Executive Summary
Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a series of big news stories around broker-dealers, including the announcement that LPL is going to force most new hybrid advisors who join the platform to use LPL's own corporate RIA (and not outside RIAs, nor even the RIAs of its OSJs), the news that Mass Mutual is cutting its MetLife annuity trail compensation by a whopping 73% for advisors who left the MetLife broker-dealer in recent years (a potentially troubling precedent), and the emerging trend of smaller broker-dealers "tucking in" to larger B/Ds by becoming a branch OSJ in order to avoid the compliance and technology burdens of running a B/D while maintaining their team and culture.
From there, we have a few practice management articles, including one on how trying to make all your clients happy can actually reduce the success of the business (as it hopelessly divides the limited resources of the business), another on why it's better to try to win new client business by being "different" than just showing how you're "better" (in large part because few consumers will believe you when you say you're better anyway!), and a third on how to handle the news when you find out you're losing a great client (by changing your own mindset to focus on the capacity opportunity it creates!).
We also have several more technical articles this week, from a discussion of how it's not enough to just talk about "success" and "failure" risk of a retirement plan because there are really several different degrees of "bad" (from not maintaining a desired standard of living, to not being able to support a basic floor standard of living, or true depletion and bankruptcy), to a fascinating study that looks at what investors really want from an advisor's investment reporting (and how it's not only a performance reporting issue but also a trust issue), and a look at how our understanding of investor risk profiling is beginning to change with a more nuanced understanding of the different factors at play (which should only get better as we gather more big data on how investors really do behave).
We wrap up with three interesting articles, all focused on the theme of overcoming our own personal hurdles and demons: the first looks at how for successful advisory businesses, one of the greatest "risks" is becoming satisfied that the business is good enough, and never asking pushing it to be great (which leaves substantial upside on the table!); the second is the story of investment writer Morgan Housel, who was a lifelong sufferer of severe stuttering, but went through a personal shift that has allowed him to at least partially overcome his disability, to the point that he is now working actively as a professional speaker on behavioral finance and investment issues; and the last is the story of writer Jeff Goins, who transitioned from being "just" a successful writer to an entrepreneur and business owner, and grew the business to more than a million dollars of revenue... making himself miserable in the process, and ultimately leading him to make a difficult decision to "downsize" the business, which while scary ultimately led him to be substantially happier, and to take home substantially more in profit as well!
Enjoy the "light" reading!
Weekend reading for September 9th/10th:
Tensions Build With OSJs After LPL Financial's 'About Face' On Held-Away RIA Assets (Lisa Shidler, RIABiz) - After alluding this summer to changes that were coming, last week LPL announced a series of major changes to its rules for hybrid RIAs on its platform. First and foremost, effective November 20th, any advisor joining LPL will be required to have at least $50M of LPL-custodied advisory assets in order to affiliate with an outside RIA - which includes the RIAs of LPL's own large OSJs. New advisors with less than $50M of AUM will still be permitted to affiliated with an LPL OSJ, but will be required to put its advisory assets under LPL's corporate RIA. Which is a big deal, as the fees on a corporate RIA reportedly average 10-12bps, in addition to the fact that LPL profits from the underlying RIA custody and clearing of those assets as well. Notably, there will be exceptions to these rules for retirement plan advisors, certain acquisitions of smaller advisory firms, and W-2 employees. And any existing advisors with LPL already using outside RIAs are unaffected by these rule changes requiring <$50M advisors to use the LPL corporate RIA, although LPL also announced that starting January 1st of 2018, it will begin to assess a 5bps fee on hybrid RIA assets held away at custodians like Schwab and Fidelity. The net result is that as the advisory business shifts increasingly towards fee-based accounts and the RIA model, broker-dealers are finding themselves compelled to pivot towards the RIA model as well... and are then trying to figure out how they "get paid" and make money for providing services to those RIAs, especially on held-away RIA assets (as LPL reportedly has $375B under its corporate RIA, but assets of $166B at outside RIAs as well). And at the same time, the LPL move is also a warning shot across the bow that as the squeeze comes to the broker-dealer model, there is a rising risk for affiliated advisors, and even large OSJs, that the broker-dealer will be compelled to renegotiate its terms to defend the broker-dealer's profit margins.
MetLife Cutting Annuity Trails To Some Of Its Former Advisors (Bruce Kelly, Investment News) - When MetLife sold its Premier Client Group last year to Mass Mutual, a number of its registered representatives decided to leave and join other broker-dealers leading up to or in the aftermath of the deal. But now, Mass Mutual has announced that any MetLife brokers who left the company to join other broker-dealers will see their asset-based trails on five MetLife variable annuities and 11 fixed MetLife annuities reduced by a whopping 73%, down to just 27bps (from their normal 100bps trail). The change not only raises substantial questions about where the rest of the trail is now being paid – is it going to be rebated to the client, or will it simply line the pockets of the firm – but also raises troubling concerns about whether it will set a precedent for other insurance and annuity companies to arbitrarily cut trail payments for advisors who leave the insurance company's broker-dealer, especially as a growing number of insurance companies have been cutting their broker-dealer units loose with the DoL fiduciary rule looming (from AIG selling Advisor Group, to MetLife selling Premier Client Group, and mostly recently Jackson National selling NPH).
For Small B-Ds Becoming A Larger Broker-Dealer's Branch Office Is A Viable Exit Strategy (Bruce Kelly, Investment News) - With the ongoing challenges of the broker-dealer business model, and especially the pressure on broker-dealers to reinvest for compliance or reinvent entirely in light of the looming DoL fiduciary rule, industry experts anticipate a wave of industry consolidation as broker-dealers merge for compliance economies of scale. And the trend appears to be underway already, especially with blockbuster deals like LPL's acquisition of National Planning Holdings. However, the reality is that for smaller broker-dealers, often the easiest path forward is not to sell and "leave", but simply to "tuck in" under an existing broker-dealer, as a branch OSJ. For instance, Royal Securities (a 17-person B/D managing $1.1B of assets) recently announced it would become an affiliated branch office of VantagePoint Financial Group (under the John Hancock Financial Network), and Girard Securities (with 200 brokers) announced that it was shutting down as a standalone broker-dealer subsidiary under Cetera Financial Group, and instead would become a branch office of its sister firm Cetera Advisor Networks. And Securities America has completed six such deals in the past five years (all of which became super OSJs). The appeal of this shift is that as a branch OSJ, the small broker-dealer can retain most of its staff, infrastructure, culture, and advisors – while escaping from the technology and compliance burdens that are so challenging for smaller broker-dealers (i.e., those with under $20M of annual revenue) that lack scale.
Why Trying To Make Every Client Happy Is A Recipe For Disaster (Julie Littlechild, Absolute Engagement) - Most advisors create advisory firms to serve their clients, but Littlechild notes that eventually firms can grow so large with so many clients that trying to add value for all the clients all the time just squeezes the resources of the business to the point of breaking. In other words, by trying to help everyone at the same time – when they all have a wide range of needs – you end up providing even less concentrated value for any one of them in particular, or what Littlechild calls the "Law of Diffusion" that is an inevitable result of advisors just growing the business with any clients they can (or with any clients that meet a certain asset or revenue minimum, but regardless of their actual type or needs). So what's the solution? To focus the business – instead of trying to be everything to everyone, to provide focused value to a smaller subset of clients, and build a deeper business with that type of clientele over time. The added value of this kind of focus is that it also allows the advisor to more effectively differentiate; by going deeper with a particular type of clientele, the advisor can win all of those clients, by having a clearly differentiated solution that is "obviously" the best for that particular client. For instance, if an entrepreneur is looking for a new advisor, and interviews two advisors, and the first says they help all clients reach their goals, and the second says they help all entrepreneurs reach their goals... which one feels like the more natural fit for the entrepreneur? And the added bonus is that as an advisor, when you don't feel like you're being torn in so many different directions at once, you may find that you're happier in your business, too!
Why You Need To Be Different Rather Than Better Than Your Competition (Maribeth Kuzmeski, Red Zone Marketing) - In a competitive situation for a client, it's only natural to want to try and explain why your advisory firm is better than the competition, whether it's better products, better service, better communication, or better affiliates that you work with. Yet the unfortunate reality is that most consumers are tired of hearing how everyone says they're better than everyone else – just as when you're walking down the aisle of a grocery story and see a jug of Tide detergent with a label "NEW AND IMPROVED" you don't just immediately buy it expecting that now, finally, your clothes will get cleaner. Because in the end, the consumer doesn't really believe it's that much better, and it's stressful to make a change (whether it's to another laundry detergent, or another financial advisor). So what's the alternative? Rather than trying to be better, be different. Because if we can truly share something that is unique about who we are and what we do, then the connection that makes with a prospective client is more likely to win them over than all the "better than" claims anyway. Especially since in the end, most consumers choose their advisor based on the connection with the advisor anyway, and not his/her "better" products and solutions.
Lost A Great Client? How To Respond Like A Pro (Dave Grant, Financial Planning) - At some point in every advisor's practice, you will lose a client. In some cases, it's actually "good" news, because the client wasn't an ideal fit anyway. But in other cases, there was a close relationship with the client, and losing the client feels like you're being fired by a friend. And more generally, any time a client says "I don't want/need your help anymore", it instinctively makes us want to ask "why not!?" and defend our value proposition... if not feel outright offended. Of course, as Grant points out, all advisors have a limited capacity on the number of clients they can serve, and, as a result, the departure of a not-well-fitting client really just creates a space to find a better-fitting one. Or alternatively, recognize that sometimes, the reality is simply that the client needed help, the advisor did help, and now the client is simply ready to move on – as a happy former client whose problem was solved! In other words, the key to getting comfortable with losing a client is simply to recognize that there are plenty more opportunities ahead. So don't overly focus and lament the loss of the client in the first place; just focus on finding and adding even more value for the next one.
Three Degrees Of Bad Retirement Outcomes (Dirk Cotton, The Retirement Cafe) - When doing retirement planning, it is common to talk about retirement plan outcomes as either "successes" or "failures", where Monte Carlo analysis aims to determine the probability of success. Yet Cotton notes that from the client's perspective, "failure" really occurs in degrees: the first is failing to achieve the household's desired standard of living; the second is failing to at least maintain the household's basic standard of living "floor" (i.e., the basic necessities); and the third is an outright bankruptcy (where everything is lost that isn't specifically protected from creditors). The distinctions matter, because the reality is that many plans that might "fail" because a portfolio is depleted (and can no longer maintain the desired standard of living) may still have enough guaranteed income streams to sustain at least a reasonable floor (e.g., thanks to Social Security benefits). And in fact, some retirees will even choose to arrange their assets in a manner that increases the risk of "failing" at the top tier, in order to better secure at least achieving the second tier (e.g., by choosing to annuitize a portion of assets, and give up upside in exchange for a more secure floor). Even just discussing the phenomenon with clients – where a risk of "failure" is really just a risk of making some adjustment between the desired standard of living and the floor level standard of living – can change their attitude about how comfortable they are with a strategy, recognizing that "failure" may really just be about an "adjustment" (from the desired standard of living down closer to the presumably-still-tolerable floor). Though at the same time, it's important to recognize that the need for expenses isn't guaranteed, either – in other words, a "safe" floor might no longer turn out to be safe if a change in health necessitates higher expenses than what the floor provides. Nonetheless, the key point remains that not all "failures" are equally failing, and similarly that there can be a big difference between depleting the portfolio, and the total depletion of wealth or bankruptcy. Which means it's necessary to discuss all of these dynamics and trade-offs with clients, if you want to help them make a good decision about how to allocate assets in retirement!
What Investors Want Most In Investment Reporting (David Thompson & Benjamin Gross, Advisor Perspectives) - Performance reporting is one of the most fundamental ways that clients assess the value an advisor is adding in the portfolio. But it is also a tool for advisors to reaffirm the client's trust, by providing clear and transparent reporting... especially in a world where the advisor's level of knowledge and sophistication are beyond most clients, which means clients will always struggle to figure out how to effectively read, understand, and assess a performance report. Accordingly, Thompson and Gross find that amongst 15 potential attributes of investment reports, over half of investors state that the primary thing they want from their investment performance reports are fully disclosed fees (transparency), and that the reports be simple and easy to understand. Yet ultimately, clients are also cognizant that the reports advisors provide to clients to assess their results are produced by advisors in the first place, which means ironically that advisor-distributed (or even third-party "white labeled" reports) can still undermine trust, simply because they weren't produced independently in the first place. In fact, Thompson and Gross found that when investors were asked if they think that a third-party independent report would match what their advisors provide, 41% were not confident that the independent reporting of fees would match what the advisors claimed, 36% were not confident rates of return were accurate, and 31% were not confident that risk was reported accurately. Which suggests that there is a rather material level of distrust from investors about the reports their advisors are providing these days, and that advisors might augment client trust by not just white-labeling reporting solutions, and instead trying to connect their clients with independent third-party reporting solutions instead (or at least, explain that white-labeled solutions really are white-labeled independent solutions and that investment results were calculated objectively). In fact, the researchers found that a whopping 75% of investors would be interested in using a performance verification service if it was offered by their financial advisor.
New Vistas In Risk Profiling (Greg Davies, CFA Institute Research Foundation) - Despite the fact that regulators around the world all require some form of "risk profiling" of clients to determine if a recommended investment solution is suitable, Davies notes that there is still a substantial amount of confusion in the current landscape, from mixing together a client's "willingness" (tolerance) to take risk from their "ability" (financial capacity) to do so, or when measuring them separately lacking a mechanism to integrate them back together in a two-dimensional risk profile, to assuming that a client's behavior (their "revealed preferences") is a good way to determine their risk tolerance in the first place (it's actually not, because short-term behavioral phenomena can distort the understanding of a client's true tolerance). And of course, there's the fundamental challenge that today's standard approach is all about "optimizing" a portfolio for a client's short-term behavioral risks (i.e., whether they're likely to sell out of the portfolio in a bear market), rather than trying to determine true long-term risk tolerance and capacity and then viewing short-term behaviors as something to coach. Yet at the same time, there is still remarkably little research into understanding what leads to certain short-term behaviors, the forces really driving them, and how to positively impact a client's risk perceptions and attitudes. On the plus side, though, Davies notes that the growing volume of "big data" on investor behaviors (collected via advisors and brokerage platforms) creates new opportunities for research to finally better understand behavioral risk attitudes (as distinct from long-term risk tolerance), raising the question of whether risk profiling may be on the cusp of major breakthroughs in the coming years!
The Insidious Risk Of Successful Advisory Businesses (Julie Littlechild, Absolute Engagement) - Most business owners, including advisors, are naturally focused on the risk that their businesses might fail, and take whatever steps they can to ensure the businesses will survive and thrive. Yet Littlechild notes that ultimately, there's a second risk inherent in businesses, including and especially the successful ones: that the business may "succeed", but won't reach its full potential, and that you'll leave something on the table. And the risk is real, because we often decide as human beings to stop pushing ourselves once things are "good"... even though settling for good is a virtual guarantee that the business will never push itself to the point of being great. The problem is especially true for financial advisors, who tend to build businesses around themselves, and once they get to a point where the business is "good" and providing a comfortable income, they no longer keep pushing for growth. Of course, in many cases, the goal is to simply create a practice that supports a certain lifestyle, and not a large and growing business, but at a minimum, the advisor should know and be cognizant of what the personal vision is that they're trying to create for themselves. Otherwise, it's almost inevitable that we hit a "fulfillment flatline", where we reach our comfortable goals, and stop pushing forward. And even if we do the work to create the necessary infrastructure for growth, it's not enough if we don't have a clear personal vision as well. Accordingly, Littlechild suggests that the real questions that successful advisors need to ask themselves is not "what do I need to do to grow the business by 5%/10%/15% next year" but instead "What do I want to create" in the end... and then let that vision drive the growth and direction of the business.
Overcoming Your Demons (Morgan Housel, Collaborative Fund) - Morgan Housel is an investment writer who, seven years ago, had a dream that he wanted to become an investment speaker... but faced the challenge that he is one of the 0.1% "lucky" ones who suffers from stuttering. And stuttering is actually a disability that most people aren't even aware of, because ironically most stutterers find that the easiest way to downplay and disguise the disability is simply not to talk at all, remain silent, and avoid conversation. Fortunately, though, we can often find coping mechanisms for our challenges, as Housel eventually did in his late 20s by finding ways to reword sentences in a manner that would reduce his stuttering. And while it doesn't completely resolve the issue, it improved to the point that he finally in 2012 decided to accept an invitation to speak for the American Association of Individual Investors at a conference. And after literally months of repetitive practice leading up to the event, Housel took the stage in his terrified experiment... and found not only that he was able to navigate the presentation, but that his stuttering actually vanished when presenting, and the session was the longest he had ever spoken in his life without stuttering! The success led him to speak for another conference with The Motley Fool (where he previously worked), and with the success came more events and more successes, to the point that as a lifelong stutterer, he now has a contract with the Washington Speakers Bureau and in the last 3 years has given 29 talks in 22 cities in 3 countries, culminating in a recent event in South Africa in front of an audience of 2,200 people. The key point: it's sometimes amazing the journey that life takes you on, and how things that you imagined would be utterly impossible for you turn out to be your greatest successes just 5 years later!
How Once Talking To Seth Godin On The Phone Changed My Life And Business (Jeff Goins, Medium) - As an entrepreneur who had bootstrapped a business to a million dollars of revenue and 15 employees, Goins hit a personal wall where the business was starting to lose money, and he felt like he still had to figure out how to keep growing to work through it, even as he was stressed beyond belief. Of course, the transition from working in the business to being a successful CEO that works on the business is a tough transition for anyone; at best, it's often 24 months of working harder than ever to build the infrastructure to make the transition. Yet after trying to make the transition, Goins was still unhappy, and ultimately wrote an email to legendary marketer and entrepreneur Seth Godin, who in a 20-minute phone call changed Goins' life, by asking just a few key questions. The first was to ask why he did what he did – pointing out that a personal mission is not necessarily a business goal you can get paid for, and that you do need some business built around it. Yet often, people build businesses for the wrong reason – Goins built his to get freedom, but building a business isn't actually about freedom... it's about building a business. The path to freedom is about refining the "business" into a practice built around the individual, that doesn't necessarily grow and scale, and instead is refined for efficiency and profitability, not business growth. According, Goins decided to make the difficult transition to scaling back – by "right-sizing" the business of letting go of some key team members, canceling contracts, cutting expenses, and moving in the opposite direction of scaling, instead just focusing on what he, personally, could do, in his highest and best use. The end result – more happiness, more actual freedom, and a small lean team that keeps Goins efficient... which had the added benefit of allowing him to triple profits, with a whopping 70% profit margin, all without growing the top line much at all! The key point: sometimes you don't actually need to grow in order to get what you really want!
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.
