Weekend Reading for Financial Planners (Jun 10-11)

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.

Weekend reading for June 10th/11th:

Fiduciary FAQ: What The Latest Milestone Actually Means (Andrew Welsch, Financial Planning) - Today, June 9th, marks the applicability date of the Impartial Conduct Standards under the Department of Labor's fiduciary rule, a process that was almost 6 years in the making (although technically the rule doesn't take effect until 11:59PM tonight!). Notably, though, the primary part of the fiduciary rule that is taking effect is just the Impartial Conduct Standards that financial advisors must act as fiduciaries (at least regarding retirement accounts); the additional fiduciary agreements, policies and procedures requirements, and (website) disclosure rules, won't kick in until January 1st of 2018. However, financial institutions have already begun to send out information to clients about various changes that may be occurring under the fiduciary rule, as many firms have already been implementing changes just to ensure they comply with the Impartial Conduct Standards (and some have been making announcements today). In the meantime, though, the fiduciary rule is still not a done deal, even though the Impartial Conduct Standards are applicable today, as House Republicans just included a proposal to repeal of the DoL fiduciary rule in the new Financial Choice Act (though it doesn't appear to stand much chance of passing the Senate as-is), a similar piece of legislation was just proposed in the Senate (though it too is still subject to a Democratic filibuster), and OMB just posted a notice that the Labor Department will soon be soliciting public comments about potential modifications to the rule. Still, the odds of a full repeal seem low, though there is much discussion about whether the rule might at least be changed, particularly with respect to the controversial class action lawsuit provision (which some claim will raises costs, and others suggest are an essential point of accountability to ensure financial institutions take the rules seriously), though some have also warned that the disclosure requirements may still be problematic for some advisory firms (e.g., RIAs that do not qualify for the level-fee fiduciary streamlined exemption). Nonetheless, the fact remains that the fiduciary rule is now official and on the books, and even though the Department of Labor itself has indicated it will not be aggressively enforcing through the end of the year as long as firms try to comply in good faith, the rule is already driving substantial positive changes in the industry, from simplification in mutual fund share classes with the rise of "T shares and clean shares" to new product filings that should expand the accessibility of various no-load insurance and annuity products to fee-based financial advisors. And all financial advisors should be certain that going forward, they have clear documentation in their client files, for every IRA rollover, that analyzes the costs and performance of the old plan against what the advisor proposed, to substantiate that the rollover really was the appropriate recommendation for the retirement investor!

7 Ways To Onboard Your New Clients & Become Super Referable (Bill Cates, Referral Coach) - While most advisors focus on trying to generate referrals from long-term satisfied clients, the reality is that it's possible to start generating referrals by creating "wow" experiences for clients from the very first moment they say "yes" and begin the onboarding experience with the advisory firm. Which means it's worth spending time thinking about and looking at how you onboard clients, and the kinds of first impressions you set. Some potential ways to improve the client onboarding experience include: 1) have other members of your team contact the new client to introduce themselves, by a phone call, a handwritten note, or even just stepping into the initial meeting when the client is in the office (which helps the client understand the depth of the team, how well they will be supported, and put a face and an initial relationship to the other people who the client will be interacting with in the future); 2) invite the new client to a client appreciation event (or even just take the new client to lunch, or a ball game or golf outing, or any other fun event to start building the "business friendship"); 3) consider creating an "expectations agreement" (i.e., client engagement standards), that helps to set out clear communication and service expectations with the client; 4) conduct a follow-up phone review the first time the client gets a statement with their new accounts, to help affirm that they understand everything and don't have any questions or concerns); 5) send them a physical book (don't underestimate the perceived value of something tangible!), either related to the work you do, or something related to their hobbies or interests (which helps to show them you were listening and they were heard!); 6) connect with them via social media; and 7) create a "welcome package" to celebrate their onboarding as a new client (which could include cookies or sweets, fun items for their children, gift cards or coupons, a card signed by your team, etc.) and help make the new client process a memorable experience.

Building A Financial Services Business That Grows Itself (Erin Botsford, Investment News) - Ultimately, it doesn't matter how good you are at delivering financial advice, if you have no clients to deliver the advice to. Which means if you don't have a way to get clients handed to you automatically, you have to figure out how to prospect and market to bring in clients... ideally, in a way that is sustainable and scalable. Botsford, in her recent new book "Seven Figure Firm: How To Build A Financial Services Business That Grows Itself", details some of the strategies that she's used successfully over the years, including: 1) drop-ins with small business owners first thing in the morning (if you arrive between 7AM and 8AM, you can get to the key owners before the receptionist/gatekeepers arrive, and offer to come back later bringing pizza for lunch or to give employees a financial seminar); 2) figure out how to network your way into an organization by inviting employees out to lunch, learn about their problems, and ask them who else you should be meeting (which, repeated over a period of months and years, can give you a very big prospecting list!); 3) conduct seminars to offer education, with an opportunity to work with those who want more help (but be prepared to do the hustle it takes to get people in the room for the seminar, as old-fashioned advertising with newspaper or radio ads just doesn't work well anymore!); and 4) explore speaking to clubs and organizations (which you can find a list of through the local Chamber of Commerce). The key point, though, is to recognize that nothing works instantly and immediately; Botsford suggests that you have to commit to any method, persistently, for 18 months, to see if you can make it work, before you give up. And notably, Botsford points out that she built her business without asking her friends and family to do business first; in fact, when she told them initially that she had a policy of not doing business with friends and family, she says they actually rallied around her and become more willing to refer, as they no longer had to fear an awkward moment of being asked themselves.

The Neuroscience Of Trust (Paul Zak, Harvard Business Review) - Having trust is crucial, both in the context of engaging with clients and customers, and businesses engaging with their employees. Yet few organizations really focus on how to build a culture of trust, and deep trust relationships with clients, often engaging in short-term fads and tips, rather than looking at the core of how trust really forms. In subsequent research, Zak found that trust occurs when our bodies release oxytocin to the brain, which appears to reduce our fear of trusting strangers, allowing us to view others as more trustworthy, and reciprocate that trust. Accordingly, to the extent that we can determine how to increase the release of oxytocin (or limit it from being decreased), we have the potential to increase trust at the level of brain chemicals themselves – and, most notably, stress itself is an inhibitor of oxytocin, which is why we're less trusting and have more trouble interacting with others when we're stressed. Ultimately, Zak extended his research to find 8 ways that businesses can foster trust, including: 1) recognize excellence (as public recognition from peers that is tangible, personal, public, but unexpected, has a powerful positive effect on trust); 2) induce "challenge stress" (as moderate stress actually induces the release of oxytocin, helping people pull together to complete a common task... as long as it's still achievable); 3) give people discretion in how they do their work (once they're trained, allow them to do what they want, as when they feel trusted, they're more likely to be trusting); 4) enable "job crafting" (where people choose what tasks/projects to focus on, which usually means they focus their energies on what they enjoy the most, thereby enhancing their positive views of the company and the outcomes); 5) Share information broadly (e.g., about goals and progress towards goals); 6) intentionally build relationships (i.e., by really asking about how team members or clients are doing, and showing empathy for their concerns); 7) facilitate whole-person growth (as when people feel like they're making personal progress and the company is invested in them, they're more trusting); and 8) show vulnerability (which triggers feelings of empathy in others, releasing oxytocin and making them more trusting). And notably, while the research was done primarily in the context of companies/managers building trust with employees, if you read the list again, you'll realize that many of these are equally feasible and relevant for advisors to build trust with clients and prospects, too!

The Five Powerful Tools Your Website Needs (Claire Akin, Indigo Marketing Agency) - While a lot of financial advisors have done the work in recent years to "update" their websites to be more visually appealing, with new logos and high-quality pictures and images, Akin notes that there are several additional key features that are necessary for a good financial advisor website to actually convert visitors into qualified prospects who contact the firm about doing business. The key (and often overlooked) features include: 1) a sample financial plan (if the product you're selling is a financial plan, why not give prospects a free sample to view, so they really understand what they'll be getting?); 2) a lead capture form where people can enter their email address to get more information (notably, this is separate from the "contact" form where people actually reach out to do business... this is about getting leads onto your drip marketing list, so that they can someday contact you about actually doing business as a bona fide prospect!); 3) an online scheduling app that allows interested prospects to easily schedule an introductory call with you (which makes it easier for the prospect, and saves time for the advisor and his/her team!); 4) a custom video, where you share your story, what you do, and why, so people can connect with you personally, beyond just the static information on your website; and 5) be certain to include the keywords that help optimize your website for the search engines (i.e., if you're hoping your website will come up when someone types "financial advisor <cityname>" into Google, be certain that the words "financial advisor" and your city name appear on the homepage of your website and the supporting page description!).

Looking For New Clients? (Joel Bruckenstein, Financial Advisor) - Historically, most financial advisors have generated new business through referrals (either from existing clients, or Centers of Influence), or in some cases are close enough to "capacity" that they just aren't seeking any more new clients at all. But with referral marketing on the decline, and a growing number of referral sources becoming competitors (from CPAs going into wealth management, to RIA custodians and asset managers launching their own advice offerings), and new competition as well (e.g., robo-advisors), pressure is growing to find more scalable ways to drive new business development, which is increasingly turning advisors towards technology tools that help with marketing, from both existing and new technology providers. For instance, eMoney Advisor is launching a new Lead Generation Tool, which will allow advisors to share a unique URL that lets prospects engage directly with the software, entering a minimal amount of basic information, a simple goal, a few data points, and begin to get immediate feedback of whether they're on track or not (and if they're not, prompting them to contact you as the advisor for help!); notably, eMoney is also working on a new "Prospect Purchase" program that will actually generate leads directly through digital marketing, and then hand them off to financial advisors, for some yet-to-be-determined cost. In the newcomer category, Bruckenstein points out EverPlans, which is a secure digital archive that clients can use to store everything their loved ones will need if someone happens (i.e., not only wills and trusts and insurance policies, but information about important accounts and passwords, vendors, health and medical information, final wishes and funeral preferences). By offering EverPlans to clients, the advisor has the opportunity to start forming relationships with the client's children/heirs, in large part because the EverPlans process includes inviting clients to write a "just in case" letter (a quick summary for family/advisors of what to do if something happens to them), and those who will have access to it are notified (thereby becoming aware of the service the advisor is providing). Other digital tools to support advisor marketing include: FinMason, which offers a service called FinScore Pro, a risk assessment tool that can be embedded on the advisor's website to invite prospects to have their portfolio (automatically) analyzed, and then prompted to share the results with the advisor and contact the advisor if they need help (though FinScore Pro is cheaper than similar competitor Riskalyze); RiXtema, which offers a tool called "Annuity Advisor" that lets prospects get their annuities analyzed; and MyMoneyGuide from MoneyGuidePro, which allows advisors to have prospects go through an initial guided financial planning process, and then work further with the financial advisor if they need deeper assistance.

Cetera's New Digital Tool For Deciphering Client Behavior (Suleman Din, Financial Planning) - The standard approach to risk tolerance assessment tools is to ask clients a series of financial and other questions, and then score their answers to determine whether they're more conservative or aggressive. However, Cetera has recently launched a new facial recognition software tool called Decipher, which provides prospects/clients with a series of questions and financial vignettes, scans their faces as they read through and navigate the situations, and then "scores" them based on their facial expressions and visual emotional reactions! The idea of the software is that not all financial advisors pick up on all non-verbal cues from clients and prospects (especially when meeting with a couple at once), and that people aren't always good at answering questions to report their own tolerance for risk; however, software may be able to more fully capture and analyze a person's non-verbal communication to come up with additional or unique insights. The idea may sound far-fetched, but the reality is that facial recognition software is already used extensively by law enforcement (particularly at global borders), and the financial industry has increasingly been using facial recognition as a way to grant clients access to their accounts via mobile device. Though ultimately, Cetera emphasizes that the software is meant to support and augment financial advisors, rather than replace them. And for client privacy purposes, the software will not store any of the biometric information and facial images or videos, simply capture them for scoring, and then report the results of the tests into summaries for financial advisors (with all data processed in the U.S.).

Can Vestwell Revolutionize How Advisors Sell Retirement Plans? (Ryan Neal, Wealth Management) - One of the biggest challenges for advisors looking to add 401(k) plans to their solutions for clients is that the process can be very paperwork intensive, and is often far slower to establish and process than "traditional" investment accounts. Newcomer Vestwell is aiming to change that, building what is effectively a "robo-advisor-for-advisors" platform specifically to help advisors sell and administer 401(k) and 403(b) plans at a lower cost by using digital tools to ease and automate the previously-cumbersome administrative parts of the process. Vestwell also uses Quovo's account aggregation technology to let plan participants sync outside accounts, improving the experience for the client, and opening up visibility about additional business opportunities for the advisor. Vestwell is founded by Aaron Schumm, who previously built and sold the FolioDynamix TAMP platform, and is essentially trying to re-create the ease and popularity of the TAMP and its supporting technology, but in the 401(k) and 403(b) channels. The Vestwell platform will allow digital inputting of all key data (e.g., employee census information and the plan adoption agreement), generate side-by-side proposals with fee comparisons, and the full stack solution costs just 35bps to 65bps depending on the plan size. And to minimize the fiduciary liability risk for the advisor, Vestwell curates the investment strategies and acts as the named fiduciary and investment manager (although the RIA can choose to be the investment manager, with a different fee-structure and fiduciary responsibility arrangement). At this point, Vestwell is aiming primarily to capture the small-to-mid-sized 401(k) market (i.e., plans up to $50M of AUM), which may be particularly appealing for financial advisors who work with small business owners who offer such employer retirement plans.

Client Portals: Many Options, Different Goals (Mark Nahlovsky, SEI Practically Speaking) - In the past, advisor technology was a custom creation of large firms, which over time (in the late 1990s and the 2000s) become a series of software components that independent advisors could purchase and begin integrating together. Now, though, advisor technology is consolidating around client portals, which clients connect to in order to engage with their financial advisor and financial information. However, the challenge is that there are lots of different client portal options now, and the relative benefits of each varies depending on what, exactly, the advisor wants to get out of the portal for their clients, and the perspective of the portal creator themselves. For instance, investment custodians offer basic client portals that allow investors to see their accounts and the holdings of those accounts... but they don't necessarily put the advisor into the picture (even if the client is viewing accounts the advisor manages!), nor do they often pull in other financial information for the client. On the other hand, independent portfolio management solutions are increasingly offering more modern interfaces that at least pull together investment holdings across multiple custodians and platforms (and often outside accounts through account aggregation as well), although their "core" as a portfolio reporting solution still means that's often where the first development resources go. Financial planning software is increasingly offering its own full-household account aggregation portals as well now, from eMoneyAdvisor to newcomers like Advizr, although those programs are often so focused on the financial plan that they fail to give clients enough information on portfolio performance reporting (which, for the financial planner who also manages portfolios, is often still a necessity). And, in the meantime, client portals are also beginning to crop up from new robo-advisor-for-advisor platforms, and there are direct-to-consumer technology companies that also give clients a holistic personal financial management solution (e.g., Quicken, Mint.com). And some financial advisors, unsatisifed with them all, are creating their own custom portal instead. The bottom line: even though there's been a proliferation of client portal tools, none are really executing on everything the financial advisor needs, but this is probably still only the start of what's yet to come.

The Elements Of Value (Eric Almquist & John Senior & Nicolas Block, Harvard Business Review) - The fundamental decision that any prospective buyer of a product or service faces is deciding whether the perceived value is worth the cost. The challenge, though, is that while pricing is often relatively straightforward to determine, pinning down "value" is far more psychologically complicated, as it often varies by the eye of the beholder. Nonetheless, it's still possible to break down the core components of "value", which the authors find will fall into four primary categories that comprise 30 different types of value: functional (e.g., saves time, simplifies, organizes, informs, etc.); emotional (e.g., reduces anxiety, fun/entertaining, nostalgic, aesthetically pleasing); life-changing (provides hope, is motivating, aids self-actualization); and social impact (the value is "self-transcedent" – beyond one's self). Notably, the relative value of these categories is hierarchical – similar to Maslow's hierarchy of needs, the functional benefits come first, while the emotional are higher-order (but most be built on functional benefits), the life-changing benefits are even more valuable (on top of functional and emotional), and the social impact benefits may be most valuable but can only "work" if at least some of the underlying needs are satisfied as well. Not surprisingly, the researchers found that the most successful companies are the ones that can deliver on several elements of value (and several tiers of the hierarchy), though companies don't have to hit all 30 (for instance, Apple still only scored high in 11 out of 30 elements), and certain elements are vital (e.g., "quality" is an absolute necessity in virtually all situations). From the advisor's perspective, though, it's interesting to think about how these elements of value map onto what we as financial advisors do – where some of what we do is functional (simplify, save time, make money), other parts are emotional (reduce anxiety), and some are life-changing (retirement transitions, or motivating towards them), but it may be best to pick specific elements of value and really focus on delivering them well (since it's not feasible to do them all).

What Is Your Value Proposition (Barry Ritholtz, Big Picture) - In a world where so much information is available online and for free, there is a growing challenge and pressure on financial advisors to explain what they do, and why it's worth paying for, over letting clients just read, learn, invest, and make their own financial decisions themselves. Accordingly, Ritholtz shares the 10-element value proposition that he uses to justify the firm's services and pricing to clients: 1) behavior management (both to help clients avoid disasters like selling in a down market, and also to keep positive momentum in what the goals they're working towards); 2) communication/understanding (as there's a myriad of bad information out there, and it's valuable to be a filter for clients to help convey to them the accurate information that they need to know); 3) financial planning plus updates (as it's vital to put investments in the context of a broader plan); 4) better portfolios (as you might be able to build it yourself, but do you really want to take the time and develop the expertise to do so, and unfortunately we know in reality most consumers do not effectively diversify their portfolios); 5) cost-effective implementation (as while the advisor themselves have cost, a fiduciary advisor has a healthy incentive to drive down underlying investment costs as low as possible); 6) constant monitoring and updates (as most of the time, nothing important happens, and thus most consumers don't keep paying attention... which means they miss some important opportunities when they do come along!); 7) access to a professional network (as quality advisors can provide helpful referrals to other quality professionals); 8) portfolio rebalancing (which everyone knows they "should" do, but many often fail to do themselves); 9) tax management and tax loss harvesting (another example of something that can be done individually, but often doesn't get the attention it deserves, while an advisory firm can ensure it's being done consistently and properly); and 10) establishing a spending strategy (as there's more than just the retirement portfolio itself, such as when to take Social Security benefits to supplement the portfolio). Again, the key point is not that investors can't do this themselves, but simply that many don't want to, or won't realistically maintain the focus to do it and follow through when the time comes.

New Thinking Could Help Advisers Better Deliver Value (Dan Kemp, FT Adviser) - As financial advisors around the world adjust to the shifting regulatory environment, with recent new fiduciary rules (that outright banned commissions) in both Australia and the UK, there is a near-universal struggle to figure out how to effectively articulate the value proposition of financial advisors, especially in a world of unlimited free information, and low-cost "robo" platforms to access markets. The general answer remains that advisors help clients to reach their financial goals, but clearly the way this is done is shifting, as the approach the past – a focus on technical expertise and market access – are no longer compelling on their own in the age of technology. Kemp suggests that one path forward is akin to how theology has evolved in the modern scientific era – where in the past, the role of the Church was often to help "fill in the gaps with God" (where gaps in humanity's knowledge was attributed to divine intervention), but now it is increasingly focusing on the shared journey of personal development with God. In this context, it implies that going forward, advisors must focus less on the "how", which can be increasingly addressed through technology and the internet, and focus more on the "why". For instance, "how to invest to achieve your goals" is available through technology, but answering "why do so many investors fail to reach their goals" is ultimately not a question of information, but of human behavior. Of course, the idea of behavioral coaching is not entirely new for financial advisors, but Kemp suggests that the industry has been very light historically on real training on behavioral coaching – a gap that must and will soon be filled, as advisors are increasingly compelled to stop focusing on the "how" and start focusing on the client "whys" instead.

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.