Executive Summary
Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a slew of big news, including that the Department of Labor has received OMB approval to issue a formal proposal to delay the full enforcement date of the fiduciary rule by another 18 months until mid-2019 (but will still have to collect and consider public comments before making it final), the IRS is loosening rules on hardship distributions and employer retirement plan loans for those impacted by Hurricane Harvey, a Federal judge has struck down the Obama administration's overtime pay rules (which could have impacted a wide range of financial advisor trainees and paraplanners), HUD has announced new rules that will increase costs and reduce borrowing limits for HECM reverse mortgages, and this weekend Wall Street will be finalizing the switchover to shift most trade settlements from T+3 to T+2 instead.
From there, we have a number of articles on marketing for financial advisors, including: new research on how the financial services industry is using social media (and that even though LinkedIn is the most adopted platform, Twitter is actually the one with the most advisor activity!); the rise of text messaging as a way of communicating with clients; a guide on Facebook marketing and advertising for financial advisors; guidance on the key information that must be on your advisor website to communicate both your costs and your value; and a look at how and why most financial prospects slip through the cracks (and what advisors should do about it).
We wrap up with three interesting articles: the first explores the concept of "nonlinear" thinking, why it's so much better to improve a car's fuel efficiency from 10 Miles Per Gallon to 20MPG (instead of improving from 20MPG to 50MPG), and how such nonlinear concepts translate to other parts of the business world; the second explores the critical thinking concept of "inversion", where instead of focusing on your goals and what it takes to succeed, you focus on what could ruin the outcome (and identify that as something concrete to avoid!); and the last takes a fascinating look at the true difference between an "amateur" and a true "professional", which is all about the mindset of how you approach problems and try to create solutions.
Enjoy the "light" reading!
Weekend reading for September 2nd/3rd:
OMB Approves Proposal For 18-Month Delay Of DOL Fiduciary Rule's Second Phase (Mark Schoeff, Investment News) - This week, the Office of Management and Budget (OMB) to approve the Department of Labor's request to propose an 18-month delay to the full enforcement date of its new fiduciary rule, which would push the full effective date from January 1st of 2018 out to July 1st of 2019. Notably, the OMB decision doesn't actually mean the rule is delayed yet; it simply grants the Department of Labor permission to proceed with issuing a formal proposal to delay the rule, which is expected to be released in the coming weeks, and will be subject to a (likely short) public comment period, after which DoL must take the feedback, formulate a "final" delay rule, and re-submit it to OMB for final approval. Which means it's still possible that overwhelmingly negative comments objecting to a rule delay – or even a lawsuit against the DoL if it is deemed to be violating the Administrative Procedures Act – could prevent the delay from occurring. Nonetheless, the DoL itself is acting as though the delay is going to happen, and according the DoL has already begun to issue guidance (in the form of Field Assistance Bulletin 2017-03) indicating that it will not enforce next year against Financial Institutions that continue to require mandatory arbitration and ban consumers from suing them in a class action lawsuit. The real question, though, is about what else might be changed in the DoL fiduciary rule during the delay period. The Department of Labor has already indicated that it is considering a new form of "streamlined exemption" – akin to the Level Fee Fiduciary exemption – for broker-dealers that use clean shares, though some are concerned that a new streamlined exemption for clean shares may be a pathway to allow Financial Institutions to retain other problematic conflicts of interest while avoiding the full-BIC requirements. And in the meantime, the SEC also announced this week that it is making several leadership changes (in particular, with Dalia Blass taking over as director of the Division of Investment Management), that are expected to be a prelude to the SEC beginning work on its own fiduciary rule during the prospective 18-month delay. Still, the DoL fiduciary rule itself remains in place and intact; the only question now is whether or how it gets altered, either with a new alternative exemption to the full Best Interests Contract and its requirements, changes to the BIC, or other adjustments to coordinate with whatever the SEC may propose as its own fiduciary rule in the coming year.
IRS Loosens Rules For Retirement Plans To Lend Money To Hurricane Harvey Victims (Michael Cohn, Financial Planning) - On Wednesday, the IRS posted Announcement 2017-11, which will grant streamlined procedures for taking employer retirement plan loans and/or hardship distributions from a 401(k), 403(b), or governmental 457(b) accounts, if they live or work in disaster area localities affected by Hurricane Harvey. (In order to qualify, they must be designated for individual assistance by FEMA.) The rules also apply for those who want to use the money to help a son, daughter, parent, grandparent, or other dependent who lived or worked in the disaster area. Relief provisions include eliminating the 6-month ban on 401(k) or 403(b) contributions that normally applies to employees who take hardship distributions, eliminating any specific requirements about how the hardship distribution is used (as long as the person is part of an affected area), and plans can make such loans or distributes even if they don't currently allow it (as long as they complete the amendment process to add such provisions by the end of the next plan year). The relief rules will apply to loans and distributions that are made from now until January 31st of 2018, and is similar to relief offered after prior disasters, including Louisiana floods, and Hurricane Matthew. Notably, though, all the other normal rules for hardship distributions and loans still apply, including the taxability and potential early withdrawal penalties for (hardship) distributions, and the loan repayment requirements for loans from a qualified plan.
U.S. Judge Strikes Down Obama Administration Overtime Pay Rule (Daniel Wiessner, Financial Advisor) - On Thursday, a Federal judge in Texas definitively struck down an already-temporarily-suspended Obama administration rule that would have extended mandatory overtime pay to everyone with salaries up to $47,000 (up from the current $23,660 threshold). The judge declared that the threshold was set too high, such that it would have captured some management workers who are supposed to be exempt from the overtime protection rules. The rule was heavily opposed not only by several business groups, but also by numerous states that would have been impacted – in fact, the ultimate lawsuit that brought down the overtime rule was fined by the state of Nevada, which was the lead plaintiff along with 21 other states that sued. However, the judge did affirm that the Department of Labor has the right to set such overtime rules – as long as it bases them on a combination of both compensation and job roles/duties. In the financial advisor context, the elimination of the rule is significant, as it could have had a substantial impact on the compensation of everyone from high-hour-but-low-wages financial advisor trainees, to potentially some paraplanners and even administrative assistants (in high cost-of-living areas where wages for such roles may exceed $47,000/year). Ultimately, the Department of Labor may still re-propose a higher threshold overtime rule someday in the future, but for the time being the rule is officially dead.
HUD Announces New Reverse Mortgage Rules (Mary Beth Franklin, Investment News) - This week, HUD issued Mortgagee Letter 2017-12, which will adjust the reverse mortgage lending limits and costs for the Home Equity Conversion Mortgage (HECM) program. Specifically, the new rules will eliminate the current 0.5% upfront Mortgage Insurance Premium (MIP) that currently applies, and increase it to 2% instead (though the higher 2.5% upfront MIP for larger loan utilization is eliminated); on the other hand, the ongoing annual Mortgage Insurance Premium will be reduced from 1.25% of the outstanding mortgage balance down to only 0.5%. In addition, the expected rate assumptions will be lowered as well, which effectively will reduce the maximum borrowing limits on the HECM program by up to about 10%. From the Federal government perspective, the changes were "necessary" to increase the flow of dollars into the HECM insurance program, and to limit the Federal government's exposure to reverse mortgages someday going "underwater" (where loan proceeds compound in excess of the value of the home, resulting in a potential loss to the insurance fund). Yet at the same time, improved solvency for the HECM program will come at higher upfront costs for most consumers and reduced borrowing limits. The changes are especially inhospitable to the popular financial planning strategy of a "standby reverse mortgage", as the higher upfront cost increases the risk of simply spending on a line of credit the borrower never needs, and the lower principal limits and expected rate assumptions will reduce the growth of the line of credit in the future. Notably, the new rules will not affect the costs and lending limits for any existing borrowers... only for those who take out a new (HECM) reverse mortgage beginning on October 2nd of 2017.
Your Trades Will Soon Spend Less Time Stuck In Market's Plumbing (Annie Massa, Bloomberg) - The standard financial planning curriculum teaches that when most securities transactions occur in the stock market, they are settled in three days, which is commonly known as "T+3" (trade date plus three days) settlement. The original purpose of the T+3 rules was to allow time from when a trade occurred, until the actual physical stock certificates had to be delivered from the seller to the buyer to settle the trade. Of course, in an electronic world, trades and the subsequent settlement can and often do happen much faster, and as a result markets around the world are beginning to "modernize" by shortening the time period for settlement. Accordingly, after a 2-year build-up, this Labor Day weekend, US markets will be making a shift from T+3 to T+2 for most securities (though investments with shorter settlement periods, such as mutual funds that typically clear in T+1, will continue to use shorter time periods), following on a similar recent shift in other markets around the world (as Europe shifted to T+2 in 2014, and Australia, New Zealand, and Hong Kong have also made similar shifts in recent years). The US markets took a bit longer, simply because of its sheer size and complexity, as the changes were estimated to cost hundreds of millions of dollars. For most clients, the change will hardly be noticeable, but it does mean that cash is available one day earlier after selling an investment, and perhaps, more importantly, the change also reduces the overall systemic risk of the financial system (i.e., the danger than in a financial meltdown a brokerage firm might default and be unable to complete all its settlements). Of course, in the future, the settlement cycle may still shorten even further, as in theory in a world of electronic trading, it may eventually be possible to settle trades "instantaneously" (or at least, within the same day or hour).
How The Financial Services Industry Is Using Social Media (Amy McIlwain, Wealth Management) - Social media company Hootsuite recently launched a new Research Hub, which parses all the data regarding what social media platforms its users use, and how. When segmented specifically to use within financial services, the data reveals that when it comes to conversations and posting content (as opposed to just where advisors create accounts), the most popular platform for financial services is actually Twitter, followed by Facebook, and only then LinkedIn (with Instagram to follow) – likely due to the fact that Twitter is especially conducive to conversation and back-and-forth exchanges (while LinkedIn is more for static content that takes longer to develop). In terms of content distribution, the data finds – to perhaps no great surprise – that financial services firms primarily distribute content during the normal workweek of Monday through Friday, with a (slight) peak on Wednesdays, and far less on the weekends, with most content posted mid-day (e.g., 9AM to 4PM). Ironically, though, studies on what consumers actually use finds that financial services firms may be mismatched; the best time to post to Facebook for activity is actually during the weekend, and both Twitter and LinkedIn see optimal posting times (for engagement) around 5PM to 7PM (and Instagram shines in the evening hours as well). Another notable data point: Advisors post photo or video content for most Facebook posts, but only about 1/3rd of Twitter and LinkedIn posts, despite the fact that Tweets with photos generate a 35% increase in retweets or shares.
Advisors Turning To Text Messages To Communicate With Clients (Liz Skinner, Investment News) - Advisors are beginning to express a growing interest in using text messages for communicating with clients, given the unfortunate reality that emails are often drowned out in the volume, while most people still have their smartphones handy and respond more readily to text messages. At this point, the estimated adoption of text messaging by financial advisors is still under 10%, but is expected to pick up, especially since FINRA recently clarified some of its guidance on required archiving for text messaging with clients in Regulatory Notice 2017-18. Accordingly, providers like Hearsay and Smarsh have recently introduced software solutions for advisors to archive text messages (and follow other required regulations, such as getting permission from clients before texting them). One advisory firm, oXYGen Financial, has been using text messages to distribute regular tidbits of monthly financial advice via text message, and now has a "texting" list of more 10,000 subscribers, and finds its open rate is nearly 90%!
The Facebook Marketing Guide For Financial Advisors (James Pollard, Iris.xyz) - Facebook is one of the largest digital marketing platforms in the world, even though it's used very little by financial advisors. Accordingly, Pollard provides a series of tips on how financial advisors can get started with Facebook marketing and advertising, including: recognize that a Facebook ad spend is not an expense, it's an investment (because it can bring in new revenue that more than pays for itself!); when you find something that works, quickly expand your spending on it (after all, if you can generate $2 of new revenue for every $1 you spend, why not immediately spend as much as you can, because every dollar you spend is literally coming right back to you two-fold!); view Facebook as an amplification tool, where you start by taking content you've already found "works" on a small scale, and try to ramp it up (by spending on Facebook advertising to expand its reach); test multiple ads, as you never know which images and text will perform best (but fortunately, Facebook makes it easy to test and compare them side-by-side); remember that while you may generate interest on Facebook, ultimately you need to move prospects "from rented land to owned land" by getting them to your website (where you can offer them something to collect their email address and move them into your ongoing prospect list); realize that because you want people to come to your website, the primary metric to track is not just Likes and Shares on Facebook, but what actually produces clicks through to your own website; leverage Facebook's "retargeting" capabilities by sending ads to people who already visited your website, inviting them to come back and do business (since you already know that they have some interest!); and watch your "ad frequency" or how often your ads are being served, as if the number creeps too high, it means you're hitting the same audience with too many repetitive ads, and the efficacy is likely to fall off.
The Five Points That Belong On Every Advisor's Website (Bob Veres, Advisor Perspectives) - The average consumer faces what Bob Veres calls "The Jaffe Dilemma", after finance columnist Chuck Jaffe who once observed years ago how two advisors can both charge the same 1% AUM fee for the same portfolio and provide substantively different services (e.g., one provides comprehensive financial planning and ongoing portfolio management, and the other "just" delivers portfolio management using buy-and-hold index funds). Veres notes that across the entire financial planning profession, advisors offer as many as 13 different categories of service, from college planning to retirement planning to estate planning, cash flow and budgeting, insurance, and more... which might cumulatively add up to far more value than an advisor who "just" manages a portfolio for the same fee. Accordingly, Veres urges advisors to clarify both their costs, and their value, in their website marketing, with five key elements: 1) list your fee schedule, so people clearly understand what they'll be paying (because like it or not, most want to know up front!); 2) list the services that you (or your firm's advisors) provide for your compensation, so it's clear what you do (and how much you actually do!); 3) try to give prospects an idea of the potential dollar value of the value that you provide, since the truth is that most clients have any idea what rebalancing is worth, or the true benefit of tax loss harvesting, not to mention the more complex forms of value an advisor provides; 4) share stories about clients who had been managing their own affairs, and how you are now helping them as a central hub to keep them organized and provide them ongoing advice (as while you can't use testimonials, you can share anonymous "case study" examples to demonstrate and explain your value!); and 5) explain how clients should compare fees between what they pay to other advisors versus you (including what they may not even realize they're paying!).
Are Your Prospects Slipping Through the Cracks? (Julie Littlechild, Absolute Engagement) - Most financial advisors measure the success of their marketing and sales by the number of prospects they talk to, who actually become clients. But Littlechild points out that the real number to measure for marketing is what percentage of prospects who stop by your website ever take the time to contact you and meet with you in the first place. Of course, the irony is that most advisors don't even measure this to know, but with tools like Google Analytics available, it's possible to find out how many people are visiting your website but not ever contacting you to do business. Which, for most advisors, is a lot; in fact, in a world where most advisors get "no" new business from their websites, it effectively means they're failing with 100% of their website prospects! So how can advisors avoid having these prospects slip through the cracks? Littlechild advocates a 7-step process: 1) add value before the prospect even becomes a prospect, by offering them something of value for free to connect with them (e.g., an e-book or article or report or checklist, in exchange for their email address); 2) make sure the messaging on your site is well targeted to your particular niche or desired clientele (recognizing that if you're already failing with 100% of prospects, if you fail with "just" 99% by turning them off, that's an improvement!); 3) Get the prospect's contact information into your systems so you can follow up with them (once they respond to #1); 4) begin to personalize your communication to the prospects, based on how they're interacting with your content/website; 5) begin to ask prospects an occasional follow-up question (e.g., via email) to engage them and learn a little more about them; 6) further customize your communication to the prospect based on their responses to #5; and 7) be certain you have a regular process (e.g., an ongoing blog or newsletter) to stay in touch with the prospects and keep yourself top-of-mind to them!
Linear Thinking In A Nonlinear World (Bart de Langhe & Stefano Puntoni & Richard Larrick, Harvard Business Review) - Human brains think linearly. For instance, if you were asked "Is it better for fuel savings to replace 10MPG (miles per gallon) vehicles with 20MPG, or 20 MPG vehicles with 50MPG ones", most of us would intuitively answer that a 30MPG increase (with the latter) is better than a 10MPG increase (with the former). Yet in reality, if you measure how much gas is actually saved when someone drives 1,000 miles, it turns out that going from 10MPG to 20MPG saves 500 gallons, and going from 20MPG to 50MPG only saves 300 gallons of gasoline; in other words, the relationship is nonlinear, and the savings is actually better going from 10MPG to 20MPG than from 20MPG to 50MPG! In fact, going from 20MPG to 100MPG still isn't as much of an improvement in actual gallons of gasoline saved, as going from 10MPG to 20MPG is! Unfortunately, though, our brains just aren't hard-wired for these types of nonlinear relationships. And it creates problems, as we can make substantively wrong business decisions with it as well. For instance, if your choice is to discount your prices by 20% and get a 20% sales boost, or discount by 40% and get an 80% sales boost, most of us would intuitively pursue the latter for the bigger sales volume; but here, again, a more detailed analysis reveals that, once you consider any reasonable level of costs, the net profits are actually better with the smaller discount than the larger one, as the relationship again is nonlinear. And the pattern can impact businesses in other ways, as well. For instance, consumer behavior is also nonlinear – moving a client satisfaction rate from a 3 to a 4 (on a 1-5 scale) doesn't make nearly as much of a different as moving them from a 4 to a 5, as "5s" are raving fans who refer, while both 3s and 4s may not be substantively different in their referral ratings. (This is why tools like Net Promoter Score are so popular these days!) Of course, not all nonlinear relationships are the same, either – some rise gradually and then more steeply, while others rise rapidly and then more slowly, and the same is true for declines. The fundamental point, though, is that it's crucial not just to look at indicators, but actual outcomes – for instance, if you measure clients by profits and not revenue, you may find your "optimal" strategy for getting new clients is very different, and if you measure client engagement by actual referrals (and not just satisfaction ratings), you may find different ways to focus your resources.
Inversion: The Crucial Thinking Skill Nobody Ever Taught You (James Clear) - The ancient stoic philosophers had an exercise called "premeditatio malorum", which translates to "premeditation of evils". The idea was to envision the negative things that could happen in life, as a way to prepare for future challenges – for instance, imagining what it would be like to lose their jobs and become homeless, or suffer an injury, or lose their reputation – a marked distinction from the "traditional" approach today, which is all about having people focus and vision (just) their success and what it will take to achieve that success. And as Clear notes, there is actually a substantial critical thinking value to this kind of "inversion" thinking, where you consider the opposite of what you want, and its implications. The strategy is helpful not only for setting goals and strategies, but thinking through problems – as often when you come at a problem from the opposite direction, prior roadblocks vanish and the path forward becomes clear. The approach fits in realms from mathematics to business and even to art (Nirvana produced Nevermind for $65,000, in an era when metal bands like Poison and Def Leppard spent millions to produce and promote each record). And at an even more basic level, inversion recognizes that for much of life, the key is not about pursuing success, per se, but simply about avoiding catastrophic failures (which is perhaps equally true when it comes to your investing and finances!). Other applications of the approach include: instead of trying to figure out who is a good manager, envision a terrible one, and then fire anyone who has a too-close resemblance to that description; don't market by trying to figure out what would attract new clients, but by focusing on what might alienate them (and then avoid it); approach a project by assuming it failed, figure out what would have made it fail, and then avoid that; consider what would make you less productive, realize that that's what distracts you, and then eliminate it; etc. The fundamental point: you can learn just as much from identifying what doesn't work, as trying to spot what does, and accordingly inversion isn't about finding good advice, but finding the "anti-advice" to avoid!
The Difference Between Amateurs And Professionals (Shane Parrish, Farnam Street) - In the modern world, some people manage to achieve tremendous success, while others of us struggle and just feel like we're treading water. Parrish suggests that the difference is driven in no small part by the differences in mindset between most of us – who act like "amateurs" – and those of us who approach our lives and careers as a bona fide professional. So what's the difference between the two? Parrish provides numerous examples, including: Amateurs stop when they achieve something, while professionals understand that the initial achievement is just the beginning; Amateurs have a goal, but professionals have a process; amateurs think they are (or can become) good at everything, while professionals understand their circles of competence; Amateurs value performance (even if isolated), while professionals value consistency; amateurs give up when there's trouble, but professionals see failure as part of the path to growth and mastery; amateurs try to improve weaknesses, while professionals focus on their strengths (and find people who are strong where they are weak); amateurs blame others, while professionals accept responsibility; amateurs show up inconsistently, but professionals show up every day; amateurs think in absolutes, but professionals think in probabilities (and recognize a range of possible outcomes); amateurs try to go faster, but professionals try to go further. Do you need to change your mindset to break through to the next level of success?
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.
1,000 miles at 10MPG requires 100 gallons; 1,000 miles at 20MPG requires 50 gallons: a reduction of 50 gallons. 1,000 miles at 50MPG requires 20 gallons: a reduction of 30 gallons. The reduction in total gallons is greater going from 10MPG to 20MPG than from 20MPG to 50MPG but as a percentage, 10MPG to 20MPG is a reduction of 50% but 20MPG to 50MPG is a reduction of 60%. The law of diminishing return in action.
What are some of the good text message tools available for advisors? Any providers with Salesforce integration and third party Outlook add-in?