Weekend Reading For Financial Planners (May 27-28)

Bank Advisors Are More Diverse But Also At Risk Of Losing Their Best Advisors

(Michael Thrasher | RIA Intel)

Aspiring financial advisors have many business channels from which to choose. While some might choose to join a (relatively) smaller RIA, the majority of open positions tend to be with larger firms, such as wirehouses, insurance companies, and banks. And a recent report suggests that while the bank channel has attracted a younger, and more diverse, group of advisors compared to the industry as a whole, it faces challenges holding on to them in the long run.

According to a report from research and consulting firm Cerulli Associates, 16.9% of advisors at banks and credit unions were under 35 years old (compared to 11.6% of all advisors), and 29.5% were between the ages of 35 and 44 (compared to 23.9% for the industry as a whole). Further, 5.4% of bank advisors are Black, nearly twice as many as the broader industry. One advantage for these advisors is that their banks often provide a steady flow of referrals (in part from marketing to customers who already use their banking services) as well as a salary, reducing the importance for newer advisors of tapping their personal network to become clients. On the other hand, working as an advisor within a bank can come with disadvantages as well, particularly when it comes to a relative lack of independence compared to advisors who start their own RIA or work in a smaller, nimbler firm. Further, some bank-based advisors have lamented the state of the technology tools at their bank, which were sometimes developed many years earlier and do not necessarily integrate with other AdvisorTech tools. Together, these could make it difficult for banks to hold on to their younger advisors in the years ahead.

Ultimately, the key point is that the ability of banks to generate referrals for their advisors can be an attractive proposition to a new advisor starting out without their own book of business. At the same time, RIAs have several potential ways to compete for talent, whether it is offering a valuable new hire training program, developing career tracks, a modern, effective tech stack, and/or designing attractive compensation models and benefits programs!

Waning Confidence In Banks Creates Opportunity For Advisors To Manage Clients' Cash

(Ryan Neal | InvestmentNews)

Cash tends to exist at the forefront of individuals' day-to-day lives for many reasons: as a stable savings vehicle for near-term goals, a safety net for unforeseen emergency expenses, and, of course, to pay for daily living expenses, just to name a few. And this nearness to daily life means that cash - and how it is used - is also often at the forefront of individuals' minds. However, despite the impact that cash might have on a person's mindset, advisors have traditionally spent little time advising clients on what to do with their cash - except simply to tell them not to hold too much for risk of losing value to inflation. With recent economic changes, though, there are renewed opportunities for advisors to help clients manage their cash more effectively.

Clients might increasingly look to their advisors to help manage their cash in part due to declining consumer confidence in the banking system. For instance, a Cerulli Associates study found that just 59% of affluent investors overall indicate they are “very” or “somewhat” confident in the stability of the banking system, and more than half of those surveyed indicated their confidence had decreased in recent months in the wake of multiple bank collapses. This could provide an opportunity for advisors to add value by helping their clients ensure their bank deposits fall under FDIC limits, but also to potentially attract clients who currently bank and invest with the same company and might be increasingly reluctant to have all of their assets concentrated at a single firm.

In addition to confidence in banks, the rising interest rate environment gives advisors the opportunity to help clients earn greater returns on their cash holdings than they would at traditional banks (particularly the largest banks, which often offer the lowest interest rates). In addition to high-yield savings accounts at online banks that have been popular places to store cash for the last decade, there are also multiple options for cash management accounts developed solely for clients of financial advisors (e.g., Flourish Cash, Max, advisor.cash by StoneCastle, and R&T Deposit Solutions. With these platforms, advisors can offer a cash management service within the rest of their financial planning 'ecosystem', offering competitive yields on cash and FDIC coverage limits of up to $25 million.

While the current economic environment (and recent concerns about bank stability) provide a particular opportunity to focus on cash management, the reality is that the value of cash management can be ongoing despite the ebb and flow of economic conditions. For advisors looking to be paid directly for this value, a small, flat cash-management fee might be feasible without eating up too much of the yield on clients' cash. However, in most cases, cash management may actually be a worthwhile 'free' service – both only as a differentiator for prospects, but also as a way to renew existing client relationships and continually provide ongoing value!

When Fiduciary Duty Is At Odds With The Best Insurance For Clients

(Jeff Benjamin | InvestmentNews)

Insurance planning is an important part of the planning process for comprehensive financial planners, many of whom advertise themselves as being fee-only and are bound by a fiduciary duty to their clients. But because insurance products typically have a commission built into the price, fee-only advisors are faced with a conundrum: if they sell the product to the client themselves (and accept the associated commission) they will no longer be considered a fee-only advisor; but if they recommend the client purchase the insurance policy from another source (and pay the built-in commission), then the client will have a higher total cost of planning (both their advice fee and the separate commission). And while an advisor could just avoid making insurance recommendations in the first place, this could violate their fiduciary duty to provide their client with a comprehensive plan.

One potential solution to this problem would be to let advisory firms sell policies to clients, collect the commission, and then rebate the value of the commission to the client, so their overall cost of financial planning does not change (and they are able to purchase the insurance policy recommended by their advisor). Yet the irony is that state laws do not permit commission rebating for insurance (historically, this was because agents could unfairly offer rebates to some clients and not disclose its availability to others).

An alternative approach would be to sell the insurance policy but then offset the subsequent commission against their advisory fee. But such a structure would still not permit a CFP professional to call themselves fee-only (as while the total cost to the client is still the same, they would still have the conflict of interest to sell the insurance policy for a commission… and the potential that a big insurance sale would be more than their entire fee to offset). And more generally, advocates for the fiduciary standard have suggested that this option could muddy the roles of the financial advisor, who would serve as both a purveyor of advice and a product provider.

Another option could be to route the client to an online discount brokerage for the policy, though clients could end up with a sub-optimal policy depending on what options are available. And ultimately insurance policies purchased from online 'discount' platforms typically still include the same commission that would be paid to an agent who otherwise sold the same policy (the commission is just paid to the online platform itself).

In the end, the question of how to handle insurance policy recommendations is a long-time challenge for fee-only, fiduciary financial advisors due to the conflicts between providing comprehensive advice and having a client pay 'extra' for the commissions baked into their policy. Either way, providing clients with the full picture of their insurance recommendations, including the commissions they will pay, can at least help clients make an informed decision when it comes to buying insurance! Though arguably in the long run, the best outcome will simply be for insurance companies to develop alternative no-commission versions of their products that allow RIAs to sell a lower-cost version of the product (and then earn their advice fee on top)!

Where Did All The Organic Growth Go?

(Timothy Welsh | ThinkAdvisor)

The bull market of the 2010s was a boon to financial advisors who charge on an Assets Under Management (AUM) basis, as appreciating client portfolios meant increased firm revenues and growing firms in terms of AUM. Further, a hot Mergers and Acquisitions (M&A) market helped boost the growth of firms as well by acquiring smaller firms. But recent data show that beyond these sources of growth, organic growth for RIAs (i.e., assets from new clients or current clients bringing additional assets under the purview of their advisor) has lagged well behind.

In fact, an analysis of data from Charles Schwab by business coach Steve Sanduski found that the average RIA firm had negative revenue growth over the past 5 years when market appreciation is excluded (the analysis used a 60% stock 40% bond portfolio as a proxy for RIA asset allocations). One source of competition for client assets has been wirehouses (one of which brought in $110 billion in new assets in the first quarter of this year alone), which have advertised their financial planning capabilities in broad-based marketing campaigns. Competition has also come from retail brokers (e.g., Charles Schwab and Vanguard) and digital advice firms (e.g., Betterment) that allow clients to work with a human advisor, often at a lower cost than ‘traditional’ advisors. Further, smaller RIAs have to compete with larger RIAs that have heftier marketing budgets and a regional or national presence.

In this challenging environment, RIA owners have a variety of potential ways to create an 'organic growth engine' and boost their new client growth. Marketing tactics could include leveraging lead generation services, creating (and repackaging) content, and strengthening the firm’s referral program. Further, deciding who the firm’s target market is and then crafting messages to this group can help an advisor stand out from larger, more generalist firms. And because just generating prospects is not enough, refining the firm’s discovery meeting and follow-up processes can improve its conversion rate of prospects into clients.

Ultimately, the key point is that while smaller, independent RIAs face challenges when it comes to boosting their organic growth, they also have certain advantages on their side, from being able to drill down to more effectively serve a specific client type to being nimbler with their marketing efforts. And so, while organic growth has slowed for RIAs (and overall growth is challenged by weak market performance), creating a 'growth engine' could not only help firms get through the current difficult period, but also allow them to grow well into the future!

Examining The Organic Growth Paradox

(Philip Palaveev and Mark Schoenbeck | Financial Advisor)

When a financial advisor first starts their own firm, they are the sole person responsible for marketing and business development. But for firms that eventually add additional advisors, business development can become a 'team sport'. That said, some firm founders find that their partners and employee advisors do not share the same ability to bring in new clients (e.g., according to a small and unpublished survey conducted by the authors, founders rated themselves a 5 [out of 5] in terms of business development skill, while giving their partners who joined them later a 3.9 and employee advisors a 2.8). The question, then, for founders, is how to develop the skills of others in the firm to drive new client acquisition.

The first step is to recognize that 'business generation' is not a monolithic skill, but rather is comprised of both lead generation (i.e., finding qualified prospects) and 'closing' skills (i.e., converting the prospect into a client once contact is made). Notably, according to a 2019 study, there is no material difference in the 'closing ratios' between founders and younger advisors, suggesting that founders' business development strength is in lead generation rather than converting prospects into clients. This advantage in attracting prospects makes sense, as the founder has likely been an advisor for much longer than their employees and might be well-known in their community.

With this in mind, firm founders can consider how they can expand lead generation beyond their personal brand to their firm’s brand more broadly. This could be done by creating and publishing content (which can help employee advisors demonstrate their expertise in areas important to the firm’s target clients), building firm-level relationships with centers of influence (e.g., accounting or law firms) that can become referral sources, and making it easier for clients to refer prospects (e.g., by creating a customized landing page on the firm’s website).

Altogether, creating a 'business development culture' that leverages the talents of all members of the firm can be an important part of boosting the firm’s organic growth and reducing its reliance on the founder to generate leads. Which can not only increase firm revenue today, but help the firm thrive if it transitions to next-generation leadership in the years ahead!

Referrals Vs Word Of Mouth: What's The Difference And How To Leverage Them

(Kristen Luke | Kaleido Creative Studio)

A consumer cannot reach out to an advisor if they do not know who they are. And while there are many ways to connect with prospective clients, referrals and word-of-mouth marketing are 2 of the most popular. And although these terms are sometimes used interchangeably, in reality, they have subtly different meanings and different strategies to generate prospects using them.

Client referrals are based on a personal connection between an advisor and an existing client, and are often the result of excellent client service, relationship building, and exceeding client expectations. These personal recommendations can be strong motivators for the individual being referred to take action and reach out to the advisor. Best practices for generating client referrals include making it a priority to build strong relationships with clients, maintaining regular contact (e.g., through email messages or in-person events), and ensuring that clients receive an exceptional level of service that will make them want to recommend the advisor to others.

While client referrals are based on a personal relationship with their advisor, word-of-mouth marketing is about creating a positive reputation and buzz around an advisor and their firm, potentially reaching a wider audience than the contacts of current clients. Advisors can encourage word-of-mouth marketing by creating online content (e.g., blog posts, white papers, or social media updates) in their area of expertise as well as conducting offline activities (e.g., seminars and other speaking opportunities) that can establish the advisor as a trusted resource within their local or niche community.

Notably, client referrals and word-of-mouth marketing are not mutually exclusive, as advisors can use a combination of the methods to generate personal recommendations from clients and a broader buzz that can draw in prospects outside of current clients’ networks. And so, by demonstrating expertise and providing an exceptional level of service to current clients, advisors can boost their prospect pipeline without breaking their marketing budget!

What I've Learned From My Retirement Mastermind Group

(Fritz Gilbert | The Retirement Manifesto)

The term "study group" might conjure images of time spent in high school huddled around a desk in the library with classmates. But these groups can be very useful in the 'adult' world as well, as they present an opportunity to gather with individuals in a similar situation (whether professionally or personally) and create a “mastermind” that can generate helpful ideas better than any individual member could.

In Gilbert’s case, he started a "mastermind" group among fellow retirees in his local area. They set up ground rules (e.g., regarding confidentiality and the process for admitting new members) and organized monthly meetings, organized by a different member each month who is responsible for picking a venue, suggesting a retirement-related article to discuss, and serve as the subject for a 'deep dive' into their current situation. Several months in, Gilbert has found that his mastermind group is not only helpful in generating retirement-related ideas, but also for creating a social 'tribe' amongst its members that has led to deeper relationships among its members.

In addition to being useful for retirees, mastermind groups can be valuable for financial advisors as well. Such a group could bring together advisors at a similar point in their careers (e.g., advisors who just started their own firm) or are facing similar challenges (e.g., advisors who have reached a "capacity wall"), allowing advisors to be open with each other and to receive candid feedback and advice (and potentially providing an outlet for handling the stress that can come with being an advisor). In terms of logistics, advisor mastermind groups often create a message board or email listserv for regular communication and, like Gilbert’s group, can choose a member to lead each 'regular' meeting.

In sum, mastermind groups can help their members better generate ideas to improve their personal and/or professional lives and create personal ties that can last for years. So whether you are a new advisor looking for support from peers, a firm owner looking to take the next step in your firm’s growth, or a retired advisor considering how to make the most of retirement, joining (or starting!) a mastermind group could be a valuable step!

10 Things We Let Go Of As We Age

(Melanie Allen | Partners In Fire)

The "End Of History Illusion" is a concept describing the difficulty that many people have in predicting how much their lives are likely to change in the future. The other side of this finding, though, is that people do recognize that their lives have changed significantly during the previous decade. And for many people, what might have been important to them in the past no longer seems as vital today.

While informal, a recent thread on the "AskReddit" subreddit asked readers to identify what has become less important to them as they have gotten older. Several of the top answers were related to caring less about what other people think of them, from trying to be 'coo'' to dressing a certain way to buying the latest 'hot' item. Another top choice was not worrying as much about things out of one’s control, such as many of the latest news headlines. Other top vote-getters included not holding on to unhappy relationships as well as not over-emphasizing the importance of their careers (instead preferring to focus on work-life balance).

Ultimately, the key point is that we inevitably gain wisdom as we age, particularly about how we want to prioritize our time and attention, whether it is in pursuing our own interests (as opposed to what is expected of us) or prioritizing relationships over 'things'!

The Real Secret To Retirement Happiness

(John Manganaro | ThinkAdvisor)

An individual’s longevity is influenced by many factors, from their health habits to their inherited genetic background. Perhaps more relevant to financial advisors is research suggesting that wealth and health are correlated as well, with one study finding that Americans who had accumulated a higher net worth by midlife had significantly lower mortality risk over the subsequent years (and this effect is apparent when studying siblings and identical twins, who would have been raised similarly and share genetic traits).

And now, new research from the Stanford Center on Longevity has found that where an individual lives in retirement can affect their longevity as well. While retirees who live in upper-income areas tend to have greater longevity (as would be expected given the previous studies), the researchers found that living in certain middle- and lower-income areas provided a longevity boost compared to neighboring locales. These preferred areas, dubbed “Naturally Occurring Retirement Communities” (NORCs) by the researchers, are defined as a community or neighborhood with a growing population of older adults where the homes were not purposefully built for retirees. The key metric for these communities is that at least 40% of its households have a resident over the age of 60. NORCs can be found in both urban and rural areas and stand out for offering easy access to a broad range of health and social services to help support older residents age in their own homes. The researchers also credit the social networks that are maintained in these communities for supporting longevity as well.

In the end, while certain factors driving an individual’s longevity are out of their control, retirees might consider not only when they want to retire, but also where they might want to live when they do. Because choosing to live somewhere where they have strong social ties and support services available could not only lead to a happier retirement, but a healthier one as well!

Where Do Great Ideas Come From?

(Mario Gabriele | The Generalist)

Many companies thrive on new ideas, from a new product to consider developing to a fresh marketing strategy to implement. But it is often challenging to come up with these ideas in the first place. This problem led Gabriele to dig into academic research to find the factors that lead to the generation of the most creative ideas.

One way to encourage more idea generation is to get the incentives right. For instance, companies that incentivize experimentation over success and let their employees tinker with new ideas for longer time periods tend to generate more useful ideas than those that prioritize short-term success. In addition, while it might seem logical to look to an expert in a field to generate ideas, research has found that those with the least overlapping expertise came up with the most ingenious ideas (perhaps because they were not ‘bound’ by any previous experience in the field that prescribes how things ‘should’ be done). Further, because the best ideas often come as the result of linking together individuals with half-formed ideas, fostering a collaborative environment (and finding ways to connect creative individuals in different departments) can lead to innovation as well.

And while financial planning firms might not be inventing the next great electronic gadget, idea generation and creativity can still benefit the firm, whether in finding new ways to attract prospective clients, or in coming up with a totally new line of business. Which means that firms that foster a culture of experimentation and collaboration could be the most innovative (and perhaps most successful) well into the future!

The Effortless Way To Make Better Decisions And Be More Creative

(Jeff Haden | Inc.)

These days, it’s hard to avoid hearing about the latest 'hack' that will boost creativity and productivity. From complicated diets to intricately laid-out daily routines, there is no shortage of (possibly questionable) advice. But Haden, citing a variety of research studies, suggests that boosting one’s productivity can be as simple as getting more sleep each night.

For instance, one study found that people who are sleep deprived generate worse ideas than they would if they were well-rested; are worse at distinguishing between good and bad ideas; and get more impulsive (increasing the chances that they act on a bad idea). And in terms of overall productivity, a separate study found that people who sleep for 5 to 6 hours per night are 19% less productive than those who regularly sleep for 7 to 8 hours per night (and those who sleep for less than 5 hours were nearly 30% less productive!).

In the end, while it might be tempting to work late into the night (when you are less likely to receive emails or other interruptions), the cited research suggests that doing so could come at a cost of your overall activity. Which means that getting sufficient sleep on a nightly basis could be one of the best productivity 'hacks' of all?

How To Be More Creative

(Adam Alter | The Atlantic)

Let’s say you are given 5 minutes to come up with as many creative ideas for your business as possible (you can do this now if you’d like!). Now, suppose you were given an additional 5 minutes to come up with additional ideas; do you think you would come up with fewer or more ideas? Would they be better or worse than the first round of ideas generated? While you might assume that you would generate significantly fewer ideas in the second 5-minute period and that these ideas might not be as good (perhaps because your brain is tired from all of the ideating), researchers who have run similar studies have found that individuals significantly underestimate the potential benefits of persistence when it comes to generating new and creative ideas.

One reason for this is known as the “serial-order effect”, which suggests that each successive creative idea we have is likely to be better than the one that came before. This can occur because the first set of ideas we have tend to be either preexisting ideas or popular wisdom (which, naturally, have already been discovered). After moving through this low-hanging fruit, coming up with more ideas might be more difficult. But this is the point when pushing through can lead to real breakthroughs, as your brain innovates on the conventional wisdom and starts to piece new ideas together.

Notably, the “serial-order effect” can not only apply to a 10-minute brainstorm but also to idea generation and innovation over the course of a career. This is why some of the most effective entrepreneurs start their companies well into their 30s or 40s. For instance, one study found that an individual who founds a company at age 50 is approximately twice as likely to experience a successful exit (i.e., a sale or IPO) compared to a founder at age 30. This could be due in part to the ‘idea snowball’ growing larger in the older founder’s head over time, allowing them to build on and refine an initial idea until it is ready to launch.

Ultimately, the key point is that while a good idea can sometimes come in a flash, taking the time to brainstorm and develop ideas can lead to better outcomes. Which suggests that persistence, rather than youthful creativity (or a particularly effective shower), is one of the most important traits when it comes to generating ideas that result in successful innovations.

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We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in a future column!

In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "Wealth Management Today" blog.