Executive Summary
Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big buzz in the advisory world this week... a major feature article in the Wall Street Journal dubbed "The Morningstar Mirage" that notes how Morningstar star ratings based on past performance are a huge driver of mutual fund asset flows but have at best only limited predictive value of future performance (though the Journal authors, as well as Morningstar in its response, both note that highly rated funds are still at least somewhat more likely to outperform than just picking mutual funds at random!).
Also in the news this week was a separate major announcement from Morningstar, that it's DoL fiduciary proposal tool, the "Best Interests Scorecard", is now available as an add-on to the Morningstar Advisor Workstation. And the Investment Management Consultants Association (IMCA) announced that it is rebranding to the Investments & Wealth Institute (IWI), and has acquired the Retirement Management Analyst (RMA) designation as part of its growing investments and wealth management focus.
From there, we have a number of marketing and business development articles this week, including: a review of what a "marketing funnel" really is, and how it's relevant for financial advisors; a discussion of how most advisor websites are built for the wrong purpose, aiming to educate about the advisor's firm or get a prospective client to call when really it should just focus on getting a prospect's email address instead; a fascinating research survey about where ultra-HNW investors go for their financial news that finds HNW investors tend to rely on both traditional media, social media, and an advisor's own communication (and that younger HNW clients are even more likely to rely on the advisor's communication!); how digital marketing lessons from Silicon Valley can be applied for financial advisors, particularly when it comes to "influencer marketing"; why your answer to the simple question "How's It Going?" can unwittingly deter clients from giving you referrals; and how the best way to build Center Of Influence (COI) referrals is not to just try to find "good" COIs, but instead to work more deeply with the COIs your clients already use, where you can turn deepening client engagement with a mutual client into COI referrals instead!
We wrap up with three interesting articles, all focused around the theme of taking a fresh look at popular themes: the first explores how advisors should beware about entirely rebranding themselves as behavioral coaches and accountability partners, because the truth is that most people don't actually want to always be held accountable for everything (and at best, advisors need to be more sensitive about how to frame accountability in a positive, future-focused manner); the second looks at the simple concept of financial milestones, and the kinds of common milestones that can (and should) be celebrated with clients; and the last looks at how the recent wave of natural disasters, from hurricanes to fires, have been causing people to question how much "stuff" they really need... and not just those who are impacted by the disaster, and may have lost everything and need to start over, but even those of us who only saw the events on the news, but still find ourselves questioning whether we have too much "stuff" and how we could better focus on the things that really matter.
Enjoy the "light" reading!
Weekend reading for October 28th/29th:
The Morningstar Mirage (Kirsten Grind & Tom McGinty & Sarah Krouse, Wall Street Journal) - The big buzz this week was an explosive Wall Street Journal feature article that noted how funds that earn high Morningstar Star Ratings based on their past performance attract the vast majority of investor dollars (with an increase in flows after earning a 5-star rating)... yet most of them fail to subsequently outperform. Of funds that earn a 5-star rating, only 12% do well enough over the next 5 years to sustain the rating, while 10% fall all the way to a 1-star rating over the subsequent 5 years, and the fall-off in performance was even more dramatic amongst US stock funds (the largest category). On the other hand, Morningstar has long maintained that its star system is strictly backwards-looking, and isn't intended to predict future performance, and in a response to the Wall Street Journal article has emphasized that it's still an effective screening tool to weed out low-quality (and particularly high-cost) funds and thus does still improve an investor's odds of selecting a good fund. In fact, even the Journal's analysis finds that 5-star funds do perform somewhat better than lower-rated ones, even if on average 5-star funds eventually turn into merely ordinary performers. Still, the concern remains that Morningstar's star ratings are so ubiquitous, and so correlated to subsequent fund flows, that even if the company itself acknowledges that the star ratings have limited predictive value, investors themselves seem to be putting more weight into the ratings... as do advisors, given the wide usage of Morningstar Office, and the relative "safety" of going with the grain for an advisor who only recommends 4- and 5-star rated funds (because even if they end up underperforming, the advisor can deflect the blame to Morningstar's rating system rather than their own selection process!). Nonetheless, even Morningstar's Don Phillips, in his own response to the WSJ article, also emphasized that relying on higher-star-rated funds was still superior to just picking them at random – 5-star funds are still 40% more likely to remain 5-star funds in the future than funds chosen at random, and are materially more likely to at least be 4-star funds as well – and that even if Morningstar's star ratings aren't perfect predictors, they give the investor (or advisor) superior odds over not using them at all. Or stated more simply, perhaps the problem is not that Morningstar star ratings do too little, but just that investors (and the WSJ writers) are expecting too much from them?
Morningstar Introduces DoL Fiduciary Best Interests Scorecard (Morningstar) - With the growing due diligence obligations on rollovers under the Department of Labor's fiduciary rule, advisors have been clamoring for tools that make it easier to gather the requisite information to document rollover recommendations... and now, Morningstar has released its own solution, dubbed "Best Interests Scorecard", as an add-on to the Morningstar Advisor Workstation. In essence, Best Interests Scorecard is a proposal generation tool, that gathers details about the client's current investment holdings (from Morningstar's own extensive data) and the advisor's proposed recommendation, and then effectively "scores" the quality of the recommendation (with a green/yellow/red evaluation system) based on Investment Value (using Morningstar data to compare the current vs recommended), Client Fit (and whether the existing plan can effectively deliver an appropriate diversified portfolio consistent with his/her risk profile), and Service Value (attempting to quantify the value of the advisor's additional financial planning services). The Best Interest Scorecard can also capture other relevant factors, such as unique investment circumstances (e.g., appreciated employer securities or the employer's financial health), and the investor's desire to work with an advisor in the first place.
IMCA Rebrands To Attract A Broader Audience (Greg Iacurci, Investment News) - The Investment Management Consultants Association (IMCA) announced this month that it is rebranding to the "Investments & Wealth Institute" (IWI), recognizing that as financial advisor business models in the investment world have expanded far beyond just (institutional) investment consulting, so too has the IMCA membership base, which now includes a wider range of financial planners, private wealth advisors, and bank trust officers, in addition to investment consultants. Notably, IMCA-now-IWI emphasizes that its rebranding is occurring because it is growing beyond its original focus (not shrinking from it), as the organization's membership and certificants are up a whopping 44% since 2012 (to 11,877), but believes the "Investments & Wealth" label better reflects its focus on advanced investment and wealth management education, as the organization grants both the Certified Investment Management Analyst (CIMA) and the Certified Private Wealth Advisor (CPWA) certifications (both credible post-CFP advanced designations that have expanded into both in-person and online offerings). In addition, IMCA-now-IWI also announced that it has acquired the Retirement Management Analyst (RMA, now being rebranded as Retirement Management Advisor) designation from the Retirement Income Industry Association (RIIA), and going forward will begin to offer an online advanced certificate program in retirement planning as well as the RMA certification itself (which requires additional education and passing a comprehensive exam).
Marketing Funnels For Financial Advisors (Crystal Lee Butler, Advisor Perspectives) - A "marketing funnel" is a way of describing how prospective clients move through the process of looking for an advisor to actually hiring one. For instance, a four-step marketing funnel for a financial advisor would first include the need to Attract prospects (via marketing campaigns, website, social media, blogging, white papers, etc.), then must Nurture them to establish a relationship and become known, liked, and trusted (e.g., using video, email campaigns, or even events), then must Convert the prospect (with an actual sales process), and ultimately Retain the client with a great experience (which generates referrals that attract new prospects and repeat the cycle). The process is called a marketing Funnel, because – akin to an actual funnel – the targeting starts out wide at the top, but narrows as not everyone moves on to the next stage of the process (e.g., not every prospect first attracted to your firm is a good fit, not every prospect you nurture is interested in doing business, not every sales approach turns into an actual close, etc.). Notably, though, a marketing funnel doesn't have to be a "pushy" process – in fact, in the advisory context, it's particularly common for advisor marketing funnels to have a long and slow "Nurture" phase, as it takes time for an advisor to become known, liked, and trusted. Nonetheless, the whole point of a marketing funnel is to help prospective clients progress through a process, recognizing that without a defined funnel, you're leaving it up to people on their own to figure out how they should gather the right information to evaluate you and decide whether to do business with you... while with a defined marketing funnel, you can better guide prospects to the information they need to understand why they should work with you to address their financial needs and challenges!
The Great Adviser Website Sting (Stewart Bell, Audere Consulting) - With the rise of the internet and digital marketing has come a slew of advisor website design firms that promise "We'll build you a website that converts"... and when getting just a few new clients is so valuable for most financial advisors, website designers can often get away with a substantial cost... yet in the end, the results rarely live up to the promise. Because the real problem is that an advisor website can't accomplish much until the advisor themselves gets really clear about its true goal and purpose – which Bell suggests is not to book a meeting, or educate, or communicate the firm's vision and mission... the one and only one purpose of an advisor website is getting an email address from a prospect. Because the reality is that the odds are ridiculously low that any advisor website will suddenly make a first-time visitor realize they "need" an appointment with you, nor is it even very likely that your website is the last stop in their journey when they're about to schedule an appointment with you. Instead, the whole point of an advisor website is to gather an email address, which opens up a communication channel that will allow the advisor to become known, liked, and trusted, and ultimately turn the prospect into a client later. Accordingly, everything about the website should be refined towards engaging with a prospect enough that they want to give you an email address – which means making sure the website is about them (not you as the advisor), with simple headers, clear above-the-fold content, and strong visuals that attract the eye (because what attracts the eye, attracts the click).
Where The Wealthy Get Their Financial News (Spectrem Group) - With the rise of the internet, affluent investors have a wide range of sources from which they can gather financial news and information... which can make it especially hard for financial advisors to get noticed amongst the hundreds of websites all competing for investor attention. Spectrem evaluated the behaviors of ultra-high-net-worth investors (those with >$25M of net worth) to determine where they obtain their financial news and information... and perhaps surprisingly found that the majority still read the traditional daily financial press (e.g., Wall Street Journal, Financial Times, etc.) to gather financial information (and almost 3/4ths of those over age 65). 40% of wealthy investors also read the weekly financial press (e.g., magazines and other weekly news outlets, that tend to provide more in-depth coverage). But only 35% of HNW investors watch cable news shows for information. In the context of financial advisors in particular, Spectrem found that the ultra-HNW investor does look to their own advisor for information (65% of investors), and that younger investors were more likely to seek out information directly from their advisor than from other online sources. Although Spectrem also found that ultra-HNW investors are more likely to be using social media than those with lesser wealth, particularly on the Twitter and YouTube platforms.
To See The Future Of Referrals Look To Silicon Valley (Justin Barish, Financial Planning) - Financial advisors have long generated the bulk of their new clients from referrals, but Barish notes that "referrals" in the world of financial advice is substantively different than how Silicon Valley tech companies do it (even though they, too, rely heavily on word-of-mouth "referrals" for growth). In Silicon Valley, the goal is not merely to find people who might refer, but to find "influencers" (or advocates) with a larger platform and reach who can help amplify the firm's message further than it ever could on its own (and with the credibility of being an implicit third-party referral/recommendation, rather than just a company advertisement). And the strategy is particularly appealing in a world of social media, where the social media platforms themselves are built to further amplify what is already "hot news". For instance, imagine a firm that wants to grow visibility, but is struggling because its corporate LinkedIn page just has a few followers, and any post to the company's LinkedIn page only reaches that handful of people. However, the firm gets an influencer – a client or colleague with a lot of followers themselves, to engage with the post – which in turn causes LinkedIn to share in that person's LinkedIn feed that he/she comments on the firm's article... which means now the article is being pushed through that influencer's feed to their friends and colleagues, and now suddenly a post with just a couple of views now has several hundred (from one moment of influencer engagement). Done systematically with outreach to influencers, an advisory firm can greatly amplify its total reach and engagement in social media channels, effectively turning the one-client-at-a-time referral approach into a digital-word-of-mouth referral approach that is far more scalable in getting new clients.
Why How You Answer 'How's It Going?' Affects Referrals (Steve Wershing, Client Driven Practice) - For most advisors, the key moment for getting a referral is when he/she asks for the referral, but Wershing notes that in reality any interaction and communication with clients can impact your referrability. For instance, the standard question "How's It Going?" tends to evoke a standard response of "busy", as the financial advisor talks about how the business is growing, all the activity they're engaged with, and the demands of their time in a world where being "busy" is often held out as a badge of honor. Yet Wershing points out that from the client's perspective, the message they hear may be that the advisor is at capacity and having difficulty keeping up with all their work... which implicitly suggests to the client that this is not a good time to send the advisor any referrals! And if you reflect back on your interactions with clients, you may realize you've been doing this as well – ever have a client say "I know you're very busy, but could you spare a little time to talk to one of my friends?" How many other people might your clients not be referring to you because they fear you're too busy to take them? So if you really want to drive referrals, it's crucial to always project the image that you're in control of your time and your business – and that you actually have the capacity to accept a referral in the first place. So next time, instead of communicating how busy you are, consider talking about how smoothly things are running, how the business is on track, express gratitude for how well everything is going, or even talk about a recent "win" of the business and/or your team... all of which helps to communicate that you really are open to referrals, and are ready and prepared to serve them well!
The Reason You Don't Get More Referrals From Centers Of Influence (Julie Littlechild, Absolute Engagement) - Advisor consultants and industry surveys often talk about how getting referrals from a "Center Of Influence" (COI) are the best way to grow... yet in practice, most advisors struggle to generate a material volume of referrals from centers of influence, and even fewer ever report that they feel they're really successfully maximizing the opportunity. Littlechild suggests that the core problem is that most advisors simply try to seek out COIs to build relationships with to get referrals... instead of first starting by identifying what kinds of COIs their existing clients need, and then building relationships with the relevant Centers Of Influence not just as a referral strategy but a client engagement strategy that may also help to generate referrals. After all, by finding COIs your clients actually need, you'll likely do a better job screening them, you'll have more opportunities to build deeper relationships with them (as you do joint client work), and the groundwork for reciprocal referrals will already be laid in place. Not to mention that it's a great opportunity for the COI to actually see how you effectively serve your clients! Accordingly, Littlechild suggests that for advisors who want to build out a COI referral strategy, start by looking at the professionals your existing clients are working with, ask them who they like and think is doing a good job, and then reach out to those COIs to engage with them around your mutual client (which naturally opens the door) to learn more about their business and whether they might be a good fit for more of your clients (which is a meeting they will likely want to take!). Because ultimately, a productive COI referral relationship works better when the advisor actually understands who is the right fit for the COI in the first place – though again, the process of engagement around a mutual client can eventually form the basis for a rich cross-referral relationship as well.
Why No One [Including You] Really Wants Accountability (Stewart Bell, Audere Consulting) - It's increasingly common for financial advisors to position themselves as "behavioral coaches" who can serve as accountability partners that help keep clients on track towards their goals. Yet Bell cautions that in reality, being an accountability partner can be very challenging – after all, it's one thing to say you'll hold clients accountable to their goals, but another to call them out if they're regularly pulling $500 out of an ATM on Friday nights at an entertainment club called "Dancers" or to suggest they might go to Alcoholics Anonymous because you can see they're spending hundreds of dollars a week on alcohol in reviewing their spending. Simply put, if you're going to be an "accountability partner", you quickly have to figure out just how far you're really willing to go in fulfilling that role. And even then, you run the risk that clients who initially engage with you will disengage over time – as it's almost inevitable that eventually, they'll miss at least some of their goals, and there's a fine line between having an accountability partner that helps you make sure you get things done, and one who is just a reminder of all the ways you're failing such that you just don't even want to see them anymore (because every time the accountability partner reaches out about something you haven't done, you just feel worse about yourself!). Accordingly, Bell suggests that if you're going to try to be an accountability partner at all, you need to do it with a future focus, where you start by asking "Tell me about the progress you've made since we last spoke, and what the Wins have been?" (start with the good), then ask "What do you need help with right now?" (to focus the value of the current meeting), and finally ask "What are you going to do next?" where the goal is not really to hold them accountable, per se, but simply to get the client to make a commitment to themselves about what they will work towards next. And then let them hold themselves accountable for the commitment they made to themselves!
14 Financial Milestones Worth Celebrating (White Coat Investor) - In the never-ending treadmill of life, milestones provide a meaningful way to get oriented about your progress, and as a result are often cause for celebration... or at least, should be, as a way to reinforce our own good behaviors and progress. Accordingly, White Coat Investor sets forth a series of major financial milestones that anyone/everyone should consider celebrating to maintain their own positive financial momentum, including: Becoming "Worthless" (the moment when you pay off all your student loans and other debt, and actually achieve a non-negative net worth of $0!); Buying a home (especially given the effort it takes to get a good credit rating and save for a downpayment in your early years); Reaching a net worth of $100k (because reaching a round number and adding a digit to your net worth is a good cause for celebration to maintain the momentum!); a retirement portfolio of $100k (as it's one thing to reach a total net worth of $100k, but another to have it in just your future-focused retirement accounts!); achieving a $500k net worth; buying your first new car with cash (of course, some people don't want to buy new cars at all, but if you do, it's great when you can do it without taking on debt!); a $1 million net worth; a $1 million retirement portfolio; being "done" with your saving, where growth alone can get you to retirement at age 65; paying off your mortgage (once upon a time people actually had a party and burned the mortgage note!); and reaching the final milestones where you have enough retirement savings to cover your basic needs, then all your needs at your current spending, and finally all your needs at your "desired" rate of spending, when you reach the true moment of financial independence. Financial advisors: do you celebrate any of these milestones with your clients when they achieve them? Do you have the means to track them in the first place? What would the impact be to a client if you called them the day they first reached a $1M net worth, just to let them know the good news that they crossed a major lifetime milestone worthy of celebration?
Floods And Fires Make Americans Rethink Their Love Affair With Stuff (Lisa Bonos & Jura Koncius, Washington Post) - The recent series of hurricanes in Florida and Texas and wildfires in California have led to a surge of evacuations, where people often have just a few hours or minutes to gather a few of their key belongings and leave their homes... and for many of those affected, has become a reminder of how much "stuff" we have that we don't really need, even if the looming disaster turns out not to be disastrous and they can in fact return to a home still filled with everything they own. In fact, the coverage of people who have lost everything in a natural disaster seems to be spawning a national obsession with organizing and decluttering, with even professional organizers in areas not impacted by disasters seeing an uptick in call volume and interest in getting more organized since the recent natural disasters have been all over the TV, internet, and social media. In essence, even when we're not directly impacted by a natural disaster, seeing someone else go through it can still prompt us to think about what's really important to us... and realize all the things that aren't. Still, though, purging our belongings is often more difficult in practice, as our "things" also keep us connected to our past and reminisce in nostalgic moments... not to mention the never-ending possibility that something "might" still be useful in the future. Nonetheless, with a growing awareness of how nature can still take a lot of our "stuff" away at a moment's notice, the recent natural disasters seem to have been a call-to-action for many to reassess what's really valuable, and what's just some stuff taking up space.
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.
The real “Morningstar Mirage” is the myth that Morningstar has perpetuated for decades that active management adds alpha. While the company has done a remarkable job of convincing advisors and consumers of the value of its mutual fund research, one cannot help but wonder how many billions of dollars have been diverted to “5-star” fund managers instead of following the mountain of academic research in support of indexing.
Hey, keep that dream alive, gotta sell those subscriptions.
During the California gold rush, the folks who made the most money were the store owners who sold picks and shovels. Newsletters are the picks and shovels of the investment “gold mine.”
RE: The Great Advisor Website Sting
With respect to the use of an FA website as a sales funnel, part of Bell’s advice is sound – the objective should be to get cold prospects to cough up their currency (i.e., email addresses). However, Bell neglects to mention that this may be aided through the inclusion of carefully crafted CTAs. Riskalyze’s “What’s your risk #?” is a good example, as is Nest Egg Guru’s “Test Your Preparedness”. Newsletter offers, e-books, etc. can help too. A well designed home page should entice the new visitor to scroll “down the funnel.” Above the fold should be a clear, concise value proposition and little else.
Contrary to Bell’s assertion, the FA website serves two other audiences as well – existing clients and referrals from existing clients. With respect to the latter, short video clips that offer insight into the FAs value proposition and personality are extremely helpful. Agree that FA websites should be highly visual with minimal text.
I wonder what exactly triggered the WSJ to publish a story in October 2018 about the Morningstar fund ratings? For as long as that rating has existed everyone has known it’s primarily a backwards-looking momentum rating. Yet after all these decades it’s suddenly a front page story.