Executive Summary
Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the huge industry news that mega-RIA United Capital has been sold in a mega-deal to Goldman Sachs for a whopping $750M, in what is both an eye-popping valuation (nearly 3X revenue) that strongly validates the industry's RIA trend and also signals a major shift for Wall Street itself as Goldman Sachs enters its biggest deal in nearly 20 years to move into the RIA business itself.
Also in the news this week was the announcement that, after years of relying on the Broker Protocol to recruit breakaway brokers from wirehouses, HighTower is now shifting to an RIA-acquisition model and dropping its own no-longer-relevant participation in the Broker Protocol. And the CFP Board has released a new guide with suggestions for what fee-only advisors should be mindful of with the new CFP Board Standards of Conduct coming this fall... as the reality is that it's not only the broker-dealer community that is impacted by the new rules.
From there, we have several insurance-related articles, including the news that John Hancock is going to start offering LTC policyowners the chance to add a co-pay to their policy benefits as a way to mitigate premium increases, a look at what to consider when evaluating a hybrid LTC insurance policy for a client, and a broader industry look at the ongoing trends in the LTC insurance marketplace (from the ongoing rise of hybrid LTC policies that now outsell traditional LTC insurance almost 4:1, to the emergence of basic LTC coverage attached to Medicare Advantage plans).
We also have a few articles on the rise of video in financial advisor marketing, from tips and best practices in recording and sharing videos (it's OK to record vertically, but it's time to add subtitles!), additional tips to prepare if you're about to start doing video for the first time, and a look at how it's becoming increasingly common to record a video for your website when changing firms to explain the switch to your clients (both as a means to more personably get the message out to them all at once, and also because it's easier to navigate the Broker Protocol if the former clients come to you and your website!).
We wrap up with three interesting articles, all around the theme of what's changing (and what's not) in the world of financial advice: the first looks at the divide between the "historians" (who suggest that the financial services industry has faced technology disruption before, and always ends out on top) versus the disruptors (who believe this time is really different) and which side is likely to win; the second explores a fascinating study that finds, in the aggregate, that the financial services industry has actually managed to maintain an aggregate fee that amounts to about 1.5% to 2% of all-in costs since the late 1800s (as the industry's services and products evolve, but its "cut" remains almost exactly the same in the end!); and the last is a fascinating thought experiment from industry commentator Bob Veres about how the financial planning profession, in particular, will likely look different 20 years from now (when he predicts the transition from our product-based roots to our advice-centric value propositions will be complete, and the entire nature of the role of the financial advisor will look fundamentally different than it does today).
Enjoy the "light" reading!
Goldman Sachs Buys United Capital In 'Huge Validation' For RIA Business (Charles Paikert, Financial Planning) - This week, it was announced that Wall Street mega-firm Goldman Sachs is buying the $25B RIA United Capital for a whopping $750M in cash, pricing the firm at just over 3X its reported trailing 12-month revenue of $230M and 18X its EBITDA (including both its core wealth management business, and its FinLife CX technology platform for other RIAs)... a price that is high by "typical" RIA standards, but not that unusual for a mega-firm with United Capital's size and economies of scale. Goldman Sachs CEO David Solomon has stated that he sees United Capital as fitting into part of Goldman's big shift into serving a wider range of consumers across the wealth spectrum (and United Capital is Goldman's biggest acquisition in 20 years), where its Marcus banking platform will appeal to the masses, Goldman's massive $500B Private Wealth Management offer serves ultra-high-net-worth clients, and United Capital will fit in between; in fact, Solomon stated that his goal is to "double the [United Capital] business in relatively short order." United Capital founder Joe Duran is expected to stay on for the time being in a "senior" position, though he is also reported to have still held a 10%-20% stake worth $75M to $150M of cash to Duran when the transaction closes in the third quarter. From the broader industry perspective, the United Capital deal is also being heralded because it's not "just" another sale to a private equity firm, but to a storied Wall Street firm that sees the RIA business as a key strategic channel for its wealth management future. On the other hand, though, some are already predicting that Goldman Sachs will also try to cross-sell the firm's in-house products via United Capital to its clients (at least for the subset of United Capital clients who are affluent enough for many of Goldman's high-end alternative investment offerings) and sweep United Capital client cash to Goldman's banking offerings (which Goldman's bank can subsequently lend as a traditional bank lender), although at this point, Duran denies that Goldman product distribution is part of the United Capital acquisition plan; nonetheless, the entrance of Goldman Sachs to the RIA channel raises concerns about whether the RIA channel – that has been storied for its independence – may also start to shift and become less transparent and more conflicted going forward (which for the most part is permitted as long as it is disclosed in a firm's Form ADV). And in point of fact, RIABiz reports that Duran's original goal for capital may have been to simply raise more cash for growth to eventually IPO (and maintain greater independence for United Capital), but the company's existing shareholders preferred the purchase price that Goldman was willing to pay instead.
HighTower Exits Broker Protocol In Identity Makeover (Charles Paikert, Financial Planning) - HighTower built much of its base of $50B of AUM by attracting large breakaway broker teams over the past 10 years, but as the breakaway broker marketplace gets more competitive, HighTower is shifting its strategy to acquire other RIAs instead... and in the process, is dropping its participation in the Broker Protocol, which is no longer necessary if the firm isn't trying to attract brokers transitioning their clients away from a broker-dealer in the first place. On the one hand, the announcement puts a definitive nail in the coffin for HighTower burying its breakaway broker recruiting strategy of the past and shifting to RIA-to-RIA acquisitions instead, which has started with further buying up the revenues of its existing teams (as in barely over a year, HighTower has shifted from owning just 23% of its advisors' revenues to 80% of them today, and aims to be nearly 90% by August, which at $50B of total AUM means HighTower has actually bought more AUM revenues from its advisors in the past 18 months than Goldman Sachs just bought from United Capital!), and HighTower also hired marketing executive Abby Salameh to help it further consolidate the HighTower brand across multiple advisor offices. Accordingly, by leaving the Broker Protocol that it no longer needs for wirehouse recruiting, HighTower can potentially make it more difficult for its own advisors to leave as the company tries to further build itself for its own future liquidity event. And with two of the four major wirehouses pulling out of the Broker Protocol themselves in the past 18 months, recruiting major breakaway teams from wirehouses has become less lucrative than it once was anyway. On the other hand, the departure of Morgan Stanley and UBS from the Broker Protocol was widely criticized for reducing the independence of the firms' own advisors, and so it is somewhat ironic that after spending a decade preaching the virtues of independence to advisors at broker-dealers in order to attract them, HighTower has now decided to make its own advisors less independent going forward.
New CFP Board Standards Will Tighten Rules For Fee-Only Planners Too (Kenneth Corbin, Financial Planning) - The big buzz of the CFP Board's new Standards of Conduct taking effect this October is that CFP certificants will be subject to a fiduciary duty "at all times" when providing financial advice or financial planning (as opposed to the prior rules where the fiduciary standard only applied when CFP certificants were actually doing financial planning). Which has put a big focus on the broker-dealer community, and how advisors at broker-dealers will fulfill their fiduciary duty to clients with the sometimes-conflicted demands that their broker-dealers put upon them... whereas the RIA community is already subject to a fiduciary standard, and has largely viewed the new CFP standards as a moot point. Yet as Corbin points out, the CFP Board's version of fiduciary rules and requirements is not exactly identical to the standards currently required of RIAs, in part because not all RIAs run purely fee-only firms in the first place, and also because the CFP Board's new Standards will have their own disclosure and fiduciary process requirements (including new rules to define "sales-related compensation" and determine when a CFP certificant can actually use the "fee-only" moniker in the first place). Accordingly, the CFP Board has specifically published a new guide for "fee-only" CFP professionals on what they in particular need to know to comply with the new Standards, such as creating specific disclosures to acknowledge that even fee-only AUM firms have a conflict of interest in making recommendations to pay down a mortgage or other debts (that may be good for the client but reduces the RIA's assets under management and therefore its client revenues), being especially mindful that fees are consistent with the amount of work and care delivered to the client (i.e., be cautious not to overbill for the actual work and value provided), and understanding exactly what constitutes "financial advice" such that the CFP Board's fiduciary duty would begin to apply in the first place.
LTC Insurer Offering Co-Pays To Blunt Soaring Premium Increases (Greg Iacurci, Investment News) - With ongoing increases in premiums for existing LTC insurance policies continuing to create stress for consumers, John Hancock is now proposing a new option: to allow policyholders to add co-pays to their future claims, in lieu of paying some or all of the premium increase. For instance, an LTC policyowner might get the option to have a 20% co-pay on future monthly claims, in return for a lower (or less-increased) LTC premium going forward (ostensibly on a policy that otherwise was going to face a premium increase anyway). The insurer has already received approvals for the idea from insurance regulators in several states, and will begin rolling out the option in the fourth quarter. Notably, offering changes to LTC insurance policies to mitigate premium increases is not an entirely new tactic, as LTC insurers in the past have already typically given consumers the choice of decreasing their inflation rider and/or reducing their existing monthly benefit to keep their premiums stable (which reportedly is already selected by consumers facing premium increases about 50% of the time). The co-pay option, though, is a new avenue for mitigating premium increases (although Prudential and CNA have had co-pay options in some of their existing policies from the start), and a unique one in that it fits more of a traditional health-insurance-style risk-sharing approach in the first place (that may reduce future claims from those who decide to engage in self-care longer to avoid their 20% coinsurance obligation, which in turn helps reduce the amount of the premium increase that would otherwise be necessary in the first place).
What You Need To Know About Hybrid Long-Term Care Insurance (Cheryl Munk, Wall Street Journal) - As traditional long-term care insurance has become more and more expensive (both with respect to premium increases on existing policies, but also simply on new policies), more and more consumers are shifting to purchase hybrid long-term care insurance instead (that combines together a life insurance or annuity policy with a long-term care insurance policy). In fact, last year, 260,000 hybrid LTC insurance policies were sold, as compared to "just" 66,000 traditional LTC insurance policies in 2017. The policies have been popular in part because there is often a return-of-premium feature and/or guaranteed cash value, and also simply because if the benefit pool isn't actually used for long-term care needs, most or all of it may be bequeathed to heirs as a life insurance death benefit instead... effectively making the hybrid policy one where the buyer will get the benefits no matter what, and the only question is whether it will be as a long-term care claim or a life insurance death benefit instead. The caveat, though, is that by buying "two" insurance policies instead of one (long-term care insurance and a life insurance death benefit), the coverage may ultimately be more expensive, which usually means the benefit periods for hybrid LTC policies end out being shorter (and/or that the total premiums are higher). Other notable caveats and issues to be aware of with hybrid LTC policies include: while traditional LTC insurance policies are fairly standardized (to conform to Internal Revenue Code requirements for what constitutes a tax-qualified LTC insurance policy), hybrid LTC policies have a much wider range of features (from how inflation adjustments are handled to whether/how an elimination period will apply) and price points, which makes it harder to compare them (and/or at least requires more due diligence from the advisor); costs themselves vary widely, including the structure of how premiums can be paid (with some that take payments annually or over 10 years, and others that require a substantial lump sum that might be $100,000 or more in order to get the coverage all at once); and the variability of price points and features mean it's even more important to shop around. Though notably, perhaps the biggest caveat of hybrid LTC insurance policies is simply that if interest rates continue to rise, the policies may indirectly become more expensive as clients whose lump sum dollars are tied up in hybrid policies may lose the ability to reinvest those dollars into higher-returning fixed income alternatives instead.
The Five Big Trends To Look For In LTC Insurance For 2019 (Tom Riekse, LTCI Partners) - With the ongoing changes in the LTC insurance marketplace, Riekse provides his predictions on what's likely to continue to change (or not) in 2019. Key points include: hybrid LTC policies will keep growing, as the marketplace traditional LTC insurance keeps shrinking, with consumers continuing to show a preference for the "rate guarantee" (though it isn't really) in hybrid LTC insurance policies, and the policies seem to only be getting more popular as carriers restructure from requiring single lump sum deposits (which isn't always feasible for clients) into 5-pay, 10-pay, and lifetime-pay options as well; Medicare Advantage plans are becoming more popular, and since May of 2018 its possible for Medicare Advantage plans to pay for custodial long-term care benefits such as in-home assistance, light housekeeping, meal delivery, etc., and as many as 7.5% of Medicare Advantage enrollees will have access to some extra LTC benefits through such policies in 2019 (and while the policies are often of a less flexible managed-care style, they are becoming an alternative for at least some seniors who need basic LTC insurance coverage); as traditional LTC insurance has shrunk, so too have the historically-agent-based distribution channels, leading employers to explore new pathways like returning to the employer group marketplace, and even the potential rise of online direct-to-consumer InsurTech solutions for consumers to buy LTC insurance themselves in the future; with a growing number of states looking at a state-level fiduciary rule for life insurance agents, long-term care insurance may unwittingly be scooped up into a fiduciary obligation as well, creating uncertainty about the obligations of an LTC insurance agent in a fiduciary future; and while long-term care insurers appear to now, finally, have appropriate pricing on their LTC insurance policies (with reduced risk of future premium increases on policies sold today), there may still be some high-profile deals of insurers selling off or exiting the LTC insurance marketplace because they don't want to deal with their existing block of under-premium LTC policies already being paid out (which some buyers are willing to buy, in the hopes that medical and technology advances will reduce the need for seniors to claim as much on their long-term care policies in the future).
Social Media Video Trends For Advisers (Johnny Sandquist, Investment News) - While video has been increasingly popular as an advertising medium for many industry in recent years, it seems that 2019 may be the year video finally comes in full to the advisory industry... not just in the form of professionally produced videos that go on an the advisory firm's website homepage, but also more "casual" self-shot social media video to make the advisor more relatable. Some notable trends emerging today around the use of (self-recorded) video as it goes more mainstream: while video professionals have historically shot horizontally (to fit the traditional wide-screen TV or screen), mobile/social video is increasingly being viewed vertically (the way we naturally hold our phones), which is making it more common to record videos vertically as well; live video is becoming popular as a way to further connect directly with people you may be interested in doing business with, using a live broadcast (even just for a few minutes) to have a way to communicate back-and-forth more directly with those who may want to connect and hear you share your expertise; because people watch social media in a variety of locations, often where it's not appropriate to hear the video (e.g., 85% of videos shared on Facebook are actually watched on mute!), consider adding subtitles to any videos you do post so people can take in the information by seeing it even if they can't listen to it (and fortunately, captions can now be generated automatically with tools like Facebook's auto-captioning, or iPhone's Apple Clips).
Before You Get In Front Of The Camera... (Crystal Butler, Advisor Perspectives) - While video is becoming increasingly popular in marketing (including advisor marketing), most financial advisors have little-to-no experience "doing" video (especially when they're fully responsible for setting it up and recording themselves from a mobile phone). Accordingly, Butler provides a number of tips for those looking to get started, and what they should be mindful about, including: don't be too self-conscious about how you look on video, because the truth for better or worse is that it's the same as you look in real life anyway (so just wear what makes you confident in real life!), but do be mindful that clothing and the colors of clothing may look a bit different on camera, so it's worth testing out with a brief initial recording just to be certain the clothes and colors come through as anticipated and desired; be certain you're in the right "on-camera mindset" before actually getting on camera, and figure out what it takes for you to get psyched up (whether it's focusing on your "Why" so you have the confidence in knowing why it's so important for you to follow-through and do this, or simply warming up by singing, dancing, being silly, or whatever it takes to help you loosen yourself up); do have some plan for what you're going to be talking about, and at least sketch out some talking points for yourself (if not a full script) so you know what you're going to say (reducing the risk you get tongue-tied); if you're not sure of what to talk about, recognize there really are lots of options, from sharing a big announcement to providing a behind-the-scenes look, drawing/sharing something on a whiteboard, sharing thoughts on a current event, discussing a commonly asked question, or just thank your audience; and remember that because video is so personal and direct to the viewer, you can/should just talk to the camera the way you'd talk to any person face-to-face right in front of you! And if you stress out about all the setup, consider "batch recording" – where you prepare and then record numerous videos all at once, lumping together the preparation efforts, but then sharing them out over time!
Why I Left That Firm: Brokers Use Videos To Explain Move To Clients (Jed Horowitz, AdvisorHub) - One of the most challenging things for an advisor to explain to clients is why they are switching firms, both because it's a high-stakes transition (the advisor needs the client to move to remain a client and keep getting paid), it's disruptive for the client (who needs justification for why they should go through the trouble of moving accounts), and it's very time-pressured (as advisors need to have the conversation with dozens or even hundreds of clients very quickly once breaking away before the prior firm starts making efforts to retain the clients). Accordingly, some advisors are trying to get the message out via video, recording short segments that explain the change and why the advisor is making the move to a new firm, in a way that is personable (it's a video directly from the advisor), allows them to articulate the key points and show their passion (as advisors are often very good talking through key issues and being persuasive in their communication), but can be done in a one-to-many format that all clients can see. Thus, instead of (or perhaps in addition to) trying to talk on the phone or meet in person with every client, the firm might record a video, post it to their website, and then send an announcement email to all clients to invite them to see the video explanation (and warn/remind them at the end of the transfer paperwork that will be coming soon!). The video approach is especially appealing because, by posting the video directly to the firm's website, former clients can come to the firm and see the video themselves (rather than having the advisor contact them for a meeting), making it easier to navigate the limitations of the Broker Protocol. The key point, though, is that the video is online and will "live forever" there... which means it's also crucial to keep a positive attitude and focus on the benefits for the clients, rather than speaking negative (and publicly, and in a recorded manner) about the prior firm the advisor is departing!
In A World Of Free Products, Financial Planning Must Change (Nick Richtsmeier, ThinkAdvisor) - With the current inflection point in financial services, there is an emerging divide occurring about "what comes next": on the one side are the "historians," who point out that technology companies have come many times in the past purporting that they would "disrupt" financial advisors (from discount brokers in the 1970s to the online trading platforms of the 1990s Internet era), only to find that in the end not much actually changes beyond financial advisors shifting their value proposition to something slightly newer and different that builds on top of the new technology; on the other side are the "revolutionaries," that suggest "the world has changed" and that there is so much technology coming directly to consumers from so many directions that it cannot be ignored. A case-in-point example is robo-advisor Wealthfront, which not only tried to challenge the financial advisor business model of managing investments with a lower AUM fee, but is now also giving out free financial plans to further connect with consumers directly around their financial needs (without the need for a financial advisor), just as Fidelity announced its free ETFs and Robinhood announced it will begin to self-custody to stabilize its own no-trading-fee "free" platform... all of which raise questions about whether or how financial advisors will be able to keep charging a premium price for what more and more competitors are giving away for free (to future generations that are increasingly tech-savvy and/or fully digitally native). So what's the endpoint? Richtsmeier suggests that in the end, there will still be value to advisors who really do financial planning but the value will be the ongoing planning and not The Plan that will be increasingly available for free. Because software can calculate how much it takes to retire, but doesn't necessarily help clients stay on that course during difficult times, nor can it figure out how to adjust the plan based on "priorities hidden in the subtext of stories." Thus, Richtsmeier suggests that in the end, the winners will be the "integrators," that figure out how to effectively integrate the two (the planning process, and the technology that supports it).
The Finance Industry's Incredible Ability To Keep The Money Rolling In (Paul Davies, Wall Street Journal) - Notwithstanding the adverse impact of the financial crisis (and subsequent regulation), the rise of index funds, and the growing pressure on transparency in the financial services industry, the industry has managed to keep taking in a remarkably stable slice of dollars from the consumers it serves. And in fact, a recent economic study by Thomas Philippon finds that the financial services industry's "cut" as an intermediary has remained remarkably stable for nearly 130 years, consistently taking a toll between 1.5% to 2% of every dollar that passes through its hands, from the late 1800s all the way up through the mid 2010s. In part, this is because even as one set of products get simpler (and more transparent, and cheaper), the industry tends to just create more new products that are riskier (and usually more complex, and usually more costly); thus, even as low-cost index funds are increasingly popular, investors have also thrown more and more dollars at high-fee hedge funds, private equity, and structured products as well. Such that in 2003, the industry got 36 cents in revenue for every $100 it managed... and in 2016, across all fund managers globally, it was just about the same, at 37 cents for every $100 managed. The notably contrast, though, is that other industries tend to reduce themselves as they get more efficient and productive... thus why retailers and wholesalers, for instance, have been comprising a lower and lower share of GDP, even as the finance industry gets bigger and more complicated. Which is also significant because it suggests that even as the financial advisor industry reinvents itself with the shift from commissions to fees, and robo-advisors and other technology firms enter, the endpoint may not actually be lower revenue and costs for consumer at all... but just an advisory industry (as part of the broader financial services industry) that simply continues to reinvent itself and its value proposition in order to justify the same fees and revenue it has managed to continue earning all along.
How Financial Planning Will Change By 2039 (Bob Veres, Financial Planning) - While the financial services industry in general, and the world of financial advisors in particular, can change a lot over 20 years (e.g., 20 years ago, virtually all "financial advisors" were mutual fund salespeople!), it's often hard to see the change on a year-by-year basis. Accordingly, to help vision the changes that are underway and where the industry is going, Veres conducts a hypothetical interview with a financial planning in 2039, about what it will be like then, as contrasted with the industry today. Some notable differences include: there's no such thing as quarterly performance statements (or the quarterly scramble to produce them), as clients can check the health of their accounts (and overall financial plans) any hour of the day or night from their mobile devices anyway; the accessibility of meetings through videos and mobile devices has eliminated the process of "regular" meetings altogether, as clients instead simply connect when they have downtime or need to talk (rather than taking a ride in a driverless car for a meeting that could have been done by video chat and a follow-up email anyway!); the business model has shifted from an AUM model based on assets to a flat annual fee for the primary financial care every client receives (and separate fees to specialist advisors that are referred in when more complex needs arise); the investment process has largely melted away, as technology lets consumers just invest directly in companies that need capital with mass crowdfunding, and those who want more diversified model portfolios simply pick them for free from the available model marketplaces; financial advisors themselves no longer market, because instead technology is available to monitor our financial situations, and all consumers work with an advisor on an ongoing basis to get help when financial speed bumps arrive (similar to how everyone has a "doctor," whom they may only actually see when the need arises); and the CFP marks have become the baseline designation for all (after the PFS merged into it), though the CFA designation remains for those few who still go much deeper on investment issues in particular.
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.
I watched the videos you linked to and would encourage the financial professionals to do less teleprompter reading and speak naturally with a few main talking points instead of reading 100% from a script. But I guess if a representative is still with a broker-dealer firm, I bet the BD wants a script to be used at all times to limit the broker-dealer firm’s liability.
Hybrid LTC policies continue to sell as stand-alone policies sag. I bought my policy 3 years ago in spite of the comment that I am missing out on the opportunity costs IF interest rates rise in the future. The nominal rate is guaranteed. Had I waited to my current age my premiums would be higher. It is true that not everyone can afford the lump sum policies but a heck of a lot of clients can do so. Dave Blanchett’s “retirement smile” is a direct consequence of LTC spending and having that tail risk covered seems like a best practice.