Executive Summary
Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with latest tracking report on mergers and acquisitions of advisory firms, that finds firms in the first quarter of 2019 doing deals at a near-record pace... but at a volume that is still ultimately a minuscule fraction of the total number of advisory firms in the marketplace, and with storm clouds looming that advisory firm sales could quickly grind to a halt if a bear market emerges (and firm owners may not want to sell at depressed valuations on reduced AUM revenues). Also in the news this week is the somewhat surprising revelation that the Department of Labor is working on a new fiduciary rule... but this time, one that will from-the-start be written to conform to whatever the SEC puts forth in its final Regulation Best Interest rule.
We have several other regulatory-related articles as well, including a look at how the SEC is stepping up its scrutiny on Chief Compliance Officers (and whether RIAs really have a bona fide compliance oversight program in place for their firm), the new expectations that the SEC is setting forth for advisory firms working with seniors (including establishing policies for the firm about how to handle senior clients experiencing cognitive decline), and a recent high-profile case of an RIA that was fined $150,000 by the SEC for failing to disclose over the span of a decade its revenue-sharing solicitor arrangement with Fidelity's custodial referral program.
From there, we have several articles on advisor marketing and specifically websites, from the reasons why most advisory firm websites are useless (as even when they laud the benefits of the firm, they typically do so in the exact same undifferentiated way as every other advisory firm), updates to focus on first to make an advisory firm website look more modern, common blogging mistakes of advisors who are creating fresh content for their websites but aren't necessarily distributing or leveraging it properly, and an interesting look in what Baby Boomers really search for online using Google's Search tools (and why advisors are less likely to get clients with "10 Reasons Why Fiduciaries Deliver The Best Objective Transparent Financial Advice" and more likely to find prospects with "The Best Retirement Cake Inscriptions" instead... with, of course, the advisor's contact information in the byline at the end!).
We wrap up with three interesting articles, all around the theme of how the advisory industry is forever growing and changing: the first looks at how entrepreneurs may actually be better off by launching their firms alone rather than starting with a team of 2-3 co-founders (at least, as long as they're ready and willing to hire outside help in the areas they need it when they do need help); the second explores the evolution of the famous Andreessen Horowitz venture capital firm, and how the company is restructuring itself into an RIA (rather than a traditional VC firm) to have even more flexibility to make big focused bets with their client assets; and the last is a fascinating deep-dive into the evolution of Charles Schwab, and how the company grew from a discount broker for do-it-yourselfers into a mega-firm that's increasingly focused on the full range of financial services... including a growing footprint in financial planning as well.
Enjoy the "light" reading!
A Near-Record Quarter For RIA Acquisitions (Jeff Benjamin, Investment News) - The latest tracking data from DeVoe & Company is out for the first quarter of 2019, and it was a "blockbuster" quarter of mergers and acquisitions, with a total of 31 RIA deals reported (one shy of the record). The primary drivers for so many mergers and acquisitions appears to be the pursuit of the greater economies of scale that (at least theoretically) come with greater size, along with advisory firm valuations sitting near record highs as well (especially given that most RIAs charge assets under management fees, which puts revenues at record highs as markets themselves keep striking new record highs). Notably, though, the nature of what firms are doing the acquiring, as well as the size of firms being acquired, is shifting - with a growing volume of "sub-acquisitions" (where a private equity firm effectively "acquires" an RIA by giving funds to one of the existing RIAs it owns to "sub-acquire" the smaller firm), with most sub-acquisitions occurring in the $100M to $500M AUM range. As a result, the average RIA acquired was only $610M in the first quarter of 2019, compared to an average of over $900M in 2018 and $1B+ in 2017. Overall, though, the primary buyers of RIAs continue to be other RIAs, with individual firms and consolidators of other RIAs now making up nearly 90% of all RIA buyers. At the same time, though, a separate recent advisor survey found that while the majority (59%) of RIAs expect industry M&A to increase in the coming year, optimism for rising M&A activity is actually down (from 68% last year and 70% in 2017), with 56% expressing concern about a bear market in the coming year, which may be slowing interest in mergers and acquisitions for firms that don't think they can complete the sale process before the anticipated downturn comes.
Acosta Says Labor Department Will Revive Fiduciary Rule (Mark Schoeff, Investment News) - In a hearing before the House Education and Labor Committee, Labor Secretary Acosta announced that the Department of Labor is working on a new fiduciary rule. Unlike the prior DoL rule, though, this time the Department of Labor is allowing the SEC to take the lead, which means the updated DoL rule is anticipated to conform to whatever the SEC releases as its final regulations (which are expected to come out this summer). On the one hand, the DoL's actions are significant, because it suggests that the reach of the SEC's new rule may go beyond just brokers and investment advisers (e.g., the Department of Labor could also extend the rules to insurance and annuity agents working with retirement accounts, as it did previously). On the other hand, though, the financial services product distribution industry aggressively fought (and ultimately overturned) the Department of Labor's original rule, and has been more supportive of the SEC's recent Regulation Best Interest precisely because it is not actually a full-fledged fiduciary rule. Which raises concerns that the DoL's new "fiduciary" rule may not actually be fiduciary either, but merely a "non-fiduciary Best Interest" rule akin to the SEC's original proposal (which does little to actually mitigate broker-dealer conflicts of interest). Which would be awkward, because the Department of Labor's own prior analysis of the landscape - used to justify its original fiduciary rule - suggested that a full-scale fiduciary duty was needed in the first place, presenting the risk of a court challenge to the DoL if it tries to enact a less stringent rule this year.
SEC Intensifies Scrutiny On Doubled-Up Chief Compliance Officers (Todd Cipperman, Financial Planning) - In 2017, the SEC's Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert, naming "weak compliance programs" as one of the top five most frequently identified compliance deficiencies, and resulting in a recent upsurge in enforcement actions against compliance programs and Chief Compliance Officers (CCOs). The significance of the SEC's focus on this is not merely that lax compliance oversight and procedures can lead to potential client harm, but also to note that the SEC can bring enforcement actions against such "inadequate" compliance programs even when no actual violations or client harm has occurred, because lax compliance processes and procedures itself is still a compliance risk that RIAs are expected to remedy (or preferably, not have a problem with, in the first place!). Especially since the SEC can fine not only an RIA itself, but also its CCO... which means an RIA who wears the two hats of being an advisor and the CCO has legal liability exposure if he/she fails to fully engage with the obligatory duties of a CCO. In fact, recent SEC actions have included fining one RIA for failing to conduct its required annual compliance reviews and for appointing a CCO without relevant experience, while another was punished for hiring a CCO but not providing the person enough resources to implement their compliance duties, and a third firm was fined because it had a lawyer as a CCO but the individual was also General Counsel for the firm and determined that the lawyer could not both represent the clients (as the CCO) and the firm (as its attorney). The key point, though, is simply to understand that RIAs must commit appropriate resources to compliance oversight and support - which Cipperman estimates is typically at least 7% of the firm's operating expenses (and for large SEC-regulated entities, may be as high as 20%), either by hiring an in-house compliance officer, and/or at least utilizing outsourced compliance consulting to support.
SEC Exams To Focus In On RIAs With Many Senior Clients (Tracey Longo, Financial Advisor) - In recent months, the SEC has been focusing its exams on what policies and procedures RIAs have in place for protecting senior clients and their accounts... and found that more than half either didn't have any written policies, and/or did but hadn't implemented them. These "significant weaknesses" in policies and protections for senior clients means, in turn, that the SEC intends to increase scrutiny in these areas going forward, and more generally will look to increase its examination rate with RIAs that are focused more heavily on senior clients (i.e., defined as those age 62 and over) and their assets. Key questions and concerns from the SEC include: how does the RIA address diminished capacity and changes in power of attorney and trustees amongst elderly clients? (i.e., how does the firm handle scenarios where third parties engage the RIA on behalf of an elderly client as a trustee or under a PoA); what happens when clients transition into retirement? (i.e., how is the firm overseeing the prudence of any rollover recommendations); how is the firm dealing with (potentially specialized) communication issues with senior clients?; and what happens upon the death of a client? The SEC also noted that it was finding more frequent billing issues with senior clients as well, not necessarily because firms were engaging in fraudulent fee billing to seniors, but recognizing that senior clients may be less effective at scrutinizing their invoices (which means if the firm doesn't have its own proper controls and oversight in place, mistakes are more likely to slip through). The SEC is also suggesting that firms add a request for seniors "trusted contacts," so there is a formal line of communication to a family member or other trusted person if the client begins to exhibit signs of dementia or elder (financial) abuse (extending the recent passage of the "Senior Safe Act" which gives advisors immunity from liability if they report senior impairment or financial abuse to the authorities).
Robare Group Decision Highlights Importance Of Form ADV Solicitor Disclosures [For Custodial Referrals] (Melanie Waddell, ThinkAdvisor) - In a recent Appeals Court decision, an RIA in Houston (the Robare Group) was deemed guilty of violating two antifraud provisions of the Investment Advisers Act - Section 206 regarding disclosures to clients, and Section 207 regarding disclosures to the SEC - for failing to disclose in its Form ADV its revenue-sharing agreement with Fidelity for receiving custodial referrals. Notably, an Administrative Law Judge had initially dismissed the charges against Robare, but the SEC's Commissioners themselves disagreed, reversed the prior ruling, and imposed a $150,000 penalty on the firm along with a cease-and-desist order. And now when elevated to the Appeals Court, the decision is being left to stand, even though the Appeals Court affirmed that there was no willful violation of the law, nor any demonstrated intent to defraud clients, because Robare nonetheless had "negligently" failed to provide full and fair conflicts of interest disclosure in its Form ADV, by not explaining in full detail "the Fidelity revenue sharing formula, rates, and attendant conflicts of interest" as required under the Solicitor Rule for a period of nearly 10 years (from when Robare started in the custodial referral program in 2004, until the SEC's enforcement division took action in 2014). The key point: the SEC's Solicitor Rule is very strict in what is required to be disclosed to clients, and must include significant detail about exactly what the financial arrangement is, and the conflicts of interest that it may present to prospective clients!
How To Know If Your Website Is Worthless (Sara Grillo, Advisor Perspectives) - For a growing number of advisory firms, their website is the first impression a prospective client will have of the firm (when seeking them out online, or checking up on them after being referred), and therefore is a key opportunity for the firm to distinguish and differentiate itself from the start. In practice, though, Grillo notes that most independent advisory firm websites all reiterate the same not-well-differentiated talking points, including: we're fiduciaries who put your best interests first; we're passionate about helping people; we offer the best service; our process is the most comprehensive; we founded the firm 20 years ago because we thought we could do it better; we're all CFPs (or similar advanced designation) who also altruistically engage in community service; we provide comprehensive financial planning, retirement planning, investment management, and help small business owners; and contact us for a free consultation. Notably, the point isn't that these are bad things to do and be... but simply that every other advisory firm makes the same points as well, which means the firm isn't giving the prospect any actual reason to do business with that particular firm over any other (similar-sounding) firm. So what's the alternative? Grillo suggests that instead, consider making some YouTube videos (as she notes, "it's harder to be boring on camera than writing something [boring] on a piece of paper," and if you are boring on camera, it may be a good nudge to help liven it up!), then spend some dollars on YouTube ads to see if you can get any engagement (and if people drop your video after 10 seconds, that's another hint it's time to liven it up a bit!). At worst, even if your video experiment doesn't "work," it'll at least give you some good feedback and perspective about which of your messages are or aren't working, for a relatively modest cost of a few YouTube ad dollars to get it out there!
Simple Updates To Your Website For A Modern Look (Jordan Fromholz, Advisor Perspectives) - As our internet surfing habits have changed, so too have the ways that websites were designed. For instance, in the past a homepage was all about simple blocks of text that people can read (e.g., a detailed welcome introduction/explanation of the firm), but increasingly today web surfers expect a more visual appeal with more simple white space (i.e., a succinct introduction of fewer than 250 words, and details that are easily skimmable). Similarly, in the past, an "About" page bio would read like a resume, with a list of degrees and credentials, awards and achievements, and headshots of various team members (in suits, arms crossed, on a grey background); now, the advisor's bio is more about why you do what you do than just the "what," a headshot that matches the style of your target client, and a tone that is more personal (sharing hobbies, family, and community engagements). Similarly, a blog or resources page in the past might have included links to third-party websites, aggregations of third-party articles, or generic personal finance content; today, blogs feature custom-written (or at least white-labeled) articles, or ideally the advisor's own original content to share their expertise, and additional white papers, infographics, or e-books as further resources. And rather than just having a Contact page, every page should include a phone number for the firm, an email address, and a button to schedule a call or fill out a contact form. (And it's OK to finally ditch the fax number.)
10 Blogging Mistakes Financial Advisors Make (Samantha Russell, Iris.xyz) - Many advisors struggle to find the time to create original content for the blog on their advisor firm website as a way to attract prospective clients through search engines... but as Russell notes, arguably the only thing worse than struggling to find the time to create content is actually doing so but then squandering it with common blogging mistakes in execution. Key points to consider, for those who are blogging, to ensure they get the most leverage out of the results, include: having a niche is absolutely essential, because it's actually easier to win attention and traffic on your website with hyper-targeted content to a particular audience (as mega-media companies like CNBC and Marketwatch will dominate in the generalist-content areas); all blog articles should include a Call-To-Action (or "CTA" for short) that invites people to sign up for your mailing list to receive ongoing updates (as otherwise the risk is that even if they read one good article on your advisory firm website, they may not necessarily remember weeks or months later where they read it and therefore won't come back); be certain to link out to other articles/content/resources for readers, as while it may temporarily take people away from the website, ultimately the greater depth of resources and value helps to ensure that they come back (and of course, it's an opportunity to cross-link to your other website articles, too!); remember to mix in some images as well (as articles with a mixture of text and images get more shares than those with just text alone); be certain to make the articles as easy to read as you can (especially if they are long) by breaking up long sections and paragraphs with headers and sub-headers; use an editorial calendar to organize what type of content you publish when, so it's easier to plan around (e.g., technical articles on the first Monday of the month, and shorter personal finance tips on the third Monday of the month); be certain you have someone review the articles to do basic editing (so the articles are free from typos and grammatically correct, which helps improve the firm's perceived professionalism); and don't be afraid to show your own personality as an individual, because in the end people like to connect with other people too (for instance, Russell's firm occasionally publishes "Meet The Team" posts that just provide some background information and story about the team members so the firm's clients and prospects can better connect with them!
What Baby Boomers Really Search For On Google (Sara Grillo, Advisor Perspectives) - Advisors have long been skeptical of whether their prospective clients - in particular, older Baby Boomer clients - really use the internet and Google to find financial advisors. And most have lackluster results to show for their efforts. But Grillo suggests that's not because consumers - including Baby Boomers - don't use the internet to find services and professionals. It's because advisors are focused on the wrong kinds of "keywords" and topics to attract prospective Baby Boomer clients. The key is to understand that it's true that few consumers just type "financial advisor in <cityname>" in droves to find an advisor; there are at least a few, but Google's search tools reveal that even in a mega city like New York, the search "financial advisor New York City" generates only 480 searches per month (and it would cost $9 to $20 per click to serve up ads for that search). On the other hand, searches for "40th wedding anniversary gifts" (a common question of many retired couples!) averages 4,400/month, "retirement gifts for women" averages 12,100 per month, "best places to retire" averages 18,100 searches per month, and "assisted living" averages a whopping 90,500 searches per month. In other words, rather than trying to get prospective retirees to search for you in particular, the opportunity is to create content/articles about the things they actually care about and are already searching for, and create relevant content there instead. In other words, you're less likely to get clients with "10 Reasons Why Fiduciaries Deliver The Best Objective Transparent Financial Advice" and more likely to find prospects with "The Best Retirement Cake Inscriptions" instead (and of course, include your contact information in the byline at the end!).
Entrepreneurs Are Better Off Going It Alone (Cheryl Munk, Wall Street Journal) - According to a recent working paper by business professors Jason Greenberg and Ethan Mollick, solo-founded entrepreneurial ventures have a better likelihood of surviving and succeeding than team-based entrepreneurial ventures. Specifically, the study found that over a 7-year period, solo entrepreneurs were nearly 2.6X more likely to remain in business than companies with 3-or-more founders, and solos were 54% less likely than teams to dissolve or suspend business functions... all while generated on average more revenue as well. The study specifically focused on 3,526 businesses that were crowdfunded using the Kickstarter platform, which raised a total of $151M in cash and generated a total of $358M of revenue between 2009 and 2015. Notably, though, solo-run companies tended to raise less money initially, even though they went on to generate more revenue and last longer. And in an extension of the study to the Crunchbase business database, preliminary results suggest that the solo-vs-team-founder results are still holding, with solos tending to fail less often and grow more revenue. The business professors suggest the most likely reason is that solo entrepreneurs remain the ultimate decision-makers and bring in help when needed, while team-based ventures are more likely to get stuck in contentious disputes about the vision (i.e., "the more cooks you put in the kitchen, the more likely there is to be disagreement about what ingredients you should use and so forth"). Of course, other factors are clearly relevant as well, from the size of the venture, to the industry, the experience of the founder(s), the dynamics of the founding team (if there is one), and more. Nonetheless, Dr. Greenberg is actually adjusting the approach even in his own classroom, and no longer requires students to work in groups but instead teaches them the skills they need to be successful on their own... including how to hire the right people to balance their skill set, and to hire quickly if/when/as necessary.
Andreessen Horowitz Is Blowing Up The Venture Capital Model, Again (Alex Konrad, Forbes) - Launched in 2009 in the aftermath of the financial crises, Marc Andreessen and Ben Horowitz, the Andreessen Horowitz venture fund laid the groundwork for a unique approach of finding "megalomaniacal" founders who would use technology to "put a dent in the universe" (or at least, be willing to strongly disagree with and challenge the status quo in an effort to create billion dollar companies)... and in the process, raised a war chest of billions of dollars to invest, got behind companies including Facebook and Twitter, and in the coming year will see five of its unicorn investments - Airbnb, Lyft, PagerDuty, Pinterest, and Slack - all go public. Notably, though, Andreessen Horowitz has long been known for doing things "differently" than the rest of the Venture Capital world, having founded the firm on the vision of being the VC company that as founders themselves they would have wanted to take money from in the first place. Which meant not only funding ventures, but developing an army of experts to support their fast-growing firms as well (from helping their companies find their next VP of Engineering, to assisting founders in practicing and perfecting their pitch decks before going into the next capital round). Of course, the challenge now is that as other VC firms have sought to emulate Andreessen Horowitz's approach, and its harder than ever to differentiate. Which in part is why the VC firm is actually deciding to abandon its VC roots, and instead is becoming a Registered Investment Adviser (RIA) instead, which puts them more squarely under the SEC's regulatory purview and oversight, but also will allow the company to go even deeper on riskier firms (from putting $1B into cryptocurrency or tokens, to buying unlimited shares in public companies or from other investors), effectively leveraging the full extent of an RIA's discretionary management capabilities. Which isn't necessarily a formula that the typical RIA working with individual clients will want to emulate. But does raise interesting questions about the future of "traditional" RIA regulation if RIAs also become the stomping ground for the Venture Capital firm of the future?
How Schwab Ate Wall Street (Lisa Beilfuss, Wall Street Journal) - Last year, Charles Schwab managed to pull in a whopping $624M per day in net new assets... more than its three biggest Wall Street rivals combined. The growth is a remarkable shift over the past 10 years, since current CEO Walt Bettinger took over from founder Chuck Schwab in 2008, and has increasingly pivoted the firm away from its discount-broker-for-DIY roots and into a full-scale "personal finance supermarket" of services... helping the firm to grow its stock price by 76% since the end of 2007 before the financial crisis (as compared to just 26% for the broader Dow Jones Select Investment Services Index). As a result, the industry is now responding, from Morgan Stanley start to market that it's not just for millionaires, to JPMorgan Chase giving away free trades, Goldman Sachs targeting middle-class clients with its Marcus banking platform, and Fidelity to announce more commission-free funds in its lineup within an hour of when Schwab made its first-mover announcement last February. The challenge, though, is that with nearly $3.5 trillion in assets, Schwab is using its massive economies of scale to drive prices lower and lower to keep out-competing everyone else... from launching commission-free ETFs to expanding its branch system, and most recently included the launch of its new $30/month subscription financial planning solution. Schwab is also the largest RIA custodian, which in recent years appears to have nudged Wells Fargo into launching an RIA platform, and E*Trade into buying a custodial firm to get into the business. Not to mention being the first major firm to move into the "robo-advisor" business (and again, with a "free" platform at that, using its own proprietary ETFs while charging nothing for the robo-service itself). Perhaps most significant, though, was Bettinger's efforts to bolster Schwab's banking arm, which has now grown to the point that more than half of the company's entire revenue of $10B+ in 2018 was actually from banking and not brokerage. Though at the same time, Schwab's success is drawing a rising level of criticism, from the conflicts of its cash management revenue model (and its atypically-high cash allocation in its own robo service), to whether the firm is increasingly competing with its own RIAs by moving further and further into financial planning and wealth management services. Nonetheless, thus far while the criticism of Schwab may be growing, its growth and success continue unabated, and the industry has still been more likely to copy Schwab's recent moves than out-compete them.
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.
