their performance was encouraged through training, evaluations/feedback, and culture. To the extent that money is used as a motivator, Tibergien notes it should align with the job; while a heavy short-term variable component is appropriate for sales/business development roles, variable compensation should be a much smaller component for management and service jobs. Ideally, compensation should align with the firm's overall vision and philosophy - and Tibergien includes an example at the end of the article - and overall the bottom line is simply this: as a firm leader, your primary goal is to hire motivated people, and then create an environment in which they can flourish.

Don’t Be A Crash Test Dummy - This article by Joel Bruckenstein in Financial Advisor magazine reviews the new investment risk and portfolio analytics company "RiXtrema" which has designed a tool to help advisors "crash test" their client portfolios. Historically, the tools to accomplish this for advisors have been limited - most were institutional and far beyond the budget (and training) of the typical advisor - though in recent years two emerging providers have been Hidden Levers and MacroRisk Analytics, and RiXtrema and their Riskostat tool is now the third. The key differentiators from RiXtrema is that they claim their analytics are more 'crisis-aware' than other platforms, including models that are specifically designed to model the unique market behaviors that emerge during times of crisis, and their tools provide actionable "portfolio crash tests" and "fund crash ratings" either on an absolute basis, relative to a benchmark, or based on a user's own custom inputs (along with an optimizer that can provide recommended trades to re-adjust the portfolio to a target crash test level). Riskostat can either be installed locally on an advisory firm's own desktops/servers, or can be accessed over the internet (same tools either way), and an iPad version is coming soon as well. When Bruckenstein tested the (desktop) software, he found that it was initially complex, but is something advisors can get comfortable with after playing around with the software for a bit (RiXtrema states that the goal is for advisors to be proficient with the basics fairly easily, though becoming a 'power user' will still take time). On the other hand, Bruckenstein also notes that compared to competitors like Hidden Levers, RiXtrema does not appear to have as easy an interface or as visually appealing aesthetics (for advisors or their clients) as some competitors, though this may improve as the software continues to be developed; in addition, RiXtrema currently lacks many integrations, so advisors who want to analyze existing client portfolios still have to re-enter them manually into the software.  For those who are interested, the list price of the software is $300/month, which makes it "competitively priced" to its competitors, though Bruckenstein notes that overall only a limited number of advisors have adopted tools of this nature in the first place.

Next Generation CRM: Powered by Social - From Morningstar Advisor, this article by tech guru Bill Winterberg reviews the new "social-powered" advisor CRM tool Wealthbox. By "social powered" Winterberg means that advisors will interact with the Wealthbox CRM in a manner similar to how information is communicated on social media platforms - built around "activity feeds" that show either ongoing activity for the firm and all its clients overall (with some control capabilities to limit what advisors can see about other advisors' clients within the firm), or at the level of the client record all the activity underway for that particular client. Shifting from information about the client to connecting with the client is also easy, as clicking on the client's email address immediately opens an email composition window (in Outlook or Google Apps at this point), and clicking on the client phone number similarly dials the client with an integrated VoIP click-to-call feature (and when the call wraps up, Wealthbox automatically updates the contact record with evidence a conversation took place (to which the advisor can add custom notes as desired). In addition to providing a social-networking-style activity feed, Wealthbox can also connect directly to client LinkedIn and Twitter social media accounts to view their latest updates directly within the CRM (Facebook and Google+ account integrations are planned in the future as well). The CRM also includes integrations with Albridge, MoneyGuidePro, LaserApp, and Quik! Forms, with more integrations ahead. The platform can also be accessed via a mobile device, with a "full-featured companion mobile app" out soon (not available yet when the article was being written), follows industry standards for data security, and is priced favorably at $29/month per user (far less than the new Junxure cloud solution, slightly less than RedTail for very small firms, and slightly more than RedTail for mid-sized firms). Given that the advisory industry has generally lagged on social media adoption, there hasn't necessarily been a high demand for 'social-powered' CRM, but Winterberg notes that there is a lot of leverage in having firm-wide activity streams - the approach is being adopted in many other CRM tools as well, across industries - and with Facebook leveraging the activity stream for more than a billion users worldwide, it seems clear there are many ways to get value from a more social-style CRM.

Planning Tool Moves to the Cloud -- An Improvement? - In Financial Planning magazine, Joel Bruckenstein reviews the latest version of Money Tree financial planning software, which was recently released in its new web-based version called "Total Online". Money Tree is actually one of the longest-standing financial planning software tools, dating its earliest version back to 1981, and is actually comprised of several tools, including "Silver" (for simple planning accumulation and decumulation, and has been available online for years), and Total Planning Suite (its more comprehensive offering) which in turn includes Easy Money (a goal-based planning solution) and Golden Years (a retirement income distribution tool that can optimize cash flows around distribution planning, including detailed tax analysis). The latter Total Planning Suite is what has now been transitioned to a web-based version. Bruckenstein cautions that the planning transition process itself can be daunting; the conversion guide runs about 80 pages, and the new online version was entirely rebuilt, which means it will take some time for advisors who already used the prior version to retrain. On the other hand, the new web-based does - as with all cloud applications - allow access anytime and anywhere, and gets advisors out of the business of maintaining the software application, servers to run it, client files, and the associated backup and data recovery tools. Bruckenstein notes that there's a lot of control over the data input process, from cash flow and savings details, to the insurance input options, the tax section, and the estate section. Total Online also includes a client portal for access. However, Bruckenstein also notes that the software lacks "dazzle" and the bells and whistles like sliders and interactive graphs that some other planning tools now make available; similarly, while the client-facing reports cover all the necessary information, the graphs also look "antiquated" (though the company states that updating reports is next on the to-do list now that the software has been relaunched online). Overall, Bruckenstein's conclusion is that the new MoneyTree is definitely an improvement and worth upgrading for existing users - notwithstanding the conversion/transition hassles - but that for advisors already using something else, the case for MoneyTree is more difficult, as the capabilities to do the planning is there, but the report/presentation capabilities (or weakness thereof) may be a dealbreaker for some.

Efficiency Quest - From Financial Advisor magazine, this article by practice management consultant David Lawrence highlights several new software tools to help advisors improve their office operational efficiencies. The first is XTRAC Solutions, a subsidiary of Fidelity that offers a web-based portal to access workflow and document management services - think tracking, routing, review, approval, and audit control of business processes, allowing the implementation of prepackaged (or customized) workflows to better improve workflow automation. In addition to its workflow capabilities, XTRAC is also deeply integrated into Fidelity's own platform, and also has integrations to CRM platforms Redtail and Salesforce; the tool can also prefill documents drawing on CRM data. The next tool that Lawrence recommends is ProTracker Cloud, the latest web-based version of this financial planning CRM solution, which now also includes some workflow management features (limited to basic sequential task workflows, but still useful for firms where the processes are generally simple and straightforward anyway); ProTracker Cloud is a document management system as well, and advanced editions include additional compliance features and business management tools (the basic version starts at $59/month per user). Lawrence's third tool is E-Valuator, a newly launching investment decision-making tool that focuses on "investment performance tolerance" (i.e., by what amount and for what duration will the investor tolerate underperformance and what is their overall time frame), and helps advisors to craft portfolios based on the client's tolerance along with performance-based, risk-based, fund-based, and qualitative-based parameters. The last offering from Lawrence is Digital Fortress, an interactive online platform that offers practice management concepts, and a "marketing command center" that helps to manage the advisor's website and social media presence all in one place, supported by turnkey materials. Digital Fortress includes interactive lessons, a resource library, a community forum, prepackaged commentary and newsletter materials, website design, and other turnkey plug-and-play digital materials (that are already FINRA/SEC approved).

The One Act Of Image-ination RIA's Must Undertake Before Debuting On Social Media - On RIABiz, marketing consultant Abby Salameh makes the key point that while some advisors spend a lot of time developing a marketing plan or considering how to engage with social media, many miss one of the most simple and essential parts: a quality image showing the advisor in the first place, as many sites have no photographic evidence of their founders at all, or have an image that is poor quality or outright unprofessional. While some advisors are dismissive about the importance of a photograph, Salameh makes the key point that first impressions matter, and we invite our clients to place an incredible amount of trust in us... and in a world where prospective clients often check us out online before meeting us (even if we're coming to them via a referral!), that online photo is the first impression that humanizes us and allows prospective clients to begin to connect. Notably, quality photos have moved beyond 'just' a classic headshot on a bland corporate background, and often include a broader "torso" shot (to convey a sense of body language and attitude) and may be in a more neutral "atmospheric" setting. The cost is generally quite modest; Salameh suggests that just Googling "photographer" and your hometown should come up with plenty of options, and most photographers should provide you with an hour-long sessions and a minimum of five digital images and two retouches for no more than $300, a very worthwhile investment for quality above just taking a "selfie" or having a family member take the picture on your iPhone (which doesn't have the same quality optics as real professional photographer cameras). Some final tips from Salameh: in terms of dress, men can wear suits or business casual, in whatever style they normally dress in the office (to be authentic), while women should be cognizant to avoid low-cut shirts, sleeves dresses or ruffles, and to choose something with a flattering neckline; avoid clothing with patterns or large lines or stripes; wear a little makeup to even your skin tone and keep down the shine; jewelry, if any, should be simple; and remember to smile!

The Myth of the Bell Curve - The so-called "bell curve" explains the distribution and likelihood of many naturally occurring phenomena, but recent research is finding that one area in which results materially deviate from the bell curve happens to be human performance. While such a "normal distribution" would suggest that in the workplace there should be a small number of underperformers, a small number of outperformers, and the rest clustered in the middle - and many HR departments manage this way, providing an 'average' raise to the average employees, a higher raise to a limited number of star employees, and perhaps trying to cull the ranks of whoever "must" be the (relative) bottom performers of the group (even if a whole group includes high performers, the presumption is still that someone must be the worst and culling them would improve the average of the remaining herd). However, in reality performance tends to follow a Power Law distribution instead, which looks quite different; it includes roughly 10%-15% "hyper-performers" who are above average (often far above), a large population that is actually slightly below average, and a very small group in the 'long tail' that are very far below average. In terms of productivity, the distinction is even more significant, as the 10%-15% hyper-performers even more disproportionately impact business value. In this framework, the key is to recognize that the size and depth of the hyper-performer group is dynamic and should be developed and cultivated, rather than trying to 'force' a tiny subset to being the "above-average" superstars and characterizing the rest as average (and a small offsetting group of below-average). Similarly, this means that rather than distributing the bulk of raises in a moderate manner to the masses at average - which may frustrate the emerging hyper-performers who feel underrecognized at average but don't "fit" into a bell curve at the top - compensation should be targeted more at the upper end of the scale (which both incentivizes rising performers and discourages comfortable mediocrity from those in the middle). In essence, the author's point is that forcing an even distribution of income, compensation, and employee ratings may be "fair" in that it's even, but that "fairness" may not actually be fairly representing the contributions of each person, and that viewing the world as a power law meritocracy that acknowledges a subset of higher performers really do disproportionately create business value will better encourage those employees to rise to the task.

Data Gathering Vs. Discovery - This article by financial life planner Roy Diliberto makes the important distinction between the processes of "data gathering" and "discovery" with new clients. The difference is that data gathering is purely quantitative - they're the "how much" questions (How much do you have? How much do you make? How much do you spend? How much will you retire on? Etc.). Discovery, on the other hand, is about learning who the clients are, not merely about how much they have/want. In Diliberto's words, discovery is about "understanding their histories, attitudes, values, dreams of the future, visions of their lives, how they feel about philanthropy, and other much more qualitative information." The distinction is important, because focusing just on the data gathering aspects may allow you to craft a plan of what the clients need to do, but it won't necessarily aid you in helping them get there, and understanding the behavioral roadblocks that may emerge as clients seem to defy logic in refusing to implement recommendations or change their (potentially self destructive) behavior. Diliberto suggests that shifting from a data gathering to an impliedly-superior discovery process is about changing the questions that you ask; from "when do you want to retire" to "how do you visualize your life in your 60, 70s, 80s, and beyond" or from "how much is your business worth" to "tell me about how you started your business and made it grow, and what are your plans for the future?" or from "have you taken steps to reduce taxes at your death" to simply "how do you want to be remembered?" Also important is to understand the client's history - knowing the kinds of money values instilled in them by parents when they were young and their money mistakes of the past provides more clarity on the challenges to be navigated now and in the future. The bottom line - data gathering for the quantitative information is still vital to what we do, but we should be careful not to limit our discovery process with clients to just the quantitative information; true discovery looks to the interior issues driving client behavior as well.

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!