Weekend Reading for Financial Planners (July 14-15)

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.

SEC Censures, Fines Advisers For Yelp Endorsements (Ryan Neal, Investment News) - This week, the SEC fined three financial advisors $10,000 each, along with the marketing consultant they used (Dr. Len Schwartz) for another $35,000, for violations of the SEC's testimonial rule for certain behaviors they had engaged in with respect to Yelp and other social media websites. Notably, the SEC did issue guidance several years ago noting that it was permissible for financial advisors to have their business listed on Yelp, and for clients to post reviews there, recognizing that the site is ultimately independent of the advisor themselves. However, the rules stipulated that this was only permissible as long as the social media site, and the reviews, were independent of the financial advisor themselves, suggesting that while Yelp reviews were permissible, soliciting clients to leave Yelp reviews (which would create a material connection between the advisor and the reviews) would still violate the testimonial rule. In this case, Schwartz's "Squeaky Clean Reputation" service had been hired to contact the advisors' clients and asked them on behalf of the advisors to post reviews to Yelp (and other social media sites), which the SEC deemed the equivalent of the advisors having solicited the clients' testimonials themselves, in violation of the rule. Notably, the SEC also separately filed another RIA $35,000 for creating a 31-minute-long YouTube video that was shown to guests at the firm's 50th anniversary celebration party... which featured the positive impact that the firm had had on 27 clients who were featured in interviews, which was also deemed a violation of the testimonial rule.

SEC Backs Major ETF Rule Change (Lara Crigger, ETF.com) - The SEC has voted unanimously to officially propose the so-called "ETF Rule", which is now open for a 60-day comment period, and if adopted would make it drastically easier for new ETFs to be launched. Specifically, proposed SEC Rule 6c-11 would allow ETF issuers to launch both new ETFs structured as an open-ended fund (both active and passive version, but not UITs) without being required to first obtain "exemptive relief" (a workaround that allows the ETF to be issued without violating  the Investment Company Act of 1940, particularly around the requirement that shares of an open-ended fund must be redeemable on any day at the request of the shareholder, whereas ETFs can only be deemed by authorized participants). Currently, exemptive relief for an ETF must be applied for and ruled on one new ETF at a time, which dramatically increases the legal/regulatory costs (and the timeline) to launch an ETF, and some allege it has caused an "uneven" playing field because each ETF issuer has its own exemptive relief provisions that are not necessarily consistent with others (as what the SEC has been willing to allow has itself changed and evolved over time as ETFs have matured and gained adoption). The rule would also expand the ability for custom creation/redemption baskets to be made available for all ETFs, which is important to allow particularly active ETFs the ability to swap which securities are used in creation versus redemption transactions in an attempt to minimize capital gains events. Ironically, though, the growth of the ETF market has already led to various white-label issuers stepping in to support ETF creation, such that what took a year and $1M to get approved a decade ago, is now just a few months and tens of thousands of dollars instead (though it's not clear how those white-label providers will evolve now that expedited exemptive relief will no longer be necessary in most cases). Notably, the SEC's proposed ETF rule would also increase transparency requirements for ETF providers, including a requirement for issuers to disclose historical premiums and discounts and their typical bid/ask spreads directly on their own websites, and to publish their creation baskets at the beginning of each business day.

Here Come New No-Load Insurance Policies (Ben Mattlin, Financial Advisor) - The growth of ETFs and index funds hasn't just signified a notable shift in the use of active versus active investment vehicles over the past 20 years; it's also signaled the rise in "buying power" that no-commission fee-based financial advisors can command with their clients. Yet despite the meteoric growth of various no-commission/no-load investment options, the insurance and annuity marketplace has remained stubbornly hooked to commission-based (and commission-only) products and distribution models. As with loaded mutual funds, the significance is not just a difference in how the advisor is paid and charges for services, but the simple fact that once commissions don't have to be priced internally into the product, the internal costs are often much lower; for instance, amongst the (admittedly small) subset of variable annuities available on a no-load basis, the typical cost is just 20-30 basis points, compared to an average of 135 basis points for commission-based variable annuities. In addition, for most insurance and annuity products, the surrender charge exists primarily to help ensure that the company can recover the upfront commissions paid via those higher expense ratios (or the surrender charge itself if the contract is cancelled early)... which means if the product is no-load, there is usually no need for any surrender charges, either. The caveat, though, is that early experiments with no-load annuity products in particular have gained only limited traction at best, due in part to the simple fact that even if the products are no-load and thus can fit an RIA's business model, they lack the integrations to fit the RIA's existing technology and business processes. And to the extent that no-load products are being launched at all, they have primarily been on the annuity side of the business, and not life insurance. Nonetheless, with both a regulatory (i.e., fiduciary) push that is anticipated to lead inevitably to more fee-based business and less commission-based business, and companies like DPL Financial Partners working to build the bridge between insurance/annuity carriers and the RIA market, the pace of no-load insurance and annuity product launches (and integration capabilities) is anticipated to expand rapidly in the coming years.

Are Fears Of Rate Increases On New LTC Insurance Policies Overblown? (Tom Riekse, LTCI Partners) - Despite a steady rise in retirees as more and more Baby Boomers reach retirement age, sales of traditional long-term care insurance policies have been declining for more than 15 years now, a problem that is attributed in large part to the rise in premium costs for LTCI policies, including both rate increases on new policies being issued, and high-profile rate increases on a huge swath of existing policies issued in the early years. In fact, the viewpoint that LTC insurance policies will have future premium increases has become so pervasive that consumers are often counseled to expect future rate increases (perhaps exacerbated by the fact that many states now require carriers to list their rate increase history, further emphasizing the perception that rate increases are normal), despite the fact that new policies have long since had their upfront premiums increased in an effort to prevent the need for future price increases. Because as Riekse notes, LTC insurance actuaries have long since made numerous changes to pricing assumptions, from reducing lapse rate and interest rate assumptions, to implementing gender-based pricing (given that women not only live longer but have been shown to claim more), and making further adjustments to mortality and morbidity assumptions. In addition, state regulators have also made a number of changes, from adjusting required pricing models to focus more on long-term tail events (as the lack thereof in the early years permitted carriers to underprice), to capping profit margins if rate increases must occur (which dramatically increases the incentive for carriers to get pricing "right" in the first place), to simply requiring that new policies be at least as expensive as older ones that had rate increases (which means by definition all prior rate increases are already priced into new policies!). All of which means that today, the odds have never been lower that new LTC insurance policies being issued today will ever have a future rate increase!

Should You Refer Clients To Private Doctors? (Kimberly Foss, Financial Planning) - With a growing focus on the cost of health care in retirement, and growing awareness of the impact that good health care and health decisions can have on those long-term costs, affluent clients who are not satisfied with the current state of health care are increasingly exploring the possibility of "private" doctors, generally known as either "concierge medical care" or "direct primary care" (DPC). The trend is being expedited by physicians who themselves are shifting to private practices as a way to regain control over their own businesses (and the predictability of their billings). And while the early version of concierge medicine often had a premium price point (e.g., $15,000/year for 24-hour mobile phone access to the doctor), more recently a "stripped down" version of DPC solutions are emerging that have fees as low as just $600/year (though most pay between $51/month and $99/month) and can be researched via a MyDPC.org directory. Ultimately, though, the key distinction of these services is not merely that they provide various forms of additional services beyond the traditional health care system (easier access to doctors, shorter wait times, longer meetings with patients, etc.), but that they also bypass traditional health insurance as a means to pay for it, allowing the doctor to rely instead on some form of monthly or annual retainer that is far less expensive for the doctor's office to bill and maintain. Although for those with especially challenging or complex medical conditions, the appeal of concierge medicine is not just better access to the doctor, but that more regular and continuous access to a less hurried doctor may actually provide additional opportunities to spot rare diagnoses or formulate more effective medical treatments.

How To Unleash The Power Of Advisor Teams (Angie Herbers, Investment Adviser) - One of the biggest challenges for growing advisory firms is handling the "growth barriers" that crop up periodically, where the volume of new and existing clients that must be serviced outgrows the firm's capacity, which itself takes a long time to ramp up due to the sheer time it takes to train and develop an experienced advisor's skillset. To address this capacity-building need, Herbers advocates a "Diamond Teams" structure for advisory firms, where clients are served by 4-person teams that include one senior advisor, two lead advisors, and one associate advisor (four points on a diamond like the four bases on a baseball field). The essence of the structure is that the senior advisor is ultimately responsible and accountable for the team and the clients, but the two lead advisors do the bulk of the client servicing work, and the associate advisor is responsible for sitting in on all client meetings to take notes and capture key updates for the client file. The real virtue of the system, though, is that it's naturally conducive to training and developing the advisors on the teams, as the associate advisor gets substantial client-facing time that speeds up the process of promotion to a lead advisor, and the lead advisors get opportunities to spin off and create their own new diamond team as the team leader. And the growing number of lead advisors, that continue to break off and form new teams over time that in turn have to be built up with clients (and have experienced advisors who can help build them up) leads to more stable overall growth for the advisory firm as well. In the meantime, Herbers has found that the teams tend to create their own mentorship and internal management systems (as no one wants to be the one that lets down a close-knit team), and the opportunities they create (by rotating associate advisors up to lead advisors, and lead advisors into senior advisors on new diamond teams) helps to attract and retain quality talent as well.

5 Steps To Build Stronger Teams In Your Advisory Firm (Kelli Cruz, Financial Planning) - One of the key characteristics that defines winning sports teams is not merely that they're a group of high-quality individual contributors, but that they actually function as a team who collectively work together, support each other, and trust each other. In the context of advisory firms, the appeal of teams is that clients can be served by a wider range of individuals (allowing for more specialized skillsets and more of a "one-stop shop" solution), while minimizing the risk or dependence on any one key person and making it easier to delegate key tasks to improve overall firm efficiency. Yet unfortunately, not all teams function equally well, and accordingly Cruz offers up 5 core strategies to help improve team dynamics and results: 1) Be certain to set clear direction and goals (as if there aren't clear and concrete goals, like "increase revenue by 10% over last year", it won't be clear to team members what they, personally, need to do to help achieve that collective outcome); 2) Recognize and reward success (in particular, if you want the team to operate as a team, be certain to include team-based compensation incentives and not just individual performance bonuses); 3) Check in often to see how the team is doing, both to be able to make the necessary adjustments to support the team, and also because teams themselves function better when the leader shows empathy and caring for the team members; 4) See potential in every team member, which can include using tools like StrengthsFinder to understand where a team member's true strengths lie, so their role can evolve increasingly in that direction over time; and 5) Be certain to celebrate successes and have fun, not only because all work and no play can lead to burnout, but also because teams that socialize and spend time together tend to bond better and ultimately work better together.

How To Use Educational Principles To Develop Staff (Kate Ross, XY Planning Network) - Growing advisory firms will eventually hit a capacity wall unless they hire more staff to expand the team, which in turn means the firm has to learn to effectively train and develop those staff members as they're hired. As with any kind of educational/learning situation, though, different new hires will come to the table with different existing knowledge levels, which means training must be at least partially customized to the needs of the staff member (ideally identified already in the interview process itself). It's also important to recognize that not all new employees will necessarily learn in the same way, as according to the "VARK" model, some people are Visual learners (use infographics, screencasts, and whiteboarding to teach them), others are Auditory learners (discuss new concepts with them and then ask them to repeat it back to you), some learn through Reading (present the material in written format in advance and let them read it, ideally as a manual they can refer back to repeatedly), and the rest as Kinesthetic learners (who learn hands-on by doing and being guided as they go). Realistically, most advisory firms will end out using a combination of them all, but that's also the point - it's not enough to just have an employee manual, or just screencasting videos for delegated tasks, or just some meetings to explain the firm's systems and processes, but all must be developed to at least some degree. Notably, the fact that different employees may respond to different types of learning is also reflected in how they respond to leadership, as Daniel Goleman (in his famous book "Primal Leadership") notes six different leadership types - Visionary, Coaching, Affiliative, Democratic, Pacesetting, and Commanding - and that the most successful leaders are the ones that are adept at using any/all of them based on what is most appropriate for the situation (which is known as "situational leadership"). And understand that ultimately training is about more than just remembering and understanding facts (the basic layers of Bloom's Taxonomy of learning), and that ultimately master entails being able to analyze, evaluate, and create within the system as well.

You've Recruited Women Advisors. Now What? (Nina O'Neal, Financial Planning) - According to Cerulli Associates, only 16-in-100 advisors are female, while the number of female CFP certificants is 23%, and the numbers have remained remarkably unchanged for over a decade despite rising efforts to recruit more women into the industry. O'Neal suggests the problem is that the advisory industry has not only a recruiting problem with women, but also a retention problem, which is quickly exacerbated by situations where women are not given the professional credibility of their male counterparts (e.g., going to industry conferences where women are often just assumed to be an assistant, operations associate, or spouse of an "actual" [male] advisor, even after a decade or more of experience as an advisor). In addition, there's the real challenge that women in particular may face trying to have children while also balancing a career as an advisor, which many women have navigated over the years (at sometimes substantial personal stress), but which arguably could be much better supported by using more team structures in advisory firms (reducing the reliance on any one team member and making reasonable maternity leave policies more feasible). And it's important to recognize that just as not all women clients want/need to work with a female advisor (although some may prefer to do so), not all women advisors will want or need to work with (or niche with) female clients as well. Ultimately, O'Neal suggests the better approach for improving female advisor retention is simply to create more community for and around female advisors, and let them engage with the support system as they want to or feel they need to.

Ensuring The Future Of Your Firm: Growing G2 Entrepreneurs (Philip Palaveev & Richard Schwartz, Financial Advisor) - One of the biggest challenges facing experienced advisory firm founders and entrepreneurs is the struggle to find next-generation ("G2") talent that has a similar entrepreneurial spirit to carry the business forward. Yet Palaveev suggests that ultimately, the problem may not be that next generation advisors aren't entrepreneurs, but simply that they're often a different type of entrepreneur than the founder. At the most basic level, the dictionary simply defines an entrepreneur as someone who "organizes, managers, and assumes the risk of an enterprise"... which does not necessarily mean the person who starts/founds the business from scratch, and can be anyone who takes on the obligation (and risk) of managing the enterprise. In fact, for a sizable advisory firm, taking on "just" a 5% or less stake as a G2 owner might still be an investment larger than his/her house, and as ruinous to the G2 advisor if the business failed as it would have been for the entrepreneur in the early years; in other words, relatively "small" equity stakes by G2 owners (in a larger advisory firm enterprise) can still be a substantial entrepreneurial risk-taking step! Of course, in many situations, the perceived problem of G2 entrepreneurship is less about the willingness to take business risks and create business value, and more directly about business development and the fact that many G2 advisors are not well trained in sales skills... yet Palaveev suggests that problem is often a result of the firm itself creating a culture that prides itself on not being "salesy" (suggesting from their start with the firm that the advisors who succeed there won't need to learn sales skills, only to find out later that they do need to). Similarly, Palaveev notes that entrepreneurship itself is not something people are just "born" with (or not); entrepreneurship can be developed, but only if future leaders are put in positions where they have the opportunity to take risks and excel (and not face career-ending termination if it doesn't work out). In other words, the challenge of advisory firms finding next-generation G2 entrepreneurs isn't necessarily about a shortage of entrepreneurial talent, but a lack of the proper systems and culture in advisory firms necessary to develop G2 advisors into entrepreneurs in the first place, and a lack of guidance to G2 advisors about how to fulfill their entrepreneurial destiny.

Research: The Average Age Of A Successful Startup Founder Is 45 (Pierre Azoulay, Harvard Business Review) - There is a common view that the most successful entrepreneurs are visionary 20-somethings like Bill Gates, Steve Jobs, or Mark Zuckerberg, a worldview that is reinforced by the media that likes to profile young hypergrowth firm founders. Yet in a much deeper and wider-reaching study of entrepreneurship, it turns out that the average age of entrepreneurs at the time they founded their companies was age 42, with some additional variability by industry ("just" age 40 in software startups, but 47 in industry like oil and gas or biotech), and amongst the most successful 0.1% of startups (based on growth in their first 5 years) the average age of the founder was 45 (even higher than the overall average). In other words, not only is the average entrepreneur much older than the stereotype, but the most successful entrepreneurs tend to start even later. In addition, the researchers also found that older entrepreneurs have a substantially higher success rate as well (rising sharply with age right up until the founder's late 50s). The driving force to the phenomenon appears to be experience, both because of general on-the-job maturity and skillsets that are developed, and industry-specific domain knowledge that is often also successful (e.g., those with at least 3 years of prior work experience in the same industry were 85% more likely to launch a highly successful startup). All of which is important in the financial advisory industry as well, as it suggests that financial advisory firms would be far more likely to succeed if advisors first worked someone else and gained their 3 years of experience (necessary for meeting the CFP certification requirements anyway), and then went out to start their own firms; in addition, the data suggests more generally that advisors who wait even longer to go out on their own are even more likely to succeed when they do, and that there's no need to hurry when making the transition from employee advisor to independent.

Older Entrepreneurs Do It Better (Carl Schramm, Wall Street Journal) - Several years ago, famed tech entrepreneur Peter Thiel launched the Thiel Fellowship, a 2-year $100,000 fellowship program that encouraged 20-somethings to skip (or drop out of) college to get started in an entrepreneurial endeavor. And as a result, a growing number of universities are now boasting programs to keep budding entrepreneurs on campus instead, supported by a stream of Federal and state grants to support young entrepreneurship incubators and training programs. Except it turns out that, based on data from the Bureau of Labor Statistics, Americans who are 35 or older are 50% more likely to start a business than younger counterparts, and that mid-career entrepreneurs were nearly 5X more likely to have a going-concern business 5 years later compared to those who started their businesses straight out of college. The rise of the "older" entrepreneur appears to be driven in part by the fact that it simply takes most people a while to realize their "destiny" is to start a company, and that the inspiration is usually borne not from a college program on generic entrepreneurship skills but "seeing" a problem in their industry based on their previous job experience. Middle-aged entrepreneurship is further aided by the fact that they've had more working years to build up their own personal savings, retirement accounts, and home equity, while paying down their student loan debt, and often include a spouse with access to health insurance, all of which make it easier to finance and otherwise less risky to launch a new business venture. In the context of financial advisors in particular, this again suggests that the best path towards developing advisory firm owners is not trying to spot an entrepreneurial 20-something and hire them into the business to be a successor, but instead to focus on developing employee advisors to the point that they're ready to be and have the opportunity to become more entrepreneurial when they reach the stage of having that mid-career entrepreneurial itch.

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.