Weekend Reading for Financial Planners (Mar 13-14)

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.

Compliance Clock Starts Ticking For New SEC Ad Rule In November 2022 (Mark Schoeff, Investment News) - In the final weeks of 2020, the SEC announced that it had finalized its new Marketing Rule for (SEC-registered) investment advisers, modernizing what were nearly 60-year-old regulations that were widely acknowledged as having failed to keep pace with the times, from the rise of the internet and social media as a marketing channel to the ongoing prohibition against client testimonials in a world where "customer/client review platforms" from Yelp to Angie's List have become a dominant channel for finding quality providers. However, with the inauguration following just a few weeks after the SEC published its rule - which technically still hadn't taken formal effect because it wasn't yet published in the Federal Register - and an Executive Order from President Biden in the initial days of his administration to pause new regulations, questions arose as to whether the SEC's marketing rule would be wound back. But this past week, the final marketing rule officially hit the Federal Register, which means it is truly "official", effective this coming May 4th, with a compliance deadline of November 4th of 2022. At its core, the new rule opens up the door to more 'modern' marketing techniques, including for the first time the broad use of client testimonials and third-party endorsements (albeit still subject to limitations about not being misleading), provides a green light for the rise of third-party review sites for financial advisors, establishes new performance advertising guidelines (for those who wish to advertise their performance), creates a more accommodative framework for a wide range of social media marketing, and updates the rules for using paid solicitors who refer business to investment advisers. All of which are options that RIAs will be permitted to use in their marketing come May (when the rule takes effect), with an expectation that firms will act in good faith to comply but where the SEC will not examine RIAs for their compliance with the new rules until next November of 2022. (Though notably, because the rule is specifically for SEC-registered investment advisers, state-based RIAs will still need to look to their own local state rules about whether testimonials and endorsements, third-party review sites, and the rest, can be incorporated into their marketing. Which in practice will likely vary by state, depending on whether or how quickly the states take up their own conforming rulemaking process.)

Still-Practicing Brokers With Checkered Histories Cast Doubt On FINRA Enforcement Efforts (Tobias Salinger, Financial Planning) - One of the most fundamental roles of a regulator is to create rules and systems to detect and prevent wrongdoing, and to remove bad actors who violate such rules. Yet in practice, there is so much money at stake in the financial services industry, and so many ways to try to hide questionable activity, that FINRA continues to struggle to detect and correct such activity. Still though, even otherwise public matters - from one advisor who was arrested more than a month ago on charges of aggravated sexual assault of a child to another who has been behind bars since late last year and is awaiting trial on charges of murder and wire fraud - are not reflected in their FINRA BrokerCheck records. Of course, the reality is that defendants in a criminal proceeding are still innocent until proven guilty, and charges of a crime are not a finding of guilt. Nonetheless, one of the troubling trends for FINRA is that the advisors in question already had other black marks on their records, from prior child sex abuse charges, in the case of the former, (along with a prior state insurance suspension, a prior termination, and a $95,000 settlement with a client), and a prior felony forgery charge (albeit subsequently dismissed) in the latter's case. More generally, the concern is that, despite the level of regulation that FINRA does engage in amongst broker-dealers, it is still the plaintiffs' attorneys representing harmed clients who seem to surface enforcement cases (not FINRA itself in its role as regulator and investigator), nor is FINRA seemingly having much success in barring even those who have a history of questionable (or outright illegal) activity, and in fact 2019 (the latest year of data on record) saw a record low in the number of brokers who were barred for problematic behavior. On the other hand, FINRA itself has proposed a new rule to the SEC in an attempt to close some of the enforcement gaps on 'bad actors', though the focus of the rules would still shift more pressure to broker-dealers themselves and increasing their capital requirements to make good for any harm caused (under the presumption that broker-dealers will then have more skin in the game to either oversee more stringently or just refuse to work with such brokers themselves to avoid the risk).

Growth-Minded Advisors Embrace A Tech-Driven Borderless Future (Kenneth Corbin, Financial Planning) - The pandemic of 2020 forced a new level of flexibility and adaptability on financial advisors (and the public in general!), resulting in the adoption of a wide range of virtual services and capabilities, from digital onboarding to virtual client meetings via Zoom... which a growing number of financial advisors are looking to retain as ongoing practices even after the pandemic and its social distancing mandates subside. Not only because they create, in many cases, new efficiencies (e.g., avoiding paperwork with digital e-signatures), and may even enhance client communication (e.g., being able to see every participant's face in a committee meeting, and not looking at some more distant than others around a horseshoe-shaped set of tables or rows of seats), but also because of the geographic flexibility that more virtual engagements entail. For instance, financial advisors may no longer need to have proximity to larger metropolitan areas to find a certain density of prospective clients (when geography is no longer a constraint). In addition, growing flexibility amongst financial advisors is also leading to a hunger for more flexibility... which industry analyst Cerulli Associates predicts will lead to a rise in the number of advisors that switch to the independent channel (where there tends to be more flexibility given the independent relationship). On the other hand, more virtual opportunities that are not geographically constrained lead to new approaches to marketing, that are more about identifying ideal clients and engaging in (non-geographically based) online marketing that can attract those ideal clients to the advisor (regardless of location). Because in the end, clients do still want to connect with an advisor. But with growing virtual capabilities, the desire to "connect" can increasingly be fulfilled in a digital/virtual format.

NFTs Explained: What The Heck Are They? (Joon Ian Wong, B2) - In recent weeks, a hot new investment phenomenon has emerged: the NFT, with headlines of everyone from investment/venture capitalist Chamath Palihapitiya to Mark Cuban talking about them. So what is an NFT? The acronym itself stands for "Non-Fungible Token", a form of digital token that can be publicly tracked (most commonly via the Ethereum blockchain) and attached to a particular digital image or sound file. To create an NFT, an artist uses a blockchain platform (e.g., Ethereum's CryptoKitties or Flow's NBA Top Shots) to "mint" the NFT, which is effectively a unique identifier that stipulates control or ownership of a particular digital artifact (e.g., a sound file, or an image, or more recently Jack Dorsey's first-ever Tweet). Accordingly, an NFT becomes a form of digital ownership over a digital element, allowing someone to claim ownership of the digital asset - thus why someone has been willing to bid $2.5M to "own" Jack Dorsey's first Tweet. Of course, some might quickly note that a "digital asset" like a tweet has no inherent intrinsic value of its own to make it worth anything, but arguably the same is true in the world of art as well; yet nonetheless, collectors will pay millions of dollars or more to own a piece of canvas with some paint smattered upon it if it was painted that way by a famous artist, which means the value comes from the social agreement that the art originates from that artist and is valuable because it is scarce and desired (for which the NFT provides the same mechanism with a digital asset). In fact, according to tracking site NonFungible.com, there was $250M in NFT transactions in 2020, and the pace is accelerating quickly. In practice, NFTs are primarily showing up in three core areas: tokens from video games, artwork, and items used in virtual worlds. In turn, digital galleries like Rainbow.me are emerging as a place for NFT collectors to "display" their digital assets (akin to a personal museum of private-owned artwork). And notably, because NFTs are cryptoassets themselves, a growing number of tools are emerging to make it possible to borrow against them, fractionalize them, or re-sell them (again not unlike the trend emerging in high-end collectible art as well).

NFTs And A Thousand True Fans (Chris Dixon, Andreessen Horowitz) - In the classic 2008 essay "1000 True Fans", Kevin Kelly observed that being successful in a creative endeavor doesn't necessitate a following of millions of customers, but simply 1,000 true fans who will buy whatever you produce (whether it's any/every book you write, song you release, video you produce, or meal you cook)... which becomes uniquely more feasible with the internet as the ultimate matchmaker to allow 1,000 true fans to find their craftsperson creator and the creator to find their fans. Over the past decade, the direction of the internet was very much the opposite, with the rapid growth of mega social media platforms that created huge followings. But now, arguably, the pendulum is swinging back, from the rise of Substack where anyone can create a newsletter that with 1,000 subscribers paying $10/month will net the writer over $100k/year (or more than most publications would pay writers to write in the first place). In this context, the rise of NFTs represents the next step for creators to monetize their creativity, where social media platforms build audiences but NFTs enable them to actually get paid for and sell what they (digitally) create. In fact, according to CryptoSlam, there has been nearly $300M in NFT transactions in just the past month. And importantly, because creators can sell their work directly via NFTs, it arguably produces better economics for creators who don't have to pay expensive intermediaries (e.g., agents) to make deals happen. In addition, it allows for creators to price up their work for their most ardent fans - just as NBA Top Shot cards range from just a few dollars to over $100k for a few of the most popular. The key point, though, is simply that NFTs are providing a mechanism for (digital) creators to be able to sell their digital works, in a manner that lets anyone find their own 1,000 true fans (and monetize their work accordingly).

In Defense Of Non-Fungible Tokens (Nick Maggiulli, Of Dollars And Data) - NFTs have exploded in the media in recent weeks, with a number of high-profile transactions like a video of a LeBron James dunk that sold for $208,000 or a beautiful GIF of a Michelangelo quote that sold for $57,000. On the one hand, the fact that people are paying so much money for what are just digital images or recordings of actual events (i.e., it's a video of LeBron James dunking a basketball, not the basketball itself signed by LeBron James!), has quickly raised questions of whether NFTs are simply the next Tulipmania, a bubble of speculation over something with no intrinsic value that will crash soon enough. Yet at a more basic level, NFTs simply represent a way that fans can support a creator and act as patrons of their art (or athleticism or other niches), as well as a way to publicly signal their support of the subject matter (e.g., it's not just "I like the NBA" but "I like the NBA so much that I'm willing to pay to own this clip!"), effectively making NFT purchases, in part, a signal of identity itself. In addition, because NFTs themselves are recorded "forever" in the blockchain, they become a form of digital asset with an indefinite life itself (unlike so many other goods that can wear out, degrade, be damaged, or be censored). Notably, this doesn't necessarily mean that NFTs are good as an investment, in a world where their individual price is arguably still very much speculative, literally predicated on whether someone else will pay more for their identity-rights to signal ownership of that digital asset. Accordingly, Maggiulli suggests that NFTs should be better viewed as a payment to the artist and as a collectible (e.g., less like rare art and more like baseball cards) - the kind that maybe, someday, will turn out to be valuable, but which you probably buy and own simply because you want to own the collection for yourself (and, perhaps, occasionally show it off to others as well).

What To Consider When Hiring Your First Remote Employee (Matt Sonnen, Wealth Management) - This March marks, for many advisors, the 1-year anniversary of working remotely and virtually, and, for many firms, marks a turning point from simply converting to doing digital work (with team members who were formerly working together in person pre-pandemic) to a team that was hired for remote digital work, to begin with. Which, in turn, creates a new set of burdens and challenges for firms that have never run a virtual hiring process before, or dealt with the possibility of hiring a non-local team member. Accordingly, Sonnen highlights a number of issues that advisory firms should be aware of, including: if the employee is in a different state than the firm, be cognizant that you may need to register with the Secretary of State and/or Department of Revenue in that employee's state (as you're now "doing business" in their state with an employee there), along with ensuring that you have payroll taxes and unemployment insurance set up for that state (not to mention being properly registered in that state as a broker-dealer or investment adviser, if the person will be in an investment-registered role with the firm); bear in mind that remote employees need to take reasonable 'local' data security matters into consideration, including ensuring that their home WiFi is secure (i.e., password-enabled and not just an open WiFi network), implementing a policy that no company files should be saved locally, use a Virtual Private Network (VPN) if the firm has physical servers that employees are logging in to, and be certain to give employees cybersecurity training in how to spot phishing attempts and malware/ransomware; and be mindful of staying connected with team members with weekly meetups and/or regular one-on-one check-ins (which can be supported with tools like 15Five), where the reduced in-person interaction of a virtual team necessitates having a more regular and continuous performance review and feedback mechanism for all team members!

Five Tips For Writing Effective Job Descriptions For Your Firm (Ryan Watin, XY Planning Network) - When an advisory firm is growing, and it's time to hire, the starting point is typically to create a job description of what the prospective new role in the firm would be. Yet few financial advisors have experience actually creating job descriptions for new hires, which often leads to simply Googling around for a "sample" job description for the role, and copying it into the advisory firm's own needed job description. However, Watin notes that, in practice, every firm is at least a little different in what it really needs out of any particular position. Which means that copying a job description from another firm really just helps identify who would be a perfect candidate for that firm (not yours!). So how should a job description be crafted? At its core, Watin suggests 7 key areas for every job description: a clear Job Title, a Company Summary of the organization (so the candidate knows what kind of business they'd be working for!), a Position Summary of what the role itself is about, a detailed list of Job Responsibilities, the necessary Qualifications that the firm expects of viable candidates, the "Working Conditions" (e.g., in-person or remote, compensation and benefits, etc.), and an EEO (Equal Employment Opportunity) Statement. Notably, though, just writing a staid list of specifications may cover the core information, but doesn't necessarily attract the best candidates who themselves may be looking at a lot of different job opportunities (for which yours needs to 'stand out'). Accordingly, Watin suggests infusing the job description with some personality (e.g., not "demonstrates attention to detail" but "displays a borderline superhuman attention to detail", if that's a better reflection of your culture), be mindful of acronyms and jargon (e.g., if you're not hiring for someone with experience in the industry already, "SEC-registered RIA" conveys absolutely nothing to the candidate!), be mindful of how certain language can be unwittingly exclusionary of women or minorities (e.g., words like "assertive" or "guru" may subconsciously discourage women and other underrepresented groups from applying), be certain to focus on the skills and growth opportunities (not just the required responsibilities), and be certain to post the salary expectations (because realistically, you already have a number in mind, so just share it, both to set realistic expectations for candidates, and because if the compensation does not meet their expectations, it saves everyone some time to just recognize it's not a good match, and move on to the next candidate who would take the job for the salary posted!).

How To Recruit More Women To Your Company (Sarah O'Brien, Harvard Business Review) - While the financial services industry is increasingly taking note of its substantial racial and gender diversity gap, the reality is still that only 23% of CFP professionals are women (a number that has remained flat for decades), and the number of CFPs of color remains in the single-digit percentages. In other words, for all the talk about improving diversity in financial services, actual results have yet to meaningfully move the needle for most firms. Recent research about the gender gap from LinkedIn (across all industries, not just financial services) found a number of key tips and strategies that can help reduce the gap, including: firms in general actually appear more likely to hire women once in the interview process (who for any job were 16% more likely to get hired after they applied), but are less likely to get women to apply in the first place (as women were 16% less likely to apply for a job after viewing it in the first place), which appears to stem from men being more likely to overestimate their abilities when applying (and will apply if they meet at least 60% of the job requirements) while women tend to underestimate (and usually feel they need to meet all of a job's criteria before applying); making job postings themselves more inclusive can boost the number of women who apply (e.g., a separate "Language Matters" study found women are 44% less likely to apply for a job that uses the word "aggressive", and "rock star" and "ninja" are also words that tend to alienate female applicants); share stories of women who are succeeding across all levels of the organization (when women see themselves represented in the firm's hiring collateral, they're more likely to see themselves at the company itself); and post expected salary (or at least salary ranges) for positions, which is found to be even more important to women than men, and more generally helps to signal that the firm is committed to open and transparent fair pay.

Focus On Building Skills Over Finding Hacks (Darius Foroux) - As human beings, we seem to be hard-wired to find appeal in the easy short-term fix, from the get-rich-quick scheme to the latest quick "hack" that will change everything for the better. And the challenge is that not only do such tactics often just not work but even when they do, their success often becomes their downfall, such as the marketing strategy that works great until it becomes so popular that everyone is doing it and it no longer stands out and drives results. So what's the alternative? Simply put, it's building the skills it actually takes to succeed without the hacks, rather than looking to hacks as a shortcut around the skills-building process. Of course, skill-building isn't easy, and gaining the requisite experience often entails a "pay your dues" mentality that doesn't feel good for anyone going through the slow, arduous process who wishes they could accelerate it. Nonetheless, if you talk to virtually any financial advisor (or successful businessperson in general) who has built a successful business, they all talk of the hard work it entailed along the way (and perhaps some good luck, too, but still a lot of hard work and learning and experience-gaining and skill-building!). For which the starting point is simply focusing on doing what it takes to really be proud of your work. Because when you're able to be truly proud of your work, it means you've gained the skill, are able to execute it well, and will probably feel more comfortable telling others about it (i.e., business development!) because you're good at it. So if you're struggling to gain the growth and momentum you want... focus less on the hacks and more on the skill-building it will take to be so confident in the quality of your work that the results naturally flow.

When Everything Matters, Nothing Matters (Brett Davidson, FP Advance) - Most advisory firm owners are spread too thin, leading to what Davidson calls his own definition of "business hell", which is having 7 projects underway... all of which are 95% complete. Because in the end, it's only the projects that get to 100% completion that really move the business forward. Or as Jim Collins (of Good To Great) famously quipped, "If you have more than three priorities, you don't have any." Although Davidson ultimately suggests that having too many priorities isn't the real problem, per se, but merely a symptom of a bigger one: a lack of clarity in the first place. In fact, for entrepreneurs in particular, often the biggest challenge is not a lack of ideas, but having too many, and if you don't have good clarity on where you're going and what you want to achieve, everything looks like an opportunity (and it becomes impossible to filter which is actually worth pursuing, or not). After all, if the only goal is "more", then any shiny object can seem like a good opportunity to add a little more revenue and increase the size of the business. It's only by getting clear on what the business goals really are, who the business really wants to serve, and where it really wants to shine, that it becomes possible to figure out what doesn't fit, and what should genuinely be elevated as a true priority. So if you're struggling to get your team to implement all the projects and ideas, recognize that the solution isn't better team management or project management tools. It's sitting down and taking time to try to really answer the question "who do we serve"... and let that be the filter to figure out what really matters.

The Common Denominator Of Success (Shane Parrish, Farnam Street) - Most of us are brought up in the belief that the secret to success is hard work... until as adults, we often see people who do hard work and don't succeed, and often at least a few who don't seem to work very hard and succeed nonetheless. So what is it that's actually common to success of all types and across all endeavors - the "common denominator of success" that endures? In a statement: success comes from the willingness to form the habit of doing things that failures don't like to do. In the context of financial services in particular - as Parrish's source is Albert Gray, who gave his speech on the "Common Denominator Of Success" at the 1940 annual convention of the National Association of Life Underwriters - the common habit is a willingness to talk to people who didn't necessarily plan to meet with us, and talk to them about something (e.g., money and their financial [or, in Gray's case, insurance] needs) that they don't necessarily want to talk about. After all, there is perhaps nothing easier than finding an excuse to not prospect for new clients, to not expose oneself to rejection, to not take the risk of a prospect meeting that can end in a failure. But it's the willingness to not just take those actions, but make it a habit to do those things that others would so readily avoid - that makes it so valuable in the marketplace, and culminates in success. Notably, this doesn't necessarily mean that successful people like to do the things that everyone else doesn't; hard unpleasant things are hard and unpleasant for almost everyone. What's distinguishing of those who succeed is that they find a purpose for what they do, and it's their purpose that carries them through to be able to form habits doing the hard things that others won't. Which means in the end, if you're struggling to adopt the habits that can take you to the next level of success, the real key is not figuring out the right habits, but finding - or for those who may have stalled, re-finding - their sense of purpose, first.

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, and Craig Iskowitz's "Wealth Management Today" blog as well.