Weekend Reading for Financial Planners (Nov 10-11)

FPA Overhauls Its Structure To Combat 'Dysfunction' (Greg Iacurci, Investment News) - At its Chapter Leadership Conference this past week, the Financial Planning Association unveiled its plans for a massive shift in its organizational structure as a means of combatting its ongoing decline in membership (which is now barely over 20% of CFP certificants, down from more than 50% when the FPA was formed 18 years ago). The new initiative, dubbed "OneFPA Network," aims to centralize the (sometimes duplicative) functions of chapters, from technology to accounting and finance, by literally centralizing all the chapters into a new chapter structure simply being called TNCs (short for "The New Chapters"). Accordingly, at the beginning of 2020, all of FPA's current 86 independent chapters will have their affiliation agreements dissolved, and current chapter resources (reported at the Chapter Leaders Conference at approximately $4M of reserves) will be rolled into FPA National's own $2.5M of reserves, with earmarks of dollar amounts from the newly centralized pool tied back to each chapter for its contributing share. Suggesting, as cautioned previously on this blog, that FPA National's decision to dissolve its New York chapter earlier this year amidst a local board dispute may have been less about the expediency of resolving the local board's tensions and more of a test run for (successfully) executing a centralized takeover over its chapters. Going forward, the chapters will provide budget proposals to the National organization, and its new "OneFPA Resource Coordination Committee" will review and approve chapter budgets in the future, with local TNC leaders primarily responsible for just the programming of local events utilizing their nationally-approved budgets. And the National organization itself will then be governed by a new "OneFPA Council," comprised of the leaders from each of the TNCs (and other FPA communities like NexGen), in a Senate-like structure that will guide the National Board on strategic decisions. The impetus for the change from National is that its independent chapters are "too" independent, and the variability in systems and execution from one chapter to the next has caused a lack of integration and alignment across the national organization in the aggregate... which FPA aims to fix with its centralized OneFPA Network. On the other hand, the fact that not all chapters are currently aligned to FPA National - in National's own words - raises the question of whether independent chapters will fight back and object to the changes. And the FPA itself hasn't helped its case by announcing the initiative privately at its Chapter Leadership Conference, but without making any communication of the news to the general membership for more than a week now, who instead are learning of the impending changes from media coverage and member-rumors... not aided by the fact that the FPA bizarrely chose to take their entire national website down for 2.5 days for maintenance (rather than building their changes on a test site first, and then implementing a staged deployment during off-hours to minimize downtime!?), and hosting the information on a separate "OneFPA Network" site that members haven't even been told about yet. Notably, FPA has announced a "Listening Tour" to occur from this December through next February, to make potential adjustments to the plan. On the other hand, 2020 implementation of the OneFPA Network plan has already been announced as well, which suggests that any potential room for changes to the plan may be limited, especially given that the FPA has already explicitly stated, "If a chapter decides not to integrate... they will no longer exist as an FPA-affiliated community and will not have FPA members," ultimately giving chapters no real choice but to adopt the new structure anyway. Although ultimately, the real concern is that when a large portion of the FPA membership already stated that chapters were the primary reason for joining and maintaining membership, rather than to support the National organization, that a consolidation and disbanding of chapters by the National organization risks bringing the struggles of National down to its chapters, rather than leveraging the success of its chapters up the line, and that in the end FPA's membership troubles go far beyond "just" a concern that some of its chapters are less efficient than they ideally could be.

Merrill Lynch To Focus Team Pay On More Designations And Digital & Online Areas (Bruce Kelly, Investment News) - Every fall, the major wirehouses announce the annual changes to their grid compensation payouts that will impact their advisors in the coming year, which is seen both as a way to manage the firm's overall finances (by adjusting the grid payouts up or down to maintain margins for the wirehouse itself), and a path to incentivizing the firm's major initiatives. In this context, it's notable that this year Merrill Lynch (along with Morgan Stanley) are adjusting their grids to provide better payouts for advisors who get their clients to adopt more of the firm's technology tools and achieve a lift in "digital engagement," from getting clients to accept "e-deliverable" statements, using the Bank of America or Merrill mobile apps, or at least creating an online login. In addition, the new grid structure for teams incentivizes efforts to expand client wallet share (by getting clients to use both the firm's investment advisory services, trusts, and insurance department, lending, and opening a checking account at the Bank of America parent company), and provides higher payouts to Merrill advisors who get an industry designation like CFP certification. In other words, the mega-wirehouse isn't looking at the rise of digital tools as an alternative to their human advisors, but instead is aiming to increase both digital adoption of Merrill's online tools, and the use of increasingly-well-trained Merrill advisors with CFP (or other meaningful) certification.

Advocates Hope Reform Of SEC Advertising Rule Will Ease Advisers' Use Of Social Media (Mark Schoeff, Investment News) - In its fall regulatory agenda announcement for 2019, the SEC stated that it is looking to issue a newly proposed rule that would amend its existing advertising rules for RIAs by April, in what is widely hoped will be an easement on the use of social media by RIAs. Notably, the SEC has issued guidance already that stipulates advisors can use social media, but in practice, the existing guidance treats virtually everything that occurs on social media as an advertisement, putting all social media communication and interaction under the strictest of scrutiny, and raising concerns on everything from whether a simple endorsement on LinkedIn or even a "Like" on a Facebook page could be construed as an impermissible testimonial, to communicating to clients their decision-making process about an investment (which can be construed as an inappropriately-specific recommendation without enough information about the client). Ultimately, the goal and hope is that the SEC will make a clearer and more logical delineation about what really constitutes a true "advertisement" online or via social media, versus what is simply communication to prospects or clients that shouldn't be regulated more stringently just because it happens to be online rather than a face-to-face conversation.

Your Fund Performance Is Even More About Luck Than You Thought (Mark Hulbert, Wall Street Journal) - It's generally understood that markets can be volatile in the short-term, and that it's necessary to evaluate an investment strategy (or the performance of an investment manager or financial advisor) over an extended period of time in order to really judge their efficacy. However, in a recent paper by Eugene Fama and Kenneth French in the Financial Analysts Journal, it turns out that even over 10-year periods - generally viewed as "long-term" by most advisors and clients making evaluations of investment results - stock market volatility is great enough that there's still a material risk that a superior strategy or factor will underperform. For instance, their analysis suggests that otherwise-long-term-outperforming value strategies still lag in 9% of randomly created 10-year investment horizons using historical data... implying that the underperformance of value over the past decade is still well within the range of normal statistical noise (and not necessarily a signal that value investing itself has lost its value). Similarly, given their even-higher volatility, there is a 24% that small-caps will underperform over a 10-year cycle (even when assuming their historical return premium is persisting), and a 16% chance that stocks will underperform Treasuries (even if their historical equity risk premium remains valid). On the one hand, the important implication of the research is that even 10 years is not necessarily long enough to determine if a manager (or a factor) has lost its ability to outperform. On the other hand, when the researchers also find that even over 20 years, there's an 8% chance that equities will underperform Treasuries despite the equity risk premium... the question arises as to how long any client will realistically wait to prove the point?

Morningstar Names The Best 529 College Savings Plans For 2018 (Leo Acheson & Stefan Sayre, Morningstar) - Back in 2011, Morningstar launched its Analyst Ratings, which were intended to be a qualitative forward-looking assessment of investment managers (to use in addition to or in lieu of its backward-looking-performance-based Star Ratings), and over the years the Analyst Ratings have been expanded beyond just mutual funds to now include 529 College Savings Plans as well. And in its latest evaluation of 62 different 529 plans (representing more than 95% of all 529 plan assets), Morningstar rates less than half of them (27) as achieving at least a Bronze or Silver rating, and only 4 earning the coveted Gold rating: the Utah my529 plan, Virginia529, the Illinois BrightStart plan, and Nevada's Vanguard 529 plan. Notably, all four plans are direct-sold plans to consumers that don't necessarily include any advisor compensation (which helps to bring down their fees and likely improved their ratings), although the Utah my529 plan does have a pathway to working with financial advisors. On the other hand, just being from a low-cost fund family - e.g., Vanguard - was not enough to obtain a good rating, as two plans - the Arkansas GIFT College Investing Plan and North Dakota's College SAVE, both rely heavily on Vanguard but are smaller plans with higher program fees that more than offset the Vanguard savings (such that even if savers in those states want a Vanguard plan, it may not make any sense to choose their in-state Vanguard plan!). In fact, one of the clear trends amongst Morningstar's Analyst Ratings is that the 529 plans on the rise are generally the ones that are larger or at least growing, and are using their increasing size to more aggressively negotiate down their plan fees in the first place, as at least some 529 plans have managed to reach significant economies of scale.

A Communication Guide For The Market Downturn (Stephen Wershing, Client Driven Practice) - The arrival of the next bear market is an inevitable reality, especially after nearly 10 years of a bull market cycle, but recent market volatility has brought the issue much closer to the forefront for many advisors and our clients. And as Wershing notes, the key to maintaining client confidence through a "scary" market cycle is being able to show that the advisor is on top of it, and has a plan and process for dealing with it. Which means the starting point in preparing for the next market downturn is to actually have that plan and a communication plan on how to convey it to clients in the first place. For instance, when does the advisory firm plan to communicate when the market downturn comes? Wershing suggests that it actually depends on how the firm communicates in the first place... as if the advisor already sends out regular (even quarterly) investment commentary, an extra communication in the face of market volatility will likely be taken positively as providing additional insight, while if the firm never otherwise communicates about markets then a "special" communication could actually make the situation worse by scaring clients (e.g., "If my advisor [who never communicates about markets] is moved to reassure me about this market, it must be REALLY bad!"). And bear in mind that ultimately, clients don't actually care about where the market is headed, as much as they care about what it means for them, which means it's less about just explaining the markets or encouraging clients to stay the course, and more about updating financial plans or doing whatever else is necessary to show them that they won't be "eating dog food in retirement" because of the impact the market's volatility is having on their lifestyle. And ultimately, be certain to communicate that you have some plan, process, or strategy to deal with the markets. Even if you otherwise have a passive approach, clients still want to know if there's something that would trigger you to take action, what action you would take in response to that trigger, and more generally what indicators or events you are keeping an eye on (so they can feel confident that you're on the watch).

3 Ways Indie Brokers Can Survive A Shrinking Industry (Mark Elzweig, ThinkAdvisor) - From the broader industry perspective, the wave of broker-dealer consolidation is viewed by many as a savior, allowing broker-dealers to achieve greater economies of scale that can both bring down the costs (and improve the payouts) for the brokers on those platforms, and give them the depth and bargaining power to implement superior technology. In fact, the number of IBDs has declined by 28% from just over a decade ago as waves of consolidation continue to roll across the industry. The caveat, however, is that when a broker-dealer merger or acquisition announcement comes, the brokers themselves often has a very short timeline to figure out what to do before clients start getting direct notifications of the merger (typically 30 days before the deal closes) and deciding what the odds are of potential service disruptions if long-standing home staff don't get to stick around in the merger. So what should independent brokers do? Elzweig provides 3 suggestions: 1) Understand where the broker-dealer really fits into its new parent company's picture (will the new B/D be their core business or a profitable sideshow? Is the acquirer buying for growth which means they'll make reinvestments, or for profits which means they're more likely to cut staff at the risk of impairing service)? 2) Be ready to do your due diligence, especially if you're merging in or joining another smaller independent broker-dealer, both to ensure that the combined entity can even survive, and understanding whether the smaller firm has been engaging in "risky" practices (e.g., hiring brokers with questionable regulatory records) in their stretch for growth; and 3) create a "put option" for your firm by talking periodically with other broker-dealers that are out there, even if you're not currently planning to make a change, so that you have a clear understanding of your value and the options on the table for you should the untimely news come that your broker-dealer is being acquired and you don't want to stick around to see how it turns out.

Wirehouse Vs. Indie Culture: What's Really Driving Change? (Greg Franks, Financial Planning) - Over the past decade, the wirehouse channel has continued to see attrition, while the independent broker-dealer channel has largely held its own (only recently starting to struggle a bit with competition from RIAs), raising the question of why some segments of the broker-dealer channel are doing so much better than others. Franks suggests that it ultimately boils down to differences in culture, and in particular, the problematic ways that wirehouse culture has evolved over the past 30 years that is undermining what just 15 years ago was viewed as an insurmountable lead (so much so that when they created the Broker Protocol as recently as 2004, the wirehouses thought it would only be used to trade brokers with other wirehouses!). For instance, 30 years ago, the wirehouses each had their own distinct cultures - "EF Hutton had swagger, PaineWebber was white-shoe, Merrill Lynch was Mother Merrill, and Shearson was rough and tumble" - and those cultures attracted brokers who wanted to be in that culture. Today, however, the wirehouses are largely similar in their style and culture, eliminating the emotional attachments that once existed to the organizations, and effectively making them much easier to leave in the first place. Arguably, the Wall Street culture itself, and the focus on profits and the bottom line, may have undermined the culture over the decades. But now the trend may only be further accelerating as some firms have taken a more tech-centric automation approach, which risks further undermining the relevance of their culture to their brokers. All of which Franks suggests is helping to drive the movement towards independence. Because brokers today want more flexibility to select once again the culture of the firm they're based in... or to simply start their own and set their culture themselves!

Is The Flight To Independence The Reason Wirehouses Are Leaving Protocol (Bob Veres, Financial Planning) - There have been many milestones in the financial planning profession over the past decade, from the financial crisis and its aftermath to the Department of Labor's fiduciary rule, but Veres suggests that ultimately when we look back one of the biggest turning points may end out being the sudden announcement last year that wirehouses Morgan Stanley and then UBS were leaving the Broker Protocol. The about-face is a stunning reversal from barely over a decade ago, when 3 of the leading wirehouses first formed the Broker Protocol to make it easier to recruit amongst the other wirehouses without being embroiled into costly lawsuits with one another, as contrasted with today when there are more than 1,750 firms in the Protocol, 99% of whom are looking to take business away from the wirehouses (either to a more independent broker-dealer, or to an independent RIA instead). And while there are no good public statistics on exactly how many breakaway brokers there have been, the mere fact that two major wirehouses would exit suggests that, in their own view, the Broker Protocol had become more of a liability in losing to independent channels than it was an asset in recruiting from other wirehouses... a daunting statement about the wirehouses' own views of their recruiting and retention prospects! The trend has almost certainly been hastened by the emerging of major intermediary service platforms specifically designed to help facilitate the breakaway process (or outright recruit brokers away), from Dynasty Financial and HighTower to Focus Financial and United Capital, along with the development of "breakaway" support teams at nearly all the major RIA custodians and independent broker-dealers (and the simple fact that large RIAs are now large enough to comfortably absorb $1B+ breakaway teams, which wasn't feasible a decade ago when there were virtually no RIAs larger than $1B in the first place!). In addition, the evolving technology ecosystem for independent advisors has also reached a turning point, where the breadth of technology for independents to integrate is often better than the now-legacy systems that large firms once touted as being superior in depth and capabilities. The real "surprise," though, is that increasingly, the most common reason for breakaway brokers to leave is not actually the economics of the transition at all - despite payouts that may be as much as double in the independent channels - but simply a desire to have more freedom over the advice they provide their clients, and the ability to serve their clients the way they want to serve in the first place, without any of the limitations that large firms still often impose on their ability to give advice.

The #1 Office Perk: Natural Light (Jeanne Meister, Harvard Business Review) - The media is always touting the latest fads in office design, from treadmill desks to $16,000 nap pods. But in a recent research survey, it turns out that the #1 desired office perk isn't an onsite cafeteria or a fitness center; instead, it's simply more access to natural light and views of the outdoors. In fact, 47% of employees without access to natural light from their office spaces reported feeling more tired because of it, and 43% stated that the lack of light made them feel more gloomy. And the results appear to fit into a broader trend underway towards enhancing "workplace wellbeing," which again is less about classic office "perks" and more about just having the office feel like a more positive space in which to work. Especially since one recent Cornell study found that greater natural light in office space significantly improves health and wellness, with a 51% drop in eyestrain, a 63% drop in headaches, and a 56% reduction in drowsiness. And the rise of screen time, from computers to mobile devices, may also be further feeding a growing desire for more natural light and outdoor time. But the starting point is simply to take a fresh look at the firm's workspace through the lens of employees (especially since senior executives often have offices that have more access to natural light, and may not realize how the office set-up impinges on natural light for the rest of the employees), and then consider whether it's time to restructure the physical set-up of how the office is arranged to make natural light more accessible for more members of the team!

The Office Of The Future: No Desks, No Chairs? (Aileen Kwun, Fast Company) - Last week at one of the leading European trade shows for office furniture, Swiss company Vitra, previewed a set of office seating prototypes dubbed "Soft Work” that looks more like the furniture of a chic hotel lobby than a traditional office... with the idea that the future of office space isn't about a battle between physical offices, cubicles, and open-office plans, but the elimination of the desk-and-chair set-up altogether in lieu of a more open community-style seating arrangement with... sofas. The concept isn't just about setting up traditional workspace for traditional employees, though, but also recognizing that in the coming decade, even large-firm hiring managers are projecting 38% of their employees to be remote, and overall the freelance workforce is growing 3X faster than the overall U.S. workforce (potentially projected to be the majority of all workers by 2027!?). Notably, the “office sofas of the future" are still designed with adjustable platforms for at least placing a laptop and access to a power strip (in addition to more adjustable seat-backs, armrests, etc.), rather than just being "traditional" sofas to lounge upon. Nonetheless, the point remains that as computers automate more and more repetitive tasks, leaving humans with the roles that require interaction with other humans... perhaps it's time to re-design office space of the future to better promote that interaction than just making it (too) easy for everyone to sit at their desks alone all day long?

Your Coworker With The Annoying Sit-Stand Desk May Be Onto Something (Mark Wilson, Fast Company) - After no small amount of debate in recent years about the relative benefits (or not) of standing desks, a robust new year-long study from the School of Medicine at Mount Sinai finds that access to a standing desk really does appear to improve productivity. As unlike most prior studies, which evaluated the benefits of standing desks in a lab, this latest study actually randomly assigned workers in a real office space to either a traditional sitting desk, or one that had the ability to be adjusted to a standing desk, and then followed up with them a year later. Notably, those who had the option for the standing desks didn't necessarily stand all day, but they were sitting 12% less than when they first got the desks... and a whopping 61% of them reported the desk positively improved their health outside the workplace as well (i.e., felt stronger, more limber, less pain in muscles/joints/back, more energy, etc.), even though the sitting-desk-only participants were educated on the importance of good desk posture and the benefits of taking frequent walks/breaks from their desks. And even more significant was the fact that the sit-stand participants reported greater productivity at work, suggesting that buying standing desks for employees could actually generate a positive ROI for the business itself. Notably, another recent study did suggest that standing desks might impede someone's ability to concentrate, but the results of this study suggests that most people are actually pretty good at self-regulating which tasks are better-suited to standing and which were preferable while sitting (and thus the importance of not just a standing desk, but one that can be adjusted up/down to sit or stand in particular!).

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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.