Weekend Reading for Financial Planners (February 17-18)

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 17th – 18th:

Massachusetts Regulator Accuses Scottrade of DoL Fiduciary Rule Violations (Lisa Beilfuss, Wall Street Journal) - This week, the Massachusetts state securities regulator accused discount brokerage firm Scottrade of violating the Department of Labor's fiduciary rule by holding (at least) two sales contests in late 2017 after the "Impartial Conduct Standards" had already taken effect, including a "Q3 Run The Bases" contest including $285,000 in cash prizes and a fourth-quarter contest that included weekly cash prizes to reps of $500 and $2,500. As notably, even though the remainder of the Best Interests Contract Exemption rules for DoL fiduciary are delayed until the summer of 2019, the Impartial Conduct Standards still took effect last June 9th of 2017, and sales contests in particular were a major focal point of the fiduciary rule. In fact, the Massachusetts regulator specifically noted that it felt the need to step up and protect its citizens because the Trump administration appears to be waffling on implementation and enforcement of the fiduciary rule, and follows a similar path of other states that have recently taken up their own fiduciary initiatives (including new state fiduciary rules in Nevada and Connecticut, and similar proposals in New York and New Jersey). The Massachusetts regulator is seeking both an administrative fine, disgorgement of profits, a public censure, and a cease-and-desist order against Scottrade requiring a full review of the company's supervisory policies... although the real buzz is that if Massachusetts is already pursuing Scottrade, what other financial services firm might also be targeted by the regulator for similar failures to adhere to the DoL fiduciary Impartial Conduct Standards?

SEC Offers Amnesty Program For Undisclosed Share-Class Conflicts (Kenneth Corbin, Financial Planning) - The inappropriate use of higher-cost share classes when a lower cost otherwise-identical alternative was available has been under increasing scrutiny from the SEC and FINRA, with 9 cases from the SEC alone in recent years and guidance from the SEC's Office of Compliance Inspections and Examinations, especially with the rise of fee-based accounts (where taking an advisory fee and earning 12b-1 fees may be considered double-dipping). In some cases, broker-dealers or other platforms may require the use of funds with a 12b-1 fee (which goes to the platform, while the advisor earns a fee), but at a minimum the SEC requires a clear disclosure of the fact that lower cost share classes may have been available and were not used as a means to compensate the advisor or platform. To further accelerate resolution to the issue of double-dipping and/or failed disclosures regarding the practice, especially for larger platforms that may have had such incidents occurring on a widespread basis, the SEC has announced a new "Share Class Selection Disclosure (SCSD) Initiative" that allows eligible advisory firms to voluntarily self-report (by June 12 of 2018) any violations for failing to disclose such situations, and promptly refund money to harmed investors, in exchange for amnesty from any other regulatory fines and civil penalties or other adverse consequences. Notably, though, as part of the carrot-and-stick initiative, the SEC also points out that those who do not self-report and fix the situation, and instead are caught during a regulatory exam, will not be eligible for the amnesty program, as a way to further emphasize and encourage voluntary self-reporting and prompt resolution of the issue. Which means, at a minimum, firms need to update their disclosure materials if such practices are occurring, and ideally should renegotiate to obtain more favorably priced institutional share classes instead.

2018 Advisor Software Survey And Analysis (Joel Bruckenstein & Bob Veres, T3 Technology Hub) - At the recent T3 Advisor Technology conference, Bruckenstein and Drucker released their latest 2018 Advisor Software Survey, which provides a broad look at both adoption/usage trends of advisor software (especially in the independent channels), but also User Ratings of what are actually the preferred platforms, and which software advisors are considering a switch to (which provides guidance about future adoption trends and how market share may change in the coming years). Notable trends in the various software categories included: the leading portfolio accounting/management software solution is PortfolioCenter, followed by Tamarac, Morningstar Office, Orion, Albridge, and Black Diamond (though PortfolioCenter has lower User Ratings that most competitors, and advisors are most commonly looking to move to Orion, Tamarac, or Black Diamond); Morningstar is still the dominant player in Investment Analytics for advisors, though Fi360, YCharts, and Kwanti are all gaining advisor interest and market share, and DFA Returns and Riskalyze Stats are the most popular for portfolio Stress Testing; when it comes to rebalancing software, iRebal (the free TDA version) has the top market share and the highest User Ratings, followed by Tamarac, Orion's Eclipse, and Morningstar's tRx (with advisors most commonly looking to adopt Orion, Tamarac, or iRebal); in the Financial Planning software category, MoneyGuidePro is the most popular, followed by eMoney Advisor, but recent upstart RightCapital is now beating legacy players like MoneyTree and NaviPlan in both market share and User Ratings, and eMoney Advisor is overwhelmingly the most popular financial planning software that advisors are thinking about adding (followed by MGP and RightCapital); the most popular advisor CRM was WealthBox, followed by Junxure, Redtail, and Salesforce (although the authors note that WealthBox market share statistics may have been boosted by strong survey participation from XY Planning Network where Wealthbox is included, and in general Wealthbox skewed towards smaller firms, Redtail and Junxure in mid-sized firms, and Salesforce and Tamarac in the largest advisory firms), with advisors most likely looking to add Redtail or Salesforce; when it comes to "Digital Advice" (i.e., "Robo") platforms, the leader is Schwab's Institutional Intelligent Portfolios, but no robo player has more than 5% market share and the overall category is seeing "just" 20.6% adoption amongst advisors overall; and while the 3 major RIA custodians (Schwab, Fidelity, and TD Ameritrade) all score relatively well on their User Ratings, there was a very wide range of advisor satisfaction scores for broker-dealers, with Cambridge and Ameriprise scoring near the top, and Lincoln Financial, Cetera, Royal Alliance, and RBC Wealth (RBC Black) scoring at the bottom.

7 Game-Changers from the T3 Advisor Conference (Craig Iskowitz, Wealth Management Today) - The T3 Advisor Technology conference is the largest annual event dedicated to advisor technology, with near-record attendance of almost 700 this year. Key themes for this year's conference included: the ongoing debate rages on about whether the best way to provide a holistic platform to advisors is building an end-to-end all-in-one platform or simply using best-in-class solutions with ever-deeper integrations (as the rise of APIs makes integrations more possible than ever, but this year's Advisor Software Survey announced at the conference also had an especially strong showing in User Ratings from all-in-one platforms like Advyzon); interest in doing "real" financial planning is on the rise, but with financial planning software in particular, a whopping 63% of advisors say that lack of integrated technology is a real challenge (although amongst younger advisors, financial planning software is viewed as even more important than CRM as the core to running their businesses); there were a number of major product release and integration announcements, including a new MoneyGuidePro integration with MX (for Personal Financial Management tools), the new ASTRO Direct Indexing solution from Orion, and the new Morningstar Office Cloud version; an ongoing buzz around cybersecurity solutions; and industry pundits continue to predict that blockchain technologies will have a substantial impact on financial advisors, though the actual solutions have not yet emerged (but there's interest in everything from event-triggered "smart contracts" to efficiencies that simply bring better pricing for advisors).

At T3 eMoney & MoneyGuidePro Redraw The Lines Of Battle (Graham Thomas, RIABiz) - Over the past decade, MoneyGuidePro has been the "simpler-to-use" goals-based planning software, while eMoney Advisor was more cash-flow-based with more advanced planning tools, but at the recent T3 advisor conference, MoneyGuidePro announced a new "advanced planning" initiative (and a new partnership with MX for a more eMoney-Advisor-like portal) while eMoney Advisor simultaneously announced a "right-sized, simple planning tool" with a focus on goals-based planning, as MGP tries to push into larger RIAs and family offices that do more sophisticated planning (where eMoney Advisor has reigned), and eMoney Advisor aims to move into the domain of simpler planning for younger clients. Yet the caveat is that planning for younger clientele doesn't really necessitate simpler planning software; instead, planning for younger clientele simply involves different complexities, which aren't covered by planning software today, raising the question of whether eMoney Advisor is misunderstanding the needs of the marketplace. In the meantime, mega-advisor Ric Edelman keynoted the T3 conference, and raised the question of whether all the planning software solutions are providing dangerous advice by potentially grossly underestimating the impact of medical advances on rising longevity (i.e., what happens if the majority of clients live to age 120... and don't even want to retire until their 80s or 90s?). Other notable initiatives discussed at the T3 conference included the integration between Riskalyze and Vestwell for advisors serving 401(k) plans, the new Orion ASTRO solution for advisors to implement Direct Indexing, and a coming new "Virtual Exhibit Hall" that T3 founder Joel Bruckenstein is aiming to launch soon.

The Dealmakers Financing Top Advisor Technology (Ryan Neal, Investment News) - For most of its existence, advisor technology has been ignored by private equity and venture capital firms, leading the bulk of today's advisor software solutions to be "homegrown" tools that advisors often first developed for themselves, and then sold to their peers and in the process created a software company (including Junxure, Redtail, Orion, ProTracker, Oranj, tRx, and more). To the extent that outside investors pursued "FinTech" at all, it was directed primarily at direct-to-consumer FinTech solutions (e.g., robo-advisors). In recent years, though, a growing number of investors have begun to pursue Advisor FinTech as its own dedicated category, from high-profile advisors like Steve Lockshin (who was an early investor in Betterment, in addition to having co-founded performance-reporting software Fortigent that was sold to LPL, and more recently has invested into Quovo, Advizr, and FeeX), to Brad Bernstein of venture capital fund FTV Capital (that most notably led the $20M investment into Riskalyze in late 2016), along with Brooks Gibbins of FinTech Collective (which was also an investor into Quovo, as well as NextCapital), Ian Sheridan of Vestigo Ventures that has just finished raising capital for a new round of investments into advisor FinTech, Mike Durbin of Fidelity Institutional (which acquired eMoney Advisor in 2015 and continues to eye advisor FinTech investment opportunities), and Len Reinhart who originally founded the TAMP Lockwood and is now looking to invest into new companies (including Wheelhouse Analytics that was acquired by Envestnet, and also LifeYield which also received capital from Vestigo).

How To Sell An RIA Practice In A Hot M&A Market (Neal Simon, Financial Planning) - Since 2015, Simon's firm Bronfman Rothschild has completed several acquisitions of advisory firms, and provides some tips from his perspective about what potential sellers can do to maximize their own likelihood of success in finding a buyer. Key points include: all transactions start with a conversation (which should not be about the financials, but about the ideal vision of how clients should be served, the goals of building the business, etc., because not all buyers are buying and not all sellers are selling for the same reasons in the first place, which can vary from a desire to retire to a goal of staying in the business but gaining access to more internal resources from a larger firm); assess the fit (as cultural fit is ultimately the biggest driver of whether a merger is successful or not, raising questions from the focus of the firm on planning vs investments, its philosophy around serving clients, reinvesting in staff, etc.); whether/how the two firms will actually join together (is it really a "merger" of equals, or an acquisition where the smaller firm will be required to adopt the tools and systems, the investment process, and/or even the name, of the acquirer?); and lastly, the valuation of the deal (which does matter and should be fair, but often is actually the last issue to resolve, as a good valuation is a moot point as it's unlikely to be realized if the preceding points don't line up first, and the reality is that "price" can be somewhat flexible as it also heavily depends on the terms, anyway).

Broker-Dealers Seek Reps In Play (Dan Jamieson, Financial Advisor) - While much has been written about the growing volume of mergers and acquisitions amongst RIAs, the reality is that the recruiting market amongst broker-dealers is also heating up, from the trend of breakaway brokers leaving wirehouses for independent B/Ds, to IBDs recruiting from one another, and mergers and acquisitions of broker-dealers by one another (which in turn often spurs another round of recruiting initiatives as brokers decide whether to stay or go when the new owner is announced). A case-in-point example from 2017 was the announcement that LPL was buying the group of four National Planning Holdings broker-dealers, which led to an unusually high volume of recruiting for competitors like Cambridge Investment Research and Securities America. In fact, a number of the largest broker-dealers reported record-breaking recruiting years last year, as upwardly mobile advisors in particular are taking a fresh look at whether their broker-dealers are well-positioned for the future, and changes in both technology and compensation from the DoL fiduciary rule are also driving a number of advisors to reconsider their current broker-dealer platforms. The trend appears to be especially favorable for the largest IBDs, which simply have more resources to deal with both the rising demands for DoL fiduciary compliance, and for advisor technology in general, with most large broker-dealers predicting that 2018 will be a strong year as well. And the ongoing disintegration of the Broker Protocol may further accelerate wirehouse advisors defecting from Merrill Lynch and Wells Fargo (at least as long as they remain in the Protocol!).

Curing The Advisor's Retirement Blues (Bob Veres, Financial Planning) - In a world where most advisors become fully immersed in their advisory businesses, the allure of freeing up time in retirement may be appealing... yet the challenge is that scaling back and giving up day-to-day responsibilities can also feel as if they're cutting out a part of their lives (adversely impacting our own self-image and feelings of status), and raises challenging questions about what their role will be in the future (big-picture thinker? mentor?). And at a minimum, despite having pushed hard for decades, many advisors simply feel guilty for now wanting to take a pause and enjoy life a little more (especially given the healthy income a mature practice can produce). Veres suggests that a starting point to think through these challenges is just to begin the transition away from the most nitty-gritty tasks, that should be easiest to give up (and may even be more productive for the firm anyway, allowing the founder to focus more on big-picture needs of the firm). Although in multi-advisor (and especially multi-partner) firms, the shift in founder/partner responsibilities can also raise questions of compensation... for which Veres suggests the best path is to restructure partner compensation into a formal salary for the actual duties performed in the business, as separate from partner shares of profits from the business (which would continue to be allocated based on ownership). The biggest question for the firm, though, may simply be whether to take on associate advisors who can ultimately take over clients and the firm entirely, though Veres suggests that while doing so may feel like a perceived loss of status for the founding advisor, in the eyes of clients it can be celebrated as bringing continuity to the firm and the services that it provides to clients. The real point, though, remains that the biggest challenge for advisors trying to retire is usually not the succession plan or the financials of the business, but the personal impact that it has for someone who has had the business at the center of their lives for 20-30+ years... and suddenly has to figure out how to reinvent themselves for their own second act.

Rethink Forced By The Loneliness Of Long-Distance Work (Emma DeVita, Financial Times) - With the rise of the internet came the rise of telecommuting, and the idea that most workers would be happier to avoid long commutes and the lack of flexibility and inherent distractions of working in an office. Yet in the past few years, a number of major firms, from Yahoo to IBM, have been dialing down their remote working options, in recognition that it is leaving employees feeling more disconnected from the overall business, which in turn is impairing the customer experience at many businesses. Notably, the endpoint isn't necessarily to eliminate remote working altogether, but to at least acknowledge that it probably shouldn't be a standard option, nor viewed as a path to save on expenses (e.g., by eliminating the cost of rent/office space); instead, allowing some partial remote work is viewed as part of creating an overall more flexible working culture. In part, this is also simply driven by the fact that the realities of working from home often turn out to be inferior to the idea of what it could/should be, which means employees who started to work from home are often deciding they want to come back and work in the office together. For employers continuing remote working environments, the companies are taking more of a focus on how to enrich the remote working experience, from better tools and technology to promote communication, to even environments like a "virtual break room" for remote employees to connect with co-workers. Alternatively, some companies are adopting a mid-point, renting shared office spaces for groups of employees, as a means of providing some in-person interaction between employees, but in geographically convenient locations that may at least partially reduce the burden of some employees' long-distance commutes. The bottom line, though, is simply the acknowledgement that for many, remotely working from home turned out to be a lot lonelier than expected, and that while there are productivity negatives of being in an office, it's important not to underestimate the positive value of co-worker social interactions (for both personal and business reasons).

The Rise And Fall Of Working From Home (Rebecca Greenfield, Bloomberg) - With the rising popularity of telecommuting, a growing number of firms have tried it in recent years... and often find that the theory is much better than reality, with not all employees effectively able to manage themselves remotely, and some outright abusing the flexibility and lack of supervision. Notably, this doesn't necessarily mean that companies are eliminating telecommuting altogether, but at a minimum more and more companies at least want workers in the office some of the time, with 60% of firms saying they allow some type of telecommuting, but 77% of those stating that they don't let people work from home on a full-time basis (but may allow ad-hoc remote work, such as the person who needs to stay home for the plumber or to wait for a package). Nonetheless, the flexibility of being able to work from home – or just flexibility in work hours in general – continues to rank highly on employee benefits surveys, especially amongst workers who are parents with younger children. But as more work environments become team-based, the retrenchment of requiring employees to come at least semi-regularly into the office is on the rise, including for very large firms like IBM. Which means the future may not be about a work of telecommuters, but instead simply adopting technology to create more flexible work environments for the occasions that employees genuinely need a little more flexibility (while expecting them to continue to be in the office the rest of the time).

Coworking Is Not About Workspace, It's About Feeling Less Lonely (Steve King, Harvard Business Review) - A growing number of research studies are finding that while remote working has a lot of benefits, from flexible hours to no commute and more autonomy over how you work, the results also show that telecommuting also results in a lot of complaints about isolation and loneliness and missing all the human interaction and social aspects of being in an office. And loneliness isn't even just a social problem; it's also associated with health problems, and a reduction in lifespan similar to smoking 15 cigarettes a day! Fortunately, though, one recent research study found that the solution isn't necessarily to bring all remote employees back into a central office; instead, almost any kind of "co-working" space that brings together multiple people into a shared physical space can reduce the remote-worker-hazard of loneliness (in addition to enhancing one's professional network, too). In fact, the community aspect of many co-working spaces led another study to find that coworking members were more likely to report that they were "thriving" at work than even traditional employees. Other benefits of co-working spaces include that they often have better business and technology infrastructure than working from home, and may help promote innovation and creativity given the higher likelihood of employees being exposed to a wider range of other companies and services. In fact, given these benefits, co-working spaces may be especially valuable for independent workers (e.g., financial advisors), given the social aspects of co-working and professional networking opportunities, for a fairly "reasonable" cost that averages around $350/month (albeit with significant variability depending on the city/location).

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.