Weekend Reading For Financial Planners (February 17-18)

Cerulli Study Finds Fee Transparency Could Help Advisors Win More New Clients

(Holly Deaton | RIAIntel)

When a prospect is looking for a financial advisor, understanding how much they would pay in fees can often be a tricky proposition. In part, this is due to the many commission-based advisors whose compensation depends on the sale of insurance or investment products, where the price that a client pays is baked into the price of the product or is included in (often opaque) fees associated with buying, selling, and/or holding the investment. But even as fee-only financial planning has gained in popularity and advisory firm websites have become ubiquitous, it can still sometimes be hard for prospective clients to determine how much they would pay for advice before actually reaching out to the firm.

According to a recent survey by research and consulting firm Cerulli Associates of investors without a financial advisor, (a lack of) cost transparency was the top response to the most difficult aspect of working with an advisor, even more so than the cost of the advice itself or being uncertain that their advisor would recommend the best products. Which suggests that advisors could overcome this hurdle (and gain more leads) by increasing their fee transparency, perhaps by posting their fee schedules on their website (though this will be much easier for fee-only advisors than those receiving commissions!). In fact, Kitces Research on Advisor Marketing found across all firm sizes (in terms of total revenue), and for relatively smaller firms in particular, high-growth firms were more likely to include their fee schedule on their website than other firms.

While there are a range of additional potential benefits to fee transparency (e.g., allowing clients who would not meet a firm's fee minimums to self-select before scheduling a discovery meeting), the conventional wisdom amongst financial advisors has been that the best place to talk about advisory fees and minimums is face-to-face with prospective clients, which allows the financial advisor the opportunity to explain the nature of what they do, and the value of their services, to provide better context regarding their costs. Nonetheless, given that a firm's website is often the first touchpoint the prospective client has with the advisor, websites can be useful tools for explaining the advisor's value and linking it to the fees that it charges. In this way, a prospective client can see why the advisor would be the best option for their needs (particularly if the advisor focuses its marketing on its ideal client persona) and better understand the value they will receive for the fees that they will pay, which could make them more confident in scheduling a discovery meeting with the advisor.

Ultimately, the key point is that while advisors might be hesitant to post their fees on their website, Cerulli's survey suggests that this approach could turn off certain prospects who might be hesitant to reach out to an advisor without knowing how much they will pay (perhaps in part to avoid the potential embarrassment of finding out during an in-person meeting that they do not have sufficient assets to work with the firm). Further, advisors can design their websites to demonstrate the unique value they provide to their target client in addition to their fees to give prospects context not only into how much they will pay, but also in terms of the (significant!) value they will get if they do become a client!

Financial Advisors Get Flexible With Fees – With Or Without AUM Charges

(Tobias Salinger | Financial Planning)

In the early days of the financial advice industry, an advisor's most valuable service for clients was simply providing access to financial products (as stocks, bonds, insurance, etc. couldn't be purchased directly by consumers). However, the advent of online brokerages not only drove down the cost to purchase investment products, but made investing (as the slogan went) "so easy, a baby could do it". As a result, advisors turned their focus towards building customized portfolios for clients, and rather than earning commissions on the products they sold, began charging recurring fees for managing those portfolios on an ongoing basis, often in the form of a percentage of Assets Under Management (AUM).  

More recently, however, ongoing technological progress has automated portfolio management to the extent that it's now "so easy, a robot can do it", and once again, advisors have evolved to make their main value offering the advice that they provide across their clients' entire financial lives. Yet, despite the introduction of alternative fee structures (including hourly and subscription models) based on the delivery of advice rather than management of assets (as well as growing consumer interest in flat fees), growth of the AUM model remains robust (with Kitces Research on Advisor Productivity finding that 89% of advisors surveyed receive at least some compensation from AUM charges and a recent study from the Investment Adviser Association (IAA) and National Regulatory Services (NRS), a COMPLY company, finding that 95.2% of RIAs charge asset-based fees in some form).

Nevertheless, while AUM fees remain popular among RIAs (in part because the ability to scale, as the size of these fees rises alongside the growth of client assets), they are often not the only fee method used by firms, particularly those looking to work with less traditional client groups (e.g., younger clients who might have sufficient income to pay an advisory fee but little in the way of investible assets at the moment), with flat-fee retainers, project-based charges, and hourly charges being among the available options. In fact, the Kitces Research cited above found that only 27% of advisors surveyed only use 1 fee method, with 43% using 2, 25% using 3, and 6% using 4 and the IAA/NRS study calculated that about half of RIAs collect fixed or hourly fees. Further, advisors might use separate fee types for the different services they offer; for example, a firm could take a 'hybrid' approach by charging a flat retainer fee for financial planning services and an AUM-based fee for investment management.

In sum, while AUM-based fees remain incredibly popular among fee-only advisors, the growth of planning services beyond investment management (which is most directly linked to AUM fees) and a desire to reach different target client groups for whom AUM fees might not be a good fit (whether they would not meet an advisor's asset minimum or because they prefer to pay a flat fee), among other reasons, has led many firms to use alternative fee models, either in isolation or in tandem with AUM fees. Which suggests that choosing a fee model does not have to be an 'either/or' decision for financial planning firms, but rather an opportunity to shape the way(s) it charges to best suit its ideal client type(s) and the value it provides!

FPA, CFP Board Diverge On DoL "Retirement Security Rule" Proposal

(Mark Schoeff | InvestmentNews)

The Department of Labor (DoL), in its role overseeing retirement plans governed by ERISA (e.g., employer-sponsored 401(k) and 403(b) plans), has gone through a multi-year process across 3 presidential administrations in efforts to update its "fiduciary rule" governing the provision of advice on these plans (as well as IRA rollovers in/out of these plans). The DoL fiduciary standard, first formally proposed in 2016 under the Obama administration, took a relatively stringent approach (where commission-based conflicts of interest had to be avoided altogether), but encountered numerous delays under the Trump administration and was ultimately vacated by the Fifth Circuit Court of Appeals in 2018 (under the somewhat awkward auspices that brokerage firms and insurance companies themselves maintained that their own brokers and insurance agents are merely salespeople and therefore shouldn't be held to a fiduciary standard because they are not in a position of 'trust and confidence' with their customers), before in December 2020 being resurrected and adopted in a more permissive form (e.g., allowing broker-dealers to receive commission compensation for giving clients advice involving plans governed by ERISA, as long as the broker-dealer otherwise acts in the client's best interest when giving that advice).

Amid this backdrop the DoL released a new proposal in October 2023, dubbed the Retirement Security Rule (a.k.a. the Fiduciary Rule 2.0), which would again attempt to reset the line of what constitutes a relationship of trust and confidence between advisors and their clients regarding retirement investments and when a higher standard should apply to recommendations being provided to retirement plan participants. Notably the proposal would apply a fiduciary standard whenever a one-time rollover recommendation is made (not just as part of an ongoing relationship, as covered by PTE-2020), and would include those recommending rollovers out of a retirement plan, thereby covering a wide swath of investment advisers, brokers, and even insurance agents recommending annuities and insurance to prospective retirees' retirement assets (that aren't currently covered by Regulation Best Interest because they're not securities).

As expected, the DoL's proposed rule has encountered strong opposition from brokerage and insurance industry groups, several of which testified against the proposed regulation in public hearings last month. Echoing their stance against the 2016 DoL Fiduciary Rule, the groups argued that in a transaction-based relationship, consumers understand that they're dealing with a salesperson who is paid on commission, meaning there is no implied relationship of trust and confidence that would justify a fiduciary standard. 

Many groups promoting higher standards for financial advice came out in favor of the DoL's proposal, including CFP Board, which issued a comment letter outlining its broad agreement with the proposed Retirement Security Rule, noting that strengthened standards are necessary to meet a retirement investor's "reasonable expectation of a relationship of trust and confidence". On the other hand, the Financial Planning Association (FPA), which in the past has argued for higher standards in areas such as title protection for financial planners (i.e., to pursue legal recognition for the title of "Financial Planner", as a means for bona fide financial planners to distinguish themselves and their services from others who may use the title but don't actually do financial planning), was much more ambivalent towards the DoL proposal in its comment letter, suggesting that while it supports measures that enhance retirement investor protection, it also believes (similar to other industry lobbying groups trying to delay the rule and its impact on salespeople) that more time is needed to understand how the measures would impact both financial planners and retirement savers. In particular, FPA highlighted the potential compliance burden the Retirement Security Rule would place on its members; for instance, small firms might have to pay for legal services (to ensure they are complying with the Rule) and potentially face higher Errors & Omissions (E&O) insurance costs given the potential fiduciary legal exposures the Rule introduces (even as other public comment letters have highlighted that in practice fiduciary RIAs often have lower E&O insurance costs than brokerage firms!). In addition, despite its recent focus on title protection, the FPA's public comment letter said little about titles in response to the Department of Labor's request for comment about their potential impact. 

Altogether, while both organizations promote higher standards for financial advice, the differing approaches between CFP Board and FPA towards the DoL's Retirement Security Rule reflects the latest divide between the 2 groups toward certain regulatory issues (following FPA's decision to leave the now-dissolved Financial Planning Coalition [which also included the National Association Of Personal Financial Advisors (NAPFA) and sought to use their collective strength to influence regulatory decision making in favor of financial planning advice over product sales and distribution] in 2022 over differences regarding approaches to title protection). In the current case, while there is always a balance to be had between the benefits of regulation for consumers and the costs it imposes on firms, it appears that despite both organizations supporting CFP professionals across a wide range of RIAs and brokerage firms, the CFP Board is prioritizing the former, and FPA (whose self-described "core members" are also CFP professionals) appears to be focused on the latter, which, notably, puts its position much closer to that of the insurance and brokerage industries that it has frequently opposed lifting standards for financial advice!

The 5-Step Process To Create Centers Of Influence

(Cindy Beuoy | Advisor Perspectives)

While there is no shortage of potential marketing strategies available for financial advisors, one popular option (in fact, the 2nd most commonly used marketing strategy for advisors, according to Kitces Research on Advisor Marketing) is to build relationships with Centers Of Influence, such as estate attorneys or accountants, with whom the advisor can offer and (hopefully) receive client referrals. Nonetheless, while this strategy might be attractive in principle, finding COI partners and building a relationship so that the pipeline of referrals begins to flow can be a trickier endeavor (as a financial advisor not only has to find high-quality professionals, but also those who would be willing to give them referrals). 

With this challenge in mind, Beuoy suggests taking a structured approach to finding and cultivating relationships with COIs. First, a warm introduction (e.g., an email from the advisor’s client to the attorney or accountant they are recommending) can help start the relationship on the right foot. Then, the first introductory meeting can give the advisor the opportunity to describe their firm (including the value they provide to clients and any asset or fee minimums), note mutual clients they have in common, and have the potential COI partner do the same. If this first encounter goes well, subsequent meetings can include visits to each other’s offices (to introduce the advisor/COI to the staff of the other’s firm and ensure they understand how the partner’s firm operates) and regular monthly meetings to cultivate the relationship and discuss potential client referrals for each side.

In the end, while COIs can be valuable sources of client leads for financial advisors, nurturing these relationships takes time. Nevertheless, advisors might find that this time investment is worth it, both for the prospective clients it can generate as well as the ability to better serve current clients by having a roster of vetted professionals to offer when they need certain services outside of the advisor’s purview!

How To Make Lead-Generation Services Work

(Bob Veres | Advisor Perspectives)

For many financial advisors, one of the most fulfilling parts of the job is the ability to work directly with clients and help them build a financial plan that allows them to live their best lives. Of course, because clients don’t magically arrive on a firm’s doorstep, marketing to find prospective clients can take up a good amount of an advisor’s time and/or money. Which has led to a growing number of advisor lead-generation platforms that offer advisors the potential to outsource their lead generation process (for a fee), allowing users to spend more time meeting with prospects and serving current clients.

However, it is important to recognize that these lead-generation services tend not to be ‘turnkey’ programs that provide leads that fit the advisor’s ideal client profile and can meet their asset and/or fee minimums. Rather, while these services typically do some preliminary due diligence on the leads (e.g., investible assets, proximity to the advisor’s office), it is often up to the advisor to contact leads they receive and do a more thorough vetting to see if they might be an appropriate fit for the firm. With this in mind, the advisors that have found the most success using these services are often those that have sufficient time to call the leads they receive (often soon after receiving the lead, given that other advisors might have received the same lead as well) and determine whether they might have a mutually beneficial relationship. Which means that the advisors having the most success using lead-generation services are often those with newer firms and/or fewer clients, as they have more time to devote to the process than established advisors who have to spend much of their time serving their current clients. 

Ultimately, they key point is that while advisor lead generation services can save advisors time (by finding leads who have expressed at least some interest in working with an advisor and who meet certain criteria), success with this tool typically requires both an investment of money (to pay the service’s fees), and of time, not only to contact leads and determine whether they might make qualified clients, but also (given that they differ in terms of fee structure, how they do due diligence on leads, and how leads are delivered, among other factors) to vet the services themselves to find the best option for the advisor’s needs! 

Why Webinars Are A Triple Bottom Line Win

(Bob Hanson | Advisor Perspectives)

In-person seminars have been a longstanding marketing tactic for financial advisors, as they offer the advisor the opportunity to demonstrate their expertise (and introduce their services) to a room of potential clients. However, these events can be expensive, both in terms of time (e.g., finding a suitable location and setting up for the event) and money (e.g., paying for the venue and in marketing the seminar). Further, attendees might not necessarily be interested in financial advisory services and could be there based on an inducement (e.g., if the advisor is offering a free dinner at the event). 

Given these potential costs, many advisors have transitioned to conducting webinars, which have the potential to be significantly more cost-effective and efficient. For example, a webinar platform is likely to be less expensive than an in-person venue, webinars typically are not limited in the number of attendees (or to a certain geographic location), and they can be recorded and repurposed for future content marketing. 

At the same time, merely holding a webinar does not guarantee a solid number of attendees, or, more importantly, an inflow of prospective clients. With this in mind, Hanson suggests several steps that can make webinars more successful. First, selecting a topic that will resonate with the advisor’s ideal target client not only can lead to more attendees, but also increase the chances that they will be a good fit for the firm. Next, marketing the event via email can be a particularly effective tactic (as some research shows that email invitations drive 80% of attendance); in addition to a preliminary invitation, sending out a ‘last chance’ email 48 hours before the event can boost attendance (given that potential attendees will have a better idea of their schedule!). And once an individual has signed up, sending a confirmation and reminder emails 24 hours and 3 hours before the event can increase the chances that they actually show up to the webinar.

During the event itself, offering compelling material and speaker(s) can enhance engagement among attendees. Further, hiring or designated a producer to manage the event can increase the chances that it will run smoothly (and allow an advisor who is presenting the webinar to focus exclusively on the content rather than on technical issues). In addition, making a time-limited offer during the webinar (e.g., offering a free Friday morning consultation during a Wednesday webinar) and following up with attendees can encourage them to take the next step towards becoming a client.

In sum, webinars can potentially represent an attractive cost-benefit proposition for advisors compared to in-person seminars. At the same time, organizing a well-produced webinar requires a good bit of planning, suggesting that it could be a good option for advisors with a limited marketing budget but plenty of time (and perhaps a sizable email list)! 

The Non-Linear Relationship Between Spending And Happiness

(Katie Gatti Tassin | Money With Katie)

If you live in a cramped apartment, you might dream of the day you could move into a large house with room for any activity imaginable (home gym! hosting guests!). But when the day comes that you do move into the larger house, you might find that there are some unwelcome surprises, from more space to clean, additional repairs to make, and higher utility bills. So while the new house might be 3X the size of the old apartment, it might provide less than 3X the boost to happiness.

This non-linear relationship can apply to many areas related to spending. For instance, while going from having no car to 1 car could be a major life improvement and provide significantly more flexibility, adding a new car when you already have 3 might not provide as much enjoyment (but still comes with the marginal costs of having an additional car). In addition, while it makes sense to upgrade your lifestyle to some extent as income rises (without letting "lifestyle creep" crowd out any additional savings that could be put away), the concept of "hedonistic adaptation" suggests that individuals often get used to life "upgrades" quickly, and that it can be much harder to go back to the previous lifestyle, even if it would be financially advantageous (e.g., once you buy a luxury car, 'downgrading' to a less-expensive model might feel like a major sacrifice).

In the end, while some research indicates that more money can buy greater happiness in many cases, the relationship is not linear, with the slope of the increased benefit becoming flatter at higher income levels. Which suggests that financial planning clients might consider not only how much they can afford to spend today, but also the potential marginal benefit of different purchases for their long-term happiness (and how today's lifestyle upgrades could impact their financial plan in the years ahead)!

Frugal Vs Independent

(Morgan Housel | Collab Fund)

Every now and then, a story will pop up about an individual who lived a seemingly anonymous, spartan lifestyle but had amassed millions of dollars by the time they died, often leaving it all to charity. While these individuals frequently are (posthumously) praised for their thrift and generosity, others might wonder why they did not spend more on themselves during their lifetimes.

For Housel, these situations demonstrate the difference between being "frugal" versus being "independent". For him, frugal means "depriving yourself of something you want and could afford", while being independent means "not wanting something to begin with because you get your pleasure and identity from sources that can't be purchased". In cases like the above, the individuals might have been frugal and perhaps amassed significant wealth (and greatly limited their spending) because they were worried that they might need it for a rainy day. Perhaps more likely, they were independent in the sense that the familiar trappings of wealth (e.g., a fancy house and car) did not appeal to them and they derived more enjoyment from the knowledge that their money would go to a good cause after they died. 

For financial advisors, awareness of the frugal/independent dichotomy could be helpful when working with clients who spend significantly less than they could otherwise afford. Advisors can potentially support frugal clients by using a variety of tactics (e.g., segmenting spending, increasing guaranteed income, reducing the 'pain' of spending) to give them 'permission' to spend on the things they want to buy (but can't bring themselves to purchase). On the other hand, independent clients might not be responsive to these tactics at all, as further spending might not bring them a large happiness boost (though if they are charitably minded, they might consider giving during their lifetimes to support causes with current needs and get to see their money at work while they are still alive). Which suggests that advisors can add value for clients not only by determining how much they can afford spend, but also the 'why' behind clients' spending habits!

The Opportunities And Potential Perils Of "Coast FIRE"

(Meg Bartelt | Flow Financial Planning)

The common image of an individual in the Financial Independence, Retire Early (FIRE) movement is someone who has saved so much money (whether by pinching pennies, receiving a large windfall, or just saving a significant percentage of a large salary) that they can meet their spending needs without having to work again. However, for individuals who would like to continue working (perhaps at a lower-paying job or with a more flexible schedule), the concept of "Coast FIRE" could be an attractive (and more easily attainable) path.

An individual (or couple) 'reaches' Coast FIRE when they have amassed enough in retirement savings to support their future retirement spending needs. Notably, thanks to compounding, this amount is significantly less than someone would need to immediately retire ('regular' FIRE). For instance, an individual who has built up $1M of retirement savings by age 35 would see this nest egg grow to just over $10M by age 65 (assuming 8% annual growth). Which means that those who have reached Coast FIRE only need to earn enough to support their ongoing spending needs until they retire (and tap this savings), potentially opening the door to trying a lower-paying career or taking regular unpaid sabbaticals.

While a Coast FIRE approach might seem attractive, it is not without risks. For instance, the amount that needs to be saved assumes the individual knows how much they will need to spend in retirement, which means that increased lifestyle expenses (that will remain in retirement) or greater-than-expected inflation (that will drive costs higher in retirement) will necessitate greater savings. In addition, worse-than-expected investment returns or an earlier-than-expected retirement date could affect the calculation as well. Which means that those pursuing this path could consider increasing their margin for error by making a more conservative estimate of their Coast FIRE 'number' (i.e., how much they need to have saved at a certain age). 

Altogether, Coast FIRE represents a potentially attractive opportunity for those who might not have the income and/or spending restraint to pursue 'regular' FIRE and/or who do not want to stop paid work but who would like to enjoy the benefits of their retirement savings before they leave the workforce (in the form of the flexibility to earn less during their working years). Notably, financial advisors can play a valuable role when working with clients interested in pursuing Coast FIRE (or in introducing the concept to clients who might not be aware of the opportunities it offers!), not only in helping them determine how much they need to have saved to go down this path, but also, once they commit to this strategy, in assessing whether they remain on track for a financially sustainable retirement (and recommending adjustments along the way if necessary)! 

Why Writing Daily Will Transform Your Life

(Darius Foroux)

Despite it being an important part of many occupations (and can be an enjoyable leisure activity as well), most individuals don’t think about practicing their writing skills on a regular basis. However, Foroux suggests that a daily writing habit not only can sharpen your writing skills (and potential job prospects), but also improve other areas of life as well.  

For instance, implementing a daily writing habit can improve your self-discipline; by proving to yourself that you can follow through with the writing commitment, you might be encouraged to establish and maintain other helpful behaviors In addition, writing can improve how you communicate with others, whether because it helps develop empathy and understanding (as you have to think about how your audience will receive your written work) or because it forces you to see your arguments written down (which could lead you to adjust them and increase your persuasive power). Further, a regular writing practice can build on itself, as today's writing topic might unearth an additional idea that could serve as inspiration for the next day's composition.

In the end, while financial advisors might view verbal communication skills as being more important to their jobs (given the preponderance of prospect and client meetings), being able to communicate clearly through the written word can offer significant benefits, from building an audience of potential clients through an advisory firm blog) to effectively communicating with current clients (e.g., creating written client newsletters, which can be more efficient than fielding regular client phone calls!). 

Writing Things Down May Help You Remember More Information Than Typing

(Chen Ly | NewScientist)

Before computers became common, taking notes in a meeting or for a class via pen and paper was the primary option available. But now, workers and students have the option of typing their notes into their computer, which might not only be faster than taking them by hand, but also more accurate (at least for those with poor handwriting!). Nonetheless, because individuals typically take notes because they want to remember the material, an open question is whether comprehension and memory are better with handwritten or typed notes.

To explore this issue, researchers in Norway ran an experiment in which they placed electrodes on participants’ heads (to monitor their brains' electrical signals), then flashed words on a screen and had the subjects either type them out or write them down. The researchers found that for all participants, writing by hand (but not typing) led to increased connectivity between central and outer parts of the brain (possibly because writing requires more detailed motions than typing), indicating more brain activity and providing some evidence that taking notes by hand could result in more effective learning.

Today, financial advisors not only have the option to take meeting notes by hand or by typing, but also to avoid taking notes at all, recording the audio of meetings and having them transcribed by available tools. Which could result in significant time savings, though this research suggests that when taking courses or studying for tests (e.g., the CFP exam), where an advisor needs to remember the information (and can't just pull it up in a CRM entry), going 'old school' and taking notes by hand could be worth a try!

Why Can't We Read Anymore?

(Hugh McGuire | Medium)

While there is no shortage of written content to consume these days, from blogs to magazine articles to social media posts, the length of time each of these takes to consume varies widely. And at a time when there are more distractions than ever (particularly from email, messages, and smartphones), reading the longest-form content (i.e., a book) can seem more challenging than ever.

Despite having a career centered on book publishing, McGuire was surprised to find out that he had only read 4 books in the previous year. While he had read a significant amount of text during this time (largely in the form of articles, tweets, and emails), he had only managed to make his way through a few books. After some self-reflection, he realized that there were many distractions that were taking him away from concentrated periods of reading (as it’s hard to finish a book reading only a few sentences or paragraphs at a time!), with television and his smartphone being the main culprits. 

Given his desire to read more books in the coming year, McGuire made a series of changes to clear the way for more focused time to read books. These included having no smartphones or computers in his bedroom (where he reads before going to sleep each night), no television after dinner (to clear out time to read), and no more reading of random news articles (which he found to be much harder than the other steps). And while he expected that it would be hard to break the 'distraction habit', he was surprised to find that his mind adapted quickly to reading books again and that he really didn’t miss the distractions. 

Ultimately, the key point is that while shorter-form content can be valuable (or at least relatively shorter-form, wink), consuming books (which can offer both professional and personal value!) can take an additional dose of concentration. Which could mean getting rid of potential distractions (or at least keeping them in a different room) so that you can fully concentrate on the book in hand!  

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We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in a future column!

In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "Wealth Management Today" blog.