Executive Summary
Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with coverage of this week's Supreme Court decision in the case of Tibble v. Edison, that will likely send ripples (and possibly even shockwaves) through the world of 401(k) plans and increased scrutiny about the expenses and share classes held inside of 401(k) plans. Also in the news this week is a proposal from the SEC to 'modernize and enhance' Form ADV with new information requests that RIAs would need to complete, and an announcement that robo-advisor-for-advisors Trizic has raised $2M of venture capital as the opportunities in providing 'robo' technology for advisors continues to heat up.
From there, we have several practice management articles this week, including: a look at the emerging trend of advisors using 'co-working' spaces instead of a home or traditional office; another emerging trend of advisory firms launching their own "active" ETFs even as large mutual fund companies struggle to do so; mistakes to be avoided when 'breaking away' or changing broker-dealers; how to use the free HARO (Help A Reporter Out) service to get media exposure; the issues that arise when couples have differing levels of risk tolerance (and the importance of measuring husbands and wives separately so you know there's an issue in the first place!); and the challenge in how to effectively "fire" a client who is no longer a good fit (ideally without burning a bridge in the process!).
We wrap up with three interesting articles: the first points out that notwithstanding all the buzz about the Department of Labor's fiduciary proposals, the real regulatory issue in the coming year is the potential for "harmonization" of regulation for investment advisers and brokers that could ultimately subject RIAs to FINRA oversight; the second is a discussion of what the popular personal finance blogger Mr. Money Mustache - as someone who 'retired' in his 30s - is aiming to teach his son about money; and the last looks at the rising number of firms that are beginning to explore hourly and retainer models, and whether the future of financial planning will eventually migrate away from today's AUM fees and make them obsolete.
And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including Advicent's launch of the new Figlo financial planning software platform, the announcement that Bloomberg-terminal-competitor YCharts has raised $6M of venture capital, and the release of a new workflows solution from SEI!
Enjoy the reading!
Weekend reading for May 23rd/24th:
Supreme Court Hands Down Decision In Key 401(k) Lawsuit (Darla Mercado, Investment News) - The case of Tibble v. Edison was one of the first lawsuits to be filed for employees against an employer for failing its fiduciary duty of prudence by allowing fee-laden funds to remain in the company 401(k) (in this case, because the plan fiduciary allowed retail versions of funds to remain in its plan instead of insisting they be replaced with lower-cost institutional-class shares). At issue in particular was the question of whether an employer plan fiduciary can avoid liability under the six-year statute of limitations for breach of fiduciary duty if the "imprudent" high-cost investments were added more than six years ago (the higher-cost share classes were added in 1999 and the employees didn't sue until 2007). After winding its way through the court system for 8 years, on Monday the Supreme Court issued its unanimous ruling in favor of the plaintiffs, ruling that because the fiduciary duty is an ongoing duty to clients, the statute of limitations continues to remain open as long as the imprudent funds remain in the plan (and the six-year statute only begins once the plan's ongoing duty of monitoring ends). Given the outcomes, commentators are noting there will now be a newfound pressure on plan sponsors to scrutinize the costs and especially the share classes of investments in their 401(k) plans, and that in light of the Supreme Court's focus on the ongoing nature of the monitoring responsibilities under the fiduciary duty of prudence, plans will need to be cognizant to have an annual (or more frequent?) process to review such details in the plan. In fact, the Tibble v. Edison ruling may create so much focus and pressure on plans using the lowest cost share classes, that some are raising the question of whether the ruling could begin to squeeze out 12(b)-1 fees and revenue-sharing agreements commonly used in 401(k) plans to cover administrative expenses, which could lead to more dramatic 401(k) industry changes in the coming years if 401(k) vendors and providers must begin to charge separately (and more explicitly) for their services.
SEC Wants Form ADV Changes (Melanie Waddell, ThinkAdvisor) - On Wednesday the SEC issued a new series of proposals that would "modernize and enhance" the information gathered from Registered Investment Advisers (RIAs) on Form ADV. Potential new disclosures for advisors would include information regarding the use of leverage and derivatives in any separately-managed accounts, additional reporting for advisors with multiple branch locations, and require advisors to include the details of their social media and web presence. Some commentators have suggested that the proposed changes are nothing more than 'additional busywork' for advisors, and that the SEC should be focusing elsewhere on 'more important' issues, and that additional reporting can be especially onerous for smaller advisory firms (though there is some indication that new reporting requirements could be 'tiered' with a lighter burden on smaller advisors). Nonetheless, the proposals - which can be viewed in full on the SEC's website - will remain open for a 60-day comment period, after which the SEC will decide whether how it wants to proceed. Notably, the proposals also include (more significant) potential changes to reporting for Registered Investment Companies (RICs, i.e.., mutual funds) that would have to include new monthly and annual reporting to the SEC.
Mobile Entrepreneur Backs Digital Wealth Management Startup Trizic (Dan Butcher, Financial Planning) - Last week, the "robo-advisor-for-advisors" institutional platform Trizic announced that it had raised $2M in venture capital to fund its ongoing efforts to bring a robo-advisor platform to banks, broker-dealers, and other types of asset and wealth management firms. Trizic's new funders, which include mobile banking entrepreneur Drew Sievers, believe that wealth management will soon go more digital in a similar manner to online/mobile banking, and wants to help position the company as a go-to solution for institutions who want to offer such services on a white-label basis for clients. Trizic's main product now, "Trizic Accelerator", which like other robo-advisor-for-advisors platforms offers a combination of client-facing front end interface, and a back-end advisor console that assists with account opening, portfolio management, securities trading and rebalancing to advisor-created models, compliance reporting, and billing - though notably, Trizic works only with advisors/institutions and does not also have a 'competing' direct-to-consumer offering. Notably, though, some are still skeptical about whether advisors - and especially large institutions like banks - will really be ready to adopt such new technology, as it raises questions and challenges both around "who owns the client" and also just the difficulty of integrating new technology into firm's existing technology infrastructure. Nonetheless, Trizic notes that even since Schwab launches its "Intelligent Portfolios" solution - which effectively 'validated' the relevance of robo-advisors for large firms - their phones have been 'ringing off the hook' with interest from large players who want to get into the game.
Co-Working Grows Among Advisors (Lauren Barack, Wealth Management) - As advisory firms increasingly adopt cloud technology, it's becoming more and more feasible to be productive outside of the office, to the point that some advisors are simply forgoing a traditional office altogether, especially in the cost-sensitive start-up phase when it's more cost-effective to just get launched from a home office instead. However, for younger advisors who may have kids at home, working out of a home office isn't necessarily feasible either. As a result, a number of young advisors are looking at "co-working" spaces instead - a form of temporary or flexible office like Gather and WeWork and NextSpace, where advisors share common rooms and then have a small private office of their own (and a conference room that can be used for client meetings), but at a much lower cost than what it takes to lease a traditional office. Notably, advisors in co-working spaces also highlight the benefit of being in a diverse environment of other start-up firms - of a wide range of types - with the relationships that can be formed and the opportunities for learning, that don't exist in an 'isolated' home office environment.
Fleet-Footed RIAs Storm Into The Active ETF Market As Fund Giants Tie Pretzel Dough (Lisa Shidler, RIABiz) - While it's now "possible" to implement some forms of actively-managed ETFs, legacy mutual fund firms have generally shied away from them so far, both because they don't want to reveal and communicate what they're buying and selling in real time (given the depth of proprietary research that goes into the process, which others could then copy for 'free'), and also because at the size and scale of major mutual funds the risk of being front-run as capital is deployed is a real challenge. However, RIABiz notes that a number of independent RIAs have been launching their own (active) ETFs lately, counting on the fact that at their 'smaller' size front-running isn't a significant risk, and that ultimately there is still at least a 24-hour lag between when the ETF makes changes and when the market can see them the following day. And notably, many RIAs are implementing their active strategies using a rules-based approach that makes it more practical to manage in ETF format, and that when the ETF cost is low enough most investors will probably be more likely to just buy the ETF than try to externally replicate the strategy anyway. Of course, the caveat is that smaller RIA-based ETFs also may not be struggling with front-running simply because they don't have the brand-recognition and track-record to merit it, which also may make investors wary to adopt them in the first place. And overall, the active ETF space is still only cumulatively up to $20B of AUM, which is tiny compared to the $2.6 trillion in total ETFs. In the meantime, major mutual fund providers are still trying to obtain regulatory approval for a less transparent active-ETF format, that would limit the front-running and investment-idea-stealing concerns in the first place, although so far the SEC has been rejecting such requests (though it did approve Eaton Vance's "NextShares", a hybrid form of "exchange-traded managed fund", last fall).
Top Ten Mistakes Financial Advisors Make During Practice Transitions Away From Broker-Dealers (Scott Matasar, AdvisorHUB) - While it's definitely possible to change broker-dealers, Matasar notes that there are definitely some "right" and "wrong" ways to go about it, and that transitions can become much more complicated and problematic if not done correctly. Accordingly, Matasar highlights the top ten mistakes that he sees in his practice while consulting with advisors moving to a new broker-dealer, including: don't leave personal money at the former broker-dealer when you give notice, or the firm might freeze the personal accounts to pressure the advisor; be certain to keep quite about the change until it happens, as a broker-dealer that knows you're going to leave may preemptively terminate you and disrupt the transition; be aware of the Broker Protocol, whether your current broker/dealer is a member, and how it works; beware downloading or copying lots of client data before leaving (it can violate the broker protocol, and compliance departments do track and look for these things); even if you're certain you're leaving, beware burning bridges when you resign (as offending the firm as you leave gives them motivation to make life more difficult for you in the transition!); be certain to really look over any restrictive covenants in your advisory firm contract before leaving; don't be intimidated by cease-and-desist letters from your old firm (If you've done everything correctly, you have nothing to worry about); and recognize that it takes time to plan a transition (at least weeks if not months), so leave enough time to do the necessary planning (and to engage the necessary professionals and outside counsel) in the first place!
How To Use HARO To Earn Valuable Media Mentions And Links (Jared Carrizales, Heroic Search) - The HARO service - which is short for "Help A Reporter Out" - helps journalists and reporters find expert sources by sending out a free newsletter 3 times per day with media requests that anyone can respond to. Anyone can sign up here, and note which category of media inquiries they're interested in receiving (for advisors, it would be "Business and Finance"). Of course, the caveat of HARO is that because the media inquiries are open and free, reporters can get a high volume of responses, which means being successful in HARO pitches requires you to respond fast (ideally within the first 30-60 minutes it goes out for popular media outlets), be unique (remember you may be competing with dozens of other responses, so truly why would/should a reporter respond to you?), and be brief in making your pitch of why you should be a source (reporters don't have the time or interest to read long massive replies when they're inundated with responses!). In addition, given the potential volume of responses that reporters will get, it's generally a good idea to qualify whether the request is really worth responding to in the first place - is the media outlet really relevant, can you meet the deadline indicated in the HARO email, and do you really have the kind of unique and differentiated expertise that means the reporter would want to use you as a source - if not, you'll just end out spending (wasting) a lot of time replying to HARO requests but not getting interviews. And remember, if you are included in a story from a HARO request, you should leverage the benefit afterwards by including a link to the story on your own Press/Media page on your site. In addition, remember to send a nice follow-up to the reporter afterwards (at least if it was a good interview and someone you want to stay in touch with!) as this provides an opportunity to being building a more direct relationship with that reporter for future stories where you might be used as a source as well!
Advising Couples Who Disagree On Risk Tolerance (Paul Resnik, ThinkAdvisor) - When it comes to investing, the stereotype that women are generally less tolerant of financial risk than men actually holds up, at least in married couples; recent data from the FinaMetrica risk tolerance questionnaire (which has gathered data on over 800,000 test-takers from 23 countries around the world) reveals that in 67% of couples, the men had the higher risk tolerance (similarly true in the UK where men had higher risk tolerance 64% of the time, and in Australia it happens 65% of the time). In addition, FinaMetrica found that when there's a material difference in risk tolerance levels of the couple, 83% of the time it's the male who is the risk taker (and again similar around the world; 87% of the time in the UK, and 82% in Australia). Though notably, there do appear to be some cultural differences as well; for instance, in the UK women overall appear to be materially less risk tolerant than women in other countries. From the advisor's perspective, the first key in addressing the situation is simply to recognize the importance of separately measuring the risk tolerance of both husbands and wives, to at least be aware of whether there is a material difference in the first place. Measuring tolerance separately for the couple also provides a key starting point to have a constructive conversation with the couple about their differences, and help them arrive at a decision about how to handle the difference - whether the more conservative partner will be more aggressive, the more risk tolerance partner will acquiesce to being more conservative, or something in between. And of course, to the extent that the portfolio may be adjusted for the tolerance of one member or the other of the couple, this may also impact whether the goals of the financial plan itself need to be changed as well.
The Gentle Art of Firing Unsuitable Clients (Peter McDougall, Financial Advisor IQ) - Not every client is the right fit for every advisor, but sometimes you don't discover a mismatch until after the fact when the person is already a client... which leads to the awkward situation of figuring out how to "fire" an unsuitable client. Some advisors approach the situation with an "it's not you, it's me" approach, to help clients feel less defensive - for instance, making the point that if the advisor is really focused on passive strategies and the client wants a more active approach, the advisor can say he/she just isn't the fit right and can't solve the client's needs and is sorry for not explaining the advisor's approach more clearly from the start. In some cases, advisors will even work to find a more 'suitable' replacement advisor - one whose approach and (investment or planning) philosophy is a better match for the client. Notably, some advisors prefer a more 'documented' approach, and will deliver the message to clients in writing that the advisor/firm is not a good match, and that they will help to facilitate the transition to another advisor/provider. The general consensus across all advisors, though - be straightforward and direct when there's clearly an irreconcilable difference, and don't let the problematic relationship linger to the point that it goes even further downhill.
Forget Fiduciary: Real Battle Coming Over Harmonization (Jamie Green, ThinkAdvisor) - At the recent Envestnet Advisor Summit, MarketCounsel founder and CEO Brian Hamburger discussed the current regulatory environment, noting that while all the media headlines are focused on the Department of Labor's fiduciary proposal, the push for "harmonization" of RIA and broker-dealer regulation is getting underway. And while that might sound good - who doesn't want "harmony"!? - as it may mean some form of fiduciary standard being applied to brokers, it would also potentially mean a lot of broker regulations coming to RIAs, including reviews of advertising, books and records requirements, and FINRA-style continuing education requirements. In addition, Hamburger notes that harmonization of the rules will also give FINRA a new opportunity to try to expand its jurisdiction to cover RIAs, as in a harmonized regulatory environment it's easy for FINRA to say "if RIAs are subject to the same rules as brokers, then we [as the overseer of brokers] should be the ones to examine RIAs as well!" Accordingly, Hamburger argues against harmonization, suggesting instead a model closer to the UK, where advisors were forced to decide and declare whether they would be brokers or advisors, with different registrations and different standards of care and a clearer dividing line between the two. In the meantime, Hamburger notes that overall the SEC has been lax on its advisor enforcement for years, and that's a major reason why the DOL has proposed fiduciary rulemaking under ERISA, effectively doing an end run around the SEC. On the other hand, fiduciary supporters are also still concerned that even the DOL proposal isn't enough, and that the latest "best interest contract exemption" (or "BICE") is too big of a "loophole" in allowing advisors to give advice with conflicted compensation, and risks being undermined even further by the brokerage industry's lobbying efforts before a final rule comes forth later this year.
What I'm Teaching My Son About Money (Pete, Mr. Money Mustache) - The Mr. Money Mustache blog is known for its founder, who "retired" in his 30s and lives a simple low-expense lifestyle (about $25,000/year) funded by cash flows from assets he accumulated in his early working years (as it doesn't take a 'huge' amount of money to support a less expensive lifestyle in the first place). In this article, he talks about his own perspective on teaching his son about money, noting that the recent Ron Lieber book "The Opposite Of Spoiled" both provides thoughtful and thoroughly researched advice, and also reflects how complex our lives have become, in a world where the social pressures of conspicuous spending are taking such a toll on kids in the first place. Instead, Pete suggests that we'd all be better to get back to the financial values of "a small working-class 1980s town" when things were simpler. Accordingly, in his household discussions about money are open and not taboo, so the 9-year-old son understands how money is earned, when happens when you spend it (it's gone), and what happens if you invest instead (it works for you, a powerful lesson since Pete's son was born after they already 'retired' and has only known a life of his parents' financial independence). Pete tries to further support this understanding and learning by giving his son an allowance (structured as a 'salary' earned for every mile walked or biked as a part of family life), in addition to helping his son get odd jobs, and helping his son track all of this (as well as family gifts) on a spreadsheet that highlights income and outflows. To encourage saving and investing behavior, Pete pays his son a 10% annualized interest rate on his money held with the 'Bank of Dad', compounded monthly and also tracked on the spreadsheet, so he can see how growth compounds over time. In the meantime, Pete notes that perhaps the most powerful lessons are the ones learned by example - as his son learns a more frugal lifestyle from his parents - and that perhaps a lot of the stresses that kids struggle with about money are a result of parents who themselves are operating from a competitive and scarcity mindset around money. Ultimately, though, Pete's goals around money are similar to the ones Lieber espouses in his book as well - using money to teach good values around personal responsibility, generosity, and that money is not the end of the quest but something that facilitates the journey.
Are Asset-Based Fees Becoming Obsolete? (Dan Jamieson, Financial Advisor) - At a recent panel session at the NAPFA National conference, the question was raised by industry commentator Bob Veres of whether AUM pricing is on the way out, especially when it comes to financial planning services. More generally, panelists raised the question of whether it really makes sense to offer a high-value core competency - like financial planning - on top of an increasingly commoditized pricing model (asset management and AUM fees). Advocates for the alternative - various forms of retainer models that aren't tied directly to assets - also make the case that retainer-based pricing avoids some problematic conflicts of interest that can be challenging for AUM providers, such as the client who wants to take money out of the portfolio to invest into a business venture or to pay down a mortgage, and that more generally it's hard for both firms and clients to keep focus on the value of financial planning when their fees are attached directly to the portfolio. Notably, retainer models, as well as hourly planning, also opens up the doors to new markets that can't be served by 'traditional' AUM models, from younger professionals with a healthy income (to pay financial planning fees) but no assets to manage, or those working in jobs (particular state government) where pensions actually are still popular and there may not be much liquid net worth available to manage. For firms that use retainer pricing, most appear to lock in fees for 2-3 years at a time and then adjust them, either based on net worth level, or simply the overall 'complexity' and depth of the client situation. In the hourly model, pricing is generally tied to the experience and knowledge of the advisor, as well as the complexity of the client situation.
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! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!
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!
Thx for sharing this very informative article. I found something to read this weekend. 🙂
Michael,
I find it fascinating that one of the main thrusts against the AUM fee is that it is a conflict of interest. The example often cited is the one you used above..paying down a mortgage vs. investing. Aren’t RIA’s and those holding the CFP designation held to the fiduciary standards? Isn’t advising a client to invest rather than pay down a mortgage, if it were appropriate to pay down the mortgage a clear violation of one’s fiduciary duty? Are retainer fee based folks taking on clients and getting them on the hook for monthly fees for ongoing financial planning services that they really don’t need? How much ongoing planning does a young person need after the initial set-up or what does the retainer fee planner care about what somebody ultimately does because I get paid either way so “sure, go buy that boat.” We can play this game of “gotcha” all day long.
Why is portfolio management now deemed “commoditized” yet planning services are deemed “unique”? Isn’t it reasonable to assume that most properly trained and competent planners using the same tools should reach largely the same conclusions for a general cross-section of financial planning client needs? If there is in fact such a huge disparity amongst the competency of “professionals” than it is reasonable to assume that there is a tremendous amount of the public getting poor advice and service. We can’t all be great drivers, right? Carl Richards just wrote a very nice book that one can acquire for a 20 spot, yet many in our profession have no problem charging a retainer fee of $5000 per year and claiming nobility. Save as much as you can, take care of insurance and planning, etc. Despite our desire to impress ourselves, for 90% of clients, this is not rocket science.
The retainer fee model advocates can’t have it both ways. You can’t argue that all clients needs are different and require different levels of planning and than claim the moral high ground by charging everybody the same fee. Either somebody is getting a ton of expert services at a bargain price or somebody is over paying for services they do not receive. It is like going to a mechanic and paying $500 for an oil change and $500 for an engine job. Of course the reply will be that we have different fees for different levels of services. OK, so why are we not calling this “Tiered Retainer Fees”?
Michael, a fee is a fee is a fee. You can wrap it up in a package and call it anything you want. But the bottom line is clients receive X services and pay a Y fee. This debate is semantics and marketing manipulation. Notice that the retainer fee advocates always start out the debate with the “1% AUM fee” . Nice piece of psychological “anchoring”. We all know that the traditional 1% gravy train is over. The smart firms and advisers have been way out ahead of this for some time and have already adjusted their fees accordingly. Those who haven’t will have to or they will be the salmon swimming upstream. The “1% AUM fee” is used as the anchoring point because once the AUM fee starts to dip below and heads to the upper end of the Robo fee of .05%, the retainer fee model “don’t look so different” particularly as the portfolio size gets smaller. Small clients in the retainer fee model get absolutely obliterated. The fact that some very smart people in the industry that write about this have totally missed this simple math is staggering. The retainer fee model is simply a AUM fee in disguise with each client receiving their own personal AUM % fee.
Let’s cut the charade. The retainer fee model is a response by those firms, mostly large and inefficiently run, that realize the game is up and they aren’t going to be able to manage high net-worth clients multi-million dollar portfolios for 1% anymore. It is hand to hand combat and a marketing race to retain and attract “economies of scale” through a price war for the “big fish” and if the collateral damage is that we over charge smaller clients than hey, who is the wiser? The easy give away is that everybody is using the “it takes the same amount of work to manage $10 million than it does $1 million.” The classic price war tactic. “Everyday Low Prices.”
Heck Michael, we have firms proudly charging a fee on “new-worth” now. “Hey Mr. and Mrs. Client, you have a cabin on the lake? That is good news, we will take a fee on that.” How is this concept going unquestioned without a single bit of analysis from those writing about such things? There are very smart industry people supporting this thinking. These firms are playing a game of high and go seek with the fees.
Michael, all the folks quoted in Mr. Jamieson’s article have available ADV’s. Go bring them up and look at their fee structures and play around with them at various asset and portfolio levels and than convert them to AUM fees. You will be taken aback. The fact that nobody in the industry has done a side by side comparison is beyond me.
As far as the Generation X,Y,Z or whatever, just take your existing clients kids and help them out for free and if the kids have friends, help them out for free too.
Thanks for the voice, Michael.
BA31,
Just a quick note here – not everyone charging a retainer fee literally has one and only one retainer fee for any/every possible financial planning client and situation. As I noted in the article summary, many do tier retainer amounts based on net worth, complexity, or other factors.
The only advisors I know personally who have literally just one flat retainer fee for all clients either: a) have a fairly narrow scope of services where there really isn’t much variability in the type of services provided from one client to the next; or 2) are serving a fairly specific type of niche clientele where there isn’t a lot of variability in services from one client to the next because the people in the niche all need a similar scope of services in the first place (thus the value/purpose of the niche).
– Michael
Michael,
Thanks for the reply. Yes, I understand and I am not trying to quibble with your article summary, that was not the point of post so sorry if it came across as that. I am hoping you might see my larger point, that was my only purpose.