Weekend Reading for Financial Planners (Sep 21-22)

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.

50th Anniversary Of Financial Planning: Financial Planning Founders Started A Movement, And Created A Profession (Investment News) - As recorded in "The History of Financial Planning", it was December of 1969 that 13 individuals, from mutual fund salespeople to stockbrokers and life insurance agents, gathered together in an airport hotel near Chicago to plant the seeds of what is now known as financial planning, a shift away from the product-centric sales focus of the time to helping people more holistically manage their finances. Out of that first meeting emerged the International Association of Financial Planning, and what is now the College for Financial Planning, which graduated its first class of 42 CFP professionals a few years later in 1973, growing what is today nearly 85,000 CFP certificants in the U.S., and another 181,360 around the world. That first class of the College of Financial Planning also created the Institute for Certified Financial Planners (ICFP), spawning what would be a long-standing tension and competition between the two that didn't end until 27 years later when the two merged into today's Financial Planning Association. Along the way, financial planning went through many evolutions, including the shift from what was entirely "financial planning as a loss leader to get product transactions" in the early days, to the rise of charging standalone financial planning fees in the 1980s and 1990s, which eventually led to a blending of brokerage firms using fee-based accounts (a rule challenged by the FPA in court that was vacated in 2007), and today's rise of alternative fee-for-service business models. Notably, though, a key battle throughout the past 50 years has been the standards to which financial planning should be held, which was debated early on, and is still an issue today with the CFP Board's first "fiduciary at all times" rule, 50 years after the profession was founded, only just now taking effect this October of 2019 (with enforcement delayed to next June of 2020).

Vanguard Pilots Digital-Only Financial Planning and Advice Product (Ryan Neal, Investment News) - This week, Vanguard filed an initial disclosure brochure with the SEC to launch a new digital-only financial planning and automated investing service to be called "Vanguard Digital Advisor". According to the brochure, the new Digital Advisor offering will be available to both Vanguard's direct retail clients and participants in employer-sponsored retirement plans, collecting information on client goals, time horizon, and risk tolerance, and then opening an account online and allocating the client's portfolio accordingly. The new Digital Advisor solution will be priced at just 15 basis points with a $3,000 minimum (as compared to 30bps and a $50,000 minimum for its human-CFP Personal Advisor Services solution), which is being viewed particularly as a shot across the bow at other robo-advisors, given that competitors like Wealthfront and Betterment are charging 25bps for such asset-allocated 'robo' portfolios (and, notably, often even use a significant allocation of the same Vanguard funds that Vanguard's Digital Advisor will ostensibly use itself for an even-lower robo wrapper fee). Of course, it's not entirely clear that Vanguard will be able to develop equally competitive technology to the startup robo-advisors... but as the success of Schwab's service has shown, along with Vanguard's existing Personal Advisor Services, both of which are drastically larger than Wealthfront or Betterment, at some point the sheer size, heft, and breadth of a national brand like Vanguard can still carry it quite far, even if the technology isn't fully on par.

RIA Buyers Charge To Newport Beach Moaning A Familiar Refrain: Not Enough Sellers! (Timothy Welsh, RIABiz) - At the latest Echelon "Deals and Dealmakers Summit", the consensus amongst buyers is that it's still very much a seller's market for RIAs, with a plethora of increasingly large RIA buyers looking for acquisitions to fuel their inorganic growth. The primary hunger, however, is for the relative dearth of 'large' firms, as $1B+ AUM RIAs now control 56% of the assets and 51% of industry revenues, yet make up only 3% of the total population... leaving acquirers to go increasingly 'downmarket' to smaller firms just to find buying opportunities. At the same time, buyers are increasingly trying to entice prospective sellers to sell, with a growing focus on the potential impact that a bear market could have on advisory firm valuations, as in the end, a 20% drop in markets can crash advisory firm valuations by as much as 70% (since ultimately advisory firms are priced on profitability, which collapses when top-line revenue declines come straight off the bottom line), which may 'force' firm owners to then hold for several more years waiting for a recovery. Either way, though, there is an increasingly wide range of prospective buyers, from those who seek to create cost saving synergies by acquiring firms and centralizing their infrastructure into a common platform, and others that are happy to acquire firms and let them remain quasi-autonomous to better support their entrepreneurial drive. Though with valuations driven to all-time highs with the competition, ironically even the buyers now increasingly acknowledge that it's getting expensive bidding each other up to buy prospective firms outright, and that it may be preferable to just try to attract advisors through recruiting instead - or as practice management guru Mark Tibergien puts it: "It is better to be the employer of choice, not the buyer of choice."

Half Of RIAs Open To Sale Talks, DeVoe Study Says (Ian Wenik, CityWire) - According to the latest DeVoe RIA M&A Outlook Study, the rise of RIA valuations and dealmaking activity may finally be enticing more advisory firm owners to consider selling at least a portion of their firm to an outside investor, with a whopping 50% of firms indicating an openness to the discussion (up from just 33% two years ago). Notably, though, not all talks of potential outside investors are for the purpose of advisors selling to exit and leave the firm; instead, DeVoe finds that a number of advisors are considering outside investors specifically to raise capital in order to further fuel their own acquisition potential, with 54% of RIAs looking to acquire another firm (and 75% of those with $1.5B+ in AUM), but only 25% of advisors actually expecting to sell their businesses in the next two years. And the biggest driver of selling activity in the first place is simply that firms are struggling with their own succession plans, with only 32% of firms surveyed expressing any confidence that their next-generation advisors would even be able to buy out their firms' founders.

RIA Feeding Frenzy Moves Downmarket (David Sterman, RIA Intel) - The rapid pace of advisory firm acquisitions in recent years may finally be reaching the point where most of the large ($1B+ AUM) firms that were going to be sold have been, such that a recent TD Ameritrade report on RIA M&A found that for the first time ever the majority of RIA acquisitions in 2019 have been more "mid-sized" firms in the $100M to $500M range instead. The shift appears to be further driven by the fact that small-to-mid-sized firms are less likely to have formalized succession plans, leaving them few alternatives to a sale (for which there is no shortage of interested buyers). In fact, with Cerulli projecting as many as 40% of today's advisors will retire in the next decade, and a recent FPA study finding that more than 75% of advisors lack a formal succession plan (which can often take 5-10 years to execute even when done well), some suggest that the industry may still only be in the early stages of an additional wave of retirement-driven acquisitions and consolidation. Still, though, for the time being, there appear to be far more buyers than sellers, and while RIA valuations have been at record highs, many prospective sellers still overvalue their firms (most commonly by overestimating the multiple and revenue and failing to realize that their below-average profit margins won't support such terms). In addition, the real driver of a successful acquisition is still about finding a strong philosophical and cultural alignment between the buyer and seller... and clarity from the seller about whether they really want to sell and exit, or not, when the time comes.

Selling Your RIA To A Consolidator (Zachary Milam, Mercer Capital) - For advisory firm owners who do want to sell their firms, there are a number of choices about how to exit, though one of the most common buyers (who often have the deepest pockets) are the so-called 'RIA consolidators'. The basic concept of an RIA consolidator is simple - serially acquiring multiple RIAs to gain more size and better economies of scale, in the hopes that the whole will be worth more than the sum of the parts. And thus far at least, RIA consolidators have had a lot of traction, with most growing their AUM at double-digit growth rates over the past 5 years, and accounting for an increasingly large portion of the overall M&A deal volume for advisory firms. Notably, though, many RIA consolidators don't just want to buy a firm where the founders immediately walk away; instead, it's common for founders to still be required to stick around for a number of years after the close (to ensure the smooth transition of clients and the development of next-generation advisors to take over those clients). Which means it's especially important to clarify what 'post-deal life' will look like for the seller, as some firms require significant standardization (i.e., the seller must fully assimilate to the acquirer's back-office systems and technology and brand and investment and planning processes), while others are more open to a 'stay as you are' approach and letting the selling firm continue to run largely as-is while centralizing just a small subset of back office capabilities. Financially, consolidators do tend to pay 'competitive' prices, although the exact terms of the structure vary depending on whether they're pursuing strategic synergies and cost savings, or are simply trying to acquire and participate in the economics of the cash flows; either way, though, consolidators typically acquire 100% of the RIAs they purchase (rather than just taking minority stakes to fund 'growth capital'), while sellers/shareholders who maintain any ongoing/future interest typically do so through earnouts and employment agreements (or possibly taking on shares in the consolidator itself, as deals often use the consolidator's stock as at least part of the consideration).

Focusing On The Wrong Niche Could Be A Disaster  (Patrick Brewer, Advisor Perspectives) - The benefit for financial advisors of focusing on a niche is that it can truly differentiate the advisor as a specialized expert who prospects can seek out (improving the firm's inbound marketing), while bringing financial planning efficiencies by being able to create a more repeatable process for a standardized clientele. The caveat, however, is that not all niches will necessarily 'work', as it's still necessary to choose a niche that can be profitable to serve in the first place. Brewer suggests that viable niches can be identified by ensuring they have the five Ps: Pay (be certain that your target clientele have the financial wherewithal to pay you, and be cautious that you're not just trying to differentiate on cost or fee model alone); Pain (your value proposition must relieve a significant pain point for your prospective niche, which is why women going through a divorce or physicians juggling student loan debt 'works', but just trying to 'niche' in serving plan participants at companies with fewer than 50 employees won't likely work because there is no clear pain point that motivates them to action); People (there must be enough people in the prospective niche, which doesn't take a lot as advisory firms can be successful with just 50 Great Clients, but that means the niche doesn't just need 50 people but enough to meet all 5 Ps in sufficient volume to attract a portion of them); Platform (if you want to reach the niche, you need a plan for what platform you'll use to reach them, whether it's networking through an association they belong to, key COIs that are relevant in their community, or targeting them via Facebook ads on social media, etc.); and Professionalism (be certain that you can still show up professionally in the niche you're targeting, especially if your connection to the niche is through a hobby like motorcycle riding).

Differentiating Yourself When All Advisors Sound Alike (Bryce Sanders, Iris.xyz) - When it seems 'everyone' who's a financial advisor claims that they'll provide comprehensive financial advice customized to the needs of their clients, it's increasingly difficult for most advisory firms to stand out and distinguish themselves. Especially since in the end, whatever the advisory firm says it will do is still contingent on the prospective client believing and trusting that the firm will actually be able to deliver. So what can the firm do to validate its claims? Sanders offers several suggestions about how to "prove" the firm's credibility, including: if the firm wants to demonstrate its integrity, don't just say it, but 'prove it' – show the firm's years in the business, assets under management, number of clients, etc., that provides social proof that others who engage the firm are finding the firm has integrity (or else they wouldn't stay), and consider an 'Awards' tab that highlights the industry recognition the firm has received; size often matters as well (as more affluent clients do tend to choose larger advisory firms), so if the firm really does have some size, communicate that clearly by reporting the number of offices/locations and number of advisors; if the firm manages assets, its research capabilities to manage those assets matter, so highlight the depth of the research team, their years of experience and credentials, etc.; if the firm is committed to serving its clients better, talk about how much the firm reinvests into technology (e.g., as a percentage of revenue); and to demonstrate the firm's commitment to the community, be certain to talk about how the firm is connected to the community (e.g., how long it has been in the area, details of how long employees have served/lived in the community, ways that the firm engages with the community, etc.). The key point, though, is simply to recognize that it's not enough to just say "trust us, we'll take great care of you", there are a number of relatively straightforward ways that firms can provide additional data and details to support the point to a prospective client.

5 Profitable Truths For Financial Advisors Ready To Grow Online (Margie Shard, Financial Advisor) - For many advisory firms, the primary challenge is convincing prospective clients to actually sign up with and engage the firm for services. For others, though, their value proposition and sales process is strong... the biggest issue is simply finding more prospective clients to get in front of in the first place. For which the internet is a tremendous opportunity for prospecting and attracting prospective clients... but only when the firm's digital marketing is executed properly. Key steps include: consumers can easily browse advisory firms (or social media profiles) quickly, so it's essential to have a crystal clear message for the target clientele you serve (i.e., rather than inviting everyone to get to know you better, which takes time they won't invest, stand out with a strong clear message that will instantly resonate with your target client, recognizing that while it won't connect with the rest, neither would generic marketing messages anyway); having good messaging isn't enough if the firm doesn't have a way to drive traffic to their website in the first place, as sales and marketing are still a numbers game (whether doing networking and seminars, or trying to attract prospects online); getting traffic to your website won't help, if you don't have a way to capture the prospect's information by offering something of value (e.g., a short webinar, an e-book, etc.), that persuades them to turn over an email address so the firm can stay connected and continue to market to them (as it still often takes 5-7 exposures or even more to the firm's brand before a prospective client establishes the necessary trust to be willing to engage); if you're going to email prospects after getting their address, it's still necessary to have clearly targeted content that speaks directly to their pain points (as generic financial education information is available on lots of other websites); and once you create a digital marketing funnel, recognize that it's still important to test different messages and approaches to see which ones resonate and generate the best results.

Are You Negotiating Against Yourself? (Mark Tibergien, ThinkAdvisor) - The latest industry benchmarking studies show record highs in advisor productivity (i.e., the amount of revenue that the average advisor services), but the caveat is that this may be more a function of markets lifting client portfolios (and their AUM fees) than improvements in advisor pricing and servicing efficiency. Still though, 28% of advisory firms last year at least re-worked their AUM fee brackets, with more than half raising their fees overall, while just 10% of firms reported lowering their advisory fees. However, Tibergien raises the question of whether these firms are raising and lowering their fees because they're actually mispriced and needed to charge more or less... or if the fee changes are primarily a function of top-performing firms getting more confident and therefore raising their fees, while firms that are struggling and are less confident are succumbing to the rumors of fee compression and falling on their swords by cutting their own fees in advance. Or stated more simply, how many advisory firms that are cutting their fees are doing so not in pursuit of a deliberate pricing starategy, but simply because they're "negotiating against themselves" instead? For instance, is the firm cutting fees because of a few isolated conversations from clients or prospects that had pushback (when in truth, a good fee schedule should generate at least some pushback from some prospects), because it sees headlines about pricing pressure and is reacting out of fear without any actual client pushback, or because it actually wants to be a (discounted) price leader to grab market share? To ensure that pricing is actually reasonable, Tibergien suggests starting with a more bottom-up approach, by dividing total expenses of the business by the number of clients (which gives a raw estimate of cost-per-client), targeting a gross profit margin to earn on top of the raw costs, and then grossing up the required fee to charge accordingly. And then consider what you actually communicate to clients that justifies a potential premium pricing... recognizing that "We deliver comprehensive portfolio management, tailored to your needs. We are committed to integrity, trust and the fiduciary standard" won't do it, because that's precisely what everyone else says for the same fee!

Advisers Must Step Up And Articulate Their Value (Jodie Hampshire, Firstlinks) - A growing base of research in recent years has attempted to quantify the value of financial advice to consumers, with various studies from Morningstar, Vanguard, and Envestnet. Now a new "Value Of An Advisor" study from Russell Investments is out, which provides an interesting A + B + C + P + T framework for an advisor's (quantified) value. In this context, "A" is for Annual rebalancing, which notably is difficult to measure because it depends on exactly what asset classes are being rebalanced (as in some cases rebalancing increases returns, but in others it may decrease returns albeit with the benefit of managing risk exposure that can otherwise result from unrebalanced portfolio drift). "B" is for Behavioral mistakes, and the difference between what markets deliver and what investors earn, with Russell estimating this 'behavior gap' of returns at 1.9%/year based on ICI monthly fund flows. "C" is for the Cost of getting it wrong with their asset allocation, particularly for those who under-invest in growth assets, who can leave substantial returns on the table (which Russell estimates at 1.6%/year based on the return differences of a 30/70 conservative portfolio and the 70/30 growth portfolio a younger investor might have otherwise owned). "P" is for Planning, and all the beyond-portfolio advice that an advisor delivers (which, notably, is especially difficult to measure because it may not relate to the portfolio and a percentage-of-assets calculation in the first place). And "T" is for Tax-smart investing, including proper asset allocation, which Russell estimates at 0.9%/year or more. Cumulatively, the results suggest that an advisory firm may add as much as 4.4%/year in additional wealth, though notably those results place an extremely heavy load on the cost of investors getting their asset allocation wrong (too conservative) and then trying to market time (which isn't necessarily a problem for all clients)... though the results ultimately don't quantify the value of financial planning advice at all.

Consumers Value Adviser Honesty Most, Survey Finds (Alan Hudson, Financial Planning Today) - According to a new consumer research study from the UK, a plurality of investors stated that what gives them the most confidence in their financial advisor's recommendations was not open lines of communication (36%), previous performance (37%), or familiarity with the client's situation (41%), but simply the perceived honesty of the advisor themselves (46%). Which, ironically, may itself be a testament to the low trust that UK consumers place in financial advisors (arguably a parallel challenge here in the US as well), and in fact just 7% of UK investors stated that they were loyal to their current advisor, with 77% stating that they were quite willing to switch advisors if they didn't feel they were receiving value for their money. Ultimately, though, the key point is simply that while there's a growing focus on financial advisors better articulating their value proposition, in the end the biggest challenge may be that consumers simply don't trust the promises that financial advisors make (whatever value it is that they're trying to articulate).

Vanguard Releases New Framework To Calculate An Advisor's Value To Clients (Bernice Napach, ThinkAdvisor) - Given the growth of Vanguard's own human CFP professional advisor solution (Personal Advisor Services), in recent years the company has become increasingly involved in research trying to demonstrate and quantify the value of a human financial advisor. This week, the company released a new study, aptly titled "Assessing The Value Of Advice", that looked to Vanguard's own broad base of human-advised clients (now with over $100B in AUM, with the median client being a 65-year-old with a $250k to $500k portfolio) to evaluate the financial (and other) benefits and outcomes of working with an advisor. When it comes to direct portfolio benefits, Vanguard compared 44,000 client portfolios from what they owned on a self-directed basis, versus what they owned after 6 months of working with an advisor, and found that on average cash allocations dropped substantially from 16% to 1% as clients got fully invested, 10% of investors reduced single-stock concentrated positions, equity allocation rose slightly from 58% to 60%, but over 90% of clients broadened their international diversification. In terms of achieving their financial planning (most commonly, retirement) goals, Vanguard found that 80% of their clients had an 80%-or-better probability of success (though notably, that may be more a self-selection bias of who has enough wealth to use the program and hire an advisor in the first place). Though Vanguard did find that the emotional connection to the advisor was especially crucial, with the biggest perceived value of advisors tied to the advisor being trustworthy, having a personal connection to the client, and being able to provide reassurances in down markets, with Vanguard estimating overall that 45% of the client's assigned value to the advisor relationship was tied to the emotional aspect of the advisory relationship.

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.