Weekend Reading for Financial Planners (October 24-25)

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.

Investor Willingness To Pay For Advice Is On The Rise (Jacqueline Sergeant, Financial Advisor) - In its latest consumer research survey on "Accentuating The Value Of Advice", Cerulli Associates has found that 56% of consumers are willing to pay for professional financial advice, up from 51% just one year prior, and 82% of those who are currently paying for advice believe that what they are receiving is worth the price (while only 1% express outright dissatisfaction with their advisor). The ongoing rise in the willingness to pay for advice aligns with both the ongoing rise of various fee-for-service financial planning business models, along with a rise in consumer demand for financial advice in the face of the pandemic and its ongoing economic disruptions (with 40% of investors surveyed by Cerulli reporting they need more financial advice than before). Though the significance of the rise in consumer willingness to pay for advice is important not just for the strength of financial advice as a business model, but also the stability of advisory fees themselves, as Cerulli's research provides little indication that fee compression is coming for financial advice the way it has impacted the products that financial advisors use, and in fact, a recent Investment News research study found that over the past 2 years only 24% of advisory firms have adjusted their fees, and those that did were 2:1 more likely to raise their fees than lower them! At the same time, the pressure is rising on advisory firms to do more – i.e., provide broader services beyond 'just' portfolio management – in order to justify their advisory fees.

Growing Advisory Firms Really Are Gaining Clients Who Feel Let Down By Their Current Firm's Poor Technology (Greg Bartalos, RIA Intel) - In a new survey on the "American Financial Experience", AssetMark finds that 62% of investors have changed how they view their advisor's performance, with 28% feeling more positive about their advisor, 26% questioning who they're currently with, and 8% who are outright unhappy with their advisor. The key difference between those advisors with positive and negative ratings: the extent to which they've embraced virtual tools to interact with clients (e.g., Zoom or other video technology). Ultimately, though, the driver isn't really about the technology itself, per se, but simply that clients leave advisors they don't feel a personal connection to, and in a pandemic environment where in-person client meetings are limited, advisors who don't maintain a client connection via technology may not be able to maintain a client connection at all in 2020. And the uptick in communication tools and frequency, and the associated connection, is especially pronounced in younger clients, with 1/3rd of clients aged 30 to 45 saying they view their ideal advisors as a life coach or friend, and younger clients tend to cite the advisor's network and personality as key drivers of satisfaction. All of which, again, necessitates finding ways to connect – in-person or now virtually – in order to make that connection.

Tech-Heavy RIAs Rising To The Top (Michael Thrasher, RIA Intel) - While the debate rages on about whether, or to what extent, virtual technology tools should supplant or supplement in-person client meetings, most would agree that there's still more room and opportunity to better leverage technology to automate the advisor's back office. But a recent advisor survey from Cerulli finds there is still a tremendous range amongst advisors in whether, or to what extent, they actually embrace technology, with an estimated 36% of firms that "heavily" utilize technology tools, 41% who are medium users of technology, and 24% who are light technology users. Yet technology use is directly tied to more successful practice metrics, with heavy users of technology averaging more than double the AUM of light tech users ($239M vs $106M, respectively), being far more likely to have affluent clients (24% vs just 15%), and overall tending to dominate market share (with the 35% of heavy-tech users capturing 46% of available assets, while the 24% of practices that are light tech users are managing to capture only 14% of the available assets). Notably, though, the results aren't entirely clear as to whether tech-savvy firms are more likely to attract more and more affluent clients, or simply are better able to scale and keep growing as they add clients (while other less-tech-savvy firms may hit the ceiling on capacity without the technology tools to automate for scale). And Cerulli acknowledges that often technology systems for advisors are too broad and complex to easily adopt, leading to a chicken-and-egg challenge where tech firms add and expand (rather than simplify) features to capture more advisor users, but advisors may not want to take the leap because the software is no longer as targeted and relevant to the firm's specific needs.

Developing New Clients Remotely (Anne Field, Wealth Management) - One of the biggest challenges for advisory firms in the pandemic environment has been adapting to not just meeting with clients virtually –who may be more willing to adapt and more forgiving of any technology hiccups because of the existing relationship, and may require less investment into the relationship because it is already established – but trying to meet and develop relationships with prospects who might become clients in the future but are starting from 'zero' on the relationship. In fact, given the difficulty in finding new prospects to work with, some advisors have been stepping up their frequency of virtual meetings with existing clients, as a means to both bolster the relationship during times of difficulty, creating a talking point for clients to share with their family and friends (e.g., "I just met with my advisor for the 3rd time in 3 months over Zoom... oh, you haven't met with your advisor since February?"), and potentially outright asking clients to refer their friends and family who aren't being as well served (and perhaps offering them a free review of their current plan and situation). Other advisors are counting on the fact that if it's hard for advisors to meet with prospects in person, it's hard for prospects to find an advisor in person as well and may be shifting even more to online/digital marketing, leading to a big reinvestment of advisory firms into Search Engine Optimization (SEO) to help, with a particular focus on local search (e.g., "financial advisor in San Diego" for an advisory firm based in San Diego). Other firms are becoming even more proactive digitally, increasing spending on social media advertising (e.g., Google and Facebook ads) to get their message in front of new prospects. Though some firms are simply using the pandemic pause as an opportunity to reinvest into their future marketing... including one firm building out a 60-person "education room" in the hopes of reactivating their seminar marketing efforts in full force in 2021.

21 Virtual Event Strategies To Spark New Business (Maribeth Kuzmeski, Red Zone Marketing) - For advisory firms that have never tried to market online/digitally in the past, the hardest part of getting started is often just figuring out where to get started. Accordingly, Kuzmeski offers up a creative list of various types of virtual events that advisory firms have implemented to attract and establish relationships with new prospects. The broad categories of virtual events include: conducting virtual games (e.g., Virtual Bingo or Virtual Trivia) where the advisor invited clients and any friends/family they wanted to bring along, typically hosting 20-30 clients-plus-prospects on a weekly basis and promoted via emails to clients or promotions via Facebook; virtual educational events (e.g., a webinar on protecting investments in volatile markets, or top retirement income strategies, or perhaps working with a vendor as a partner to interview one of their portfolio managers), leveraging tools like LeadingResponse or White Glove's Virtual Seminar offerings and inviting clients and prospects again via email or social media postings; virtual entertainment and shows (from virtual concerts to virtual Second City Improv shows); conducting virtual food and drink events, from virtual wine tastings (which can be co-hosted with vineyards or wine sellers) to virtual cooking classes (with a third-party chef to co-host and teach); offering virtual touring travel experiences from Tokyo Online to a virtual climb of Mount Everest; hosting virtual information meet-ups on a monthly basis with either a networking group or simply with existing clients (which might feature a 'surprise' external guest each month, or simply be used to help introduce clients to various team members of the firm who may not otherwise be as visible); and Sponsored events, partnering with local businesses with whom the advisor and business can share their lists for co-marketing (e.g., a local yoga studio trying to offer virtual yoga).

The Formula To Catch Leads (Shauna Mace, Advisor Perspectives) - Prospecting for clients is not unlike the process of fishing, in that both require a certain level of patience, persistence, and intention, in order to succeed. And at its core, fishing has three components that lead to the desired outcome –location, bait, and the ability to reel them in – which itself translates extremely well to the world of prospecting as a financial advisor. In fact, the analogy highlights that one of the key distinctions that anglers are highly cognizant of – but financial advisors are often not – is that the starting point is "location", or more specifically knowing where the fish are so that they can cast their reels in the waters most likely to yield success in the first place. And so the starting point often is simply identifying "where are your ideal leads found", whether that's a particular online publication, association, organization, industry, geographic zip code, or some other factor (and if you're not sure where to fish, the best course of action isn't to just start casting your reel, but do some additional research and figure out where that location should be!). Even when you are 'fishing' in the right place, though, the reality is that not every outing hauls in a big fish, which means it's important to plan upfront to show up consistently over time, maximizing your odds of fishing successfully (in the marketing context, that may be a consistent email marketing campaign, or consistent social media sharing, etc.). From there, landing a fish still requires a "lure" – something of upfront value to offer that attracts the prospect in the first place (whether it's a free giveaway or simply a compelling subject line). And like catching a fish, once you do get a bite, it's important to reel them in quickly, which means being ready and able to respond promptly when a prospect inquiry does come in before they drop the bait and 'swim' away.

How To Hire For Skills Not Experience (Caleb Brown, ThinkAdvisor) - Most advisory firms looking to hire a newer financial planner will simply advertise something to the effect of "seeking (insert title, e.g. Associate Planner, here) to put together plans and support senior planners", but Brown notes that the reality is not all firms agree on what financial planning is, and what constitutes a financial plan. Which means simply asking for a "financial planner with 3 years of experience" says virtually nothing about whether the prospective hire will actually have any of the relevant skills necessary to actually do the job expected...both because the new firm's planning process may be very difficult than the prior, and in some cases, because the prior firm's financial planning was so light-weight that the 3 years of 'experience' wasn't really much experience at all (whether it's because the prior firm mostly required them to sell products and do little financial planning, or bound them to a job that in reality was more administrative than planning oriented). So how can firms suss out which is which? Brown suggests that the starting point is to have a very clear job description, and identify the specific experiences that would be relevant for the role – for instance, instead of simply saying "have 3 years of planning experience", specify instead "has developed recommendations and delivered multi-disciplinary advice to high net worth clients individually", or "acted as the first chair for at least a dozen clients", or "has completed a least 30 full financial plans in MoneyGuide or eMoney", etc. Of course, because not all firms do financial planning or develop career tracks in the same way, not all candidates will necessarily be able to check all the boxes. But isn't that what you'd want to know as the hiring firm when making the decision about how experienced a prospective hire really is (or isn't)?

What The Hawthorne Effect Tells Us About Employee Productivity (Khe Hy, Rad Reads) - If a business exists at the end of the day to generate a profit, there are few inputs more significant than the productivity of the employees who actually do the work, especially in a service-based business like financial advice. In fact, the focus on worker productivity goes back nearly 100 years, to the early industrial age as workers shifted from farms to factories and it became necessary to figure out how to maximize the output of the factory and its workers. In one famous experiment cited in Goodall and Buckingham's "Nine Lies About Work", the Hawthorne factory in Chicago in the 1920s began a series of tests, starting with making the factories brighter, and found that worker output increased. Except shortly thereafter, the researchers turned the lights back down to their original state and analyzed the results, and found that output went up again. In turn, they went on to test a wide range of conditions, including making work stations cleaner, keeping the factory tidier, providing more food during breaks, varying the length of breaks, etc., and found that output increased with every change... and then continued to increase again when levels reverted back to their original state! However, when the experiment concluded in its entirety, workers then – and only then – actually sank back to their original levels. The ultimate conclusion was that what the workers actually craved wasn't any particular change in working conditions, but simply to know that management was observing – listening and paying attention – to what matters to them in the first place. Because no problem will get fixed if it's not observed in the first place. But the key to motivation wasn't actually the fix... just the confidence that management was watching, observing, and cared enough to fix the problem if/when it arose. Which raises the question: are you paying attention and showing you're observing what matters to your team as a manager or leader?

Employees Should Come First, NOT Clients (Scott Hanson, Investment News) - The conventional view of the financial advice business is that advisory firms exist to serve the best interests of the client, such that the client always comes first. But, as Hanson notes, elevating the client above all else can have perverse consequences for an advisory firm; on the one hand, it helps to ensure that clients are served well, but on the other hand, it also creates an expectation that if a client is difficult or unpleasant to serve, employees are expected to just deal with it (because the client comes first). Whereas Hanson notes that as the firm grew, they eventually came to the point where they began to fire clients who were abrasive and unpleasant to the team... and finding that eliminating even just a few of the least pleasant clients can result in a significant morale boost within the office! In fact, arguably one of the best things about operating an independent advisory firm, in particular, is the ability to choose who the firm does – or does not – work with in the first place! More importantly, though, from the team perspective, being willing to terminate unpleasant clients for the sake of the team communicates that in the end, it's the team that is more important than any one client... which is even more positive for the morale and trust of the team itself (to serve the other 95%+ of clients who are pleasant to work with and generate the bulk of the profits anyway!). In Hanson's case, the end result was that the firm actually adapted its own Core Values, from putting Clients First, to its current focus of 'Associates First' instead.

What The Coronavirus Means For The Future Of Clients' Financial Plans (Christine Benz, Morningstar) - While the economy may be progressing through a V-shaped recovery from the pandemic – and the market already has managed a V-shape recovery – the bounceback in employment itself, and our overall financial situation, is far more varied, from cash reserves that have been burned through, jobs and businesses that have been derailed, and financial and retirement plans that have been waylaid (including for many, an unexpectedly early retirement due to pandemic layoffs and bleak opportunities of being rehired anytime soon). And notably, the financial difficulties are not specific to only less affluent households; in fact, a Pew Research study in April found that just 23% of lower-income households had an emergency fund to tide them through 3 months of job loss, but 52%(!) of middle-income households couldn't cover 3 months of living expenses (and even 25% of upper-income households couldn't cover 3 months' worth of income, either!)... for which the CARES Act implemented new "Coronavirus-Related Distributions" to draw up to $100,000 out of an IRA (and then pay it back over a 3 year period) to bridge the gap, but more generally has highlighted how important emergency funds really are (and especially for those in the 'gig' economy whose work situations may be more tenuous, along with higher-income-but-more-specialized workers who may take longer to find new/replacement jobs). Other financial planning factors highlighted by the pandemic included: the importance of having a plan for health insurance, including and especially in the event of a job loss, to ensure continuing coverage (and ensuring for high-deductible plans that there is a Health Savings Account to help cover actual expenses, especially in times of job loss when medical events can still happen); and the risks of unexpected 'early' retirement (where job losses occur and a layoff proves to be the last job the individual holds, as one Morningstar study found that workers end out retiring an average of 4 years earlier than they expect to!), which in turn creates even more focus on managing early retirement cash flows, from pre-Medicare health insurance to the timing of Social Security benefits... and of course, the challenge of investing in a forced-retirement portfolio in the midst of today's low-yield environment!

Providing Financial Services To Employees Is A Win-Win (Doug Politi, Harvard Business Review) - For virtually all workers, the employer is the primary holder of the household's purse strings, as the payor of the monthly or bi-weekly paycheck that most people use to pay their ongoing bills (at least until they have enough to not need to work and be able to retire!). As a result, the workplace is increasingly becoming not only the place where the money is earned, but also a provider of financial services to help its workers steward those earnings... representing, in essence, the rise of financial services in the workplace. The starting point is often providing greater flexibility around pay itself, whether it's shifting from monthly to bi-weekly paychecks, providing employees with even more rapid and direct access to their earnings (e.g., through so-called "Early Wage Access" programs that are functionally similar to payday loans but average barely 1/5th the cost). Beyond providing more and faster access to income, though, workplace programs are increasingly offering budget management tools to help employees better manage where that income goes, as witnessed by the rise of Financial Wellness technology offerings within workplace benefits programs. And with the pandemic disrupting not only employees' jobs and incomes but also their 401(k) plans and other assets, fully integrated financial and retirement planning is now on the rise as well, which is leading to both an uptick in the demand for financial advice... and a growing interest in such financial advice being delivered directly through workplace channels.

Fulfilling The Implied Promise Of Financial Planning (Susan Bradley, Advisor Perspectives) - As the coronavirus pandemic has disrupted the business of financial advice, and forced advisory firms to adapt to the changing marketplace, the industry media has been replete with tips on how to conduct virtual client meetings, to market to prospects virtually, and to build teams and execute the business virtually... but remarkably little about how to address the emotions that may be overwhelming our clients in the midst of their stress in this difficult environment. Which is important, because the "implied promise" of financial planning itself is that the advisor will be the "go-to" for whatever happens in the life of the client, helping them stay on track when everything is otherwise going according to plan, and to adapt when life and circumstances change. Accordingly, Bradley suggests that now, more than ever, is the time for financial planning and financial planners to be practicing "both sides" of money – the technical and also the personal, the quantitative and the qualitative, the rational and the emotional. In addition, because the pandemic is causing major real-world transitions for many clients, from job losses and retirement, to the sale (or shutdown) of a business, and even the loss of a loved one to COVID-19, advisory firms need to be focused on how, exactly, they actually counsel clients through such transitions, and ensure they have the knowledge, training, and skillsets to help clients navigate. And in some cases, the key skillset is 'simply' learning how to effectively deal with stress – not the stress of the advisor, but the stressed client who is trying to navigate a difficult time. Not that financial advisors necessarily are or need to become therapists; but now, more than ever, is the time to "show up, over and over again, to witness the grief, confusion, and trauma of clients... And [be] willing and able to deal with the full range of our clients' experiences to fulfill the promise we have made."

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, and Craig Iskowitz's "Wealth Management Today" blog as well.