Executive Summary
Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an announcement that the SEC will begin to audit RIAs over the use of mutual fund share classes, seeking to verify that investment advisers are really using the lowest cost institutional shares available, and not trying to double-dip into 12(b)-1 or other back-end fees on more expensive share classes. Also in the news this week was the SEC's decision to bar Dawn Bennett and fine her a whopping $4M, for what started out as an investigation into overstated AUM on her radio show and in marketing materials, and then snowballed into a fight over the SEC's use of administrative law judges.
From there, we have a few articles related to how the Department of Labor's fiduciary rule continues to ripple, including a look at the likelihood of the rule being struck down by legislators (virtually impossible) or in the courts (still highly unlikely), how advisor recruiting amongst broker-dealers has fallen a whopping 40% in the first half of 2016 (attributed in large part to uncertainty about how DoL fiduciary compliance will play out), and the ways that broker-dealers are starting to push back on financial services product manufacturers to make their commission payouts levelized and more uniform from one company to the next. There's also an article looking at a new niche RIA custodian called MoneyBlock, which specifically targets advisors who are heavy implementors of options strategies with clients.
We also have a few marketing-related articles this week, including a discussion of how asking clients to send "referrals" is far less effective than specifically asking for introductions, the approach that one start-up financial advisor has been using to achieve a whopping 76% close rate on his prospective clients, and a Journal of Financial Planning cover story that interviewed a dozen financial advisor marketing experts for a wide range of marketing tips and strategies that advisors can implement.
We wrap up with three interesting articles: the first looks at how financial advisors may increasingly play a role in spotting financial abuse of seniors, as legislators change laws to make it easier for (or even require) financial advisors to report potential abuse situations; the second is a look at how the increasing volume of data used to manage an advisory (or any) business is leading to the rise of "business dashboards", central reporting tools that pull together the relevant business data (often from several sources) and make it easier to keep track of the health of the business; and the last is a valuable reminder that as successful advisors, it's important to give back to our communities, which is not only about being charitable but also recognizing that there's a business opportunity to "do well by doing good", too.
Enjoy the "light" reading!
SEC To Audit RIAs Over The Types Of Mutual Fund Share Classes They Use (John Waggoner, Investment News) – This week, the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced a new initiative targeting the types of mutual fund share classes that investment advisers are implementing with their clients. Given an advisor’s fiduciary duty (in part to manage costs), RIAs are expected to use the lowest-cost share class available for mutual funds (and 529 plan investments), and the SEC is concerned that some advisors who have access to institutional class shares are not using them (and may even be profiting from the more expensive share classes through 12(b)-1 or shared service fees). The SEC indicated that it will review firms’ compliance policies and procedures that it uses to select (and ensure the proper selection of) mutual fund and 529 plan share classes, including an especially for hybrid or dual-registered investment advisers who are also affiliated with a broker-dealer where they may be (alternatively or additionally) compensated for mutual fund and 529 plan sales. Accordingly, in what may or may not have been related news this week, LPL announced that it will formally banish all A-shares and other mutual funds with 12(b)-1 fees in advisory/managed accounts, to be replaced exclusively with lower-cost institutional-class shares.
SEC Bars Dawn Bennett From Industry, Orders $4M Payment (Christopher Robbins, Financial Advisor) – This week, financial advisor Dawn Bennett and her firm Bennett Group Financial Services were barred from the industry, and ordered to pay more than $4 million in disgorgement of client fees and civil penalties by the SEC. The charges drove from Bennett and her firm allegedly overstating their AUM, by at least $1.5 billion, in Barron’s magazine, her “Financial Myth Busting” radio show, and to prospective clients. Bennett also allegedly touted her firm’s investment returns on her radio show, claiming that “their returns placed them in the top 1% of firms worldwide”, but failing to disclose that the returns were actually based on a model portfolio and not actual client returns. Notably, Bennett’s legal proceedings with the SEC have been complicated by her refusal to appear before the SEC’s administrative law judge, claiming that the SEC’s process of appointing its own judges to hear its own cases is unconstitutional. Accordingly, while her “no-show” failure to appear led the judge to conclude with a guilty finding, Bennett is still fighting the SEC’s decision… though either way, the outcome is a cautionary tale on how serious the SEC takes it when RIAs overstate their regulatory assets under management for promotional purposes.
Congressional And Legal Challenges Won’t Stop The DoL Fiduciary Rule (Ron Rhoades, Advisor Perspectives) – Over 3 months have passed since the Department of Labor issued its final fiduciary rule for advisors working with Retirement Investors, and only 9 months remain until the substantive portion of the rule takes effect on April 10 of 2017. Yet given numerous challenges to the rule, both legislatively from Congress, and legally in the courts, have raised questions as to whether the rule really will take effect next April. Rhoades notes, though, that even as Congress continues to put forth proposals to stop the implementation of the rule, they’re not realistically feasible, as even if a bill to block the rule somehow passes both houses of Congress, the President has pledged to veto it, and the Republicans simply don’t have the votes to override the President’s veto (with virtually all Democrats expected to follow the party line on a veto vote). And even if a Republican (e.g., Trump) wins the White House, it’s still not clear that the rule could be realistically blocked, as it is a final rule now, and a new President would still have to follow a new (and time-intensive) rulemaking process to change it (or else risk that the change to the fiduciary rule would face its own legal challenge for being a ‘hasty’ change). Beyond the legislative attempts to stop the rule, there are also three substantive lawsuits seeking to block the rule. One from the National Association for Fixed Annuities (NAFA) in the D.C. Circuit (which is primarily about the inclusion of Fixed Indexed Annuities in the final Best Interests Contract) that should be ruled upon by September, though even if NAFA is victorious, it may simply mean FIAs are subject to the Impartial Conduct Standards under PTE 84-24 instead (which is only slightly less onerous than the full Best Interests Contract Exemption requirements). The second challenge is from Market Synergy Group in the Kansas Circuit Court, and again is focused primarily on blocking the application of the Best Interests Contract Exemption to Fixed Indexed Annuities (seeking instead the slightly lesser PTE 84-24 standard). And the third challenge is the lawsuit from the broker-dealer community, filed via the Financial Services Institute, SIFMA, and the U.S. Chamber of Commerce, which complains about an even broader range of issues, but given the DoL’s significant administrative concessions between the proposed and rules, and its supporting economic analysis, Rhoades suggests that this lawsuit has a less than 25% of winning (and even if it does, the courts would more likely strike down just a particular provision or two of the fiduciary rule, rather than eliminating the whole rule, though changes could end out being substantive enough to force the DoL “back to the drawing board” to reissue an updated rule in 2018 or 2019). The bottom line, though, is that the legislative attacks are unlikely to prevail over the President’s veto power, and the lawsuits are at best likely to only strike down particular narrow sections of the rule (or perhaps temporarily delay its implementation), not to eliminate the fiduciary rule in its entirety.
Advisor Recruiting Moves Drop 40% (Michelle Zhou, Financial Planning) – The number of brokers changing broker-dealers has plummeted in the first half of this year, down over 40% from the pace at this time of year in 2015. The pullback is attributed at least in part to the turbulent markets, which started out of the gate in January and have continued throughout the year, which may be leading brokers to spend more time just focusing on retaining clients rather than looking to make changes. But perhaps the bigger inhibitor for advisor recruiting right now is the Department of Labor’s fiduciary rule, now scheduled to take effect next April, and leaving significant questions in the air about what the broker-dealer environment and the related compliance obligations will be going forward (since it’s not even clear yet which broker-dealers will choose to comply with the Best Interests Contract Exemption, versus the Level Fee Fiduciary streamlined option, and what the product selection and payouts will be after the changes occur). In fact, given the feared pressures of the DoL fiduciary rule, advisors who are looking to change are aiming to go primarily to another wirehouse, to RIA or hybrid channels, or perhaps an independent broker-dealer, but regional broker-dealers and banks (which are feared as being least prepared for DoL fiduciary compliance) are drawing the least interest. Some suggest the growth of teams at broker-dealers, and the greater complexities of moving an entire team, are also slowing the pace of brokers changing firms.
Broker-Dealers Eye Level Commissions To Reduce Risk Under DoL Fiduciary Rule (Greg Iacurci, Investment News) – As the broker-dealer industry begins to make preparations for next year’s fiduciary rule, B/D executives are taking a hard look at the compensation structures of their available products. Given the DoL’s scrutiny of “variable compensation” – where one product pays substantively different commissions than another, raising the question of whether the broker recommended one product over another based on the compensation it provides – the push is on to “levelize” commissions to minimize any exposure to litigation. While this isn’t likely feasible across all product categories (at least for the time being), the starting point is to have standardized commissions for each distinct type of product – for instance, uniform commissions for all variable annuities, or all mutual funds. The challenge, however, is that not all financial services product manufacturers are prepared to offer identical commission payouts, given their own differences in costs. And some product carriers, like fixed-indexed annuity providers, are being pressured for the first time to come up with more levelized-commission or outright fee-based products. Larger broker-dealers are attempting to use their clout to force product carriers to be consistent, but not all large broker-dealers are targeting the exact same payout levels. And smaller broker-dealers have limited negotiating power to push for uniform commission structures at all, which may instead force them to pick and choose products to align similar compensation. Fortunately, there is at least a little time left for the dust to settle, but the push for changing commission compensation structures is on.
How A Schwab Cast-Off Became A Niche Custodian For RIAs Who Like To Trade Options (Lisa Shidler, RIABiz) – Back in 2011, Schwab acquired a retail options trading platform called OptionsXpress, and along with it 400 advisors under an independent broker-dealer called BrokersXpress, but a year later Schwab decided to keep the retail division and spin away the broker segment (a mismatch given Schwab’s RIA focus). Unfortunately, though, the advisors under BrokersXpress couldn’t find a comparable platform to accommodate the needs of being a hybrid B/D-RIA firm that trades options… so BrokersXpress eventually joined some other options and online brokerage platforms to form MoneyBlock. Now, MoneyBlock is a “micro” custodian with about 60 advisors, a heavily automated technology platform (the old BrokersXpress technology core) built on Apex Clearing, and better capabilities to execute options trading that other ‘traditional’ RIA custodians (in addition to being accommodating of hybrid advisors that still have an IBD affiliation).
Moving From Referrals To Introductions (Julie Littlechild, Absolute Engagement) – Recent research finds that there is a “referral gap” for advisors, where almost 1/3rd of clients self-report that they provided a referral in the past 12 months for their advisor, but most advisors only get referrals from about 3% to 5% of their clients. The gap between the two – 33% referring, but advisors only getting the referrals from 3% - appears to be driven by the fact that the clients are perhaps ‘suggesting’ the advisor’s name, but not actually following through to ensure a connection happens; in fact, the data suggests that only about 1-in-6 clients who “refers” the advisor actually takes the step of trying to make an actual introduction. Which means that perhaps we don’t need to ask clients for more referrals to get more referrals; instead, we need to get better at asking more introductions, and making sure that they happen. So how do we make more introductions happen? Littlechild suggests the key is to make it easier for a client to refer you in the first place – for instance, creating a “Referral Welcome Page”, which is a single and standardized page that all clients are taught to send referrals to, which explains the key details about the advisor concisely and directly, and ideally doesn’t just lead to an introduction, but an outright connection by providing something of immediate value to the prospect (e.g., a “lead magnet” like a special report or checklist that the prospect can download and immediately use). And notably, Littlechild suggests that this be a “secret” referral welcome page, made available only for your clients who are referring – which makes it possible to put the relevant information in one concise place, keep it very focused to specifically helping a referral take the one next right step (to connect with the advisor), and can give the prospect a “rolled out the red carpet” specialized/personalized feeling.
How To Convert Prospects Into Leads [At A 76% Rate!] (Garrett Philbin, XY Planning Network Blog) – While many financial advisors struggle to convert their prospects into clients, Philbin has managed to convert 76% of his prospects into clients over the past 4 months (at a financial planning fee averaging $210/hour). He articulates a 5-step process for how he achieves such a high conversion rate: 1) have a targeted message and marketing (it’s crucial to define your niche, to help ensure that only your ideal clients are contacting you in the first place, or else you’ll waste a lot of time talking to non-qualified or poorly-fitting prospects who won’t close, which is why Philbin boldly embraces a unique company name of “Be Awesome Not Broke”); 2) be committed to the process of staying focused on your niche (taking on “bad fit” clients may feel like a quick way to get some income in the door, but ultimately it will be a waste of your focus and time, and you’re doing a disservice trying to work with a client you aren’t really meant to serve anyway!); 3) listen for what they need right now, and solve that problem for them first (because they don’t care about the rest of your comprehensive services until you resolve the most pressing issue on their mind!); 4) get comfortable with being uncomfortable (because if you’re really connecting with prospects about their problems, it’s likely to get emotional, and you need to be prepared to deal with it!); and 5) show them their possibility, not your process (help them understand where they’ll be if they’re successful in working with you, as that’s far more motivational and aspirational for them than just hearing you talk about what you do!).
Masterful Marketing (Ana Trujillo & Carla Schulaka, Journal of Financial Planning) – This cover story from the Journal of Financial Planning is a compilation of a series of marketing coaches and advisor consultants, with a lot of quick and actionable tips for advisors. Highlights include: Barbara Kay suggests that if you need a new/updated logo, try the crowd-sourced logo design service 99designs; Jeremy Jackson of SKY Marketing suggests that just playing the “numbers game” may be a staple of financial advisor marketing but it’s increasingly inefficient; both Stella Peterson and also Julie Edge of Fervor Marketing suggests that most financial advisors on a limited budget would get the best bang for their buck with a refresh of their advisor website and make further enhancements to their online presence (e.g., pay for a professional headshot and written bio!); Kate Healy of TD Ameritrade emphasizes the true importance of having a clear and unique value proposition as a financial advisor (it shifts the conversation from your price to your value!); engage with social media by just having a short routine that checks in quickly but regularly (e.g., for 15 minutes at the beginning of every day); and the most important theme from nearly all the experts is that because clients typically buy the financial advisor (not just the financial plan), being personal and authentic so clients actually connect with you is crucial.
How Advisors Can Fight Elder Financial Abuse (Michael Finke, Research Magazine) – Medical advances are helping retirees to live longer than ever, which has long been recognized as a significant challenge for funding retirement. However, Finke notes that given research that aging also chips away at our cognitive capabilities to make financial decisions – not to mention when diseases such as Alzheimer’s occur – also means that seniors are at increasing risk of financial abuse, sometimes by strangers but often by family members or caregivers. And the situation is further complicated by the fact that most seniors don’t recognize their own cognitive decline, which means they resist having anyone take away control over their financial decisions, even as it may become necessary to do so. Fortunately, though, financial advisors who are engaged with senior clients may be uniquely positioned to spot situations where financial exploitation; however, advisors still face legal complications about what to do and who they can tell when they spot evidence of financial abuse, given client privacy laws under the Graham-Leach-Bliley Act (GLBA). Notably, GLBA actually does have an exception that allows firms to opt out of privacy laws if reporting provides protection against fraud, but in the meantime a number of states are making it easier for – or outright requiring – advisors to report such situations to adult protective services. Alternatively – and perhaps ideally – advisors can actually have the conversation with clients in advance, and get permission and agreement about who the advisor is permitted to contact in the event of concerns about financial incapacity or financial abuse.
How To Manage The Flood Of Data With Dashboards (Andrew Gissal, Investment Advisor) – The good news of the ever-growing volume of advisory firm data is that it’s becoming more and more feasible to make strategic business decisions based on that data. The bad news, however, is that the volume of data can potentially become overwhelming. The solution to this is creating a “dashboard” – a single point to consolidate all the most relevant business data to understand whether the firm is on track for its key performance indicators. Notably, a key requirement for a “good” dashboard is that ultimately it must be easy to use, both with respect to gathering the data, and putting it into a usable format, even if the underlying data is technically complex (and may be challenging to set up the first time). What that ideal format is, though, and the requisite data to capture, is a matter of considering the advisory firm itself, and what metrics are key in the first place – some firms may focus on revenue and expenses, while others might look at client metrics (e.g., AUM or revenue per client and retention rates), while others might focus on growth metrics (the prospect pipeline, close rates, etc.). Once the key data is identified, it can be “dashboarded” – where data from multiple sources is brought into a single location for standardized reporting purposes. (Michael’s Note: The article was written by iDashboards, which not surprisingly is a business intelligence dashboard solution; for many advisory firms, the starting point may simply be to gather key business data through their advisory firm’s CRM, or portfolio accounting tools.)
Here's One Of The Best Investments Your Firm Can Make (Ric Edelman, Financial Advisor) – For many advisors, the demands of their firm consume 100% of their time, energy, and resources, but Edelman suggests that ideally firms should recognize the role their communities play in their success… and give back accordingly. Not just because giving back is arguably the “right thing” to do, but also because giving can itself create valuable goodwill for the business, too. There are many ways to go about giving back in the context of an advisory firm, though. Some firms give staff members one paid day off each year to engage in volunteerism, while others match employees’ charitable donations (up to a specified dollar amount). Notably, Edelman suggests that if the focus is to give back to your (local) community, you might limit the scope of charity giving/activities/support to your local community (though to each their own). However you give, though, it’s important to recognize that you really can “do well by doing good”, in addition to giving back, and energizing your team with goodwill as well.
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.
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