Nerd's Eye View blog

Using Reflection Questions To Help Prospects Find Clarity And Focus On A Shared Planning Vision

February 28, 2024 07:03 am 0 Comments CATEGORY: Client Trust & Communication

Initial outreach to a financial advicer rarely (if ever) results from a prospective client waking up in the middle of the night in a cold sweat because they just figured out that they're in desperate need of a comprehensive financial plan. Rather, prospects often reach out to set an initial appointment only when they realize they have a specific pain point that they need an advicer's help with. It's during that first meeting that an advicer has an opportunity not only to demonstrate how they can help the prospect solve whatever problem they may be experiencing but also to gain valuable insight into the prospects themselves so that they can begin laying the foundation for what could evolve into a long-lasting professional relationship. Apart from spending time during the first meeting only to gather facts about the prospect, advicers can also utilize a variety of techniques to focus on who the prospect is, start building rapport, begin to establish a meaningful connection, and even set the stage for emotional buy-in.

In a discovery meeting, advicers have a short period of time to gain a deeper understanding about the prospect and establish a connection that will motivate them to become a client. And by asking good questions during that initial meeting, an advicer can learn about a prospect's main concerns and what sort of advice they need. One of the best ways to accomplish this is by asking questions that encourage the prospect to pause and reflect more deeply on the issue at hand. Such 'reflection' questions ask an individual to reflect on whatever information they've just offered in order to find personal meaning in what they've shared and why it's important to them. They are particularly effective in building rapport, because the simple act of asking reflection questions shows that the advicer has been listening closely and is interested in the prospect as a person, not just a potential client.

At a basic level, reflection questions are often framed as "this or that" statements which offer 2 ideas for the prospect to consider. Part of an advicer's job is helping prospective clients gain clarity around their goals, and it often takes several meetings for those goals to become well-defined. However, "this or that" questions can help break down daunting issues (like what a fulfilling retirement might look like for the prospect) by offering just 2 scenarios that they might consider as viable options for what their future might look like, with the caveat that alternatives are always available if neither felt 'right'.

Alternatively, advisers can introduce reflection questions using the phrase, "it seems" as a way to rephrase and summarize something a prospect said in order to elicit additional thoughts. The "it seems" framework is particularly useful when prospects need help prioritizing multiple goals. For instance, an advicer might observe that "it seems that saving for your child's education is important, but it also seems that you're concerned about whether or not you'll be ready for to retire when you want." Notably, such reflection questions aren't meant to tell the prospect which issue is more important, but rather, are meant to help the prospect identify their own reasons for how they should prioritize their goals.

Ultimately, the key point is that reflection questions can be used to help prospects identify the actions they can take to make progress toward their goals, narrow down which of their goals will be the most impactful, and offer prospects the motivation to stick with their financial plan. Finding the motivation to move forward is challenging when the path is unclear, and reflection questions can help prospects find clarity around their values and goals, which can also help them appreciate the value that a financial advicer brings to the table as a valued partner in their journey towards their long-term goals!

#FA Success Ep 374: Turning Your Marketing Loss Leader Into A Positive Revenue Diversifier By Getting Clear About The Value, With Dianne Nolin

February 27, 2024 07:02 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 374th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Dianne Nolin. Dianne is the Managing Partner of Argent Bridge Advisors, a hybrid advisory firm based in Vienna, Virginia, that oversees $500 million in assets under management for 350 client households.

What's unique about Dianne, though, is how she has been able to both expand the marketing of her firm, and its profitability, by taking the divorce financial planning work that has been a loss leader service of the business for years, and turning it into a positive revenue diversifier, by getting clear on the value that Dianne's divorce clients really were already receiving, and getting more focused about actually charging for all of the time that she and her team were spending with and behalf of their clients.

In this episode, we talk in-depth about how Dianne became conscious of the service offerings of the firm, the impact it has had on clients over the years, and how that realization has allowed Argent Bridge to start to more accurately bill for the actual time spent with each and every client, how sticking with a client through their divorce and transitioning into a post-divorce financial planning offering has become a core growth pipeline for Argent Bridge to establish new client relationships, and how staying focused their coaching with, advocating for, and providing services to the divorce community, has increased their referability in the divorce niche, further accelerating the growth of their pipeline to create more long-term post-divorce AUM clients as well.

We also talk about Dianne's transition from a firm that had no formality to partnership or a path to ownership to establishing one for herself in which every partner has a seat at the table and a say in every one of the so-called "50-year" long-term decisions facing the firm, Dianne's realization that if you get clear on your value and can communicate it clearly to both new or even existing clients, they don't mind paying for it, even if they haven't been before, and how, through the growth of her career, Dianne came to the realization that she didn't have to know it all, she just needed to know who to go to for the answers that her clients were seeking.

And be certain to listen to the end, where Dianne shares how it was sitting down with a new, young client, and discovering she knew far more than the client – and far more than she realized – that she finally allowed herself to believe it, how Dianne has focused more on client relationships and really knowing each client personally than trying to know the most about the industry's products (and instead just making sure she knew the people to ask if she needed product answers), and how Dianne ultimately discovered that building her own advisory business wasn't as complicated as she'd anticipated it being, due to the team she'd already built around her, that came with her when she was ready to get started on her own.

So whether you're interested in learning about how to properly communicate your value to clients who don't mind paying for it, transitioning to a firm with a clear path to ownership and a seat at the table for every partner, or how belief in the things you know will always make you the expert in the eyes of your clients, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Dianne Nolin

KPIs To Track Your Advisor Marketing And Figure Out What’s Actually Working (Or Not)

February 26, 2024 07:03 am 0 Comments CATEGORY: Marketing

In the early days of the financial advice industry, an advisor's options for generating new business were somewhat limited. Cold calls, country club memberships, Chamber of Commerce networking, and referrals (from clients or centers of influence) were staples for growth, and determining how successful those sales-centric efforts were was rather straightforward. Over the years, though, as the focus of the profession evolved from being almost exclusively transaction-based sales to having a focus on building long-term relationships, so too did growth shift from sales-based approaches to more long-term trust-building marketing tactics. The good and bad news of this shift has been the emergence of a near-dizzying array of growth tactics, including blogging, webinars, social media, podcasts, paid search, lead-generation services, and (of course) good old-fashioned cold-calling and networking (to name just a few!). And when they're so different from each other, the challenge can quickly become figuring out which are really working the best (especially when some take more time, and others cost more upfront in hard dollars). Fortunately, by tracking key marketing KPIs and sales metrics, advicers can measure their business development efforts and not only learn which tactics are most effective, but also how to iterate over time to make them even more marketing-efficient and scale the growth of their business!

An advicer's business development activity can be measured across 2 main phases: the Marketing Activities that generate new leads and prospects, and the Sales Process that converts those prospects into new clients. As a first step, the most important is to gather data around whatever activity it is that the advicer is doing to attract new prospects (such as the number of podcasts produced, webinars hosted, blog posts published, networking meetings attended, or cold calls made). From there, advicers can determine if the activity is actually having any effect by measuring the number of Prospect Inquiries, or how many people reach out to learn more about what the advicer offers. Along the way, advicers can track their website traffic, which is a good proxy for whether their brand awareness is growing as a result of their marketing activities, as measured (in Google Analytics 4) by Users Per Month. Finally, advicers should track how much they're spending (in total) on their efforts, both from an actual hard-dollar cost, and the time that's spent on the activity itself, in order to understand if their tactics are improving over time and which tactic is outperforming another.

Once an advicer has generated new inquiries, the next step is to determine how well they are converting new prospects into new clients. Key data points around the prospects themselves that advicers should record along the Prospect Pipeline include the date that the prospect first reached out, how that prospect first learned about the advicer, if the prospect is actually 'qualified' (i.e., they're a good fit for and can afford the advicer's services), and how much revenue the prospect can be expected to bring to the practice. From there, tracking the dates of each meeting in the Sales Process and the date that the prospect signed the paperwork to become a client can help identify potential bottlenecks or issues in the Sales Process itself. Finally, advicers can also record the amount of revenue the client ended up committing in order to track and measure their growth.

The real opportunity in gathering all this data is learning which channels and activities an advicer should be focusing their time and dollars on, and determining what key metrics they should try to improve. Specifically, advicers can take this raw data and turn them into Key Performance Indicators (KPIs) that will help them become more efficient and effective. These KPIs include the total amount of time spent generating each new prospect, the percentage of those prospects that were actually "qualified", and how many of those qualified prospects became clients, along with the number of days between when a prospect first reached out and when they signed on as a client, the average revenue generated by each new client, and the total new revenue opportunity of all the prospects currently in the Sales Pipeline. Finally, advicers can arrive at the grandaddy of all marketing and sales KPIs, the Client Acquisition Cost (CAC), which measures the all-in cost of what it takes for an advicer to get a new client. By calculating the amount of time and dollars spent on marketing and dividing that by total new clients, advicers can determine if their sales and marketing efforts are truly contributing to the growth of their practices.

Ultimately, given how important it is for nearly all advicers to generate new business, gathering the raw data from their marketing and sales efforts and then calculating the key metrics resulting from those processes is a crucial step towards effectively growing their practices. Importantly, though, advicers can't improve their business development efforts if they don't first measure them. By doing so, it becomes possible to determine what's working (and what's not!), and learn where the advicer's time and money are best spent as they build and scale their ideal financial planning practices!

Weekend Reading For Financial Planners (February 24-25)

February 23, 2024 02:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" - this week's edition kicks off with the news that while both the total number of RIAs and advisor headcount have seen significant gains in recent years, client assets remain concentrated among the largest firms, according to data from Cerulli Associates, with the 7% of RIAs with at least $1 billion of AUM managing 71% of total RIA assets. Which suggests that instead of trying to go head-to-head with these larger firms (and their heftier marketing budgets) in attracting clients, smaller firms might instead demonstrate how they are 'different' by offering a unique service offering tailored to their ideal target clients.

Also in industry news this week:

A recent study has found that advisors who gain additional credentials tend to see a boost both in their confidence and in their business metrics, with the CFP certification standing out in terms of value
The implications for RIAs of a proposed Treasury Department rule that would subject many firms to certain anti-money-laundering regulations for the first time

From there, we have several articles on advisor marketing:

How advisors can adjust their email distribution practices to ensure their marketing messages are delivered amidst a crackdown on spam among major email providers
How leveraging Artificial Intelligence (AI) tools can help advisors create personalized marketing content more efficiently
3 potential marketing strategies for advisors that come with zero (hard dollar) cost

We also have a number of articles on investment planning:

How the growth of index funds (to the point that they have surpassed actively managed funds in terms of total assets) has changed the business of financial advice
The potential benefits of customized bond ladders for clients and how they could complement direct indexing strategies
While a recent research paper suggests that investors across the age spectrum could benefit from maintaining a 100% equity portfolio, the benefits (and potential risks) of such an approach might be overstated

We wrap up with 3 final articles, all about financial advisory business trends:

Why robust demand among larger, often PE-backed, RIAs, combined with the challenges facing smaller, 'tweener' firms, could lead to robust M&A activity in the year ahead
How the United States has experienced a productivity 'boomlet' in recent months and how advisory firms could further boost their efficiency
Industry veteran Bob Veres offers his predictions for 2024, including an increasing number of next-generation advisors breaking off to start their own firms amidst industry consolidation and a growing role for AI in advisors' tech stacks

Enjoy the 'light' reading!

Kitces & Carl Ep 132: What Drives Real Advisor Marketing Success: Vanity Metrics Vs Engaged Prospects

February 22, 2024 07:01 am 0 Comments CATEGORY: Kitces & Carl Podcast

At the end of each calendar year, social media platforms compile a wrap-up of each user's metrics, showing a theoretical reach for every account's best-performing piece of created media content and highlighting the "Best Of The Best" on the web, while revealing social media 'superstars' who have millions of impressions and followers. But how much do these numbers really matter for financial advisors driving the growth of their businesses? While some advisors may be naturally inclined to compare these figures with the actual reach of their own content getting in front of their target client base, are these 'vanity' metrics really a useful tool in helping advisors get better results, or are they simply a noisy distraction?

In our 132nd episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how exceptionally high social media impressions or numbers of followers don't necessarily signal the authentic growth of an advisory firm's business, and why creating content that engages a specific audience that finds value in that content is what matters most for advisors whose primary objective is to increase their client base (even though they may have much fewer followers, subscribers, impressions, and other smaller metrics than the social media 'stars' with purported 6-figure subscriber lists!).

As a starting point, understanding which metrics are actually relevant to the business is crucial for advisors to discern the right path toward actively engaging an audience with their content. And that comparing what may seem to be humble numbers against the top accounts on social media will only interfere with the advisor's own journey of planning out a successful business growth strategy; instead, focusing on the creation of content that their target audience, however big or small, truly cares about and that motivates them to interact with the advisor's social media presence will lead to more valuable outcomes (including new audience members, referrals, and prospect conversion) in the end!

Importantly, appealing to the firm's particular target audience through relevant and meaningful content will be more likely to attract the right prospects to that content. Which often means more referrals and audience members, ultimately leading not just to more prospects and client conversions but also to a broader reach out to even more prospects who find value in what the advisor offers, which is often the primary goal from the start. So while a large unfocused campaign, generically targeted to hundreds of thousands of followers, might be an attractive approach to boost impressions and followers to keep up with other social media stars, the reality is that this direction doesn't yield results as valuable as highly specific messaging targeted to a smaller subset of subscribers who most resemble the firm's ideal target client. And even though this audience base may be a minuscule fraction of those who follow larger social media celebrities, it comprises individuals who are familiar with and find value in the advisor's content – and who are also much more likely to connect and engage with the advisor for their services as well.

Ultimately, the key point is that slow growth through relevant and impactful content will result in more meaningful engagement and action from a prospective client base than untargeted blanket campaigns sent to many thousands of individuals. Building a business and client base that fits within an advisor's capacity to sustainably provide clients with high-quality service is more important than having an impressive 50K+ followers, especially when those 50K+ followers only translate into single-digit numbers of individuals who actually engage with the business. And having fewer followers and subscribers who actively engage in an advisor's content because they found something they connected with on some level is exponentially more valuable than adopting a strategy that promises growth based on high numbers alone!

FinCEN’s New 2024 Requirement For State-Registered RIAs (And Other Small Businesses) To Report Beneficial Ownership Information (BOI)

February 21, 2024 07:02 am 0 Comments CATEGORY: Regulation & Compliance

In 2021, Congress passed the Corporate Transparency Act, which, for the first time, required small business entities such as LLCs and corporations to report identifying information on their "beneficial owners" (i.e., those who own at least 25% of, or who otherwise exercise substantial control over the business). The law's provisions became effective on January 1, 2024, and so many small businesses – including a good number of RIA firms – will be required to submit a Beneficial Ownership Information (BOI) report to the Treasury Department's Financial Crimes Enforcement Network (FinCEN).

With the deadline for pre-existing companies to file an initial report approaching on January 1, 2025 (and even sooner for newer companies formed during 2024), small business owners, including many RIA owners and their business-owning clients, will benefit from a deeper understanding of the new BOI reporting requirements, including which businesses are required to submit a report, which individuals associated with the company are considered "beneficial owners" for BOI reporting purposes, and what information will need to be gathered to submit with the report.

From an advisory firm perspective, the most important takeaway from the new BOI reporting requirements is that while SEC-registered RIAs are not required to submit a BOI report (since they're included on a list of entities specifically exempted from the rule), many state-registered RIAs are still subject to the BOI reporting requirements – except, notably, firms that are dually registered as insurance producers and/or broker-dealers, which are also included on the list of exemptions.

What's also important to note is that the BOI reporting rules apply to both "direct" and "indirect" beneficial owners, which include individuals who own a given company themselves and those who own the company via one or more intermediary entities. Additionally, companies formed on or after January 1, 2024, will need to include "company applicants", which are the individuals who filed and/or directed the filing of the company's business formation documents at the state level in their BOI reporting. And if any of the company's beneficial owners change (e.g., due to ownership interests changing hands or the death of an owner), the company will need to resubmit the report within 30 days.

Ultimately, while many companies with just one or a handful of owners will have relatively simple BOI requirements (for which the primary hurdle is simply remembering to submit an initial BOI report ahead of the January 1, 2025, deadline), some companies with more complex ownership and leadership structures might have more of a challenge in who exactly counts as a beneficial owner, which might require the help of outside legal counsel. Which means that given the penalty of up to $500 per day for failing to file (or incorrectly filing) a BOI report until the violation is corrected, it makes sense for state-registered advisory firm owners to get started now on the process of gathering information and filing to fulfill the new law's requirements!

#FA Success Ep 373: Transitioning To Launch A New RIA By Taking On Passive Investors For Startup Capital, With Ben Hockema

February 20, 2024 07:02 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 373rd episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Ben Hockema. Ben is the Founder of Illuminate Wealth Management, an RIA based in Barrington, Illinois that oversees $100M in assets under management for 55 client households.

What's unique about Ben, though, is that he spent 13 years successfully working his way up the career track at a growing advisory firm, starting as an intern and eventually making partner… only to realize within 18 months that it wasn't a good culture fit for him and that he'd need to leave, but then figured out how to take on passive equity investors in a new startup RIA who helped to finance his ability to buy out a portion of his client base from the firm he was leaving in order to build the business he really wanted to build.

In this episode, we talk in-depth about how Ben leveraged some of his personal relationships to find 2 passive investors who were willing to give him money in exchange for a 25% stake in his new RIA and the 16 existing clients he'd be buying out from his prior firm, how, through developing a structured annual client service calendar guiding their offerings month-to-month throughout a given year, and a fee schedule structured around a client's net worth, Ben has been able to attract prospects and rapidly grow his client base from $16M to $100M in just the past 3 years, and how Ben's successful growth phase led him to do a second round of capital with a wider base of 13 investors where he sold another 10% of his equity in order to further paydown his debts incurred in the original RIA transition and launch.

We also talk about Ben's journey from a 3-summer long internship at his first firm, to being offered the opportunity to take over an acquired firm and its client base in Chicago, to being asked to become part of the ownership team, how Ben then realized that his entrepreneurial goals and willingness to take risks on new ideas were ultimately misaligned with the desires of the other owners and that staying in an environment that had admittedly been very successful for over 30 years would still likely leave him bored and disengaged, and how Ben found that he needed to spend time working with a therapist to manage the grieving process that came from realizing he'd need to sever business relationships he'd spent more than a decade building.

And be certain to listen to the end, where Ben shares how he took it upon himself to find his own advisor study group of peers that ultimately become his most valuable support asset through a decade of transitions, Ben's discovery that, despite his imposter syndrome throughout several shifts in his career, that being willing to ask the questions that you fear might be 'dumb' questions and are afraid to ask can help open doors and bring growth opportunities to light earlier, and how Ben has now transitioned from having been the intern who grew all the way to advisor and then partner to trying to create a work environment that affords a safe space for younger, newer advisors to similarly get the opportunity to grow and develop as he did in his early career.

So, whether you're interested in learning about how to listen to your gut when you find yourself misaligned with the business you're deeply invested in, ways to structure your client services calendar in a way that allows clients to let go of their worry about money because of the trust they have in their relationship with you and your firm, or how to build a team, no matter how small, that truly fits with the trajectory of the firm and proves to be the perfect balance you are looking for, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Ben Hockema.

Highlights From The 2024 T3 Advisor Conference

February 19, 2024 07:03 am 0 Comments CATEGORY: Conferences

The 2024 Technology Tools for Today (T3) Advisor Conference, held last month in Las Vegas, Nevada, featured a large gathering of financial advisors and representatives from across the fintech industry. Hosted by Joel Bruckenstein and his team from T3 Consulting, the conference focused heavily on the relationship between financial advice and its accompanying fintech, covering everything from how AI and other tech developments are changing the advisor landscape in unprecedented ways to the importance of stringent cybersecurity measures, tech-stack integrations that actually work together cohesively and seamlessly, and the value of retaining the human essence in a wealth management landscape that is constantly moving forward.

In this guest post, Craig Iskowitz – CEO and founder of Ezra Group, a financial technology consulting firm – highlights this year's conference with his signature Twitter-driven recap, featuring presentations on the compelling paradox of AI; as while AI has become increasingly associated with overcoming human limitations with its efficiency, accuracy, and convenience, its weakness actually lies in its lack of humanity and inability to establish human connections. For example, Snappy Kraken emphasized how delegating tasks to AI tools can increase efficiency beyond what advisors can do on their own, and TradePMR shared their own (surprising) experience that their highly skilled personal concierges were actually AI bots; however, both companies conceded that technology can only go so far without a human relationship acting as the 'engine' for all of these (automated) pieces.

A continual thread through the conference was the ongoing effort to build a truly cohesive tech stack. In the wake of an AdvisorTech boom over the last decade, many advisors have all the tools they need to build truly comprehensive solutions for their clients. However, as Pershing Wove's Ainslie Simmonds points out, 65% of affluent investors are willing to leave their advisors if they do not offer an integrated tech experience – and in fact, having interoperable tech was a key component to growth.

Other major highlights from the T3 Advisor Technology Conference included:

Several speakers, such as Craig Ramsey and Rich Cancro of Advisor Engine, emphasized how processes are quickly changing in the new face of technology, and FP Alpha emphasized that right now presents a better opportunity than ever to reexamine old practices to see what can be simplified, automated, or altered.
At the same time, Morningstar's CEO Kunal Kapoor highlighted that efficiency comes with a greater demand towards personalization, and Orion's new CEO Nataline Wolfsen also spoke of the importance of aligning technology with the human elements of trust, shared values, and personal understanding.
Apex Fintech Solutions noted that the average advisor rings in at a cool 97% retention rate for acquired clients, suggesting that net new assets may provide a clearer lens for growth than the more traditional AUM metric. In the same vein, they also highlighted that hybrid firms (i.e., those that offer both digital robo-advice and human touch) are growing faster than almost everyone else, with 24% of net new cashflows despite the low aggregate number of firms with this business model.
Of course, with digitalization, integration, and automation comes cybersecurity risks. Digital hygiene, encryption security, and good staff training can all be enormous factors in the overall safety of the company, as explained by Patrick Hennessy, Schwab's Director of Business Consulting.

Finally, the annual T3/Inside Information Software Survey, which assesses the software programs used by financial advisors, found that tax planning tools are on the rise – with adoption rates jumping from 30% to 43%. Likewise, while CRM usage has slipped by about 5%, the overall number of advisors who use a CRM still remains at a dominant 92%. And lastly, as data becomes more comprehensive in today's digital landscape, cybersecurity rises in importance – and cybersecurity tool adoption remains on a slow, but steady, rise.

Ultimately, the 2024 T3 Advisor Conference brought together advisors, leaders, vendors, and students from all across the financial advice industry to share insights on threats, changes, observations – and, of course, to examine new opportunities in a constantly shifting fintech landscape. As software providers grow in number and their offerings expand in complexity, automation and cybersecurity will be central themes as client preferences continue to change. Which means that there is plenty of space – and demand – for technology to evolve, continually helping more advisors to be better, and more successful, and also allowing for the definitions of 'better' and 'successful' to grow as our technology options do as well!

Weekend Reading For Financial Planners (February 17-18)

February 16, 2024 02:00 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the news that a study from Cerulli Associates indicates a lack of fee transparency represents a significant hurdle for many investors when considering working with a financial advisor. Which suggests that while advisors might be hesitant to publish their fees on their website before being able to meet face-to-face with prospects, doing so (and linking the fees to the value proposition they offer their ideal clients) could help certain consumers overcome their reluctance and start the process to becoming clients!

Also in industry news this week:

While AUM fees remain ubiquitous among fee-only advisors, recent data show that an increasing number leverage multiple fee models to meet different client needs and preferences
While CFP Board has come out firmly in favor of the Department of Labor's proposed Retirement Security Rule, FPA has taken a more cautious approach, expressing concern about the potential compliance costs of the proposal for advisory firms

From there, we have several articles on advisor marketing:

A 5-step process advisors can use to build relationships with Centers Of Influence (COIs) and generate more prospect leads
Why the effective use of lead-generation services typically requires advisors to have plenty of free time to follow up with the leads they receive
Best practices for how advisors can use webinars to generate client leads, from leveraging effective email campaigns to creating near-term follow-up opportunities

We also have a number of articles on spending:

Why the relationship between spending and happiness is not linear, and what this phenomenon means for client spending and life satisfaction
How the differences between being "frugal" and "independent" can call for different advisor recommendations when it seems that clients are spending less than their income and assets allow
Why "Coast FIRE" might be an attractive strategy for clients who want more flexibility during their working years but don't want to stop work completely

We wrap up with 3 final articles, all about reading and writing:

How a daily writing practice can bring a range of personal and business benefits, from greater clarity of thought to building a professional brand
How experimental data suggests that taking notes by hand, rather than typing them out, could lead to more effective learning
The challenge of reading (and finishing) books amid a growing number of distractions and potential solutions to enable greater focus

Enjoy the 'light' reading!

A Proposed Salesperson’s Exemption To The DoL’s Retirement Security Rule?

February 14, 2024 07:01 am 0 Comments CATEGORY: Regulation & Compliance

When an investor is seeking to work with a financial professional, there's a substantial difference in expectations about the nature of the relationship when the professional being consulted is an advisor versus when they're a salesperson. In hiring an advisor, the investor is presumably seeking to put their trust and confidence in someone with their best interests in mind who can advise them on a course of action. Whereas in a sales transaction, the investor is most likely aware that a salesperson's job is simply to sell a product, which puts the onus on the investor (rather than the professional) to evaluate the salesperson's pitch and decide whether or not to act on it.

The difference between an advice and sales relationship isn't necessarily problematic on its own, since some people truly do just want to buy a product from a salesperson, rather than go through the time and cost it takes to be thoroughly advised on the best strategy. However, if an investor is unable to recognize whether they're engaged with an advisor (where they would expect the advice is truly in their best interest) and when they're engaged with a salesperson (specifically intended to sell products), they may be persuaded to take actions that are not truly in their best interests.

As a result of this dynamic, there is a long regulatory history of separating sales and advice, going all the way back to the Investment Advisers Act of 1940, which strictly limited the use of the then-popular "investment counsel" title to be used only by those who were actually in the business of giving investment advice, and forbidding its use by those primarily providing brokerage services. However, by the 1970s, the "investment counsel" term had largely fallen out of use in favor of the more generic (and less regulated) "financial advisor", which grew in popularity as insurance and mutual fund salespeople began to co-opt the title and position themselves as "advisors" while still being both compensated and regulated as salespeople. To this day, slews of professionals from the investment, brokerage, and insurance industries still use the "financial advisor" title without being registered as being in the business of giving investment advice – leaving many investors who hire them confused about how their "advisor" might not actually be an advisor expected to give them advice in their best interests.

Against this backdrop, the U.S. Department of Labor (DoL) has released a new proposed Retirement Security Rule that aims to apply new fiduciary standards to professionals who give investment advice to retirement investors when a relationship of trust and confidence exists between the advisor and the client, which would encompass both registered investment advisers, and insurance agents and brokerage representatives offering advice recommendations as well. But while DoL's proposed rule applies to professionals based on the functions they engage in (e.g., the level of personalization/customization of the advice recommendations), it has also expressed interest (via a Request for Comment on its proposed rule) in how a retirement advice provider's title may or may not create an expectation of trust and confidence. For example, if a professional holds themselves out as a "financial advisor", a prospective retiree who hires them may presume that the professional will provide advice – recommendations that are in their best interest – even if that professional isn't actually obligated to do so.

Arguably, though, the DoL still misses the true significance of the role that advisor titles play. As ultimately, there may be no actual functional difference between the type of questions and the specificity of recommendations made by advisors versus salespeople; instead, the difference between sales and advice is driven by the consumer's expectation of whether they're working with someone in an advice or sales capacity in the first place. Which is first and foremost defined by the way the financial professional titles themselves and markets their services.

As a result, one of the most straightforward ways to re-assert a clearer line for consumers between advice and sales is simply for the DoL to permit insurance agents and brokerage representatives to continue to be salespeople… so long as the professional does not hold themselves out as being a financial advisor or market that they offer financial planning.

Such a "Salesperson's Exemption", which would allow insurance and brokerage salespeople to avoid the DoL's fiduciary obligation in the Retirement Security Rule, would apply to salespersons who (1) avoided holding themselves out as financial advisors or financial planners, (2) avoided marketing that they offer any financial advice or financial planning services, (3) and provided disclosures on all sales presentations or illustrations to the effect that the engagement does not constitute advice and that the consumer should consult an actual financial advisor about the appropriateness of the sales recommendation.

The benefit of such an approach is that it would allow insurance companies and brokerage firms to continue acting in a purely sales function, without meeting the additional regulatory burdens of being a fiduciary advisor. Which would also help the DoL defend against the court challenges it faced with its last fiduciary rule – struck down when the courts agreed that the fiduciary standard should only apply to advisors, and not to salespeople who are not in a "relationship of trust and confidence" with their clients. All of which helps to preserve the regulatory distinction between sales and advice, and also continues to allow retirement investors the opportunity to choose between sales and advice (according to their own needs).

The key point is that even though regulatory bodies have recognized the distinct nature of advice relationships of trust and confidence and applied higher standards of care for such advice relationships in the past, the line between sales and advice has blurred in more recent years. The DoL could help clarify the distinction with a more "truth-in-advertising" approach, by requiring those who market themselves as advisors acting in a position of trust and confidence to retirement investors to be accountable to the fiduciary standards that go along with it, while also providing a path for those who wish to avoid the burdens of fiduciary status to avoid it… by being clear that they really are not advisors, and are simply acting in a sales capacity, so the consumer is clear about the true scope of the relationship.