Weekend Reading for Financial Planners (Sept 11-12)

Authors:

Ben Henry-Moreland

Team Kitces

Ben Henry-Moreland is a Senior Financial Planning Nerd at Kitces.com, where he specializes in writing and speaking on financial planning topics including tax, practice management, and technology. He also co-authors the monthly Kitces #AdvisorTech column. Drawing from his experience as a financial planner and a solo advisory firm owner, Ben is passionate about fulfilling the site’s mission of making financial advicers better and more successful.

Read more of Ben’s articles here.

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Adam Van Deusen, CFP

Team Kitces

Adam is a Financial Planning Nerd at Kitces.com. He previously worked at a financial planning firm in Bethesda, Maryland, and as a journalist covering the banking and insurance industries. Outside of work, he serves as a volunteer financial planner and class instructor for local and national non-profits.

Read more of Adam’s articles here.

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SEC Hints At Tough Online-Broker Rules For Their Game-Like Features (Robert Schmidt and Ben Bain, Yahoo News) - In recent years, online brokerages like Robinhood have received criticism from consumer advocates for features in their apps designed to ‘gamify’ trading. And now, the concerns have echoed all the way up to regulators, as in a statement on August 27, the Securities and Exchange Commission announced that it would be seeking information on those brokers’ “digital engagement practices”. The inquiry will focus on the brokers’ use of behavioral nudges – like push notifications, trade suggestions, and Robinhood’s notorious celebratory confetti – that encourage users to make trades, and whether or not those nudges constitute investment advice. Because while the brokerage platforms are ostensibly for do-it-yourselfers who trade on their own volition (therefore not subjecting the platforms to a fiduciary standard), a determination that those brokers are actually providing investment advice opens up legal liability for (as Massachusetts state regulators have already accused) failing to put their customers’ interests first. The inquiry, as well SEC Chair Gary Gensler’s hiring of Barbara Roper (the now-former Director of Investor Protection for the Consumer Federation of America and a longtime critic of brokerage firms increasingly delivering advice-like services without operating as fiduciaries) as a Senior Advisor, is the latest sign that the SEC feels a need to address the pandemic-era explosion in retail trading, particularly given its apparent contribution to the wild volatility in ‘meme’ stocks – even though, given the zero-commission trading offered by those brokers, it may be difficult to prove that retail investors were actually ‘harmed’ by excessive trading (as when self-directed investors trade, their investment results are on their shoulders if they weren’t acting on advice, and it’s hard to be accused of “churning” for trading commissions in a zero-commission world?).

Survey Shows More Than 9-In-10 CFPs Strongly Satisfied With Career Choice (Jeff Berman, ThinkAdvisor) - According to a new survey conducted by Fondulas Strategic Research for CFP Board, 93% of CFP professionals reported high satisfaction with their financial planning career. The survey is performed periodically (it was last done in 2019) to explore CFP professionals’ satisfaction with their careers and certifications, as well as their perceptions of CFP Board initiatives and services. And while career satisfaction has rated highly since the question started being asked in 2017, this year’s result is the highest yet, with satisfaction with CFP certification at 93%, and willingness to recommend the certification to other financial professionals also at 93%. Which show that there is overall a very positive perception of the CFP certification among those who hold the mark, which aligns with the latest Kitces Research study’s findings that CFP professionals (and those who intend to pursue the designation) reported higher levels of overall wellbeing than non-CFP professionals. Also of note in the CFP Board survey were several COVID-specific questions, showing that 50% of CFP professionals saw an increase in client inquiries during the pandemic, while 58% reported increasing the frequency of proactive client contacts during COVID, with the majority of professionals reaching out to clients three or more times over the past year. On the flip side, the increase in client inquiries and more frequent contact with existing clients (along with the challenges of setting up virtual meetings and home offices and balancing work and home needs during the pandemic) meant there was less time for CFP professionals to engage in pro bono planning, which was reflected in a decline from 65% to 62% of professionals offering pro bono planning (despite 76% agreeing that it is important to provide pro bono services to people in need, and the past year arguably having an especially high need for pro bono advice amongst consumers).

FINRA’s New ‘Restricted Firm’ Plan Is on Its Way (Melanie Waddell, ThinkAdvisor) - Back in July of 2019, FINRA first proposed the new Rule 4111, which aimed to crack down on broker-dealer firms with a significant history of misconduct (after studies in recent years found that a small number of broker-dealers were disproportionately hiring a large number of ‘problem brokers’) by designating them as ‘restricted firms’ subject to capital restrictions. Now that the rule has been approved by the Securities and Exchange Commission, FINRA plans to issue a regulatory notice by September 30, which will put the rule in effect within 180 days thereafter. At its core, the new FINRA Rule 4111 stipulates that when a broker-dealer is identified as a restricted firm, they will be required to keep cash or securities in a segregated account that requires FINRA approval for any withdrawals, essentially setting aside a portion of the firm’s capital to protect investors in case of further misconduct by the broker-dealer or its representatives… and indirectly making the broker-dealer that chooses to take on problem brokers less profitable by requiring it to keep more of its own cash ‘on the sidelines’. Though there are no published guidelines for how much a restricted firm might be required to put aside, instead giving FINRA discretion to set the deposit amounts on a case-by-case basis. And notably, while all broker-dealers will theoretically become subject to the new Rule 4111, it appears that the overwhelming focus will be on firms with fewer than 150 representatives (as larger firms appear to already be more likely to ‘purge’ their own ranks of problem brokers to minimize their exposure to regulator fines). Interestingly, the new rule seeks to crack down on not only broker-dealers with their own poor regulatory history, but also those that hire representatives from other ‘rogue’ firms, meaning that broker-dealers (in particular, those with fewer than 150 representatives) will have much more incentive to look into the regulatory history of the representatives that they hire. Because even if a firm has no history of misconduct itself, hiring too many representatives with ‘dings’ on their compliance record could trigger onerous restrictions on the firm’s capital, and ultimately make it difficult to continue as a profitable going concern. For most broker-dealers that already do the right thing, new FINRA Rule 4111 will likely have little impact – aside from arguably overdue levels of increased scrutiny on brokers changing broker-dealers with already-problematic records of misconduct – but in the end, giving firms more incentive to avoid hiring problematic representatives is a good thing for consumers, and the reputation of the industry overall, as hopefully more and more misconduct-prone advisors are flushed out by the new rule.

How to Make Your Marriage More Financially Equal (Ron Lieber, The New York Times) - The pandemic’s combination of unemployment and job changes (and their accompanying changes in income), and shifts in spending patterns (from buying a bigger house to accommodate a work-from-home office space, to spending less on travel and more on direct-delivery purchases), has exacerbated financial stresses for many married couples. Which is leading to a newfound focus on examining the financial roles each spouse plays in the relationship (with respect to both the income that comes into the household, and how it is spent). Some important highlights of understanding those power dynamics in couples include being aware who brings in household resources and the research on the (implied?) privileges that come with it, as well as differing spending styles and who has a license to spend what and when. In fact, couples often have a tendency to fall into the pattern of having a “financial spouse” who handles most financial matters for the couple, leaving the other spouse short of information and agency to act on their own if necessary.  In addition to analyzing structural aspects of the financial relationship, advisors can also be cognizant of how couples communicate about money. Potentially worrying patterns include when only one spouse speaks during a meeting with a financial advisor, and when couples refer to “me” and “you” – as opposed to “we” – when discussing their financial decisions. Ultimately, though, couples’ dynamics are specific to the couple, which means there isn’t necessarily any single optimal way to organize a couple’s finances, though Lieber suggests that using a joint account for all shared expenses could prevent one partner from feeling their income is less relevant. Of course, financial advisors can help couples become aware of these issues as well, and provide significant support in these areas, from helping them resolve money disputes to encouraging them to practice gratitude with each other.

The Death of the Starter Home? (Ben Carlson, A Wealth of Common Sense) - Buyers looking to purchase their first home during the pandemic have faced stiff competition and rising prices, and builders themselves appear to be focusing increasingly on building more expensive (and profitable to the builder) houses. In fact, Federal Reserve data shows that as of July, new homes costing $200,000 or less made up just 2% of new home sales, compared to 60% of new houses sold in 2002. Conversely, new homes costing more than $500,000 made up 30% of new home sales as of June, compared to only 3% of sales in 2002. A few potential reasons to explain this trend include the fact that more houses were being built in the early 2000s compared to today, and that homebuilders scarred by the housing bubble appear to prefer building more expensive, higher-margin homes today. The decline in interest rates during the past two decades, with the average 30-year fixed rate mortgage falling from 6.5% in 2002 to 2.9% today, has also allowed buyers to purchase more expensive homes for a given monthly mortgage payment budget. Accordingly, given current interest rates, the monthly payment for a $400,000 house today is actually lower than the monthly payment was for a $300,000 home in 2002! And at the higher end, the monthly payment for a $1,000,000 home is now $520 less than the payment on a $750,000 home was in 2002! Still, though, while lower mortgage rates make higher-priced homes more attractive, they do come with additional property tax liability, as well as larger down payment requirements, which means the increasingly more common larger/more-expensive homes really are less affordable today. This could lead advisors to see an uptick in clients who want to tap their portfolio to provide down payment assistance to their children through a gift or an intra-family mortgage, as children increasingly struggle to find affordable starter homes they can purchase on their own young-adult salary.

The 5 Easiest Money-Saving Phone Calls (Robert Farrington, The College Investor) - Most people have a tendency to simply accept the price that they’re presented for a service… or if they don’t like it, take their business elsewhere. Yet the reality is that in a number of cases, prices might actually be more subject to ‘haggle’ than we might realize. Consumers have several opportunities to cut expenses through phone calls to a range of service providers. For instance, when carrying a balance on a credit card, consider contacting the card issuer and pointing out to them the balance transfer offers being received from other issuers as a way to negotiate lower interest rates with the current credit card provider. Similarly, there are opportunities to reduce insurance costs by checking to see if rates have been lowered or by bundling policies, and to find better deals on phone or cable service by first finding out the deals from other providers and then threatening to leave the current company if it won’t match or beat them (which often entails actually getting to the point of saying you’re going to leave… as that’s when the customer service script is usually triggered down the path of trying to retain you as a customer by offering a deal to keep you on board). Another opportunity is for homeowners to evaluate whether their current property tax assessment reflects the current state of their property and the assessments of similar homes nearby, and, if not, to contact their county tax assessor to negotiate a lower assessment. For those who don’t necessarily want to take the time to do this, there are a range of new online services – such as Truebill, Cushion, and Trim – that seek out these opportunities on behalf of customers, without them needing to make the call to the service providers themselves. Financial advisors also can increase their value proposition by reminding clients to seek out these money-saving opportunities periodically as part of an annual client service calendar (or perhaps even buying their clients a subscription to one of the bill-trimming services?).

SEC Marketing Rule Causes Advisers Most Compliance Concerns (Mark Schoeff, InvestmentNews) - A recent poll of compliance officers from 350 registered investment advisory firms released by the Investment Adviser Association last week ranked Advertising/Marketing as the “hottest” compliance topic for 2021 (followed by Cybersecurity in second place, and ESG/Sustainability in third). With the Securities and Exchange Commission’s new marketing rule permitting the use of testimonials going into effect last May, firms have been eager to begin incorporating testimonials into their marketing materials, and this poll is yet another sign of just how big of an opportunity firms see in it. Yet in practice, the sheer size of the rule (clocking in at a ‘slim’ 430 pages) means that compliance departments will need a long head start to fully understand and comply with its many components. Which is creating internal tensions in firms, as while the compliance date when the SEC will begin enforcing the rule is November 4^th of 2022, firms are permitted to begin using testimonials now (since the rule first took effect in May), which means many firms’ marketing departments are champing at the bit to get started, pressuring compliance teams to figure out what it will really take to implement testimonials appropriately (especially within larger advisory firms that have multiple advisers’ testimonials to oversee).

The 13 Most Important Marketing KPIs for Financial Advisors (Maribeth Kuzmeski, Red Zone Marketing) - Understanding which components of a marketing strategy are or aren’t working can help advisors optimize their marketing decisions and prevent them from throwing good time and money into ineffective marketing. Key Performance Indicators (KPIs) are used in various aspects of business, but from a marketing standpoint they can gauge how an overall marketing strategy or individual initiatives are performing, helping advisors to make better decisions and to use their marketing budgets more effectively. Of course, like many investment performance metrics, one individual statistic may provide little information about how the big picture is doing, which means tracking a constellation of useful KPIs at regular intervals can provide a clear measure of marketing success over time. And certain metrics may have more value for some advisors than others, though. For example, a firm that’s more reliant on social media for client acquisition will want to closely track metrics like engagement and follower growth, while one using more paid advertising might focus on return on ad spend. Nonetheless, Kuzmeski recommends a number of marketing KPIs that are widely relevant for most advisory firms, including Client/Customer Acquisition Cost, Lifetime Value of a Client, the ROI of your marketing spend (how much money was gained from each marketing initiative relative to the cost of that initiative), and the number of “Marketing Qualified” (engaged with the company in some way, but not necessarily ready to meet with an advisor about potentially doing business) and “Sales Qualified” (ready to speak to an advisor) Leads the firm is attracting.

Maybe You Should Stop Selling “Service” (Tony Vidler) - In an era where managed investment portfolios can look fairly similar from one advisor to the next, and ‘everyone’ says they’re offering increasingly comprehensive financial planning advice, service is routinely held up by firms as a differentiator in the sales process, promising prospective clients that they will feel (more) taken care of and attended to than they would with any other advisor. Yet for advisors whose true value really does come from their advice, those who focus on selling their service risk creating a service expectation that they may not ultimately be able to fulfill. Because as other ‘services’ become cheaper and faster to use (e.g., using Google to find an answer that 15 years ago would have required a phone call to an advisor), the client’s definition of ‘good service’ is continuously evolving as well, and it can get harder and harder for an advisor to keep up – a problem almost guaranteed to get worse with time as more and more services are outsourced to technology. Accordingly, rather than commingling service and advice in the initial value proposition, at the risk of falling behind – and possibly making the client wonder if the engagement is really worth the ongoing fee – advisors may be better off selling the advice on its own and focusing on deepening the personal relationship with the client thereafter (as a way to keep the client, but not necessarily what gets them in the first place). After all, in the end, most clients don’t seek out an advisor just for the service itself; instead, they seek out an advisor because they have a problem that they need an advisor to answer/solve for them… and service is an expectation of how that solution is delivered, but isn’t the solution itself. In turn, focusing on advice over service puts the advisor in a position where they would need to do something truly bad to risk losing the relationship, rather than simply failing to deliver on a potentially-unrealistic promise of ‘superior’ service which was never really their focus to begin with?

Selling Hours (Seth Godin, Seth’s Blog) - The increase in remote work during the past year has raised the question of whether employees should be evaluated based on the number of hours they worked, or their productivity of how much they got done in the hours they worked. As while in recent decades a key measure of workers often was whether they “put in the time” at the office (which has actually become an applicable metric only more recently), Godin notes that in the pre-industrial age, workers producing goods at home were simply paid by the number of items produced. In turn, it was only as labor moved into factories, where workers preferred a regular paycheck, that owners ‘found’ the opportunity to hold workers accountable to the hours they put in… and then tried to profit from advances in technology and worker productivity to get more out of their workers for the hours spent. Accordingly, as work now shifts back home again, Godin encourages employers to consider whether they would prefer an employee that finds efficiencies and finishes their work in fewer than eight hours, or one who produces less output but works beyond normal business hours. For advisory firm owners navigating the remote workplace, this implies a shift to a more “output-based” management style, with clear expectations, team-based accountability systems, and a cohesive company culture, which in turn can lead to greater productivity and employee satisfaction. Though in practice, this requires a significant shift in how the firm itself is managed, which may necessitate an entirely new operating system to manage and grow their business in the new more-virtual environment?

Great Companies Obsess Over Productivity, Not Efficiency (Michael Mankins, Harvard Business Review) - Most people view the words “efficiency” and “productivity” as  synonyms, but Mankins notes that there is an important difference between the two… which is actually responsible for driving business growth in recent years. The distinction is that while efficiency is about producing the same output with less, productivity is about producing more with the same resources. Managers in the 1990s and 2000s were focused on efficiency, and were able to increase profits without necessarily improving top-line revenue by figuring out how to produce the same output with less. However, these gains have dwindled in recent years, and the most successful firms have shifted to improving productivity, where the firm figures out how to do more (e.g., gain more clients, expand firm revenue) with its existing staff structure. Which is important in the context of advisory firms, as the recent focus on bringing in new AdvisorTech for better efficiencies is – akin to other efficiency initiatives – about producing the same output with less resources, which can support advisory firm profits but doesn’t necessarily assist with advisory firm growth. Thus why in practice, Kitces Research has shown that while technology can improve back-office efficiency, the use of financial planning software is actually leading advisors to spend more time constructing plans – an example of even technology driving not efficiency (same plans in less time), but productivity (better higher-quality plans that advisors can charge more for, produced with the same team they currently have)! More generally, Mankins notes that the key to actual growth – driven by productivity – is about removing obstacles to let great team members flourish with their new ideas and initiatives, deploying talent strategically, and inspiring a larger percentage of the workforce. Accordingly, other productivity-enhancing strategies for advisory firms in particular would include pursuing clients within a niche (deeper higher-value expertise to be delivered with the same firm resources), developing one’s own and staff expertise (e.g., pursuing CFP certification and other post-CFP designations), and getting the right people in the right positions are more likely to drive advisory business growth than trying to seek greater efficiency through technology adoption.

The New Status Game for Companies: Fewer Employees (Auren Hoffman, Summation) - In a world where most businesses don’t necessarily share the details of their revenue and profits, one of the most common business status symbols and signs of a company’s success was its (larger) employee headcount. However, Hoffman argues that this trend is being upended, and successful companies with fewer employees are increasingly seen as the most valuable. After all, firms that can produce more with fewer employees are arguably the epitome of highly efficient and productive business machines, and that between two businesses, the one that can do more with less will drive the best economic outcomes. Which means revenue per employee is emerging as the key metric for ‘successful’ companies, as companies with a higher revenue per employee are by definition producing more total revenue in the aggregate for the headcount they have (and emphasizes employee productivity and the business’ ability to scale). Taken to the logic extreme, Hoffman argues that companies should focus their time and staff hiring based only on what makes the company most unique, so that employees in these companies will be focused on the highest ROI activities… and outsource everything else that isn’t part of the core competency. After all, Hoffman notes that in practice “almost every company spends over 95% of its time [just] doing what every other company does”, instead of focusing on what it can truly do uniquely (creating the most value for the client, and the business itself). With this in mind, advisors should consider whether certain functions, from lead generation to investment management and back-office work, should really be done in-house, or outsourced instead. Which, notably, alleviates the firm owner of the responsibility to constantly reinvest into improving on the 95% of tasks that aren’t actually unique anyway, and instead can let an outsourced vendor have the burden of staying up to date… or be replaced by the firm with another outsourced provider who is doing an even better job of staying current. Which, in the meantime, allows firm owners to focus their time on their own unique strengths, while also leading to more empowered and productive employees who are able to work (only) on the tasks for which they are best suited that can deliver the most client value!

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 Craig Iskowitz's "Wealth Management Today" blog, as well as Gavin Spitzner's "Wealth Management Weekly" blog.