Weekend Reading for Financial Planners (Oct 31 – Nov 1)

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 31st/November 1st:

Congress Is Killing The File-And-Suspend And Restricted Application Social Security Strategies (Michael Kitces, Nerd's Eye View) - As a part of this week's Congressional budget negotiations, a "surprise" crackdown has made its way into the final Bipartisan Budget Act of 2015: changes to the Social Security Act that will effectively end the popular Social Security claiming strategies of File-and-Suspend and Restricted Application. Specifically, Section 831 of the new legislation would prevent a spouse from claiming a spousal benefit and then switching later to his/her own individual benefit, by requiring instead that any application for benefits is always a deemed application for all benefits. However, anyone who is already at least age 62 by the end of the year - i.e., born in 1953 or earlier - will be grandfathered, and still permitted to use Restricted Application strategies in the future. In addition, the new rules also limit the File-and-Suspend strategy, by stipulating that when an individual suspends his/her own benefits, it also suspends anyone else's benefits based on that earnings record, which would prevent the payment of any associated spousal or dependent child benefits. And with the File-and-Suspend crackdown, the effective date will be sooner - once we are 6 months past the enactment date of the legislation (likely sometime next week), any voluntary suspension of benefits will be subject to the new less favorable rules. Of course, this doesn't eliminate the need for a couple to plan and coordinate for Social Security benefits altogether (especially since it still rarely pays for both spouses to delay)... but it does significantly limit the available tools in the strategy toolbox going forward.

Tech-Savvy Advisors Tend To Be Bigger (Ryan Neal, Wealth Management) - The latest Fidelity Advisor Insights Study is out, and it reveals a growing divide between tech-savvy advisors and those who are lagging in their technology adoption. Advisors who are heavy technology adopters, which Fidelity has dubbed "eAdvisors", had an average of 40% more in assets under management, are attracting more Gen X and Gen Y clients, and are successfully expanding their geographic reach by bringing in more clients beyond their local area. Key differences of how eAdvisors use technology included outreach to clients via channels like social media and text messages, using tablets to view client information, automating workflows with e-signatures, gathering comprehensive client data using account/data aggregation tools, and heavy adoption of CRM software to track client interactions. Of course, the caveat is that it's not entirely clear whether the technology made these firms grow, or whether growth-oriented firms are simply more likely to adopt technology in the first place. Either way, thanks to the efficiency of the technologies, Fidelity found that the tech-savvy advisors were servicing an average of 55% more clients than advisors using 'traditional' methods.

Better-Paid Employees Build Better Firms (Bob Clark, Investment Advisor) - When it comes to doing work that is important to a business, one good employee can be worth two or even three mediocre ones, which is why it can "pay" very well in terms of Return-On-Investment for the business to compensate at the upper end of the pay scale, just to ensure the firm can hire the best people. And the results of the latest 2015 FA Insight People And Pay benchmarking study find that this trend is alive and well in the advisory industry. Specifically, despite the fact that an average of 78% of all advisory firm expenses are "people-related" staffing costs, the top 25% of "Standout" advisory firms (as measured by both revenue growth and owners' income) actually pay their employees an average of 5% more in compensation (with the exception of associate advisors, who tended to be paid less, but have more upside if they successfully climb the career ladder). In addition, Standout advisory firms also tended to offer better financial incentives for exceptional job performance, with 74% of those firms using incentive pay for professionals (compared to only 34% of non-Standout firms that offer incentive pay) and an even wider gap in the tendency of Standout firms to offer incentive pay to other staff members (e.g., management, technical, support, and admin). These compensation trends, and the sheer productivity that their well-compensated employees produced, allowed Standout firms to pay more per employee, yet get more done with fewer employees, resulting in less total staffing costs for the firm (and therefore greater profitability as a business).

Energize Your Firm By Hiring A Top-Notch Staff (Ric Edelman, Financial Advisor) - For many financial advisors, the thought of going through the process to write an ad for a job opening, publish it, sort through resumes, and then interview candidates, is abhorrent... especially if the advisor has a history of staff members quitting/leaving (or needing to be fired) anyway. Yet Edelman makes the case that ultimately, not hiring staff and keeping all the job duties to yourself is ultimately self-destructive, not only limiting the firm's growth and making it less productive (the advisor is typically the highest-paid person at the firm and should not be doing activities that could be accomplished by someone paid far less!), but eventually de-energizing the advisor as there's less and less time to serve clients. Of course, there's still the challenge of doing the hiring process and getting good team members, but Edelman suggests that usually bad hires are the result of the advisor's own bad hiring process that needs to be improved, or because the advisor is simply looking for 'adequate' talent and therefore hires mediocrity. Instead, Edelman claims that the goal should be to hire "star" employees out of the gate, which means: find people who are great at what they do and have complementary skillsets/expertise that you lack; take the time to really write a compelling ad (and put it where star talent will actually see it!); give employees a bonus if they refer candidates who get hired (as your current great employees may be the best at helping you find the next great employees!); carefully research compensation to be certain you're offering enough to really attract and retain the top talent; engage in a rigorous interview process to really vet potential employees; and once hired, be certain to put every hire through a formal orientation program to ensure they are well integrated into the firm from day one. Edelman also points out that it's crucial to give employees a clear advisory firm career track/ladder, so they can see that working hard in the firm will give them the opportunity to be rewarded. The bottom line: whether you ultimately decide to manage the process yourself, or offload the hiring process to a recruiting firm that can help, it's crucial to manage the hiring process well.

The Age-Old Dilemma of Old Age [As An Advisor] (Mark Tibergien, Investment Advisor) - Tibergien tells the story of the retirement of David Bugen, one of the founding partners of Regent Atlantic, a mega-RIA in New Jersey, who had to navigate both a transition plan for his ownership/shares, for his clients, and for his leadership duties, which he ultimately did while also keeping an eye on what he would do next as his 'encore' after the advisory firm (several volunteer leadership initiatives, and going 'back to school' for a variety of college courses!). Yet while Bugen may have made a successful transition, Tibergien notes sadly that most advisors do not, and instead they tend to 'die with their boots on' (hopefully with an exit plan at least!), and/or try to manage a transition out of the business but lack the skillset to do so effectively. In other cases, the advisor decides to only partially transition, reducing client duties and time in the business, but keeping most/all of the equity, which may be fine initially but eventually leads to resentment by the younger/junior advisors who serve the clients but have no path to ownership themselves (or find the business much more expensive, because of their own growth efforts, by the time they're permitted to start buying in). Of course, this doesn't mean that every advisor/founder should immediately sell all at once when preparing to exit the firm, either. Tibergien suggests that the best path is the one Bugen followed - a "graceful" exit, where the founder's client responsibilities, leadership role, and ownership of shares are all transitioned gradually over time, in a manner that can ensure the business will last.

Ensuring Success When Switching to a Flat Retainer Fee Model (Carolyn McClanahan, Financial Planning) - McClanahan started out as an advisor in 2004, and adopted the popular AUM model of the time, but decided a few years later that a switch to a retainer model would be more appealing, allowing her to serve clients who had significant planning needs but not any assets to manage (and to charge less to clients with large portfolios but simpler actual planning needs). To make the switch, McClanahan worked with financial advisor business coach Tracy Beckes to create clear engagement standards that would outline for each and every client exactly what services would and wouldn't be provided, and what clients should expect from the relationship (particularly given McClanahan's comprehensive financial planning focus). Once the engagement standards were created, McClanahan went through all of her clients, determining what an appropriate fee allocation would be given their complexity, with the overall goal of remaining revenue neutral (which meant some clients would be asked to pay more in fees, while others would enjoy a decrease, and many were close enough that no change in total fees was required). Once fees were/are set, they're revisited every two years to see if they need to be changed, based on then-current client circumstances and needs (ion the last cycle, fees stayed flat for 53% of clients, increased for 42%, and were lowered for 5%).

4 Ways to Simplify Your Complex Sale (Bill Good, Research Magazine) - "Selling" financial planning and investment management is complex, but Good suggests that if you're not closing at least 30% of the prospective clients you sit down with, then your process is still too complex and you need to simplify it but creating a standardized proposal that you use to summarize the potential client's situation and what you will do to improve it. (And if you don't know what percentage of prospective clients you're closing, create a structure so you can measure it in the first place!) Alternatively, Good notes that for some advisors, they already use some form of investment or prospective client proposal, but the document is completely ineffective (if it's 30+ pages, includes piles of disclosures, and has lots of jargoned industry terms like "Monte Carlo Target Band", it's not going to work with potential clients!). So what should a client proposal look like? Good suggests the following: it should be no more than a few pages (e.g., up to 8 pages); it should not include information about you, your team, etc., as that information should be provided separately (remember, too much at once in the proposal makes it overwhelming!); it should contain a simple outline and flow (your prospects don't need to see/understand how the sausage it made!), and have room for the prospect to take notes; it should have detail about exactly what you will do (if you're going to manage a portfolio, details what you will sell, what you will buy, how cash positions will be re-allocated, etc., to paint a clear picture); and it needs to be readable with simple and straightforward language (if necessary, use Microsoft Word's "Readability Statistics" to see if you need to simplify your writing with fewer words per sentence and fewer sentences per paragraph!). Once you've refined the process, track your close rate as a Key Performance Indicator for your advisory business, and monitor to see if it improves over time (or whether you need to make some further adjustments!).

Conflicts of Interest: A Look at Advisors vs Clients Paying Ticket Charges (Wall Street Rant) - One of the upsides of the ongoing trend of advisors shifting from the traditional commission-based commission-based approach to the percentage-of-assets-under-management (AUM) model is that it better aligns advisor-client interests by eliminating the incentives to churn accounts. Yet the author notes that not all AUM fees are structured the same, because some absorb the ticket charges (where the advisor pays any ticket charges out of his/her own pocket/fees), while others pass through the ticket charges (which means the clients pay for them on top of the advisor's AUM fee). Yet in a world where this is not always clearly disclosed and explained, advisors face an implied conflict of interest, as including ticket charges has a cost to the advisor that the client may not appreciate, while pushing ticket charges through can make an advisor's costs appear lower than the AUM fee alone would imply (since clients will pay ticket charges on top). Of course, if including the ticket charges bundled into the advisor's AUM allows the advisor to attract more clients, there may still be an appealing Return-On-Investment to covering the costs, but the article notes that even relatively small ticket charges require significant new assets from clients to justify paying the costs. In addition, advisors who pay the ticket charges also have far less incentive to engage in any proactive trading activity on behalf of clients, since every trade comes out of their own pocket (of course, some might contend that's a good thing, too!); on the other hand, advisors covering ticket charges is even a disincentive to rebalance regularly, which arguably should be a standard practice. Accordingly, the author ultimately suggests that for the sake of minimizing these conflicts, a "best practice" for advisors should be passing ticket charges through to clients, so that it is both transparent, and minimizes the implied conflicts of interest (or at least, aligns them so the advisor is doing the same cost-benefit analysis as the client would when considering transactions).

Hacked? This Is What The Top 5 Brokerage Firms Will Do For You[r Client] (Priya Anand, Marketwatch) - Earlier this year, an SEC survey and exam sweep found that a whopping 88% of broker-dealers and 74% of investment advisers have experienced some kind of cyber-attack, and yet the study also found that just 15% of broker-dealers and 9% of advisers promise to make clients whole after cyber-related losses. Accordingly, this article looks at how some of the major brokerage/custodian platforms will handle the situation in the event of client losses due to a cyber attack. For Charles Schwab, their Security Guarantee is that Schwab will cover 100% of any losses in Schwab accounts due to unauthorized activity, but clients must "safeguard" account information by not sharing passwords and reporting unauthorized transactions "as quickly as possible". Similarly, Fidelity's Customer Protection Guarantee, the Scottrade's Online Security Guarantee, the E-Trade Complete Protection Guarantee, and TD Ameritrade's Asset Protection Guarantee, will also reimburse losses for unauthorized activity in accounts through no fault of the client, but customers typically are expected to check statements within 30 days of posting/delivery to report suspicious activity, and must adopt various "recommended security practices" including using antivirus, opting into extra login protections, setting a unique username and password, and never sharing the information (and in the case of Fidelity, the company may send a computer security expert to the client to clean the hard drive and file a police report to authenticate the theft and claim). Although not directly discussed in the article, though, it's notable that while these guarantees may protect clients against cyber-fraud that occurs directly into their accounts due to unauthorized access, it may not protect a financial advisor who triggers the fraudulent trade or transfer on behalf of the client by acting on fraudulent directions that the advisor failed to verify with the client!

DOL's Critics Use Convoluted Logic (Dan Moisand, Financial Advisor) - While the broker-dealer and insurance community has suggested that the Department of Labor's fiduciary proposal will be bad for 'most' people and that they are not causing any harm under the current rules, Moisand suggests that ultimately the firms are just trying to justify their own existence and aren't really speaking to the true impact on consumers. By analogy, Moisand notes a local incident years ago where authorities proposed a ban on local residents using golf carts in a certain section of public roadway, which the golf cart owners various said was harmful to them, unnecessary, or an outright conspiracy theory... yet ultimately passed, because any objective third party could clearly see that these arguments were not objective and that in the end, driving slow-moving golf carts on a fast-moving stretch of road is clearly a public hazard. Similarly, Moisand suggests that in the end the broker-dealers are really just lobbying for their own benefits, and that close scrutiny of their positions similarly falls apart. For instance, the reality is that many broker-dealers already operate with large swaths of their advisors subject to fiduciary duty (as hybrid registered investment advisers), and have survived just fine. Not to mention that there has been an increasing number of advisors who previously operated under broker-dealers and are transitioning to fiduciary RIA firms (a switch that seems unlikely if brokers would be 'damaged' by making the switch to serve their clients on a fiduciary basis!). In other words, ultimately the 'threat' of the DOL's fiduciary proposal may be more of a threat to broker-dealer entities themselves, and not the advisors under them who serve clients well and may simply need to make some moderate adjustments to their standard processes to accommodate the new regulations.

Myths Wirehouses Perpetuate To Keep Brokers In Their Seats (Tim Welsh, Financial Advisor IQ) - The strong growth trajectory of RIAs is now clear, as Aite Group projects they will leap from a 9% market share in 2007 to a projected 16% by 2018, while long-entrenched wirehouses decline from 34% to 31% over the same time period. Notably, Welsh points out that wirehouses have been making progress in more ethically sound business practices, and allowing their advisors more freedom, but the transition is slow and hampered by their structural issues, resulting in wirehouses creating a "propaganda machine" to convince advisors to stay put and not break away. For instance, while wirehouses often advocate that their brokers should stay for their superior technology, in practice Welsh notes that wirehouses are struggling greatly to merge massive legacy mainframe systems (with each other, and in some cases their new parent companies' own legacy banking systems), which is limiting their resources to innovate (as contrasted with the RIA community where technology innovation has been occurring most rapidly, from the adoption of tablets and cloud solutions to flexible integrations between CRM and financial planning software). Similarly, wirehouses claim offering their advisors more and better investment products to use with clients, yet as wirehouses have increasingly shifted from proprietary product to a more open-architecture investment platform, they're simply plugging into a range of third-party investment solutions that RIAs have access to as well. In addition to incentivizing retention with the carrot (claiming superior technology and investment products), wirehouses also threaten with the stick, making their brokers fear that they will be sued when they leave, even though the reality is that the Broker Protocol provides a clear path for brokers to break away and know exactly what they can and cannot do to avoid temporary restraining orders and other adverse legal ramifications. But perhaps the most significant myth is simply the claim of wirehouses that their advisors won't be able to take home as much money, despite the fact that even million-dollar products top out in wirehouses around a 40% payout from their grid, while the top independent financial advisory firm owners may see owner take-home pay as much as 60%-70% of revenues at a similar sized advisory firm!

What If The People Around You Refused to Let You Fail? (Julie Littlechild) - Recently, Julie Littlechild completed a marathon walk (literally walking the 26.2 mile course of the Boston Marathon), and notes that her goal to do it succeeded in large part because she created a "Marathon Mastermind Group" - a small group of fellow walkers, with similar goals, who met weekly to share information and ideas, offer support to each other, and help hold the others accountable to the goals they had set. In a similar manner, Littlechild suggests that advisors should be seeking out and creating their own "Mastermind Group", a gathering of professionals who meet on a regular basis to share their experiences and ideas, and create accountability with others. These gatherings are sometimes known as "Study Groups" as well, though Littlechild differentiates that Mastermind groups are more commonly targeted specifically on solving each other's individual challenges. Some Mastermind groups are created to tackle a specific issue or goal (such as Littlechild's marathon event), most are ongoing and more broadly focused on helping the individual members overcome their ongoing challenges in an ever-growing and evolving business. Either way, Mastermind Groups typically share a number of common traits when they are organized/formed, including: a clearly defined purpose as to why the group is coming together; some guidelines about how sessions (in-person or virtual) will be facilitated and the rules of engagement; a carefully crafted team of people who want to come together; and a structured agenda of how they will meet and discuss their issues. Ultimately, the goal of participating in a Mastermind group is to gain a combination of 'content' (ideas from peers to improve yourself and your business), 'community' (a forum for you to share your challenges with others and gain insight and feedback), and 'accountability' (a peer group that will help hold you accountable to follow through on what you commit to do).

I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!

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.