Executive Summary
Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an announcement that there's a new "fiduciary registry" being launched by the Institute for the Fiduciary Standard, with public support from TD Ameritrade and Pershing Advisor Solutions. The new registry aims to highlight firms that proactively embrace a more holistic fiduciary standard than the still-limited versions currently adopted by both the SEC (pertaining to RIAs) and the Department of Labor... and in the process, raising the question of whether firms can still compete by trying to be the 'most fiduciary' as a differentiator at all.
From there, we have several articles on advisor technology this week, including a recent study finding that if advisors want to reach younger "HENRY" clients (High Earners, Not Rich Yet) it's essential to serve them in a more tech-savvy manner, software reviews of new retirement tools Last Advisor and Nest Egg Guru, and a look at the recent announcement that eMoney Advisor is aiming to build out a substantial suite of DoL compliance tools to complement its core financial planning software.
We also have a series of articles looking at the continuing evolution of DoL fiduciary's impact on advisory firms, from a prediction by Ric Edelman that as many as half of all of today's financial advisors will be driven out by the DoL fiduciary rule (clearing the way for more fiduciary- and client-centric advisors to take their place), a look at whether some advisors are selecting applying fiduciary rules in today's environment (e.g., by building fiduciary portfolios but ignoring the more holistic demands of the fiduciary standard on the business), a prediction from Cerulli that the fiduciary standard will lead to more 'cookie-cutter' portfolios and less freedom/flexibility for most advisors, and a prediction that despite the push for economies of scale to handle compliance concerns a look at other industries suggests solo financial advisors and small RIAs will continue to survive and thrive going forward.
We wrap up with three interesting articles, all focused around the theme of the wealthy: the first is an excerpt from a new book entitled "Capital Without Borders", that studied how ultra-high-net-worth clients engage with family wealth managers; the second is a look at how the "pentamillionaire" (with more than $5M in investable assets) is becoming the new millionaire, as there are now more than 1,000,000 US households that have reached the pentamillionaire status (having grown by 38% in just the past 5 years); and a fascinating exploration of how in theory it's the poor who have to work extreme hours and the rich who have time for leisure, but in practice it's turning out that 1-in-5 men in their 20s without a college degree is long-term unemployed (and that 3/4ths of their newfound 'leisure time' is being spent playing video games!), while higher income individuals have experienced the greatest decline in leisure time over the past generation.
And be certain to check out Bill Winterberg's "Bits & Bytes" video at the end, which this week recaps the highlights of a new hackathon for advisor technology development, hosted this week at the 2016 eMoney Advisor Summit.
Enjoy the "light" reading!
Weekend reading for September 24th/25th:
New Fiduciary Registry Will Promote Advisers Who Adhere To Strictest Guidelines (Ann Marsh, Financial Planning) – This week, the Institute for the Fiduciary Standard announced that it will be launching a new registry of fiduciary financial advisors, entitled the “Fiduciary Advisor Affirmation Program”. In order to be involved, advisors and their firms must include the Institute’s “fiduciary best practices” and professional code of conduct on their website and in their Form ADV, which include requirements for clear disclosure of costs, truthful communication, minimizing material conflicts of interest, etc., in a manner that is more stringent than either current RIA or DoL fiduciary rules. The significance of the approach is not merely that advisors would declare fealty to a higher level of fiduciary standard, but that by requiring firms to explicitly acknowledge these principles in the firm’s ADV, it grants the Institute’s fiduciary code additional authority, as an advisor introduces potential liability if they claim to follow these fiduciary principles but then fail to do so. The new registry received public support from TD Ameritrade Institutional and Pershing Advisor Solutions, though it remains unclear whether or how the Institute will promote the registry more broadly (to actually get potential clients to utilize and engage with it), and whether consumers will be able to sufficiently understand the differences in the registry’s fiduciary standard from all the other RIA and DoL fiduciary standards.
Digital Advice Key To Winning Young And Wealthy Clients (Sean McDermott & Johanna Hife, Financial Planning) – A growing number of advisory firms are expressing interest in reaching younger clients as a way to diversify their client base away from retirement-centric Baby Boomers who are increasingly drawing down their portfolio assets. Of particular interest are the “HENRY” segment – High Earners, Not Rich Yet – who are under age 45, and have a substantial income (e.g., $100,000+), but have not yet accumulated substantial investable asset (e.g., less than $200,000). And the good news is that at least some HENRYs do have a need for advisors; despite being more self-directed in general, 1/3rd report that they still don’t trust their own investing decisions, and over 2/3rds have a desire to simplify the investing process (potentially with the assistance of an advisor). However, the tech-savvy nature of HENRYs – who are already the most likely to use online managed accounts and other “robo” tools – may make them challenging for advisors to attract, given lagging advisor technology. In fact, the plethora of low-cost digital investing tools means that offering such robo services may become mere table stakes for advisory firms, which won’t necessarily lose clients to robo-advisors but may be judging unappealing by HENRYs for not at least also having robo-like tools. Other key tech-related transitions for HENRYs include: they prefer digital channels to in-office visits when opening accounts; they’re more open to video conferences to substitute for some in-person meetings; and they are more demanding of frequent communication (which necessitates better use of advisor CRM solutions).
Retirement Planning Software That Builds A Plan In Less Than An Hour (Joel Bruckenstein, Financial Planning) – In a world where most retirement planning software is relatively complex, a new contender called “Last Advisor” is aiming to compete with a much simpler and more streamlined approach. The software is built around its advisor/founder’s retirement planning approach called “Bucket Bliss”, a form of bucket strategy approach that breaks the portfolio into multiple time horizon buckets (e.g., for the first 5 years of retirement, the next 5 years, the next 5 years, etc.) to invest each accordingly (with increasingly aggressive portfolio allocations for longer time horizons). Ultimately, the software’s speed is driven from its relative simplicity; account balances are entered in the aggregate (rather than position by position), and the software is just focused on retirement (and not more holistic financial planning, so it can/should only be used modularly). And of course, it’s only relevant for advisors who support using a bucket strategy in the first place. Nonetheless, for advisors looking to begin doing retirement planning for the first time, particularly via a bucket approach, Last Advisor may be appealing. The software itself is available for $79/month for the tool itself, $99/month with supporting marketing materials, or $199/month with additional coaching directly from Last Advisor.
In A Crowded Field, Can Nest Egg Guru Stand Apart? (Joel Bruckenstein, Financial Planning) – With an ever-growing number of financial advisors focusing on retirement planning, there are more and more retirement-oriented software solutions to help advisors work with clients. A recent new entrant in the space is Nest Egg Guru, which aims to differentiate itself by providing tools to “stress test” retirement portfolios through random samplings of unfavorable historical market returns or allowing for projections that incorporate today’s low yields on bonds and cash. Clients interact with the software by going to a white-labeled client portal, where they can access the software’s retirement savings and spending calculators, and the software appears to be set up largely as a self-directed tool that prospects could engage with on an advisor’s website (e.g., the advisor might offer a “free retirement stress test analysis”). Notably, though, the software does not directly consider taxes, nor the different tax treatment of varying types of accounts, which means it probably won’t be appropriate for most advisors to rely upon as their primary retirement planning solution. Nonetheless, Bruckenstein suggests it may still be effective as a lead-generation tool for advisors, or one that advisors can use to support basic client education conversations around retirement planning and the potential impact of adverse returns, and it is favorably priced at either $30/month or $300/year.
eMoney Focuses On DoL Compliance (Ryan Neal, Wealth Management) – In the world of advisor fintech, 2014 was the year of advisor dashboards and client portals, while 2015 was all about becoming the integration hub for technology, and 2016 is shaping up to be the year of DoL fiduciary compliance tools. Accordingly, at this week’s eMoney Advisor annual summit, the big highlight was on transforming the financial planning software into “the industry’s first fiduciary-focused planning platform.” To fulfill this vision, in the coming months eMoney is adding new onboarding tools that will include one-click delivery and archival of Best Interest Contract Exemption (BICE) forms, new analytics to help home-office administrators identify trends or gaps that may run afoul of DoL fiduciary rules, and a new monitoring solution that will track key interactions between clients and advisors (from client event logs in the software to firm-level review of presentations and client acknowledgements of received materials). Other new features also announced in the eMoney development roadmap include more compliance-approved marketing content, and a new lead generation tool that advisors will be able to embed into their website to attract prospects. In the meantime, eMoney noted that it is also continuing to deepen its relationship with Fidelity since last year’s acquisition, from automatically populating clients’ Fidelity information into eMoney, to integrating Fidelity’s secure document vault, although the company also continues to emphasize that non-Fidelity advisors will continue to have access to eMoney’s core solutions as well (as an independent subsidiary company).
Many Advisors Won’t Survive The DoL Rule (Ric Edelman, Financial Advisor) – Edelman suggests that in the coming decade, nearly half of all financial advisors will be swept away by the revolutionary changes being spurred by the DoL fiduciary rule. The first to leave will be previously commission-based sales reps, who arguably weren’t really advising in the first place, but were simply making a living by pushing products that are no longer viable in a DoL fiduciary future. Brokers – and the broker-dealer platforms that support them – will also be impacted by the DoL fiduciary rule’s new pressure on various forms of revenue-sharing and indirect compensation arrangements. And the transition will be accelerated by lawsuits, given that the DoL fiduciary rule requires that consumers have the opportunity to file a class action lawsuit, which could drive entire companies out of business if they fail to reform their advisory ways. But ultimately, the fundamental challenge is that those who were primarily in the business of selling products don’t have the knowledge and experience to provide value through ongoing financial advice, which means they simply won’t be able to get clients and compete in a fiduciary future. Notably, though, the exodus of “bad players” may ultimately improve the industry’s reputation, and the improving consumer trust could actually enhance the profitability and viability of the survivors. Which means in the end, while the DoL fiduciary rule may eliminate a large number of financial advisors, it will also be a boon to those who can survive and reform their value proposition to remain relevant in the future.
Are Some Advisors Selectively Applying The Fiduciary Standard (Michael Nathanson & Gina Bradley & Jennifer Geoghegan, Advisor Perspectives) – Most discussion around the fiduciary standard is focused on whether various investment products are in the client’s best interests, and how the advisor is compensated for those recommendations, and Nathanson argues that the issue is broader. For instance, it’s impossible to serve clients’ best interests in the long term, if the firm doesn’t have a plan to ensure continuity in the long run; in other words, succession planning is no longer just about getting the value of the business for the founder when he/she retires, it’s also a fiduciary concern (as both state securities regulators and also the SEC are now recognizing), and that means not just having “young people” in the firm, but actually getting them trained and experienced enough to be able to take over and serve clients if necessary. In addition, for firms that are focused solely/primarily on providing investment recommendations, the question even arises as to whether it’s feasible to execute a fiduciary duty with a too-narrow investment scope; in other words, doing some level of more holistic financial planning may eventually become a necessary part of being an investment fiduciary, to really ensure that sufficient analysis was done to affirm that an investment was “best interests” in the first place. Or stated more simply, just being an investment manager that handles only investments with some support staff, but without any succession plan or more holistic service, may become not just a competitive challenge in the coming years (losing clients to firms that do more for clients and have more continuity), but an outright fiduciary concern.
Post-Fiduciary Forecast: Less Adviser Freedom, More Cookie Cutter Portfolios (Andrew Welsch, Financial Planning) – A new report from Cerulli Associates suggests that DoL fiduciary pressures are going to lead firms to offer a smaller range of simpler low-cost investment solutions, because higher fee managed portfolios and more product variability increases compliance risks for the firm. In fact, just last month Edward Jones announced that its transaction-based IRAs would now exclude ETFs, UITs, and mutual funds, driving consumers instead to choose from a smaller range of stocks, bonds, CDs, and annuities; other broker-dealers are reportedly considering whether to follow suit. In turn, the reduction in the range of products, and the shift towards simpler plain vanilla alternatives like low-cost ETFs, will put increasing pressure on advisors to deepen client relationships and provide financial planning services as a way to justify their value proposition. Cerulli notes that advisory firms also need to be prepared to improve advisor education about the fiduciary rule, especially given that it’s the advisors who are client-facing and have the most pressure to provide appropriate advice and properly document it to avoid subsequent legal scrutiny.
Not So Fast Big Boy: Small RIAs Will Survive The M&A Trend (Bob Veres, Financial Planning) – There is a wave of consolidation underway amongst financial advisory firms, with some small practices merging to create multi-partner entities out of a desire to achieve greater economies of scale, and others seeking to be bought by larger firms after failing to create a viable succession plan. Yet Veres suggests all is not lost for solo advisory firms trying to compete with mega firms that have superior scale; after all, the reality is that the planning profession and RIA community was largely born of solo advisors who were competing against large (brokerage) firms in the first place. And when we look at how other professions have evolved, it turns out that solo firms are ‘surprisingly’ robust in many fields. For instance, about 50% of law firms have been solos from 1980 to 2005, with little change over the decades; in other words, solo lawyers have not, in fact, been scaled out of business, and in fact it appears that many solo law firms are actually created from associates at large firms who decide to go out on their own rather than continue in a large-firm environment. Similarly, in the accounting world, a whopping 2/3rds of all accountants work at firms with 0 to 4 employees, and over 95% of accounting professionals work at firms with 19 or fewer employees (despite the incredibly large size of a few mega-national firms like Deloitte, Price Waterhouse, Ernst & Young, and KPMG). What all of this suggests is that while there may continue to be a growing number of mega-RIAs, the small/solo RIA may be far more robust than is suggested in the popular industry press. In fact, it may turn out that the small and lean nature of the solo firm may give it the deeper client service capabilities to remain highly profitable for a long time to come.
Penta Millionaires: The New Rising Class (Stacy Perman, Barron’s) – The country’s first billionaire was John D. Rockefeller, who reached the threshold in 1916, and by the mid 1980s the number of billionaires had still only risen to 44. Over the past 30 years, though, the ranks of the “megarich” have skyrocketed; there are now 492 U.S. billionaires, and slightly further down the wealth pyramid the growth is even faster, with the number of families that are at least “pentamillionaires” (more than $5M in investable assets) now topping 1,000,000 households. The growth in the $5M to $20M market in particular appears to be driven by a growing number of liquidity events associated with entrepreneurial businesses who have their “money event” – the sale of the business after what may have been a lifetime of building, that turns them from “business-rich cash-poor” individuals into ones with very large liquid portfolios. The demographics of the rising wealth are also shifting; these moneyed groups are more likely to be married, but the wife is no longer always a stay-at-home spouse, with a rising number of dual-income couples, and outright growth in the number of female ultra-high-net-worth (including billionaire) investors. The new rich are also getting somewhat younger as a group, particularly with the levels of superwealth being created around technology and social media. And this is spilling over in other words; younger individuals tend towards more high-engagement charitable giving, leading to recent explosive growth in social impact investing, to demands for new/different services in private banking. And the rich are more geographically dispersed as well; in the past, wealth was concentrated in the industrial corridors on the east and west coasts, but now three of the four fastest-growing cities for wealth creation are Dallas, Houston, and San Jose. Notably, though, despite the significant affluence being created around the country, new pentamillionaires are still struggling with financial fears and concerns, from the impact of low interest rates and market gyrations on their large account balances (which makes them feel ‘not wealthy’ despite the size of their balance sheet), to security (both financial and personal, from theft and fraud to cybertheft of personal information for blackmail), and especially about the impact that their newly liquid wealth may have on their children. In turn, this is leading to interest from pentamillionaires in everything from setting up trust funds, engaging in charitable giving as a family, and trying to come up with strategies that support their children but don’t ‘rob them’ of character-building opportunities.
The Free-Time Paradox In America (Derek Thompson, The Atlantic) – The classic view of leisure time is that the rich are supposed to have the most (having ‘cashed in’ on their wealth accumulation), while the poor have the least (given the need to continuously work just to make ends meet). In reality, though, the exact opposite trend is starting to emerge. In 2015, more than 1-in-5 men in their 20s without a college degree hadn’t worked in the prior year – despite the fact that 20-something male high-school graduates used to be one of the most dependable working cohorts in America. Instead, now, the whole age group is less likely to work, less likely to marry, more likely to live with parents or other close relatives. Yet perhaps surprisingly, these men are not unhappy; they self-report even higher satisfaction than the age group used to, even though (or perhaps, because) a whopping 3/4ths of their additional ‘leisure’ time is being spent playing video games. Structurally, the concern is that these men may become so disconnected from the labor market (and the dating pool) that they may become more challenged in future years as “rudderless middle-aged men” stuck near the poverty line and engaged with only cheap entertainment. On the other hand, though, some are suggesting that perhaps the opportunity for so many to live a ‘life of leisure’ is perhaps what our society was meant to build towards in the first place… a world where both the rich and poor have all the downtime they want or need, as John Maynard Keynes himself had forecast the 21st century’s work week would last just 15 hours, and the chief social challenge of the future would be the difficulty in managing leisure and abundance. Still, there is a counter-trend brewing as well – “elite men” (in wealth/income terms) in the U.S. are still the world’s busiest workaholics, working longer hours than poor men in the U.S. and even rich men in other advanced countries, and the group that has reduced its leisure time the most over the past generation. In other words, the path was supposed to be engaging in successful work in order to enjoy successful leisure time (in retirement), but instead those who work the most are working more while the leisure time is being absorbed by the less-skilled poor. Which raises the interesting question: why is this happening? At this point, no one knows, but there are three leading theories: 1) the availability of “attractive” work that is engaging has fallen (especially for young men, as jobs switch from a focus on physical labor in manufacturing to softer skills in retail, education, and health care), just as the availability of cheap entertainment is rising, and it’s the combination of the two (not just the rise of video games themselves) that is driving the shift; 2) there is a phenomenon of “conspicuous industriousness” (i.e., celebrating being a visible workaholic) that is cultivated amongst college graduates, a social force that ‘teaches’ them to aspire to working harder (which helps to explain not just why cheap entertainment is appealing to the high school unemployed, but also why college graduates are working longer than they used it); and 3) leisure time is getting “leaky”, where smartphones and computers mean our leisure time intersperses with work, such that perhaps the leisure gap isn’t actually so significant at all, and the problem is just that we don’t have a good way to measure this kind of ‘hybrid’ work/life engagement.
I hope you enjoy the reading! Please let me know what you think in the comments below, and if there are any articles you think I missed that 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. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read "FPPad Bits And Bytes" on his blog!
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