Weekend Reading for Financial Planners (March 24-25)

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 24th – 25th:

Investment Adviser Association & Schwab Press Lawmakers For Tax-Reform Adjustments To Help Advisers (Mark Schoeff, Investment News) - When the Tax Cuts and Jobs Act was passed in late 2017, the sweeping tax reform legislation included two major impacts for financial advisors in their own businesses with clients: investment advisory fees are no longer deductible as miscellaneous itemized deductions (even though commissions to advisors remain pre-tax), and advisory firms themselves are not eligible for the 20% pass-through business deduction because they are deemed "Specified Service" businesses. Accordingly, a coalition of Charles Schwab and the Investment Adviser Association (IAA) is now taking up the effort of lobbying Congress on these issues, both to equalize the field with respect to the tax treatment of advisory fees versus commissions, and also because while the "Specified Service" business rules were meant to limit the pass-through deduction to large businesses that create jobs and not "just" self-employed individuals, the reality is that in a large advisory firm the bulk of the revenue is not from the specified (professional) services of the founder but of the business's employees in the aggregate (directly fitting the deduction's job-creating-firms goal). Unfortunately, though, the scope of such potential changes is beyond just a "technical" correction to the legislation (e.g., where the law is simply mis-worded), which means that while it is arguably a bipartisan issue, changes still won't realistically be coming until at best when the next Congress arrives in 2019.

Prospecting And The Bad Date Syndrome (Julie Littlechild, Absolute Engagement) - When it comes to dating, most people have at some point had the bad experience of a first date where the other person did nothing but talk about themselves the whole time... a sharp contrast to the experience of falling in love, where instead it's about the fact that you feel seen, heard, and completely understood. Littlechild notes that the phenomenon is relevant not only in finding a future spouse and life partner, but also in finding a future financial advisor to be your financial partner. Fortunately, most advisors have long since learned this when interacting with clients and prospects, and the value of asking questions and letting the client/prospect talk more than you do... at least, until you get to the financial advisor's website. Which, like the bad date, is usually filled with discussion of why you're the best advisor and your accolades and accomplishments and services, rather than focusing on demonstrating that you understand their issues and how you can help. If you want to understand the effect, just try going back to your own website now, and visiting the homepage as though you were a first-time visitor – what are the first words you see, and images you notice... and are those words and images about yourself, or your clients and their challenges? Of course, the caveat to this is that it doesn't work until you have identified who your ideal client is in the first place – as if you don't know who you're trying to reach, it's hard to clearly articulate their challenges, and craft the wording accordingly. Nonetheless, it doesn't have to be complicated; you can connect with language as simple as "At <your firm name> we help <target or ideal client> to <promise or transformation>. We understand the challenges you face, including <list top challenges> and we can help you move through them.” What does your website communicate?

Use Google To Tune Your Marketing (Steve Wershing, Client Driven Practice) - A key goal of effective marketing is differentiation, to answer the ultimate question for the prospective client: "why should I hire YOU over all the other advisors I could choose from?" Unfortunately, though, most financial advisors only answer the question "why should I hire you [at all]", and thereby focus on their skills, knowledge, education, credentials, financial planning services, etc... all of which look substantively similar to every other advisor who tries to put a similar good foot forward! In fact, Wershing suggests that you try this out for yourself, but Googling the other firms you compete with in your area (not the local brokerage salespeople, but the other firms you actually respect who an intelligent high-net-worth prospect would likely find their way to as well), and see what you see. Imagine yourself as the ideal client you want to work with, and read those other advisor websites (and then yours) with a mind towards their marketing. What messages do you see? Which firms are really communicating a value proposition that matters from the (ideal) client's perspective? How are the other firms answering the "Why Us?" question, and what kinds of resources do they make available to help visitors get insight into how they solve the problems? Are the firms effective at helping prospective clients connect and get to know the firm's advisors personally? Or if you really want an interesting experiment, cut and paste the homepage text from three of your competitors into a document, along with the text from your own home page, show it to a half a dozen of your clients, and see if they can even identify which is yours... and which one they actually like and resonate with the most! The key, though, remains figuring out how to answer not only the question "why hire you" but "why hire you over anyone else?"

How To Create A Successful Lead-Nurturing Campaign (Crystal Butler, Advisor Perspectives) - A key aspect of marketing as a financial advisor (including and especially in digital marketing) is that most prospective clients will not be ready to do business with you the first time they hear about you or see/learn about your services. Instead, it takes time to "nurture" them, drawing them in and engaging them more deeply, before actually inviting them (or having a realistic chance of getting them) to do business with you. So how, exactly, do you nurture prospects, especially in a digital context? Butler suggests the starting point is simply to get their email address, and in exchange send them a series of 3-5 emails over the span of about 1-3 months (sending messages weekly or bi-weekly). The emails would contain a series of messages intended to slowly but steadily deepen the relationship with the prospect, and add value to further engage them. For instance, the email series might start with a simple welcome message (thanking them for your email address, or downloading your checklist, or whatever else), and then follow with a second email that explains "who you are" and includes links to your "About" page and your team biographies (and include a PDF version in case the recipient prefers to print these things out!), after which you'd send a third email that gives some kind of additional free resource and mention the types of clients you typically work with, and then the closing email would be a final check-in to see if they have any questions and/or if they're ready to engage you. The building process itself should be relatively straightforward – write out the contents of each email in a Word document, have a few friends/clients/co-workers review it for feedback, then set it up in a templated email tool like Constant Contact or MailChimp, connect it to your CRM (e.g., via Zapier), test it on yourself (so you can spot any bugs before you actually send it to prospects), and then see what happens! Over time, you can even test out different subject lines, different calls to action, etc., in an effort to refine the process further!

PR For Financial Advisors: How To Handle Your Own Public Relations (Kali Hawlk, Creative Advisor Marketing) - One of the fundamental challenges of marketing is simply building awareness of who you are and what you do in the first place... an area where not just marketing, but Public Relations (PR) efforts to earn media coverage can be especially effective. However, most advisors have little-to-no experience building relationships with the media – for which, the key, is really building relationships and not merely trying to pitch your company's services to get journalists to write about you. Which means as a starting point, try to connect with the journalist by sharing their work on social media, helping them with a project, or making yourself available as a resource (even if you don't always get quoted). And in turn, that requires actually getting to know who the reporters really are – what's their "beat" (their topic/area of focus), the nature of their publication and its editorial style, etc. And it's OK to contact them simply to ask "how do you want to be pitched if I have a story idea for you" and ask them the best/worst time to pitch (based on their own writing deadlines), what channel is best for them (e.g., phone call or email), etc. Some other rules to follow include: consider whether the story is really timely to the news cycle, or if there's a better time to pitch it; be direct and get to the point quickly of what you're pitching (as reporters receive a lot of pitches and don't want to have to read a long message); don't send anything with attachments (which tend to be caught in spam filters); put together a "Media Kit" that also includes your bio and headshot, bullet points on accomplishments, etc., so the reporter has something easy to reference; and of course, make sure your pitch/story is worthy of the reporter's attention in the first place; it may seem noteworthy to you, but is it really noteworthy to the reporter, the editor he/she will have to pitch it to, and the audience of the publication? The bottom line, though, is simply to recognize that PR is really just about building relationships – not unlike what most of us as advisors already do with clients - but simply built in a manner to connect with reporters and journalists and what matters to them.

A Referral Opportunity Advisors Rarely Recognize (Dan Solin, Advisor Perspectives) - It's common for financial advisors to try to drive referrals from so-called "Centers Of Influence" (COIs), who have access to an ongoing stream of "ideal" (e.g., high net worth) potential clients the advisor might work with. The caveat, however, is that popular COI targets, like attorneys and accountants, often get a lot of financial advisors all trying to pitch them for the same potential referrals, which makes it a crowded space that can be hard to stand out. Accordingly, Solin suggests another type of COI professional that is often overlooked: investment bankers that handle transactions in the "middle market" (which for investment banking, is typically companies with revenues between $5M and $250M per year). After all, investment bankers working in that space are, by definition, involved with business owners who have significant net worth, and the investment banking transaction itself means there's a high likelihood that the owner is about to experience a significant once-in-a-lifetime liquidity event... after which someone has to help them manage the assets and plan for their new financial reality! In fact, working with such business owners having a liquidity event often works well precisely because all of their assets are usually tied up in the business until the liquidity event occurs – which means they typically don't have any outside investable assets, and therefore no existing advisor relationship! Of course, some investment bankers receive referrals from advisors in the first place – who are trying to help their small business owners with a liquidity event – and as a result, the investment banker will typically send that referral back to the advisor. Nonetheless, there are opportunities to apply the principle of reciprocity to develop a relationship with at least some investment bankers... especially since, given the average net worth of the potential referral, you don't need very many referrals to make the effort very worth your time!

Performance Reporting Is Dead... You Just Don't Know It Yet (Jennifer Goldman) - With the shift from paper statements of old to the internet and the rise of online portals, performance reporting on investment accounts has only become more popular, and the solutions for clients more sophisticated. Yet Goldman suggests that in the coming years, the capabilities of online client portals will evolve beyond just performance reporting alone, and instead shift to a greater focus on more holistic reporting of the client's entire household by providing clients an entire PFM (Personal Financial Management) solution. Examples in this category would include Mint.com for consumers, as well as eMoney Advisor's account aggregation and client portal solution, which collect not just information on investment accounts, but also other accounts, liabilities like credit cards and mortgages, and report on not only investment performance, but also net worth, and even cash flow and spending. And the good news of such solutions is not just that clients get a more holistic picture (directly from their advisors!) that is a higher touch value proposition, but the advisor themselves doesn't have to take passwords (which potentially triggers custody rules), and staff time collecting information for financial plans and updates can be greatly minimized (since it flows directly from the software!). Not to mention that if advisors shift further away from performance reporting, the software may also get a lot cheaper – as even "expensive" PFM portals for advisors today, with their financial planning focus, are a lot cheaper than most portfolio accounting and performance reporting solutions – which further enhances the profitability of the firm by shifting from performance reporting to net worth reporting. (And for those who are wondering: no, performance reporting is not actually a requirement for RIAs.) Unfortunately, though, the industry has taken a long time to really roll out effective PFM solutions for advisors, and not all PFM and account aggregation solutions have the same capabilities; in fact, Goldman herself wrote the first version of her article on this topic nearly 4 years ago. Nonetheless, as advisor software solutions continue to advance, the coming generation of PFM solutions are not only more effective at reporting, but will even integrate further to facilitate advisor workflows, from offering Scheduling App solutions to set up a meeting with the advisor, to providing context-relevant education, and even facilitating account opening and transfer paperwork!

401(k) Robo-Revolution Is Underway (Greg Iacurci, Investment News) - In recent years, there has been a spate of lawsuits surrounding 401(k) plans, and the conflicted compensation that's often involved in the way they're distributed to small businesses. As a result, a growing number of tech startups are aiming to enter and potentially disrupt the space, overhauling everything from the process of fiduciary advice and professional account management itself, to the underlying processes of fund selection, plan compliance, and recordkeeping and administration. Different companies are coming at the issue from different angles, with some like Betterment for Business and Human Interest and ForUsAll going after small businesses directly, while others like Vestwell aim to distribute through advisors as their technology partner instead (though Human Interest now has an advisor option as well). All of them, though, are aiming for the small-to-mid-size employer marketplace, where companies typically don't have the depth of staff and resources to do deep due diligence on potential providers (nor have the size and scale to demand better transparency and price concessions, with $1M to $10M plans paying an average plan cost of 1.24%, compared to "just" 0.74% for plans with $50M to $100M of AUM). Of course, the emergence of "robo" players isn't new – as a similar wave attempted to sweep over to the direct-to-consumer marketplace in traditional investing over the past 6 years as well – but the rollout of automatic enrollment under the Pension Protection Act of 2006 has boosted enrollment rates (making the "small" business market more appealing to pursue), and the simplification of investment choices with the rise of default target date funds (which have added nearly a trillion in assets in barely 10 years) has made the market more cost efficient for new providers to serve. Although, at the same time, the opportunity to earn profits on the default (target date fund) investment has itself put more pressure on the profitability of record-keepers as they compete with investment firms that will "give away" recordkeeping at below-market rates in exchange for collecting investment assets. By contrast, while some "robo" disruptors in the 401(k) space are also looking to offer managed accounts, some are simply trying to compete more directly for what's left of the record-keeping business, and others are trying to provide managed account "overlays" while not being in the record-keeping business at all (including Blooom, Stadion, and the biggest player, Financial Engines). Ultimately, it remains to be seen whether the incumbents can be unseated, and which of the particular business and distribution models will win. Nonetheless, with the number of different "robo" technology firms competing, the attempt at a "robo-revolution" in 401(k) plans is certainly well underway.

How AI Labs May Co-Opt The Advisor Desktop By Creating An Overarching Open Architecture (Brooke Southall, RIABiz) - Independent advisors often pride themselves on their independence, which can create a lot of frustration with RIA custodians and independent broker-dealers that often require their advisors to use at least some "captive" technology, that doesn't necessarily play well (or at all) with other custodians or broker-dealers, and makes it harder for the (independent) advisor to leave. Now, a new initiative from AI (short for Advisor Innovation) Labs is aiming to change this by creating a standalone open-architecture advisor desktop platform... one that would integrate out to any broker-dealer or custodian, but exist separate and independent from them (using APIs to feed data in and push workflows out). Of course, the challenge is that this is not only technologically daunting, but requires persuading custodians and broker-dealers themselves to be willing to play ball and risk surrendering some level of control. After all, the ever-expanding Envestnet platform is similarly building an "advisor desktop" solution, and TD Ameritrade's VEO One is engaging in a similar strategy, along with the coming Fidelity Wealthscape platform, as the key players try to build their own solutions before an independent option can take hold (and provide just only as much multi-custodial or multi-broker-dealer technology as is necessary). Nonetheless, the initiative is being spearheaded by Lori Hardwick (former COO of Pershing and a 16-year executive at Envestnet), along with Mike Zebrowski (long-time executive and former COO of eMoney Advisor), who certainly have both the technical chops, and the connections, to potentially structure a disruptive form of new advisor desktop platform. Time will tell?

A 40-Year-Study Found That Kids Who Do This Are More Likely to Earn the Most Money When They Grow Up (Amy Morin, Inc) - A long-term study first initiated in 1968(!) evaluated the classroom behaviors of children at age 12 (in 6th grade), and then re-evaluate them 40 years later (in 2008) to identify which students/childhood characteristics were most predictive of future career success (along with other factors like parental socioeconomic status). And the recently published results reveal that one of the biggest determining factors were those who "broke the rules" as children. Notably, the study did find that the students' teachers described as "studious" were more likely to have prestigious jobs as adults, but the studious kids didn't make the most money as adults. Of course, the study is limited in determining exactly why the rule-breakers were most effective at generating higher income – for instance, it may be because they're less afraid to try to negotiate higher salaries or raises, or because they are more willing to compete in the workplace to advance their own interests (rather than worry about getting along with others), or even because they found ways to earn more income with unethical/illegal jobs (although there was no direct evidence of this). Nonetheless, the study adds to a growing base of research finding that "non-conformists" appear to have clear advantages in life, even though schools themselves tend to reward those who follow the rules (which means the non-conformists and rule-breakers will likely struggle in school and only excel thereafter). The key point, though, is to recognize that defiance is not necessarily a trait to "squash" in children to make them more obedient... but perhaps simply something to try to channel into a hopefully productive endeavor (while helping them to learn empathy and become better aware of the consequences if they sometimes go too far).

If You're So Smart, Why Aren't You Rich? Chance. (arXiv) - The distribution of wealth appears to follow a version of the so-called 80/20 rule (that 80% of the wealth is owned by just 20% of the people), and is a pattern (albeit with slightly varying percentages) that seems to emerge in all societies over time (in both wealth and other social phenomena). The popular view is that this occurs because we live in a world that is increasingly meritocratic, in which the most talented and intelligent people who put in the most effort and the most rewarded. The caveat, though, is that while wealth observes a "power law" distribution (concentration at the top), intelligence and most other human skills follow a "normal distribution" that is symmetrically dispersed around an average. Which raises the question – how does the even distribution of skills result in such an uneven distribution of wealth? The answer, it appears, is due to the overlaying role of chance and luck. In a recent study from Alessandro Pluchino at the University of Catania (Italy) and his colleagues, the researchers built a model to study the role of chance in human interactions and found that their simulations accurately reproduced the wealth distribution in the real world... one in which the wealthiest individuals were not the most talented (though they did need at least a certain minimum level of talent), but the luckiest who got the most extra nudges of wealth creation along the way (and vice versa for those who experienced unlucky events). Which is significant not just in reflecting who the wealthy are and are not, but also because it means if you want to support wealth creation (or in the researchers' context, fund good research) the best strategy is not just to invest heavily in a small subset of the most talented people (or researchers), but instead to divide funding/investments as evenly as possible amongst everyone to give the maximum chances for potentially lucky events to occur!

How To Raise More Grateful Children (Jennifer Wallace, Wall Street Journal) - Every generation seems to complain that children "these days" are acting more entitled and ungrateful than in years past, though some recent polls suggest that the majority of adults really do find people seem to have less of an attitude of gratitude than 10-20 years ago, and the youngest group of 18-to-24-year-olds surveyed actually were the least likely to report expressing gratitude regularly (only 35%) and the most likely to say any gratitude they did show was for self-serving reasons (e.g., "it will encourage people to be kind or generous to me"). Some are suggesting this is actually a result of the parenting trends in recent years, that have focused more on helping children have higher self-esteem and feel better about themselves... with the caveat that in turn, they just end up feeling more entitled to things and feel less grateful in the process. Fortunately, though, gratitude is a trait that can be cultivated (at any age), and one that has strong emotional underpinnings that lead to reduced levels of depression and anxiety and higher levels of overall well-being (no surprise, then, that virtually every major world religion includes gratitude as part of its value system, from prayers of thanks to blessings over food!). And the effect applies to children as well, with those who rate higher in gratitude tending to be happier and more engaged in school, and to give and receive more social support from family and friends. So how can children be taught to be more grateful? Author Kristen Welch of "Raising Grateful Kids In An Entitled World" suggests that the starting point is simply to recognize the importance of being and expressing gratefulness as a parent (behavior that is modeled to the children). From there, it's about focusing on finding gratitude in "everyday stuff" – not necessarily about forcing children to write thank-you notes, but seeing others express gratitude (saying please and thank you), reading books like Shel Silverstein's "The Giving Tree", and simply writing down one thing they would do to show the generous tree in the story that they were grateful for what she had done, while one teacher found success simply by having students spend the first four minutes of each class expressing gratitude to their classmates in writing, and some parents have found a significant impact of having children exposed to those in less fortunate circumstances (to better understand the things in their daily lives they should be grateful for). In other words, having a better gratitude mindset really just comes down to a little ongoing intentional practice at doing so, even as the effects can be long-lasting and positive.

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.