Weekend Reading for Financial Planners (Oct 22-23)

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 October 22nd/23rd:

Vanguard Sways Financial Advisers To Bring $1 Trillion On Board (Charles Stein, Bloomberg) – This week, Vanguard announced that of the $225B of new flows it has brought in this year, more than 50% of it is coming from brokers and independent advisors, which is more than the amount coming from retirement plans or even individual retail investors. In fact, overall Vanguard notes that the advisor channel now accounts for about 1/3^rd – or $1.3 trillion – of its assets, which is as big as its entire individual investor business! In other words, after building its foundation as a direct-to-consumer solution for individual investors, adoption of Vanguard in the financial advisor channel is growing so quickly that advisors are about to pass direct investors as the largest user of Vanguard funds! And the shift doesn’t appear to just be a temporary cyclical phenomenon; in fact, the looming DoL fiduciary rule, and the push for advisors to shift away from commission-based funds to (often low cost) advisory account solutions could actually accelerate the trend. In turn, the growth of Vanguard – which allows the company to scale its investment solutions, and lower its expense ratios – is rippling across the entire industry, and putting pressure on the profits of every major competitor, which has to cut prices to keep up or risk being left behind altogether (as the DoL fiduciary rule will go even further to push advisors to Vanguard index funds if competitors don’t at least match Vanguard’s pricing). For instance, even though Blackrock’s assets surged 14% in the past year, its revenue fell by 3%, driven in part by these competitive pressures. And there’s still believed to be ample room for Vanguard to grow further; Aite estimates that advisors control an estimated $19 trillion in client assets, which means Vanguard’s $1.3 trillion with advisors is still barely a 6% market share. Though at the same time, Vanguard isn’t only capitalizing on advisor adoption; its own Vanguard Personal Advisor Solutions is growing rapidly as well, now up to $45.8B as of September 30^th, which Vanguard still insists isn’t a threat to independent advisors.

Revealed: Fidelity’s Digital Strategy And Robo Adviser (Andrew Welsch, Financial Planning) – This week, at its Inside Track event, Fidelity revealed its technology and digital roadmap for the coming year(s), including how it will leverage last year’s eMoney Advisor purchase. First and foremost, Fidelity announced that it will be providing its own robo-advisor-for-advisors offering, called Fidelity Automated Managed Platform (AMP) in the first quarter of 2017, which will use an online questionnaire to match clients to one of 14 portfolios. Notably, once clients connect into the Fidelity AMP platform, they will also gain access to eMoney advisor, and the opportunity to aggregate in their outside accounts for reporting purposes… and in the process, reveal to their advisors the potential to do additional business together (including by using eMoney’s analytics to spot opportunities across their entire client base). In addition to the eMoney integration, the new AMP platform will be fully integrated into Fidelity’s coming new advisor workstation, called Wealthscape, which will include its own portfolio performance reporting tool (ostensibly a competitor to alternatives like Orion, Black Diamond, etc.). For a further in-depth preview of the Fidelity AMP solution, check out Joel Bruckenstein’s write-up on T3 Tech Hub.

Keep Plugging In [To Broker-Dealer Tech] (Joel Bruckenstein, Financial Advisor) – As the pace of advisor technology innovation accelerates, major broker-dealers are trying to respond and adapt. For instance, Commonwealth Financial Network, which already has a strong reputation for its technology platform, has been building a new proposal generation system (deeply integrated to the rest of its platform), making enhancements to its client portal (including a new mobile interface), and is rolling out new trigger-based workflow capabilities in its proprietary CRM system. Commonwealth is also upgrading its data centers, is developing a new benchmarking project that will help advisors internally compare themselves and their recommendations to other advisors, and in 2017 is launching a new digital on-boarding process for clients (with a single master service agreement to simplify data collection) and a new compliance analytics engine. Raymond James has been working on several new initiatives as well, including the recent rollout of a native iOS mobile app for advisors that replicates its desktop tools, a new CashEdge integration to aggregate clients’ held-away assets into both financial planning and investment performance reporting software, and a new client vault to facilitate client communication (as an alternative to “just” sending secure e-mails). Notably, Raymond James is also building out its own proprietary CRM system (as Commonwealth has already done), and is also building a new digital client on-boarding system with a single master agreement. At LPL, their new “next generation” advisor workstation ClientWorks is now available to more than 11,000 advisors, with the last major functionality (primarily around trading) rolling out soon, along with integrations to major CRMs like Salesforce and Redtail. As with the others, LPL is working on a new digital account opening process as well (and has already rolled out its “robo” solution Guided Wealth Portfolios, powered by FutureAdvisor), along with a practice management dashboard to support advisor business analytics, and a new alternative investments platform. Last but not least is Lincoln Financial, which has built its new Advice Next Gateway (its advisor portal/workstation), which deeply integrates to outside tools (including CRM providers Redtail, Ebix, and Skience/Salesforce). Notably, Lincoln’s strategy overall is not to build all of its technology internally, but to use its size and scale to leverage bargaining power with outside providers, from the aforementioned CRM providers, to Envestnet, and more (although it does use a proprietary financial planning tool, in addition to supporting eMoney).

3 Ways Vestorly Delivers Next Generation Client Engagement (Craig Iskowitz, Wealth Management Today) – In the past, most advisors engaged in drip marketing by sending clients quarterly newsletters, which was often a labor-intensive process of writing or creating content, laying it out into a newsletter, and physically mailing it to people… only to wonder what kinds of results it was really producing. In the digital world, it’s become easier to engage in drip marketing using a blog and email newsletters, but it still doesn’t resolve the challenge of finding good content to share in the first place (and measuring results). In recent years, though, a few start-ups have tried to solve this problem, specifically for financial advisors, and Iskowitz highlights one recent solution, called Vestorly. The software aims to fulfill five core functions: 1) make it easy to aggregate content together; 2) make it easy to curate (select high quality) content; 3) match appropriate content to each prospect or client; 4) deliver the content (electronically); and 5) track client engagement. Advisors can upload their contacts from their CRM into Vestorly, and then sends a first e-newsletter out to prospects (white-labeled to the advisor’s branding) with 6 articles. Any clients or prospects who click on the articles are tracked by Vestorly, which will subsequently send newsletters that highlight more of the type of content that the reader was clicking on. In addition, if a client or prospect forwards the content to a friend or colleague, that person is then invited to sign up as well – which means the person actually turns themselves into a potential lead for the advisor, who will receive the drip marketing going forward. Ultimately, the goal is that prospects (and clients who forward the newsletters on to new potential prospects) can build their relationship with the advisor over time, in a fully automated manner as Vestorly continuously refines the content being sent (until the person decides to contact the advisor for further assistance on an actual financial planning need).

The Journey From Financial Advisers To Tech Entrepreneurs (Liz Skinner, Investment News) – While most of the financial services ecosystem is built on technology, surprisingly little tech tools are ever built directly for financial advisors, who are often viewed as “too small” of a market to attract big startup investors. As a result, a surprising number of the industry’s leading technology solutions were actually built by financial advisors, for financial advisors, including Junxure CRM, Orion Advisor Services, Total Rebalance Expert, inStream financial planning software, Riskalyze, Asset-Map, Oranj, and more. The common theme amongst the founders of all those solutions was that they saw a need in their own firms, built a solution for themselves (typically self-funded), and then decided to turn around and sell it to other advisors. For those advisors who are thinking of making their own tech company spin-off, though, most of these tech entrepreneurs actually caution against the path, pointing out the substantial stress – both financial and family – of trying to run two companies at once, and the risk that it will distract from the growth and leadership of the core advisory business. In fact, most advisors who launch tech solutions eventually sell either the advisory firm or the tech firm to re-focus on the other. Still, the ability to run businesses in parallel for a period of time has been remarkably popular, especially amongst advisors who are skilled at hiring a (tech-focused) team around them to support the business. Though while many were bootstrapped originally, with the amount of capital finally flowing into advisor FinTech today, there are more opportunities than ever to get external funding to get a new venture off the ground.

How The Best Firms Outperform (Bob Clark, Investment Advisor) – With investment markets largely flat in 2015, the typical advisor firm saw a big slowdown in growth, absent the market return tailwinds that flowed in 2013 and 2014, and rising overhead costs further squeezed the typical advisor’s profits. However, Clark notes that the lack of market growth also provided a clearer opportunity to understand what the best firms are actually doing to outperform on growth outside of the portfolio itself. Accordingly, in the latest FA Insight benchmarking study, researchers focused in on the characteristics of the “Standout” firms, that were in the top 25% of revenue growth and owner income per revenue dollar, and tried to identify how those firms were different than the rest. The key distinguishing points included that Standout firms focus on: 1) ‘sustainable’ growth (which is growth at a rate that is positive, but not so much that staff were overworked, technology was outgrown, or overhead had to drastically increase); 2) truly differentiating on client service and the ”client experience”; 3) operational efficiency (allowing the firms to be more profitable by flat out spending a lower percentage of revenue on overhead to manage the business); 4) a quality strategic plan (ideally one that directly maps to the individual performance objectives of staff members); 5) a more clearly defined target market (that ideally is more specific than “just” minimum assets, and instead have clearer demographic or other niche criteria); and 6) marketing through centers of influence or external professionals (working proactively to cultivate those referral relationships, rather than just relying passively on client referrals).

The High Cost Of Not Engaging Employees (Mark Tibergien, Investment Advisor) – The supply and demand dynamics for talented job candidates in financial services have shifted the balance of power. In the past, many advisory firms could get away with poor management skills, because employees may have just been grateful to have a job. However, with a younger generation that is more flexible about job mobility, and an overall shortage of young talent, in today’s environment managing a team poorly really will lead to rapid turnover. Which can be extremely costly – when considering everything from higher salaries to attract new people, diminished productivity, and the learning curve for new staff, losing an employee can cost the business between 150% to 250% of base compensation to replace them. So how do you minimize this risk? The starting point is to recognize the importance of regular performance evaluations; it’s a crucial feedback mechanism, both to correct problematic employee behavior, but also to spot unhappy employees before they actually leave. Employee reviews are also an opportunity to confront tension between employees and firm owners or leaders directly; because the reality is that harboring grudges and resentment only builds to a breaking point later, anyway. Perhaps the biggest key, though, is simply to recognize that in a “people” business like financial planning, employees should be viewed as assets into which the firm makes investments for a positive return… not just a “cost” to be managed.

5 Key Questions To Ask Before Breaking Away To An RIA (Mark Elzweig, On Wall Street) – While there has been a slow and steady trend of advisors at broker-dealers breaking away to start their own independent RIAs, Elzweig notes that the path to becoming an RIA doesn’t necessarily make sense for everyone. Elzweig suggests 5 core questions to consider in deciding whether the transition makes sense: 1) Do you have an entrepreneurial skillset? (as if you’re “just” a pure investment person, or a big-picture rainmaker, you may find it easier to be successful staying at the broker-dealer without all the ups and downs and stresses of running your own standalone business); 2) Do you have a clear vision for the new firm? (and does that vision actually involve a structure or services that you can’t already do while working at a broker-dealer?); 3) What structure makes sense, solo practice or advisory team? (You can build towards either, but know whether you prefer to be solo or working with a team, as that can directly impact whether or how quickly you take on a partner or join forces with an existing RIA); 4) Which custodian(s) are right for me? (As different custodians have different styles, such as Pershing Advisor Solutions focused on rapid-growth advisors, TD Ameritrade providing a more open architecture platform, and Schwab and Fidelity offering more all-in-one tools [albeit with less flexibility]); and 5) Are you prepared to choose the right technology? (The good news is that you’re not tied to legacy broker-dealer technology, but as an independent RIA, the decision is entirely on your shoulders, and it’s an increasingly crucial one!)

The Trade-Offs, Soul-Searching, And Stress Of A Succession Transition (Glenn Kautt, Financial Planning) – The conventional view of succession planning is that it’s an opportunity for a founder to finally get their “pay day” and exit the business, transitioning to the next generation of ownership that will steer the business forward from there. However, in practice, it can be incredibly challenging and stress for a founder to actually sell and exit the business, whether to an internal successor or external third-party buyer. Kautt interviews the founder of a $200M AUM firm, who went through this process, starting with an internal successor to whom the business was offered but he said “no”, forcing the advisor to look externally instead. But finding a ‘good’ buyer can still be a challenge; even $1B+ advisory firms don’t always have a full executive management team capable of effectively taking over and managing the business. In this case, the founder wanted to sell to get out of management obligations, but not to fully exit the business, which meant finding a buyer that would still let him stick around… and then adjusting himself financially to the shift of taking home less in cash distributions in the future, but being part of a larger and more stable enterprise. However, sometimes the transitions are still challenging; for instance, the seller found he had to forgo an entire round of billing, as he typically billed in arrears, while the new firm billed in advance, and he was afraid that clients getting “double-billed” in the transition would cause retention rates to stumble. The bottom line, though, is simply to recognize that if you’re going to sell or merge – especially if you still plan to stick around as the advisor – it’s crucial to find an acquirer that really has the size and capabilities to actually take off your plate the responsibilities you no longer want to carry, so you can actually continue to do the work you want to do in the business.

Humans Won’t Ever Live Far Beyond 115 Years (Ed Yong, The Atlantic) – It’s been increasingly popular in recent years to say that amongst today’s children may be the first human who will live to age 150 or beyond. After all, our average life expectancy has been rising steadily for a century. However, there’s an important difference between our life expectancy – how long people live on average – and maximum life span, or how old the oldest people ever get. And when it comes to maximum life span, the trend has already flattened; an in-depth study of our survival rates over the past 100 years found that the oldest humans barely reached age 100 in the 1800s, and started getting to 110 in the 1990s, but since the mid 1990s no one is getting beyond age 115 (with the sole exception of Jeanne Louise Calment of France, who reached age 122 and died in 1997, and continues to hold the record for the oldest human on record). In other words, while advances in everything from sanitation to antibiotics to vaccines are doing a better job of helping us to live into our 90s, 100s, or even up to age 115 – which are all improvements in life expectancy – our maximum age hasn’t budged in decades now. The fundamental cause appears to be hardwired into biology – while medical advances are stopping most of the external causes of death, as we age we still accumulate damage to our underlying DNA and molecules, and eventually our organs just fail (in fact, most supercentenarians don’t actually die of major diseases, but of natural causes simply due to old age). Which means that even as we continue to improve medicine from here, it may be wiser to simply assume that we’re increasingly likely to live healthy lives up to the age 115 maximum life span, but not that we’ll ever actually live beyond it.

America’s Dazzling Tech Boom Has A Downside: Not Enough Jobs (Jon Hilsenrath & Bob Davis, Wall Street Journal) – The massive tech boom of the past 20 years has created some of the largest companies in the world, yet it’s striking that as large as companies like Alphabet and Facebook are, last year they finished with a total of barely 75,000 employees, or 1/3^rd fewer than Microsoft (despite a combined market cap at twice Microsoft’s size). Some recent tech acquisitions were even more extreme; Instagram had just 13 employees when Facebook acquired it for $1B in 2012, and WhatsApp had only 55 employees when it was acquired for $19B in 2014. And of course, hiring is not only down in the newest mega tech companies; the growth of technology in a number of sectors is automating and eliminating a wide range of low- and middle-income “routine” jobs as well. The end result is that while technology is delivering amazing advances in efficiency itself, it doesn’t appear to be creating the jobs that were expected when the tech sector was booming in the late 1990s. In part, this is driven by the outsourcing that tech companies themselves did to shift their supply networks to Asia’s cheap labor, which has cut total employment at computer, electronic, and semiconductor firms by nearly 50% in 15 years. And notably, the global competition trend has even slowed the pace of technology startups themselves, which are down almost 30% since 2001. Ultimately, this doesn’t mean that the technology itself is bad, but it raises challenging questions about the impact that globalization has had on the tech sector, and why the growth of the tech sector itself (by market cap) isn’t resulting in job growth along with it.

The Myth Of Financial Goals Needs To Die (Ronald Sier, See Beyond Numbers) – For most financial planners, the core focus is on helping clients to achieve their financial goals; as Stephen Covey famously said in his “7 Habits of Highly Effective People”, you must “begin with the end in mind”. The caveat, however, is that this only works if people know what they actually want in the first place… and Sier points out that in practice, many clients have no idea what they really want out of life or work (and therefore don’t know what they want with their finances). After all, when was the last time you asked a new client “what are your financial goals” and got a clearly articulated answer? And of course, if people can’t even state their financial goals, it’s going to be impossible to craft a financial plan that helps to achieve them! Notably, this doesn’t mean that goals are useless or irrelevant; Sier acknowledges that goals still help to focus our journey, give it direction, and motivate people to action. Yet this suggests our purpose as financial planners is not to craft a plan to help people reach the financial goals they want, but instead to help them figure out what’s possible and what financial goals they need to help them enjoy the journey (so they can feel good about their success). So how do you help people figure out what their goals might be? Sier suggests a series of 5 questions to help clients uncover this for themselves: 1) What’s important about your assets to you, besides return, risk, and costs?; 2) How do you want to be remembered?; 3) For what in life do you feel most grateful?; 4) Why do you want to do that?; and 5) Is there something else you’d like to accomplish?

I hope you enjoy the reading! Please let me know what you think in the comments below, and if there are any articles you think I missed that 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. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read "FPPad Bits And Bytes" on his blog!