Weekend Reading for Financial Planners (Mar 5-6)

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 March 5th/6th:

It Just Got Even Harder To Trust Financial Advisers (Suzanne Woolley, Bloomberg) - A newly released working paper entitled "The Market For Financial Adviser Misconduct" by professors at the University of Chicago and University of Minnesota analyzed all the available data in FINRA BrokerCheck for the past 10 years, and found that overall about 7% of all financial advisors have been disciplined for 'substantive' misconduct (including an arbitration or civil suit that resulted in a judgment for the client, and/or formal regulator proceedings for violations). However, the eye-popping statistic is that a subset of firms seem to have an especially high concentration of advisors with misconduct, with Oppenheimer topping the list at a whopping 20% of all advisors with misconduct records. In addition, while about half of advisers found to have committed misconduct are fired, 44% of those manage to just get hired by another firm within a year (often by going to a firm that has a higher misconduct rate itself and appears to be 'more tolerant' of misconduct). The fact that those with misconduct records remain in the industry is especially troubling, because the researchers also found that prior offenders are five times more likely to engage in new misconduct in the future. While FINRA has not yet responded to the paper, it notes that addressing the culture of securities firms was already made a top examination priority in 2016;  nonetheless, the study was already mentioned by Senator Elizabeth Warren during a Senate Banking subcommittee hearing with FINRA CEO Richard Ketchum this week.

Morningstar Releases Sustainability Rating for 20,000 Funds (Emily Zulz, ThinkAdvisor) - This Tuesday, Morningstar rolled out its first series of Environmental, Social, and Governance (ESG) sustainability ratings for nearly 20,000 funds (both mutual funds and exchange-traded funds), as interest in sustainable investing continues to grow (particularly amongst younger investors and women). And notably, the Morningstar methodology calculates sustainability ratings not just for funds that have explicit sustainable or responsible investing mandates, but any/all funds that have at least half of their underlying holdings rated by independent provider Sustainalytics. The ratings are scored on the basis of "low", "below average", "average", "above average", and "high", which are depicted as a ranking of one to five globe icons. Funds are ranked on a relative basis, with the top 10% of funds earning five globes, 22.5% receiving four globes, 35% with three globes, 22.5% with two globes, and the bottom 10% getting one globe. Fortunately, the Morningstar ratings do affirm that most socially responsible funds really are living their mandate - with more than 2/3rds of them earning the highest 5-globe rating (even though such funds are only about 2% of the fund universe). So far, the ratings are only viewable in Morningstar Direct and Morningstar Office, but in the coming weeks will roll out via Morningstar Advisor Workstation and Morningstar.com.

Should You Pay For Referrals? (Mark Tibergien, Investment Advisor) - As more and more advisory firms struggle with not growing as fast as they would like, an increasing number are turning to strategies of paying for referrals, either from centers of influence, or from their custodial platforms with retail clientele that can be referred. Yet Tibergien suggests this is a problematic strategy, not just for the financial impact of sharing client revenue, but that "when you abdicate control of your brand to others you have stopped building a self-sustaining business." In other words, 'outsourcing' referrals and business development risks undermining an advisory firm's culture and identity, including by failing to develop your own internal talent to do business development. For firms that do go down this road, Tibergien suggests that the best approach is a deep referral relationship, or none at all - informal long-term referral relationships rarely sustain. In addition, the advisor should ideally structure the arrangement with a higher payment initially, that drops to a lower trail later, and winds down altogether after a few years; otherwise, the referrer may eventually have no real financial incentive to keep referring at all, and the situation can become awkward as the referrer keeps being paid handsomely for a client to whom he/she no longer has any real connection (as the client relationship itself transfers to and cements with the advisor over time). In addition, Tibergien notes that advisory firms should be cautious not to set the payout too high - if the total projected payout over the life of the client relationship would be more than 2X the gross revenue of the client, the advisor may be paying more for the client than what the client is worth to the business itself, resulting in a negative accretion of business value!

Hosting Radio Shows Helps Advisers Attract Clients (Christine Idzelis, Investment News) - Advisor Marc Freedman started hosting an hour-long, live call-in radio show every Sunday at 4PM on a major talk radio station in Boston, but after a year of spending $2,000 per week to host the show, he had gained only one or two clients. Yet after switching to a different radio station and a Sunday morning time slot at a lower price (of just $450/week), Freedman finds that the show is attracting revenue more than three times his roughly-$40,000/year total cost outlay (which includes related ads for his firm). In essence, the radio show becomes an hour-long advertisement for the firm, and can be especially effective to make the advisor "the money guy" in the local community. Notably, though, radio show success doesn't have to be a purely local phenomenon; Ric Edelman also built his firm by relying heavily on his radio show, and Edelman Financial Services now oversees more than $15B in assets for over 30,000 clients and the Ric Edelman Show airs on 67 stations in 62 markets from coast to coast. The biggest caveat, though, is that with radio, the space is so crowded that the cost can be expensive, advisors may be relegated to less-than-ideal listening slots, the advisor's message may conflict (e.g., politically) with other shows on the radio station, and often the details and reach of the listenership is unknown. In fact, because of these challenges, some advisors are adopting podcasting as an alternative, where it may be more difficult to build an audience, but the costs are significantly lower than radio, and results may be easier to measure. However, advisors should be cognizant of compliance issues as well, especially for live radio shows (as opposed to being taped) that may require additional compliance approval.

10 Things Clients Can Teach Us About Increasing Referrals (Julie Littlechild, Absolute Engagement) - Many advisors are not happy with the volume of referrals they're getting from their clients these days, but Littlechild makes the case that it's not for a lack of latent referral potential from your client base. In fact, Littlechild's research of over 1,000 clients of advisors shows that overall, 78% of clients say they are somewhat or very comfortable to provide a referral of their advisor, and 33% of clients say they have done so in the past 12 months (with an average of two referrals each). Notably, though, a referral is different than an actual introduction, which only 19% of clients provided; the rest simply mentioned the advisor's name and/or shared contact details. So what can be done to improve the results? Littlechild finds that just asking more for referrals doesn't help, as only 8%(!) of clients said they referred because they were asked (while 43% referred because their friend/family member had a problem, and simply thought the advisor would be a good solution). Accordingly, the data suggests that the primary issue is clients don't know who to refer, because the advisor isn't clear enough about their unique value and who they best serve. More broadly, though, Littlechild suggests that the real issue is that advisors who want more referrals are trying to solve the wrong problem by asking for more referrals; instead, the focus should be on how to convert the referrals that are already being made into actual introductions, and how to make it easier for clients to know who and when to refer.

6 Ways To Attract The Affluent (John Bowen, Financial Planning) - High-net-worth clients are very appealing for a financial advisor, as it provides a path to generating greater income for the business while being obligated to serve fewer clients. The struggle, of course, is how to get those high-net-worth clients in the first place. Bowen suggests that the best strategy is through forming strategic alliances; one advisor survey found that when focusing on an advisor's top clients, 61% reported the source was referrals from other professionals, compared to only 23% of advisors who got their most-valued new clients as referrals from existing clients. So how can financial advisors better cultivate referrals from strategic alliances? Bowen suggests several key steps, including: have a well-defined client experience in place (as referrers are afraid to refer to you given the uncertainty of what you'll actually do with or for the prospect; a clearly defined process, communicated to the strategic partner, reduces that anxiety); focus on identifying who is really a good alliance partner (which might go beyond just 'accountants and attorneys', and also include life insurance specialists, association executives, business brokers, and more); recognize you can't partner with everyone, and instead focus on who is most likely to be your ideal referral partner; and conduct exploratory meetings to identify if the match is correct, and communicate to the potential alliance partner exactly what you do, how you do it, and who you serve. And remember to communicate with your alliance partners after forming a relationship with them as well, to let them know how the progress is going, so they can be confident that their referrals are in fact being well served!

You've Got Style: Why And How You Must Let It Shine (Ric Edelman, Financial Advisor) - While every advisory firm must offer substance to survive, Edelman makes the case that style, and the advisor's personality, matters as well. In fact, Edelman suggests that your personal style, and its ability to draw attention, is itself a key aspect of marketing and your firm's brand, and is something that makes you unique. In other words, don't shy away from your personal style and risk making your company's brand dry and stale; instead, embrace your personal style, incorporate it into your company brand, and recognize that you're "always" performing that brand, from business events to personal mixers (where you still might meet clients). Notably, not every style has to be as outgoing and boisterous as Edelman admits his own is; still, recognize that it's a key aspect of the first (and ongoing) impression that your clients have of you, and if you're suppressing your style it will likely show through anyway (in a perhaps even more awkward manner).

Former Goldman Sachs Star Gets Into The Depths Of Winning UHNW Clients Without Being In That Tax Bracket (Amy Parvaneh, RIABiz) - Parvaneh joined Goldman Sachs at the age of 26 to be a private wealth manager, and was faced with the challenge of how to attract ultra-high-net-worth clients while lacking any Rolodex, gray hair, or much discretionary income. Her starting point was to take a vacation with her family in Newport, Rhode Island - a known community of the ultra-rich - to see and better understand how her potential clients really lived. And her first takeaway is that much of the business development process is opportunistic - meaning, the opportunities have to come along 'naturally', but you can go out of your way to increase the likely of the opportunities falling into your lap. For instance, if you join a new gym, choose one in a neighborhood where you can source prospective clients (and ideally one that offers group classes where you'll have a chance to actually mingle with others!). Recognize that even the conversations with fellow parents while dropping kids off at school may be an opportunity to build a relationship with a prospect or potential referrer. And don't just eat lunch at your desk, when you can do lunch with an old friend or colleague instead, and use the time you were going to take for lunch anyway to expand your network. As success comes, reinvest into further opportunities; for instance, Parvaneh chooses vacations that also offer a chance to brush up with prospective wealth management clients, and flies first class specifically to have the opportunity to meet the fellow first-class patrons. The bottom line is simply to recognize that fully embracing business development may lead to a blurring of what is even "personal" versus "professional" time in the first place, but that blending is part of what creates the serendipitous opportunities that lead to success.

Powerful People Underperform When They Work Together (Angus Hildreth & Cameron Anderson, Harvard Business Review) - It's been a long-standing puzzle that leaders who have a history of accomplishing their individual goals struggle to accomplish collective goals when working in a group with other similar leaders, from the members of a board of directors that makes a disastrous business decision, to heads of state who cannot broker a meaningful peace deal. Especially since there is a lot of research finding that people who feel powerful tend to be better at processing information, thinking more creatively, and focusing for longer periods of time. Yet a recent series of experiments found that when groups of powerful people work together, the "power" benefit that helps an individual is actually a detriment in a group. In fact, the challenge is simply that when a group of powerful people all come together, they have trouble subjugating their own views to that of the collective group, making it difficult to come to an agreement. In addition, when groups of power leaders come together, significant time often ends out being spent in the dynamics of figuring out which of the leaders will have the higher status in the group, rather than focusing on the group task itself. Which means in the end, it's important to recognize that just because a leader is effective at individual creativity, focus, and processing information, it doesn't necessarily mean that bringing together more of such leaders collectively will accomplish a better outcome!

Propensity To Plan: A Key To Health And Wealth? (Barbara O'Neill & Jing Jian Xiao & Karen Ensle, Journal of Financial Planning) - Prior research has found that across the population, some people simply have more of a propensity to plan and be forward-thinking. In fact, there is a growing base of empirical data to support the Theory of Planned Behavior (TPB) framework, which suggests that someone's attitudes, perceived control of their own behavior, and subjective views of what's "normal" all drive towards forming an intention to change behavior, which then leads to actual behavior changes. The researchers hypothesized that by measuring someone's propensity to plan - as evaluated by looking at whether they engage in frequent planning behaviors - could predict that they would exhibit both better health behaviors and better financial behaviors (and that good health and financial behaviors would correlate with each other). And sure enough, the researchers found that all three of these relationships did hold up in the results. The significance of the result is that it means clients who already have a propensity to plan may be especially likely to follow through on an advisor's guidance already, but that those who do not have a propensity to plan may specifically need additional help to build their planning skillset, such as helping clients break big tasks into smaller ones, establish personal deadlines, and get better personally organized with to-do lists or even smartphone apps. In other words, recognize that some clients may just want the planning advice about what to do, but others will need assistance in getting comfortable with the effort and focus to plan in the first place.

How Good Are Advisors At Their Own Financial Planning? (Bob Veres, Advisor Perspectives) - As Veres has noted in the past, few financial advisors actually have their own financial planner, so Veres conducted a survey with Advisor Perspectives to understand how financial advisors actually do their own financial planning. Overall, Veres found that 19% of advisors receiving financial planning services from another advisor at their firm, and only 4% work with an outside advisor. Within this group, Veres found that older advisors were more likely to have an advisor of their own at all, but younger advisors were more likely to use an outside planner (if they even had one). Veres suggests that to some extent, the lack of financial advisor adoption of their own financial planner may simply be an acknowledgement that so many advisors are generalists, that there are few specialists an advisor even could seek out if needing assistance beyond their own knowledge. More broadly, though, the survey also revealed that only 45% of advisors even have a financial plan for themselves (including those who do their own planning), and fewer than half of advisors reported reviewing their own portfolios more often than once a year, suggesting there is a "cobbler's children have no shoes" scenario playing out amongst advisors (or that some advisors are outright hypocritical about the value of financial planning, selling their services to clients but being unwilling to pay for it themselves!). On the other hand, advisors do appear to be more responsible with their spending and saving; while the average household savings rate in the US is roughly 5.5%, more than half of the advisors surveyed are saving 11%+ of their income, and more than 20% are saving over 20% of their income. In addition, advisors tend to be more aggressive with their savings, with 40% of advisors stating that they have more equity exposure in their own portfolios than their clients, although it's not clear if this is because advisors are better educated about markets and perceive less risk, or are just outright more risk tolerance than their typical clients.

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!

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. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read "FPPad Bits And Bytes" on his blog!