Executive Summary
Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a look at TD Ameritrade's efforts to expand its Amerivest managed account into a full-fledged "hybrid" advisor solution (robo-technology plus TD Ameritrade retail branch advisors), raising the question of whether, given that Amerivest already has over $11B of AUM, it may become the largest "robo" solution by 2016. Also in the news this week was a discussion of how Schwab and Fidelity have been 'passing through' a portion of the shareholder service fees of certain no-transaction-fee mutual funds to large RIAs on their platforms, and whether doing so creates untenable conflicts of interest for RIAs that will end out being compensated more for using those funds in client portfolios over any others.
From there, we have several practice management articles this week, from a discussion of how to improve client review meetings by systematically implementing a pre-meeting survey to ensure the meeting is focused on what clients want to talk about the most, to the importance of creating standard processes in an advisory firm to cut down on potential advice mistakes, along with an article on how to get more insight from the results of your client surveys by discussing the responses with your client advisory board, and a look at some common 'myths' in web-based marketing for advisors and how to overcome them.
There are also a few more technical-competency articles this week, from a look at whether today's lifetime annuity products should be replaced with a "tontine" structure that was popular hundreds of years ago, to the portfolio design mistakes that some advisors may unwittingly be making (e.g., having clients hold a mortgage paying 4% interest while keeping a portfolio allocation in bonds paying only 2%!), to whether Deferred Income Annuities should have a role not just in planning for extended retirement longevity but also as a pre-retirement vehicle.
We wrap up with three interesting articles: the first is a discussion from industry commentator about why he thinks "the AUM fee is toast" and that advisors will increasingly migrate towards retainer-style fee structures; the second is a retrospective look at the CFP Board as it celebrates its 30th anniversary as an organization managing the CFP marks since it was spun off from the College for Financial Planning in 1985; and the last is a great summary article of "37 ways to upgrade your practice" that has a number of tweaks you could take and implement now in your advisory firm during the slower summer months.
Enjoy the reading, and happy Fourth of July!
Weekend reading for July 4th/5th:
Expect TD Ameritrade To Be Top Robo By 2016 (Lisa Shidler, RIABiz) - TD Ameritrade is reinvesting heavily into its direct-to-consumer Amerivest managed accounts platform, which currently manages more than $11B, but with an interface of the 'bygone' discount brokerage era that will soon be updated to one that "screams robo" instead and uses popular rebalancing software iRebal to manage the allocations. Similar to other robo platforms, Amerivest already offers pre-set portfolios, managed by Morningstar, and has 84,000 accounts with an average size of $115,000, though it charges a notably-higher 0.80%-0.90% (which means its current platform may already have more than $100M of revenue!) which TD Ameritrade President-of-retail Tom Bradley suggests is justified because the Amerivest portfolios are "much more sophisticated" than the competition. Notably though, similar to Schwab, the updated Amerivest offering from TD Ameritrade will also have a policy of sweeping cash into TD Bank - an opportunity to earn interest rate spread on cash assets over and above the management fee, but raising concerns about the conflict of interest that creates about Amerivest's "recommended" cash holdings. TD Ameritrade has defended its policy by pointing out that cash positions are set by their third-party manager (Morningstar) and not TD itself. Also notable about the TD Ameritrade offering is that their branch advisors will also be available to those on the Amerivest 'robo' platform, making the offering in practice more of a technology-plus-human-advisor hybrid "cyborg" solution. On the other hand, the fact that TD Ameritrade will be pairing together managed accounts and an advisor has raised concerns of whether TD Ameritrade is going into competition with the advisors on its institutional RIA platform, although TD Ameritrade suggests their goal is simply to gather more assets from mass affluent households that few RIAs serve and that eventually those clients will generate more referrals for TD Ameritrade-based RIAs. Time will tell?
Custodians' Payments To RIAs For Fund Picks Raise Eyebrows (Mason Braswell, Investment News) - Mutual funds include as a part of their expense ratio a "shareholder service fee", paid to custodians to help handle the servicing of investors and their accounts; the fees appear to be especially common in "no transaction fee" (NTF) mutual fund arrangements on custodial platforms, where the shareholder service fee helps the custodian recover the cost of not charging the transaction fee (and thus is why NTF mutual funds tend to have higher expense ratios for consumers). However, it appears that some large RIAs have been negotiating with RIA custodians Schwab and Fidelity to receive a pass-through of that shareholder service fee, amounting to an extra payment of up to 0.2% on certain no-transaction-fee mutual funds. By contrast, TD Ameritrade has refused to pass through shareholder service fees themselves, and suggest that it is an "egregious" conflict of interest for RIAs to receive additional compensation directly from certain fund providers that appears to resemble a trail commission (though it would be disclosed in the RIA's Form ADV Part 2), which may incentivize the RIAs to use those higher-cost funds for which the RIA will receive greater compensation over lower-cost alternatives that don't pay the RIA an extra basis point trail. TD Ameritrade's Tom Nally suggests the practice has become widespread, particularly amongst breakaway brokers (one of the biggest participants of the program appears to be popular breakaway-broker platform HighTower Advisors) who are accustomed to receiving trails (in the form of 12(b)-1 fees) on mutual funds, though some firms appear to have started stepping back from the now-controversial practice as it gains more media scrutiny.
Designing The Review Meeting Of Your Client’s Dreams (Dave Grant, Blueleaf Advisor Blog) - Client review meetings can be onerous to manage, as it's often difficult to get the necessary data from clients for a comprehensive review, but not having any data to review leads to a too-brief and not engaging client review meeting. Given these challenges, Grant decided to re-design his client review meeting, starting with a templated 6-question SurveyMonkey questionnaire that goes out to clients a few weeks before the review meeting. The questionnaire asks clients to list memorable things that happened in the last year (to help speed up the catching-up process), review their Action Plan for what's still outstanding, and give them a list of potential financial planning topics to discuss and prioritize which they wish to talk about in the upcoming meeting. Notably, when following this process, Grant has found that investment returns/performance are almost never a priority, while discussing and re-defining goals is always at the top of the list. More generally, Grant notes that there's often a surprising mismatch between what he thinks clients will want to emphasize as their top priority, and what's actually top of mind for them to discuss. To further expedite his meeting process, Grant's questionnaire also includes a question of how the client wishes to meet - do they even want an in-person meeting, or would a phone call or video chat be sufficient/preferred - and the end includes a request for feedback about how he can improve his services (as some clients aren't comfortable providing 'constructive criticism' in person, but will respond via a survey, giving Grant the feedback necessary to continue to improve his services for clients).
Advisors Mess Up Too: How to Prevent Planning Errors (Glenn Kautt, Financial Planning) - As advisors we are paid for our expertise, but the reality is that sometimes advisors can make mistakes too... especially in situations where we overestimate our own knowledge or abilities in the first place. For most advisory firms, managing this challenge becomes increasingly difficult as the business grows, and responsibility for key decisions and advice must be handed down to newer advisors and less experienced professionals. So how can responsibility be transitioned effectively? Kautt suggests that the first step is to create formal systems and process around what the firm does, to ensure situations are being handled consistently to begin with. For instance, after one scenario where the firm had to help a widowed client navigate the estate settlement process with numerous documents that were missing since long before Kautt's firm ever became involved, the firm crafted a "Formal Estate Planning Analysis" process to ensure the firm wouldn't be caught blind-sided again. Now for any advisor going through estate planning with a client, there is a formal checklist of issues to consider and discuss, a template of key areas to review in each estate planning document, a formal means to present recommendations that can be tracked for implementation, a "survivor's guide" of reference materials that a client can use if something happens, and the standardized process also includes digitizing a copy of everything on behalf of the client. Ultimately, the key point is that turning this kind of client challenge into a formal process not only reduces the risk of errors or mistakes or omissions in the future, but also becomes a structured training process for newer advisors (who are still gaining experience) to take a client through as well.
Engaging Your Client Advisory Board To Dig Into Survey Results (Stephen Wershing, The Client Driven Practice) - Conducting surveys of your advisory firm clients is key to really effectively craft and continue evolving your client-centric service. Yet the challenge is that surveys themselves are ultimately still quite limited, as numeric ratings/rankings and multiple choice questions get the highest response rate but may obscure important nuances or be outright misinterpreted, while "provide a short answer" surveys can be more illuminating but inevitably draw a far lower response rate (and may still be prone to misinerpretation of the question). Wershing suggests a good two-part process is to start with a survey, and then use a client advisory board of "A" clients to dig further into any answer that may have been surprising, and/or to simply ask clients about what they were thinking as they answered particular questions. For instance, if some clients say you don't respond in a timely manner, the client advisory board can help you define "what should be timely for a response to a client question?" A client advisory board meeting also becomes a good opportunity to ask about referrals (not for referrals, but about them) - for instance, the survey can ask clients if they're recently referred you, which you can then compare to how many referral inquiries you actually received, and if there's a gap (and usually there's a huge one) it becomes a discussion item for the advisory board about how to better facilitate referrals. Ultimately, though, the bottom line is simply this: if you're not doing client surveys, you should, and if you are but sometimes get 'surprising' results and spend a lot of time trying to hypothesize what clients may have meant when they answered the question, try just bringing the survey results to your client advisory board to get a better understanding of the situation (and if you don't have a client advisory board, this is a good excuse to make one!).
Web Marketing Myths Debunked (Maggie Crowley & Kristin Harad, Journal of Financial Planning) - As we enter the digital age, "traditional" marketing tactics like cold-calling, paid advertising, and direct mail are transitioning to new types of web-based lead generation and client acquisition strategies. Yet most advisors are making big mistakes when it comes to web-based marketing strategies. For instance, most advisors say "I can work with anyone", but in the realm of digital marketing not having a clearly defined ideal client dooms the effort to failure; if a prospect coming to your site doesn't immediately feel a resonance that you work with people just like them, it's too easy for them to just move on to the next advisor website that does. Accordingly, an advisor's website should have images, logo, branding, and messaging, all designed to resonate with that particular type of client; yes, by doing so you may drive away 98% of prospects and any 'fit' with the last 2%, but that's still better than a broad-based generalist website that will drive away 100% of visitors by not connecting with anyone! It's also important to note that even a website that 'speaks' to a clearly defined target audience isn't enough; consumers won't necessarily just reach out when they're ready, and instead will usually need a 'nudge'. In digital marketing, that's called a "Call To Action" and it's created to generate engagement and move prospects forward; for instance, a casual visitor might be invited to download a relevant white paper (in exchange for their email address) to learn more about your expertise, while someone who's ready to work with you should be invited to schedule a meeting. Once the website is clearly targeted with appropriate calls-to-action, the next step is to actually build traffic to the site, which involves creating content (e.g., a blog, shared via social media) so that consumers can find their way to you (as well as improving search engine data by claiming the advisory firm's Google Business page). And notably, remember that even if your new clients come primarily from referrals, it's still necessary to have a strong digital presence, because in today's marketplace even someone who's referred to you is likely to do their due diligence by checking you out online first, and if your website doesn't resonate, they may never follow through on the referral in the first place!
Milevsky’s Bold Plan to Reinvent Retirement Income (Michael Finke, Research Magazine) - Retirement researcher Moshe Milevsky has recently released a new book, entitled "King William's Tontine: Why the Retirement Annuity of the Future Should Resemble Its Past", which makes the case that today's modern annuity structures for retirees have got it all wrong and that instead we should revert to a "tontine" structure used hundreds of years ago. The basic concept of the tontine is relatively straightforward: the funds for a pool of prospective retirees are mixed together, and payments of principal and interest occur to them over time. The difference between a tontine and a more 'traditional' lifetime annuity, though, is that with a tontine the interest payments are always distributed based on the current number of participants who are still alive, which effectively means every time someone passes away the payments to the remaining survivors get larger. As a result, the tontine payouts will start smaller than a traditional lifetime annuity (which makes bigger payments up front in anticipation of people dying in the future), but rise over time as people actually do pass away. Alternatively, Milevsky actually suggests an adaptation of the structure that would be designed to decrease payments slightly over time even as the number of participants shrinks (which would otherwise make the payments rise), to produce the end result of simply keeping payments level throughout retirement. Nonetheless, the advantage to this tontine structure, though, is that it's more flexible in a world where we're not sure what future longevity will be; as is, insurance companies must 'guess' (on both longevity/mortality rates, and also investment returns), with the risk that if they are too aggressive the company may default, and if they're too conservative the insurance company is more profitable but the retirees lose out. With a tontine structure, the risk of changes in longevity for the group are borne by the group, so they all share collectively, but they also don't have to face a potentially significant haircut to payments in the first place by annuity companies trying to price conservatively.
5 Dumbest Investing Bets That Advisors Make (Allan Roth, Financial Planning) - While as advisors we try to produce good investment results for clients, Roth suggests that some advisors may unwittingly be making mistakes in their portfolio construction that will produce less favorable outcomes. For instance, some "alternatives" based strategies amount to little more than a Vegas-style gamble that can't possibly produce an expected profit in the long run, because the underlying options/futures being used must be a zero-sum game in the long run (unlike investing in stocks that are actually attached to an underlying company with growing cash flows that is expected to appreciate over time). In other situations, advisors may create zero-sum scenarios for clients with hedging strategies - for instance, owning an inverse S&P fund (or even a leveraged one) to protect in a market decline, while also having a long position in the S&P 500 itself, which over time will just be more expensive and less productive than simply owning less S&P 500 and some cash on the sidelines. Other problem scenarios include: clients who keep a mortgage while also holding a significant bond position in the portfolio, which is the equivalent of owning long bonds paying 2% and shorting offsetting bonds at 4% (a borrow-at-4%-lend-at-2% negative arbitrage scenario!); failing to do due diligence on index funds and owning overpriced passive funds (e.g., the Rydex S&P 500 C fund [RYSYX] is an S&P 500 index fund with an expense ratio of 2.32%!!); and holding large cash positions in zero-yield money markets when many bank savings accounts or short-term CDs will at least pay closer to 1% (not to mention giving the client FDIC insurance).
Reduce Retirement Costs with Deferred Income Annuities Purchased before Retirement (Michael Finke & Wade Pfau, Journal of Financial Planning) - The concept of the "longevity annuity" or Deferred Income Annuity (DIA) has become increasingly popular in recent retirement research as a means for retirees to hedge against the risk of 'living too long' in a manner that is more cost-effective than using a single premium immediate annuity (SPIA). In this context, the 'best' longevity annuities are the ones that have the longest deferral period (the time from when the premium is paid until lifetime income payments begin). However, Finke and Pfau make the case that DIAs also have a role during the accumulation phase, as a means of saving for retirement where the deferral period is from the date the worker makes the contribution until the date he/she retires. Not surprisingly, using such annuities still doesn't fare well in scenarios where market returns are especially good (and the portfolio simply could have compounded higher), or in situations where the prospective retiree has poor health and doesn't anticipate living long. However, in the general case, the study suggests that for 'average' returns (from an otherwise-balanced portfolio) and especially below average returns, along with 'average' mortality/longevity, a combination of pre-retirement DIA (e.g., purchased at age 55 with payments beginning at age 65) plus a portfolio may bring more certainty to the retirement plan than just depending on a portfolio alone.
Why The AUM Fee Is Toast (Bob Veres, Financial Planning) - While virtually all fee-only advisors (and an increasing number of brokers) are charging clients on the basis of assets under management (AUM), a growing number of firms are considering a switch to retainer or some other fixed compensation methodology in the coming years. Veres suggests the transition isn't surprising; after all, if investment management is increasingly commoditized and the 'real' value is in financial planning, then shouldn't advisors be charging based on the real value of financial planning and not AUM (especially for affluent clients who may 'game' the system and just give the advisor the minimum assets necessary to get the maximum financial planning services). In addition, firms that have a wide range of AUM clients often find that in practice, the subset of largest AUM clients are the only ones that are profitable and the rest are not - which essentially means the affluent clients are subsidizing the costs for everyone else, rather than charging each client their 'fair share' of fees for services. Other challenges of the AUM model that Veres notes include: AUM-based compensation can still create non-trivial conflicts of interest around the advice delivered (e.g., the advisor loses assets if clients have to take portfolio withdrawals to pay down a mortgage); the volatility of AUM revenue can create a mismatch where revenue is lowest (after a bear market) precisely when service demands are highest (when clients need extra hand-holding right after a bear market); the requisite minimums of AUM to create the necessary revenue per client has driven asset minimums to the point that there are huge blue oceans of untapped clientele who could/would pay a retainer fee for advice but just don't have the assets (available) to manage; and the aforementioned competitive challenge as robo-advisors at low price points paint advisors as 'greedy' and expensive for charging 1% AUM fees (which may be justified by additional financial planning services, but still leaves advisors on the defensive to justify their pricing). Notably, though, some pundits - including yours truly - have still suggested that for clients who can be served by AUM fees (i.e., they do have the available assets to manage), the AUM model may be more robust and last longer than the critics suggest.
CFP Board Celebrates 30th Anniversary (Rich Rojeck, Journal of Financial Planning) - The Certified Financial Planner Board of Standards (CFP Board) was founded in 1985, a time when the Dow Jones had just reached its first-ever close above 1,500, the yield on the 10-year Treasury note had declined down to "just" 11%, and the 401(k) plan was just celebrating its fifth anniversary as a new savings vehicle for retirement. Notably, the CFP marks themselves had originated a few years earlier - the College for Financial Planning graduated the first class of CFP professionals in 1973 - but 1985 marked the year that the College spun off the CFP certification into the standalone body that was then called the International Board of Standards and Practices for Certified Financial Planners (IBCFP) that was renamed in 1994 to what it is today. And over the past 30 years, the CFP Board and the marks have grown significantly; there are now over 72,000 CFP certificants (up 32% since just 2007), and while in 1987 there were only 25 institutions offered financial planning education programs there are now more than 230 (offering more than 380 programs from financial planning certificates to Ph.D.s). Looking forward, Rojeck notes the CFP Board remains committed to grow the number of CFP professionals, improving diversify in the profession, enhancing public awareness of the profession, and building out its new "Center for Financial Planning" intended to create an academic home for the CFP body of knowledge and help bring in a greater supply of new financial planners to replace those who may soon retire.
37 Smart Ways to Upgrade Your Practice (Andrew Shilling & Rachel Elson, Financial Planning) - As we enter the traditionally-slower summer season, now is a good time to look at making tweaks to improve and upgrade your advisory firm. This article simply provides a long list of ideas, and while few are entirely new, now is a great time for every advisor to read through and pick 2-3 to implement in the coming summer months. A few highlights to consider include: re-design your conference room meeting space (e.g., add a computer and big screen so you can use planning software more interactively, ditch the TV playing CNBC in your front lobby, etc.); run a cyber-attack drill to test your procedures if your client data was hacked; create a 'family boot camp' to start introducing yourself to the children of your clients; upgrade your website and/or get started on a new social media platform like Twitter, or at least install Google Analytics so you can track the website traffic on your advisor firm's website if you don't already; come up with or refine your elevator speech or other sound bites; update your bio or "About Me" section on your website to make it more personable; do a fresh review of your Form ADV (and marketing materials) to ensure they're still accurate given how your practice may have evolved in recent years; or begin to formulate a new service model for younger clients (e.g., incorporating a robo-advisor platform into your service offering).
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.
So, regarding the tontine structure – the final surviving participant also owns the principle balance of the bond portfolio?
You know its been a great weekend when you don’t get around to this until Monday morning…
Michael GREAT point about the 4% mortgage vs 2% invested in bonds. One challenge I have with implementing the strategy sometimes is that if we treat paying off the mortgage as the fixed income portion of the bond and ramp up equity exposure in the equity portfolio, we clearly have a more aggressive portfolio which may not match the risk tolerance of the client (holistically it matches but portfolio specifically is riskier). How have you adapted to this? Educating the client with an illustration similar to your blog post about the 3 clients?