Executive Summary
Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the formation of a powerful new coalition, including the Consumer Federation of America, AARP, the AFL-CIO, and more, to support the "imminent" release of the Department of Labor's newest fiduciary proposal; the coalition has created a new online petition to mobilize consumer support as well. Also in the news this week is a new petition to the Supreme Court in a case questioning whether BlackRock is keeping too much of its securities-lending-based income from its popular ETFs, and not providing enough of the income back to the ETF investors themselves.
Beyond the news, we have a number of practice management articles this week, including: a look at the emerging trend of "robo-advisors-for-advisors" solutions (an explosion of new technology choices for advisors); an interview with Fox Financial Planning Network and Genesis Smartware founder Deborah Fox about the importance of having systems and workflows in a firm (and how to create them); how a good executive assistant (which is far more than just a "secretary") can improve your life; the importance of having a "hire slow, fire fast" mentality when bringing on staff in an advisory firm; the importance of matching leadership style to the culture of your firm (and how the needs may change over time); a look at whether privately-owned broker-dealers are a dying breed as the industry continues to consolidate (and whether that's a good or bad thing for advisors overall); and a look at how the booming compensation for employee advisors and advisory firm staff is great in the short term but in the longer-term reflects a talent shortage that could create a profit-margin-squeeze for advisory firms.
We wrap up with three interesting articles: the first raises the interesting question of why the CFP Board would hire an experienced litigator to become its General Counsel, and whether it is gearing up for more aggressive enforcement or litigation issues in the coming years; the second examines the use of "motivational interviewing" as a technique for advisors to help clients change (and the ethical issues that can raise, given how effective it is); and the last looks at whether it is time for the profession to coalesce around the creation of a new, higher certification for financial planners, especially as the CFP Board continues to relax its minimum requirements to obtain the marks.
And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including coverage of the latest big updates from eMoney Advisor financial planning software and Redtail CRM! Enjoy the reading!
Weekend reading for January 17th/18th:
New Coalition Pushes For DOL Fiduciary Rule (Megan Leonhardt, Wealth Management) - A powerful new coalition has come together to push for the Department of Labor's proposed fiduciary rule, which after a first draft in 2010 and several delays on the second draft, is expected to be released imminently for final review. The DOL's fiduciary rule has faced significant pushback from SIFMA and the Financial Services Institute, who claims that the proposal could limit the public's access to financial advice. The advocates of the new coalition claim that the brokers are giving advice under a "retirement advice loophole" that needs to be closed. The new coalition organizations include both the Consumer Federation of America, AARP, Americans for Financial Reform, the AFL-CIO representing workers' unions, and more. To help educate the public on the issue, the group launched a new website, "Save Our Retirement", and has put forth an online petition that anyone/everyone can sign to support the issue.
Supreme Court May Weigh In On iShares Case (Trevor Hunnicutt, Investment News) - The pension plans of two local labor unions have sued BlackRock regarding its iShares ETFs, claiming that BlackRock is keeping too much of what it makes on securities lending for the investments within its exchange-traded funds. Normally, the income from any securities lending done with the securities in an ETF accrues to the investors in the fund, but the pensions involved claim that BlackRock is facilitating the securities lending through one of its own subsidiaries, which in turn is siphoning off a "disproportionately" larger-than-normal fee for the internally-negotiated transaction. The lawsuit was originally dismissed by a Federal judge in 2013, and then an appellate court last September, claiming in part that the courts simply don't have jurisdiction over securities-lending arrangements and that it is the SEC's pureview; the pension funds are now petitioning the Supreme Court to consider the case, though it is not clear whether the Supreme Court will take up the issue.
Advisers + Technology: Better than Either Alone? (Roundtable, Journal of Financial Planning) - This roundtable article discusses the emerging 2015 trend of "robo-advisors-for-advisors", and the idea that advisors leveraging high-quality technology solutions to augment their practice may be better than pure-technology or purely-human-advisor solutions (where the part-tech-part-human "cyborg" advisor is the winner). Notably, though, the reality is that after several years of the term in common use, what "robo-advisor" even means has become muddy; some use it to describe purely automated investment solutions, others have used the term more widely, and still others suggest that a wider variety of labels are needed to more accurately describe the landscape; either way, perhaps the real key issue is to separate out the robo "technology" (which advisors might adopt as well), from the robo "business model" that is by its very nature a direct-to-consumer offering. Of course, some parts of the robo-technology have already existed for years - advisors have had rebalancing and trading software for nearly a decade - but the marker for the new solutions is that it goes beyond just the technical capabilities of the existing software, and also delivers an effective user experience, from a quality client portal to the straight-through processing that makes the advisor more productive. Going forward, the expectation is that while robo-advisors may not directly threaten the client base of traditional advisors, they are pushing the envelope in the quality of technology solutions, the nature of the business model and advisor fee schedule, and will at a minimum "force" advisors to adopt more technology to keep up while simultaneously pushing technology vendors to provide them better solutions.
Deborah Fox on How to Evolve, Systematize, and Build Workflows (Carly Schulaka, Journal of Financial Planning) - In addition to being a financial planner herself, Deborah Fox has created both the Fox Financial Planning Network to provide workflow tools and templates for advisors, and also the Genesis Smartware technology platform for automating workflow management. In this 10-Questions interview, Fox talks in greater detail about the importance and relevance of workflows for advisors, comparing it to the concept of the "Starbucks Experience" - a premium service for a premium price, where it's impossible to deliver a consistent and outstanding client experience until it's done in an entirely standardized way (which allows for subsequent process improvement, and for the firm to better grow and scale). Notwithstanding the value of workflows, though, Fox finds that only a small number of advisors have implemented them, as advisors tend to start the business first and seek out clients and only get around to designing workflows later. Nonetheless, even for advisors in that position, standardizing the workflows of the firm can be done; the starting point is simply to begin documenting everything that is done for clients around the firm, and over time building that documentation into a manual of the firm's processes that can then be further adjusted, improved upon, and captured in software to further support (and even automate) parts of the process. Notably, though, even this aspect of establishing a firm's workflows can be difficult if the firm is not focused on who it wants to serve and what it wants to do; when there is too wide a range of clients, with different service needs, it becomes impossible to standardize the processes of the firms, which means in the end that the real key to systematizing the practice is to decide how it will be focused, first!
A Good Executive Assistant Will Change Your Life (Angie Herbers, Investment Advisor) - After having recommended for years that advisory firms with more than 12 employees and 2 owners hire an executive assistant to help the firm owners, Angie Herbers found herself in the position of hiring one after merging her own practice management consulting firm with another partner last year, creating a business with 15 employees and similarly-challenging demands in managing the staff and business. Notably, though, in Herbers' view, "executive assistant" isn't about just hiring a secretarial position that answers phone calls, but one that looks more like a "Chief of Staff" (think: West Wing) who helps to run the operation, and even take calls/meetings while acting in the stead of the owner/leader. In the advisory firm context, the goal is to essentially taking virtually everything off the owner-advisor's plate except actually working with clients and attracting new ones. Some duties that Herbers suggests executive assistants could provide include: Organizing your work schedule (from appointments for meetings and calls to travel, vacations, doctor's visits, workouts, etc., and over time the executive assistant will learn your preferences and style); Managing your personal life (sending Christmas cards and gifts, planning office parties and client events, theater tickets, etc.); Serving as liaison with staff; training the staff (or at least, creating a system for scheduling, preparing for, and setting up training meetings); and Dealing with problems and issues that crop up (e.g., while the assistant might not hire/fire employees, the assistant could drive the process for identifying good candidates and problem employees; the assistant may not sign vendor contracts, but can analyze offers and deals, etc.). Just remember, if you take on an executive assistant and make him/her indispensable, remember to appreciate them, too!
Hire Slow, Fire Fast (Mark Tibergien, Investment Advisor) - The nature and personality style of an advisor-owner often permeates the entire firm, from performance-oriented drivers to relationship-oriented nurturers. When it comes to hiring and managing employees, Tibergien suggests that each brings something positive and negative to the table; drivers tend to be willing to fire fast when necessary (but sometimes hire too quickly, too), while nurturers tend to weigh the hiring process slowly (but then often fire too slowly, as well). Ultimately, as Tibergien suggests in the title, the goal should be to hire slowly, but fire quickly; the key is to recognize that the problems which most commonly lead to problem employees are ones that can be both preempted with a slow and thorough hiring process, and if still emerging after the hiring is done are probably not likely to be rectified quickly or easily (suggesting that firing may be the best course of action). For instance, if someone is hired into a position that is ultimately a poor job fit, and there's not another (better-fitting) job opening available, it's best to just move on. Similarly, if it turns out that a candidate who was good on paper just doesn't fit the culture of the firm upon arrival, and clearly isn't willing to adopt the culture, there's not much to be done but just move on. The bottom line: while turnover is problematic for a business, that doesn't mean retaining an employee who is a bad fit will be any better; solve the problem with a better selection process up front to the extent possible, and be willing and ready to move on quickly if you realize a hiring 'mistake' was made.
Time to Adjust Your Leadership Style? (Glenn Kautt, Financial Planning) - As advisory firms grow, the nature of leadership and corporate culture begin to matter more and more, and the issues transcend just the skillset necessary to supervise people and manage tasks. Kautt suggests that the best way to look at the culture of the firm is to divide it up on two dimensions: sociability (does the culture encourage relationships, teamwork, sharing, etc., with a focus on making colleagues look good but a tendency to allow poor performers to stick around too long); and solidarity (like a pro-sports team, the focus is on relatively few goals, quick response to competitive threats, and little tolerance for poor performance). Combinations of these styles then lead to four different types of cultures: fragmented (low sociability, low solidatory); networking (high sociability, low solidarity); mercenary (high solidarity, low sociability); and communal (high solidarity, high sociability). These cultural differences are important because different types of leadership styles work better/worse with some versus others; for instance, with a small communal organization, a paternalistic leadership style may work well, but as the firm grows and responsibilities shift the firm leader may need to become more of a pacesetter to help transform the staff; similarly, more democratic/collaborative leadership may not work as well in a fragmented culture, and laissez-faire may be preferred. The print magazine version of the article includes a brief scoring quiz that can be provided to the advisory firm's staff to help score and determine the cultural style of the firm.
Are Privately Owned Broker-Dealers a Dying Breed? (Jonathan Henschen, Investment Advisor) - The broker-dealer industry has experienced a tremendous amount of consolidation and merger-and-acquisition activity since the financial crisis, with a noticeable trend towards the rise of publicly-traded broker-dealers over privately owned; so much, in fact, that 40% of the top-50 broker-dealers in 2008 were privately owned, but it's now only 20%. And notwithstanding the industry trend towards publicly-owned broker-dealers, Henschen makes the case that advisors may be happier at private-owner entities, which can focus more on just their registered representatives and face less of a struggle answering to (public) corporate shareholders (or an parent insurance company) at the same time. Nonetheless, with the prices for broker-dealers at all-time industry highs (while 30%-40% of trailing revenue was common in the past, some deals are now happening as high as 1X trailing revenue), the temptation remains for privately-owned broker-dealers to sell, and the challenges of reaching scale to manage compliance (especially with FINRA fines for books-and-records and other supervision issues on the rise) and provide deeper services to advisors on the platform are driving merger activity as well. At best, Henschen suggests that larger privately-owned broker-dealers (those with over $100M of revenue) may be able to maintain their status and focus on their rep-centered culture, but smaller broker-dealers may be unable to avoid the allure of merging or being acquired in a search for scale, access to capital, or simply an appealing price.
The Giant Raise RIA Folk Got In 2014 And The Threat It Poses In 2015 (Sanders Wommack, RIABiz) - Financially speaking, times are very good at financial advisory firms, with management and support staff compensation up 10% in the two years since 2012 (compared to only 3.7% national wage increases), and professional employee advisor compensation up 19.9% over the same time period, according to the recent People and Pay Compensation Update for 2014 from industry benchmarker FA Insight. Yet there is a double-edged sword for these compensation increases; from the firm owner's perspective, where staff labor is by far the biggest line item expense of running a firm, significant compensation increases can begin to put a squeeze profit margins that could quickly become a crisis in a market downturn. Ultimately, industry commentators suggest that the rising compensation numbers are a result of the industry's ongoing lack of young talent, which is often not apparent at the individual firm level but will soon start taking its toll on collective profit margins as income rises given the imbalance between the supply of staff advisors and the demand for them. However, some consultants suggest that the talent shortage is not actually that severe, and that at worst it's just a squeeze at the upper levels for the most experienced advisors; similarly, the compensation increases may not actually be driven by a talent squeeze directly, but simply more firms using variable compensation structures that did lift compensation up with the bull market in recent years, but will also curtail the compensation (and at least partially defend profit margins) during the next bear market.
Why Did the CFP Board Hire Camarda Litigator as General Counsel? (Bob Clark, ThinkAdvisor) - In recent weeks, the CFP Board announced a series of key changes in its staffing, including the departure of Michael Shaw, the (former) Director of Legal and Professional Standards for the organization, and the hiring of Leo Rydzewski, the (now-former) lead attorney defending the CFP Board in the case of Jeff and Kim Camarda who will become the CFP Board's General Counsel. The hire of a General Counsel attorney for the CFP Board - and especially one with so much experience as a litigator - raises interesting questions of whether the CFP Board intends to become more aggressive in playing hardball on enforcement with CFP certificants, and/or what other lawsuits the organization "expects" such that it needs an experienced litigator in a full-time staff position. The situation is even more concerning, given that some commentators believe that the CFP Board's lawsuit with the Camardas may be covered - after just a "modest" deductible - by a CFP Board insurance policy, raising the question of whether a CFP Board that gets more aggressive on enforcement and litigation could lead to a series of lawsuits where the CFP Board pursues the case with an experienced litigator at modest cost to the organization while certificants are compelled to accept CFP Board sanctions or defend themselves at significant personal cost.
Will This ‘Secret Sauce’ Attract New Clients? (Jane Wollman Rusoff, Research Magazine) - Mike Kaselnak was a career changer and a struggling advisor who never managed to earn more than $50,000 in his first 8 years, until he adopted an approach suggested by his behavioral-psychologist-wife called "motivational interviewing". The approach, which is used primarily by psychologists to help people with addictions realize that their behavior is self-damaging, by asking them questions that help them come to the self-realization (recognizing that just telling people to change often makes them defensive and even less willing to change); the technique was adapted by Kaselnak to help consumers realize that they may not be served very well by their current advisor (or that he/she is outright taking advantage of them). After 3 years of the technique, Kaselnak's income had exploded upwards to almost $1 million and upon reaching capacity, he decided to wind down his advisory firm practice and instead build a scaled marketing and consulting practice (called 5Q Group) that trains other advisors how to do so instead; the offering includes both training, a marketing program for advisors to get prospects to be front of (to apply the techniques), and 5Q Group is compensated with a combination of monthly fees, and potential revenue-sharing agreements. Notably, one of the founders of the motivational interviewing technique has actually raised ethical questions about its use for financial advisors, particularly if it is being used to induce a client to change advisors or purchase a financial services product (a significant conflict-of-interest from the psychologist perspective); nonetheless, the program raises interesting questions about the relevance of adopting of motivational interviewing in financial planning as a means to help clients recognize and change their own financially-self-destructive behaviors, and also makes some very good points about the fact that getting clients who already work with another advisor may require far more than "just" showcasing your own services and skillset.
Should A New, Higher Certification for Financial/Investment Advisers Exist? (Ron Rhoades, Scholarly Financial Planner) - Amidst the plethora of advisor designations, there are a few that have clearly risen to the top in terms of testing functional knowledge, including the CFP Board's CFP marks, the AICPA's PFS credential, and at least in the investment domain the CFA Institute's Chartered Financial Analyst (CFA). But Rhoades notes that these programs are primarily about technical knowledge, are still limited in scope, don't necessarily have robust experience and "wisdom" requirements, and have varying ethical standards about the require to serve in the clients' best interests (and what that really means, and how it's really enforced). Accordingly, Rhoades suggests that perhaps it's time for a new, higher standard to emerge, one that focuses on ever-stricter standards of conduct and an even-higher degree of expertise. Ideally, an existing designation would step up to assume the role, but with the leading certifications not pushing forward (or in the case of the CFP marks, arguably going backwards on its experience requirement!) then a new designation/certification may be a necessary alternative. If a new certification is launched, it would have a focus in three major areas: requirement to adhere to a bona fide fiduciary standard; an assessment that would require a "very high" degree of expertise to be demonstrated; and a significant experience requirement (e.g., 5+ years) doing actual work as a financial planner or investment adviser (but not "related" occupations like insurance salesperson or journalist). For those interested in providing further ideas or feedback on this concept, please leave a comment below, and Rhoades also welcomes your input directly at [email protected]!
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!
I listened to the “secret Sauce” video by Mike Kaselnak and it reeked of shady, shyster sales practices.
In the interest of full disclosure, I’ve worked with Mike Kaselnak for the past 14 years. It probably makes me biased, but it also gives me a good insider view of how Motivational Interviewing works.
Motivational Interviewing isn’t some dark science developed by psychologists to turn Democrats into Republicans. It’s the very antithesis of telling someone what to think. Rather, motivational interviewing is about asking questions that force people to think for themselves and come to their own conclusions.
That begs the question, “come to their own conclusions about what?” About whether or not they were told everything…not just the pros, but also the cons.
Motivational Interviewing works so well in the financial services world because the question that drives everything is, “were you told this?” Motivational Interviewing is just a means to get to that question in a non-threatening, collaborative and consultative way.
I’ve got to believe that full disclosure isn’t something anyone would have a problem with (I’ve yet to meet anyone who did have a problem with it). The auditors and regulators especially love the 21 point checklist and the 5Q system. According to state regulators (our advisors have been part of routine audits in 38 states) this is the most ethical system they’ve ever seen!
For what it’s worth, both the 21 point checklist and the Motivational Interviewing are investment blind. 5Q advisors use it to recommend stocks, ETF’s, annuities, mutual funds, life insurance, bonds…the whole gamut of investments. The truth is that there is no such thing as the “perfect investment.” They all have pros and cons. We at 5Q just have a way of getting to a place where people understand that, can elaborate on it in their own words, and still move forward…knowing that they have all the information they need to make a good decision.