Executive Summary
Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with some clarity around the big industry buzz around the question of whether RIAs will still be permitted to call themselves "fiduciary" after Regulation Best Interest and the new Form CRS take effect (short answer: yes, RIAs can still call themselves fiduciaries, including in Form CRS, as the SEC merely removed the word "fiduciary" from its own prescribed templated language).
Also in the news this week are several other developments on the fiduciary front, including an announcement that now Massachusetts is looking at adopting its own state fiduciary rule (after the SEC failed to adopt a fiduciary standard in Regulation Best Interest), New Jersey's fiduciary proposal continues to progress (but the comment period is being extended after strong industry pushback), and professor Ron Rhoades raises the question of whether the industry's organized fight against all forms of fiduciary, from state regulators to the CFP Board, could itself constitute a violation of the Sherman Antitrust Act (particularly with respect to a potential broker-dealer boycott against the CFP Board, which itself is a private organization).
From there, we have several articles on advisory firm practice management, including a study showing that the majority of RIAs either don't have asset/account minimums or don't enforce the minimums they do have (which raises significant efficiency and productivity concerns as firms grow), the issues with RIAs (or any advisory firm) requiring clients to sign mandatory arbitration clauses, tips for conducting an effective summer offsite meeting with employees, how to deal with (and what really constitutes) a "toxic" team member, and why one advisory firm decided early on to break the usual pattern of hiring lead advisors, admin support, and junior advisors, and instead hired a "data geek" to help the whole firm run more efficiently (and figure out where to focus its resources).
We wrap up with three interesting articles, all around the theme of our own time and capacity constraints with clients: the first looks at the research on why it may actually be better to make yourself (as a business owner) a little more "scarce" (recognizing that, in practice, when prospective clients perceive you to be less available and in high demand, it can actually make them want to work with you more, as we tend to want what we can't have!); the second looks at the importance of creating some additional slack in your schedule and business (or what may seem short-term efficient can become long-term unstable); and the long-term value of saying "no" more often to ensure that you focus and prioritize the activities and projects that have the most positive impact on your business (with tips on how to actually say "no" more effectively and without offending).
Enjoy the "light" reading!
No, RIAs Aren't Banned From Calling Themselves Fiduciaries On Form CRS (Melanie Waddell, ThinkAdvisor) - A tweet this week from TD Ameritrade Head of Advisor Advocacy Skip Schweiss highlighted that, under the new guidance of Form CRS, both broker-dealers and RIAs will be required to use the term "best interest" to describe their applicable standard of conduct, and that the word "fiduciary" had been eliminated from the template language originally prescribed for RIAs in the proposed regulations. Which was misinterpreted in a follow-up article from Wealth Management that RIAs wouldn't be allowed to use the word "fiduciary" at all when marketing themselves in the future. Fortunately, though, follow-up guidance from the SEC has clarified that in fact, RIAs are not limited from using the word "fiduciary" in their marketing, and, in fact, can even choose to use the word "fiduciary" on Form CRS as well; the only change was that the required portion of the text (that the SEC mandates all RIAs and broker-dealers include) wouldn't use the "fiduciary" word, primarily because the word itself didn't test well with consumers (who generally reported that it was legal jargon they didn't understand in the first place). In fact, with commercial speech still protected under the First Amendment, an outright limitation on the word "fiduciary" might have triggered a Constitutional challenge to Regulation Best Interest anyway. And notably, the SEC's own "conversation starters" questions in Form CRS also include a prompt for consumers to further ask a prospective advisor, "What are your legal obligations to me when acting as my investment adviser?" Where the RIA's fiduciary duty could be explained. Nonetheless, to the extent that RIAs have long differentiated themselves from broker-dealers by their fiduciary best-interests standard of conduct, it will arguably still increase consumer confusion for both RIAs and broker-dealers to use the same mandated "best interest" language, where the only distinction is that broker-dealers have a best-interest obligation at the time of their recommendation, while RIAs have a fiduciary obligation at all times for their holistic advice relationship. Though again, RIAs will still be permitted - in marketing, and on Form CRS itself - to elaborate on their "best interests" standard by explaining their fiduciary-at-all-times obligation as well.
Galvin Proposes Fiduciary Rule In Massachusetts (Melanie Waddell, ThinkAdvisor) - Given the SEC's decision not to apply a fiduciary standard to advice delivered from broker-dealers under Regulation Best Interest, Massachusetts securities regulator William Galvin declared that the state will begin work on its own fiduciary rule that would apply uniformly to not just RIAs but also broker-dealers and (insurance or annuity) agents providing advice in the state, moving alongside the states of Nevada and New Jersey that have also begun work on a state-level uniform fiduciary standard in the face of Federal regulators failing to act. As with other (state) fiduciary standards, the essence of the proposed Massachusetts rule would be a requirement "that financial recommendations and advice must be in the best interest of customers and clients, without regard to the interests of the broker-dealer, advisory firm, and its personnel," akin to the existing common law fiduciary duties of care and loyalty. Which can be contrasted with Reg BI that, according to Galvin, "fails to define the key term 'best interest' and sets ambiguous requirements for how longstanding conflicts in the securities industry must be addressed under the new rule" and/or permits those conflicts to merely be disclosed by broker-dealers rather than actually mitigated. Though ultimately, the real question is whether the growing momentum of states, especially from one as traditionally high-profile in regulation as Massachusetts, could eventually become a state-fiduciary template that leads to widespread fiduciary regulation even in the absence of the SEC acting on its own.
New Jersey Fiduciary Rule: Pressure Leads To Public Hearing, Comment Deadline Extension (Mark Schoeff, Investment News) - New Jersey is one of several states, including Nevada and now Massachusetts, that has been considering its own state-level fiduciary rule in the face of the failure of the Department of Labor (and now the SEC) to implement their own Federal fiduciary rules for advice. The original New Jersey proposal had a public comment period open through June 14th, but in the face of strong opposition from nearly 70 broker-dealers and product manufacturers (and the fact that the SEC just issued its own rule, which the industry is still digesting), New Jersey has extended its public comment period until July 18th, and will culminate in an all-day in-person series of hearings on July 17th at New Jersey's Division of Consumer Affairs. On the one hand, the industry is rightly concerned that the implementation of state-level fiduciary standards may result in a lack of uniformity across states, which creates significant compliance oversight challenges for large firms (which is why state regulators try, but rarely perfectly achieve, to maintain uniformity across states, through organizations like NASAA). On the other hand, with fiduciary rulemaking now fully stalled at the federal level - between DoL fiduciary being vacated and the SEC's Regulation Best Interest failing to adopt a fiduciary standard - investor advocates are now increasingly cheering state-level fiduciary rules as the best path forward to implement fiduciary protections for consumers, with the expectation that, if enough states adopt a fiduciary rule, so many broker-dealers will be subject to the obligation that the lack of a fiduciary obligation under Regulation Best Interest may be a moot point anyway.
Broker-Dealers' New Power Tactic - Threatening To Quit States Or CFP Board Altogether To Thwart Local Fiduciary Rules - Looks Like A Blatant Misuse Of Power (Ron Rhoades, RIABiz) - Earlier this year, Morgan Stanley threatened to leave the state of Nevada entirely and cease to provide brokerage services there if Nevada did not reform its new state fiduciary rule... a threat that was echoed by several other major broker-dealers, and even the Securities and Financial Markets Association (SIFMA), which lobbies on behalf of the entire broker-dealer industry and suggested in its comment letter that its member firms might discontinue service to brokerage accounts in Nevada. Similarly, in its June 14th comment letter on New Jersey's proposed fiduciary rule, the Financial Services Institute (which lobbies primarily for the independent broker-dealers) also threatened to cease doing business or cut back services provided to New Jersey investors if the state's fiduciary rule moved forward. And last month, Edward Jones was reportedly considering whether to withdraw all of its CFP certificants from the CFP Board if the CFP Board's new fiduciary standards take effect in October, with rumors that multiple broker-dealers are now banding together and trying to act in coordination to force the CFP Board to roll back its fiduciary standard. Of course, the reality is that if any individual business decides that it doesn't want to do business in a state (e.g., because of its fiduciary regulations), or with another private organization (e.g., the CFP Board and its marks), it has the right to do so (or not do so). However, as Rhoades notes, when multiple large firms come together, directly or via their trade associations, to uniformly oppose or compete against or boycott another business, it raises Federal antitrust (i.e., the Sherman Act) and trade practices laws. Though SIFMA itself points out that there's nothing illegal about trying to communicate with and educate regulators about the potential consequences of new regulation - particularly when it comes to state fiduciary regulations - and that the organization has a long (more-than-100-year via predecessor organizations) history of working with policymakers on regulation (which, of course, is the whole point of a lobbying association). Though as Rhoades subsequently points out in response, that still doesn't address the concern of broker-dealers jointly opposing the CFP Board's fiduciary standard (given that the CFP Board is itself a private organization and not a state or federal regulator).
3 In 5 RIAs Don't Have, Or Don't Enforce, Account Minimums (Michael Fischer, ThinkAdvisor) - According to a recent survey from Facet Wealth, 17% of RIAs stated that they have no minimums, and 44% more reported that they did not enforce their firms' stated minimum, while overall, 52% of firms stated that they had no formal process to segment and transition clients who didn't meet their minimums (even when the firms did have minimums and tried to honor them). The challenge isn't entirely surprising, given that the bulk of financial planners are motivated not just financially but by the opportunity to help others, and that many advisory firms start with low or no minimums simply because they need to get any clients they can early on, and then feel guilty dismissing those clients later if/when the firm "outgrows" them. Nonetheless, the end result of not managing no-longer-optimal (or no-longer-economically-feasible) clients is that, eventually, the firm's growth can flatline as capacity is reached, and the existing clientele aren't profitable enough to reinvest for further capacity to break through. In fact, the survey not surprisingly found that 45% of advisors said time constraints were their biggest pain point, and 42% cited growth challenges... even as 75% of firms said they spent at least 10% - 20% of their time on unprofitable clients. Thus leading to a rising urgency for advisory firms to figure out they can appropriately transition long-standing but no-longer-profitable clients (gracefully) so the advisory firm can begin to grow again.
Signing Away Your Rights Due To Mandatory Arbitration Clauses (Michael Searcy, Searcy Financial) - The use of forced mandatory arbitration is on the rise, particularly in the financial services industry, where it's being added to brokerage accounts, retirement accounts, and even independent RIAs, where compliance attorneys increasingly recommend adding a mandatory arbitration clause to advisory agreements so the firm can avoid the court system if anything goes wrong. Yet when serving as an expert witness in an arbitration hearing himself, Searcy observed first-hand how a client's former advisor had made egregious errors, only to find the arbitration panel involved had only a vague knowledge of the industry and limited understanding of the nuances of the scenario involved, such that, in the end, the 3-person panel wasn't able to effectively differentiate between the actual law and misleading testimony the advisor presented to defend themselves... such that, in the end, the arbitration panel made a (binding) decision against the couple, who ended out with no recourse in a situation that - as an advisor and industry expert himself - Searcy could clearly see was wrong. More generally, the problem with mandatory arbitration from the consumer perspective is that consumers have little control over how educated their arbitrators end out being about the issues, no ability to "shop around" for options on potential recourse, and can entirely lose their ability to sue in courts even for egregious situations of negligence, defective products, or scams. As a result, Searcy ultimately decided to remove the mandatory arbitration clause from his advisory firm contracts, and instead highlights to clients that he is not only subject to a fiduciary duty, but that he pledges his clients will have opportunity for recourse - with all the protections of the court system - in the event that anything does go wrong. (Which in turn only gives the firm even more incentives to truly ensure that everyone at the firm is really doing the right thing for clients at all times!)
5 Easy Steps For Great [Summer] Offsite Meetings (Jarrod Upton, ThinkAdvisor) - The "offsite meeting" is a common approach for businesses of all types to get the whole team out of the office, and the usual distractions of the office, to better focus and concentrate on broader tasks like strategic planning and vision-building. The caveat, however, is that most employees already believe they spend too much time in meetings... which means that conducting an offsite, or what amounts to an "ultra-meeting," may not be met with much enthusiasm. So what's the alternative? Upton suggests that the starting point is not to conduct a multi-day offsite meeting at all... but instead to simply get more focused around conducting it as an onsite meeting, in a single day, with a planned structure that ensures that (one) day is maximally valuable for the business. After all, the real goal in most offsite meetings is really to drive team engagement anyway, so Upton suggests several key steps, including choose a day that works for everyone (ideally mid-week, because Mondays are usually focused on preparing for the week, and by Friday most people are ready to leave!); set the offsite mid-quarter, so it's far from the stress of quarter-end and quarter-beginning planning; don't overplan (two meetings a year should be more than enough for most); and include everyone (from intern to President, since the whole point is team engagement, and it can't be a safe space for everyone to communicate if not everyone feels included in the first place). In terms of the offsite itself, Upton suggests running it like a "four-act play": 1) Start with Fun First (e.g., some icebreakers to get laughter going, and an abundance of good food); 2) Celebrate success (keep the good vibes going, recapping successes of individuals and the company over the past 6-12 months); 3) Address challenges (now that everyone's in a good mood, it's time to get to work on the hard stuff); and 4) Find solutions (to the challenges that were raised in the Third act, ideally by splitting up into diverse groups that mix departments to ensure a variety of views and ideas are generated). Overall, remember to keep the day positive, which means also giving time to take breaks, ending with something fun... and give yourself room to fail, recognizing that the first offsite may end out being a little awkward, but that's OK because it has to start somewhere!
How To Deal With "Toxic" Team Members (Bob Huebscher, Advisor Perspectives) - Most businesses make decisions about who is a "good" team member by looking at who is a high performer. Yet the caveat is that ultimately, the strength of a team member is a matter not just of their performance, but also of how well trusted they are by the team (i.e., whether the team believes that that person will "have your back" when times are tough and whether they exhibit humility, empathy, and patience). Of course, team members who are low in trust and poor performers are easily fired, while those who are high performers and high trust quickly become star employees. The question is what to do with those who aren't high (or low) on both. Simon Sinek, author of "Leaders Eat Last" (and the famous "Start With Why"), suggests that the biggest challenge comes from those who are high performers but low trust. In practice, such employees are often celebrated (for their high performance results), even as they're disliked by team members (because of their low trust and poor empathy)... which can eventually turn them into "toxic" employees (as the rest of the team sees a low-trust non-team player be rewarded for their individual accomplishments without supporting the team). Notably, though, not all high-performance, low-trust people are "bad" people, and in many cases, coaching them to learn the right team skills (and only fire them if they can't learn); similarly, the business can (and should) invest into those who are high on trust and low on performance to see if their performance can be brought up to match the strength of their team effort. Other key suggestions from Sinek: middle management is the hardest job in any organization, because senior managers usually have the training, but junior level workers are often promoted into management solely because they were good at the job (not necessarily at managing people), and therefore should receive focused training and resources; don't underestimate the value of "hallway talk" (e.g., around the water cooler), and consider even encouraging it by giving it a little more structure (e.g., creating a company book club, or internal discussions of notable Ted talks, etc.); and understand that often leadership itself is a very lonely experience... the inevitable outcome of what happens when you see the world a little differently (so work hard to protect the friendships and support system needed to get through the inevitable tough times).
Why Our Firm Hired A Data Geek Instead Of Another Financial Advisor (Kathryn Brown, Investment News) - The traditional path to hiring and growing an advisory firm is fairly straightforward: a lead advisor gets clients, then gets administrative support to help, then gets a junior advisor for further assistance, and when that team reaches capacity, the firm hires another lead advisor and starts the process over again (albeit also beginning to add in some middle-management support in marketing or operations by 10+ employees as there are more people to manage in the aggregate). Yet the caveat is that means the firm tends to just throw more "bodies" (employees) at problems as they come, and over time may end out growing less and less efficiently. Accordingly, Brown's firm decided instead early on to hire a "data geek," someone whose role would be to analyze the firm's activities, inputs, and outputs, and have the time to ensure that everyone in the firm has the right support. The end result is that now the firm knows exactly how many meetings are occurring each week, month, and quarter, and precisely how much time is being spent with clients, prospects, centers of influence, and on the business itself. Which, in turn, makes it feasible to then focus on process and workflow improvements that can cut down the time it takes to implement the various aspects of the business, spotting both positive trends and bottlenecks to resolve, and making more effective subsequent hiring decisions based on what the business really needs to grow. As global consulting firm McKinsey has noted, data-driven organizations are 23X more likely to gain customers, 6X more likely to retain customers, and 19X more likely to be profitable as a result... and as Brown points out, such perspective and insights can be applied in practice even in small-to-mid-sized advisory firms as well, where one employee focused on data makes everyone else far more efficient in the process!
Why You Should Try To Be A Little More Scarce (Cindy Lamothe, New York Times) - Conventional wisdom tells us that we should eagerly embrace every opportunity we can, and people in "helping professions" (like financial planning) are especially likely to agree (quickly) to step up and lend a hand when needed. The caveat, though, is that research from Robert Cialdini's "Pre-Suasion" shows that opportunities are seen to be more valuable as they become less available (i.e., people want more of what they can't have), and this "scarcity principle" means that in practice, it may actually be better to not be so readily available to opportunities after all. For instance, from a practical perspective, showing that you're (overly) excited about a work opportunity, to which you reply "too" promptly, may actually imply that you're in low demand (thus having so much spare time to respond promptly), making people question how good your services actually are (given that you're apparently not in very much demand already!?). Of course, that doesn't mean blowing off opportunities or being so slow to respond that the opportunities flitter by, but it might mean being more guarded in responses, such as, "Well, I do have a couple of other projects [or new clients] that I'm working on. However, I could [potentially] prioritize this for you if you want." (And consider taking a brief walk before replying, just to allow your own excitement to dissipate a little if necessary!) Because ultimately, negotiating power is tied heavily to the ability to walk away if the negotiation doesn't work out. And it's also helpful and important to keep an Abundance Mentality, recognizing that even if an appealing opportunity doesn't work out, there will likely be more to come in the future. (Even as the willingness to let the opportunity pass may be what ultimately helps to seal the deal!)
Investing In Slack (Seth Godin) - Businesses often focus on maximizing productivity of workers (e.g., a delivery company wants its delivery drivers to do 6 deliveries a day), but the problem is that when employees are rewarded first and foremost for "efficiency" (with aggressive goals that demand it), the end result is that they will inevitably cut a few corners to get there, and they may not always be the corners that the business wants to be cut in the end. On the other hand, if the demands are reduced slightly - e.g., the delivery business requires drivers to make "just" 5 deliveries per day instead of 6 - suddenly there's downtime to do the things that customers are often more likely to remember anyway (i.e., those extra moments of good service, that there's now time to actually deliver). And in the end, systems that have "slack" - a little extra time and breathing room - are ultimately more resilient as well. In other words, padding the day with a few extra minutes isn't wasted productivity, but more akin to wearing a bike helmet (a buffer that may eventually save the day when least expected). Or viewed another way, the key to measuring and optimizing efficiency isn't just to look at what's efficient in the short run, but what's efficient in the long run, recognizing that systems with some slack ultimately produce more stable results (by reducing the risk of the occasional-but-potentially-catastrophic system failure if there's no slack to absorb even a temporary disruption). Which means building some slack into the schedule may be more profitable in the long run anyway.
To Be Successful You Need To Say "No" Often (Robert Glazer, LinkedIn) - Most business owners (and advisors) are always in search of the next opportunity (or client), saying yes to as many opportunities as they have capacity for (or even a few more!) in order to keep growing the business. Yet the caveat is that, in the end, saying "yes" too often can become overly burdensome, turning "your" priorities into a never-ending list of other people's priorities, whereas turning down some new opportunities allows the business owner to remain focused on the true top priorities (not to mention commitments already made). Or viewed another way, the highest achievers don't just accomplish a lot of opportunities but are the most selective about prioritizing and accomplishing the right opportunities. Which itself is a challenge, because the more successful the business becomes, the more it becomes a target for people who want help (and your time) for things that are important to them but don't necessarily advance the real goals of the business. Yet especially for those who are helper-oriented, the challenge still becomes: how, exactly, does one say "no" without offending (or coming across as selfish or self-centered)? On the recent Tim Ferriss podcast episode on "How To Say No", Ferriss ironically describes how various famous and successful people he approached about being in his own book ended out saying "no" to him, observing that "successful people say no to 90% of the things that are asked of them" (recognizing that they just can't take advantage of every opportunity), and usually follow a similar format: 1) a personal acknowledgement; 2) admission that the person is doing too much (i.e., "it's not you, it's me"); 3) statement that the person has to focus on his/her own priorities at the moment; 4) an explanation of the priorities (people being rejected often need details to sympathize); 5) information about why completing existing commitments is more important than taking new ones; and 6) a rationale for a blanket policy of not taking on new meetings/calls/projects. In fact, Glazer found that when he applied this approach in his own business, not only were people understanding, but some even congratulated him for committing to existing responsibilities (sharing that it's something they have trouble with themselves!).
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.
Did the SEC Just Solve the Two-Hats problem?
As reported in this blog, the SEC issued clarification and reassurance that the peculiar wording in its BI Standard did not eliminate the fiduciary standard that applies to SEC Registered Investment Advisers, including financial planners.
In reading over the SEC’s supplemental information on the IA Standards of Conduct under the 1940 Act [https://www.sec.gov/rules/interp/2019/ia-5248.pdf] and its supplemental guidance on the the agency’s interpretation of “Solely Incidental” guidance [https://www.sec.gov/rules/interp/2019/ia-5249.pdf], it occurred to me that the the financial news media is missing a big story insofar as it appears to me that the SEC has provided much clearer and much broader guidance on the application of its fiduciary standard. Specifically, it appears to me that the the SEC has narrowed the definition of incidental guidance such that anyone who is holding himself out as a financial planner will be held to the SEC’s fiduciary standard. The SEC also clarified the requirement that the fiduciary duty of all financial planners requires them to disclose the amount and sources of compensation they may receive.
To my read, the implications of this are –
(1) Dual-Registered CFPs who sell insurance products and or brokerage products and who previously may have taken shelter behind brokerage suitability standards will now be held to the SEC’s fiduciary standard and,thus, must disclose all opaque commissions!
(2) Insurance Agent and Broker CFPs who are not registered with the SEC as IARs, may be legally liable/accountable for providing financial planning advice without being properly licensed. Simply put, if a brokerage rep or insurance agent uses the CFP mark and/or states that he/she is a certified financial planner, it is difficult to argue that the advice they are providing is solely incidental to product sales when their title states that they do financial planning!
(3) Registered Reps and Insurance agents who are not CFPs and who are not SEC registered IARs, had better stick to product sales and would do well to stay away from any implication that they are providing real financial planning advice.
To me, this new guidance renders the CFP Board’s new, feckless standard of conduct (which requires no written conflicts disclosure and no disclosure of opaque fees and commissions) completely irrelevant. I am curious to hear your thoughts.