Weekend Reading for Financial Planners (May 27-28)

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 May 27th/28th:

Despite No More Delay, DoL Fiduciary Still Not A Done Deal Yet! (Michael Kitces, Nerd's Eye View) - The big news this week was the announcement from Labor Secretary Acosta that the Department of Labor's fiduciary rule would not be further delayed beyond its June 9th applicability date. The reason is that, notwithstanding industry opposition, under the Administrative Procedures Act there was "no principled legal basis" to change the June 9th date, as previously discussed on this blog. However, the reality is that full enforcement of the fiduciary rule is still already delayed until January 1st of 2018; on June 9th, the "only" thing that will take effect are the Impartial Conduct Standards, that those giving investment advice to retirement investors must give Best Interests advice, for Reasonable Compensation, and make no (materially) misleading statements. And the DoL even issued "Field Assistance Bulletin 2017-02" this week as well, further emphasizing that during the transition period, the DoL will be focused on "compliance assistance" and not citing violations and doling out penalties. More importantly, though, the fact that the Impartial Conduct Standards will apply on June 9th, but the core of DoL fiduciary enforcement, including the Best Interests Contract itself, are still delayed until 2018, means there is still time for the DoL to revise the rule. In fact, Secretary Acosta, in his Op-Ed in the Wall Street Journal announcing no further delay, specifically noted "as the Labor Department acts to revise the fiduciary rule, the process requires patience." In other words, while the core DoL fiduciary rule itself may now be a "done deal", the details of the rule are still not. In a supporting 15-page FAQ, the Department of Labor pointed out that it is still considering further action based on President Trump's Executive Memorandum earlier this year to revisit the impact of the rule, indicated that a new Request for Information and Public Comment periods may be coming, and even raised the possibility that the January 1st 2018 full enforcement date could itself be delayed further. Which means, simply put, that the battle over the DoL fiduciary rule is far from over, even though the June 9th date is going to hold.

How To Set Financial Planning Fees To Grow A Sustainable Advice Firm (Kristin Harad, LinkedIn) - Despite its necessity in every new client meeting, many financial advisors dread the "So how much will this cost?" question from prospects, and struggle not to give in to the pressure to discount fees if there's any pushback or resistance. Yet Harad emphasizes that setting fair and appropriate pricing is crucial, not only for the health and viability of the business itself, but because you can unwittingly create internal resentment for yourself as the advisor by undercharging the client (yet doing all the work of a "full-priced" engagement anyway). So what's the path forward? Harad suggests that the starting point is to get a clearer picture of the target clientele to whom you provide the highest value; after all, if you attract prospects who are better-suited to your practice, you're less likely to face price haggling in the first place (as they're the ones who, by definition, will be most likely to fully value you for what you offer!). Then, create standard "package deals" that specify exactly what you will do, and what you'll charge, or that outlines a concrete formula for pricing; by contrast, avoid quoting fees based on the specific "scope of work" for the client, as doing so opens you up to debating about the exact pricing and cost of that work. Similarly, consider establishing a "no-negotiation" policy that simply outlines your fees (and associated services) to the prospective client, and lets them choose; having a no-negotiation policy both affirms to your client your own confidence in your value, and eliminates anxiety-producing price haggling by simply making it not an option. And if you "have to" allow for exceptions, have a specific policy about when and how you accept Pro Bono work. The fundamental point – recognize that often, the biggest enemy to setting your pricing is your own fear of the price-haggling conversation, so the more you structure your fees and the conversation, the less likely you are to put yourself in a position when you feel pressured to discount or underprice your fees in the first place.

Is Your Pricing Primitive Or Purposeful (Stephanie Bogan, Investment News) - It's not uncommon for financial advisors to offer discounts on fees; usually, they're relatively minor, for out-of-the-ordinary prospective client situations. Except cumulatively over time, they can still add up to a substantial amount of revenue – and since you're already serving the client at that point (which means the costs are already fixed), foregone revenue from discounts usually amounts to foregone profits for the advisor themselves. Unfortunately, though, it's still incredibly hard for most advisors to actually deal with those moments when prospective clients ask for discounts. And as Bogan points out, the problem is actually physiological, as questions about our pricing are interpreted by the primitive survival portion of our brain as a threat, which kicks in with an immediate (before we even have time to think) fight-or-flight response that usually results in the advisor taking the "easy" way out and saying "Ok, I'll make an exception, just this once..." to the point that the exception-to-the-rule actually becomes the standard rule. So what's the alternative? At a minimum, be prepared with a productive response, such as saying "Our fees aren't the least or the most expensive. [But] our clients will tell you they're more than fair for the value we deliver." Or simply say "Our firm doesn't reduce fees, because we don't want to compromise the service we deliver to our clients." Ideally, the purpose of the response is to defuse the "fee discounting" situation altogether, but at a minimum it should at least give you a moment to pause, let the rational side of your brain take over (from the primitive fight-or-flight response system), and come up with a more constructive and logical resolution.

What Should You Charge Millennials (Missy Pohlig, SEI Practically Speaking) - To better understand the Millennial consumer marketplace, SEI conducted a survey of over 600 Millennial investors (aged 21-35, with at least $10,000 in investable assets). The research found several different "common" archetypes of Millennials that financial advisors might work with, from "Marg" (a Mom-Assisted Recent Grad, still very early in his/her career, and heavily reliant on family for support), to "Chip" (Career-focused, Has Income Potential, who is earning a healthy income and is upwardly mobile and starting to face life events like marriage and kids), and "Drew" (Debt-Ridden Emerging Wealth, who has advanced further in his career, but is also facing larger debts like a first mortgage). A key distinction of Marg, Chip, and Drew, is that even though they're all Millennials, they're all looking for somewhat different kids of financial advice, as they're facing different life events and (financial) challenges - for instance, Marg is likely to be focused on just establishing and following a budget and planning for short-to-intermediate-term goals, while Chip and Drew are more focused on achieving a positive and growing net worth and might at least start to care about investing and retirement planning. Yet when it comes to paying for financial advice, the study found that most Millennials are fairly consistent - they prefer pay-as-you-go- or recurring fee (e.g., monthly retainer) models, or paying based on assets under management (if they have enough to manage), though Millennials all strongly prefer a "free trial" to test out the advice relationship before engaging fully (though Pohlig notes that this "free trial" could be through blog posts, e-books, and other one-to-many free content solutions that are actually good marketing for advisors anyway). In fact, fewer than 10% of the Millennials surveyed said they'd "never" pay for professional financial advice... although notably, fewer than 10% also said they would be willing to pay for advice through product commissions, either!

Building Career Pathways To Attract Millennial Advisors (Craig Pfeiffer, Investment News) - As Millennials enter the financial services industry as new financial advisors, they come with substantially different expectations than the generations before them. In the case of most Baby Boomer and Gen X advisors, the path into the industry was a "sink or swim" world of selling what you could, eating what you "killed", and trying to generate enough in commissions or fees to survive, while learning from their mistakes as they went. By contrast, Millennials advisors today are far more interested in having a clearer and more structured pathway to progression. The starting point is that Millennials increasingly expect to "learn" financial planning the way that most professionals learn their trade: by "watching" and shadowing successful advisors, just as medical graduates shadow experienced doctors and entry-level accountants and lawyers assist senior partners before going out on their own. Yet the challenge is that not all prospective Millennial financial planners even study financial planning in schools (unlike newcomer accountants, who typically actually study accounting); FINRA's recently proposed general knowledge "Securities Industry Essentials" entry exam is meant to be one way to create initial connections with young people who might someday become financial advisors (and arguably the CFP Board's growth of financial planning in undergraduate and graduate school programs is another). However, even those who complete initial entry-way exams often still need intermediate-level professional development to truly hone their skills, before they're really ready to shoulder the responsibility of managing client relationships and providing personal financial advice. Accordingly, Pfeiffer suggests a need for more entry-level preparation, early-career experiences, and associate/resident-type programs, to support growing and investing into the industry's talent pool for the future (rather than simply viewing it as an expense).

Morgan Stanley's New Want Ad: Digital Adviser Associate (Suleman Din, Financial Planning) - Even as it dials down its efforts to recruit experienced advisors from other wirehouses, Morgan Stanley is ramping up its efforts to fill a pipeline of younger new advisors, hiring "digital adviser associates", who will work from a centralized facility to support Morgan Stanley's advisors on social media, website management, and other tasks related to client communication and engagement; those who are successful can, after two years, transition into Morgan Stanley's three-year financial advisor associate program. The hope is that a more digitally-oriented job opportunity will be appealing to Millennials in particular, while providing tech and digital marketing support for "older" advisors who may be less tech-inclined, and provide a pipeline for Morgan Stanley to grow its base of Millennial advisors in the coming years. And notably, the effort isn't unique to Morgan Stanley. BBVA Compass is also hiring "digital relationship managers" to support its recent robo-offering (via Blackrock's FutureAdvisor platform), and cyborg advice platform Personal Capital has similarly attracted about 90 advisors who work with clients remotely while getting paid a base salary plus bonuses and without responsibility to go out and meet prospects to sell. And of course, Vanguard's Personal Advisor Services has been rapidly hiring those who have or are pursuing CFP certification (now over 500 advisors!) to work with clients remotely through its offices in Malvern Pennsylvania, Charlotte North Carolina, and Scottsdale Arizona. The key point: learning to do financial planning from a centralized location in a remote/digital setting appears to be rapidly becoming the new entry-level career path for financial advisors.

What To Look For When Hiring Young Planners (Caleb Brown, Investment Advisor) - While it's increasingly common to "vet" prospective hires using various types of personality profiling tests, supplemented by conversations about philosophy, expectations, and compensation, Brown suggests that one of the best leading indicators of success for a potential hire is the amount of demonstrated effort they've put into becoming a financial planner. In fact, as a firm that reviews thousands of resumes in hiring associate financial planners for advisory firms, Brown notes that often the efforts that candidates put into the job search process itself have proven to be an excellent indicator of future success. For instance, one candidate submitted responses to Brown's "mock financial plan exercise" (to test candidate knowledge and skills) at 3AM, despite having upcoming final exams... simply because she stated she was so interested in the opportunities that she didn't want to delay the process (and providing a glimpse of the kind of self-motivation she was ready to bring to the job itself). Another candidate not only completed the firm's sample financial plan exercise (using provided financial planning software), but then did it again in a second/separate software suite, and provided an analysis of the variances of the outputs from the two programs! And another candidate completed what is usually New Planner Recruiting's 14-day screening/vetting process in just two days, because she indicated that she wanted to get a head-start on the other candidates (which she certainly did, by showing her strong self-motivation in the process). Unfortunately, Brown notes that these kinds of above-and-beyond efforts in the job search process are very much the exception to the rule, and not typical, especially since today's young talent shortage means many prospective job candidates will get hired even without going the extra mile. Nonetheless, those who aren't willing to put in the extra effort in the job search often turn out to be problematic employees who don't put in the extra effort when needed on the job, either... while Brown notes that when the occasional candidate does come along who is highly self-motivated towards success, it's a key factor worth recognizing.

How To Develop More Confidence As A Planner (Dave Grant, Financial Planning) - As a financial advisor, the reality is that it takes a lot of self-confidence to be successful, as new advisors will struggle to get new clients if they can't confidently convey their value proposition, and even experienced advisors may struggle with moments of self-doubt when challenges sometimes arise. In fact, Grant notes that it took him many years to build up the confidence, and feel secure enough in his philosophies, pricing structure, and abilities, to remain unfazed when a prospect says "No". Yet ironically, with a confident mindset and willingness to say "No", Grant points out that his client numbers and professional referral relationships have actually grown and improved. In surveying financial advisors about confidence challenges, Grant found that for many, confidence starts at home – literally, as a supportive family who agrees with your career choice makes it much easier to show up for work every day (and deal with whatever challenges arise), especially if you're going to launch your own advisory firm (given that it may take years before the venture pays off financially for the family). For others, confidence comes from education and experience, as even book knowledge can help give us confidence in our ability to give accurate advice, and experience makes us more comfortable to deliver it and know we're having a positive impact. Though in some cases, advisors may suffer from the "Imposter Syndrome" – an uncertain feeling that they may not have the skills and capabilities to deliver value, even if they clearly actually do, and it can take a long time before the fear of being outed as a fraud (even if you're really not) subsides. Other tips that Grant offers to improve your confidence: surround yourself with like-minded peers (e.g., groups like FPA NexGen, NAPFA Genesis, or a study/mastermind group you create for yourself); try to recognize the sheer abundance of the world, rather than acting from a scarcity mindset; and recognize that by helping those you can help best (rather than trying to serve everyone), the success it brings will help reinforce your confidence in your own value proposition to clients.

The Face In The Mirror; Admitting And Overcoming Advisor Fears (Angie Herbers, Investment Advisor) - Yogi Berra once famously said "90% of baseball is mental, and the other half is physical", and Herbers suggests that a similar phenomenon applies in running an advisory firm, where 90% of business success is mental (and the other half is execution). In fact, Herbers suggests that ultimately, the real determinant of success in most advisory firms is not the vision of the advisor to create a successful business, but how he/she handles their fears and the inevitable failures that arise. Common fears that end up holding most advisors back include: Fear of admitting mistakes (we all know that nobody's perfect, yet most of us feel as though we have to act like we are, even though an unwillingness to recognize our mistakes often prevents us from addressing them, solving them, and moving past them); Fear of asking for help (you don't have to be superman/superwoman and have the answer and solution for everything, and it's crucial to recognize that getting outside help isn't a sign of weakness, but maturity to recognize you're building a business that's bigger than your own abilities, not to mention helping to set a culture where all employees ask for help when they need it, for the betterment of the firm); Fear of looking bad (as if you try too hard to never "look bad" or be caught in a mistake, you'll inevitably end out pretending to have knowledge or skills you don't, which may eventually result in losing the respect of your employees anyway); Fear of things we don't know (as while you don't need to know everything, it's important to get at least some familiarity with all the key areas of the business, or you risk not being a part of key decisions that can have major long-term ramifications on the business); and Fear of admitting what you want (as saying and acknowledging what we want risks the disappointment that we won't get it, yet not admitting what we want means we may not be able to gain the focus necessary to really achieve it).

How The Wealthy Talk To Their Children About Money (Paul Sullivan, New York Times) - In a recent survey, two-thirds of ultra-wealthy families with more than $20M of net worth were "apprehensive" about sharing details with their children of what they stood to inherit, and only 10% of them had given complete information about their inheritance to their heirs... mostly out of a fear of dampening their work ethic, but also a concern that their heirs simply wouldn't be able to grasp the implications of what was coming to them. Of course, in today's modern information age, children are likely more cognizant of family wealth than in the past, as it's not hard to go online and look up the value of the family home, the cost of vacation destinations, or sometimes even a parent's income or the value of a business in certain public transactions or databases. Still, it's one thing for children to have some sense there's a "lot" of money, and another to communicate to them exactly how much there is that they're someday going to inherit. Yet in the absence of a parental conversation, often inheritors don't find out until after parents are gone, and it's disclosed to them by a trustee or estate attorney. Which can create awkward mismatches, when a young adult is earning tens of thousands of dollars in a job, and suddenly inherits millions or tens of millions in assets. As a result, advisors generally recommend that having some conversation is still better than none, though it often starts with basic awareness of money as children, and doesn't morph into a deeper discussion of the implications of the family money, and the responsibilities it brings, until they are at least young adults. For families that have wealthy likely to last for generations, this often expands into an entire family governance structure that helps to formalize the way money is disbursed, and the "rules of money" within the family.

Bunker Time For The Rich (Thomas Kostigen, Private Wealth) - For most, the idea of emergency preparedness and having an underground bunker dissipated with the end of the Cold War era, but the topic is increasingly back in vogue amongst the ultra-wealthy. From underground bunkers (replete with flat-screen TVs and billiard tables), to bulletproof SUVs that can smash through walls, and safe rooms with satellite communication equipment, in the past 5 years a desire for these types of high-end emergency response and security solutions are on the rise, whether the fear is a natural hazard, a terrorist incident, cyber warfare, or simply defending against a personal attack. The fears are further stoked by the amount of information available on the internet, which for ultra-HNW clients, increases their potential risk and exposure to hostage and ransom scenarios. Providers stepping into the void include Global Guardian and Black Umbrella, which offer support for everything from crafting emergency/safety plans for high-net-worth individuals, to offering emergency evacuation and real-time security response teams. WorldClinic provides a similar solution specifically for virtual medical support. For those who don't quite have the financial wherewithal to build their own solutions, there are also offerings like Vivos Underground or Survival Condo, which provides massive underground shelters that people can buy access to. For most, spending any dollar amount – much less substantial dollar amounts for custom emergency preparedness services and solutions – may seem extreme; but for many of the ultra-HNW, the idea of such "extreme" emergency preparedness is simply another form of insurance, a way of dealing with a low-probability (but potentially high-impact) contingency that hopefully will still never actually manifest.

How To Get The Wealthy To Donate (Ashley Whillans & Elizabeth Dunn & Eugene Caruso, New York Times) - A slew of recent studies have found that the wealthier people are, the smaller the percentage of their income they typically donate, and the effect is so strong it's even found amongst their children (from wealthy college students, to wealthy preschoolers). One common explanation: "because money allows people to achieve their own goals without depending on others, it cultivates a mindset of self-sufficiency that is at odds with a charitable outlook", and in fact, researchers have shown that wealthier parents tend to teach their children to stand out as individuals and pursue their own goals, while less affluent parents tend to teach their kids to prioritize the needs of the group (with direct implications on their likely future interest in charitable giving). In an attempt to change this mindset, the authors tested (and recently published in the Journal of Experimental Social Psychology) ways to encourage charitable giving using different messaging – for instance, emphasizing individual achievement ("You = Life-Saver") over common-goals giving ("Let's Save A Life Together"), or encouraging people to "come forward and take individual action" instead of to "support a common goal". And the results found that focusing on the individuality-oriented messages really did encourage more of a personal giving mindset amongst the affluent. Notably, the researchers also tried experiments to sway wealthy people's minds about the importance of communal values, and found that this was far more challenging, as they 'inevitably' continued to emphasize their own hard work and talent. Nonetheless, the point remains that charitable giving efforts for the communal good really can be improved by appealing to the individuality of wealthy individuals.

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.