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Financial Planning Software Doesn’t Make Advisors Faster… It Makes Them Better

August 19, 2019 07:12 am 2 Comments CATEGORY: Technology & Advisor FinTech

One of the biggest challenges of planning ahead – whether with respect to our finances, or anything else in life – is that it takes time. It takes time to sit down and think about the possibilities, how they might play out, and what must be done to reach the desired goal. And for an advice-giving professional, the time to support the planning process can be even more arduous… as it both takes time to do the planning and analysis itself, plus the time to gather all the relevant information up front, and translate it into advice that can be presented and implemented.

Consequently, it is perhaps not surprising that one of the biggest hindrances to the delivery of financial planning is simply the time it takes. As according to our recent Kitces Research study on “How Financial Advisors Actually Do Financial Planning”, the typical financial plan takes 10 hours to construct, and the average financial planner spends a whopping 34.5 hours on the entire financial planning process through the first year of working with the client (from establishing the relationship and data gathering, to analysis and crafting recommendations, along with plan presentation, implementation, and monitoring). Which severely limits how many clients a typical financial planner could even handle (to generally no more than 2-3 new clients per month at the most!).

In theory, the repeatable nature of the financial planning process would be highly conducive to technology – i.e., financial planning software – simplifying the process, and making it more efficient and less time-consuming. Except as it turns out, there actually is no apparent relationship between the use of (more efficient) financial planning software and time-savings in the financial planning process.

In fact, it turns out that advisors who use account aggregation tools to better automate (and streamline, and reduce the time for) the data gathering process end out spending more time in the data-gathering phase – as faster quantitative data collection supports an even-more-in-depth qualitative discovery process with clients. And more generally, the most highly-rated financial planning software amongst advisors is the software that takes the longest to use and is the most comprehensive and customizable… because it also happens to be the most comprehensive, and therefore the most effective at helping the advisor to actually demonstrate their value.

The significance of these findings is that it suggests broker-dealers seeking to grow adoption of financial planning by purchasing “simpler, faster, and easier-to-use” financial planning software may be misguided, as planning software is not actually the time-saving tool it was once presumed. It helps advisors go deeper into planning, not faster through it… which makes it not terribly useful to brokers who aren’t interested in the planning process in the first place.

Instead, it turns out that the single greatest path and predictor of time-savings in the financial planning process is whether the advisor has their CFP certification in the first place. Or stated more simply: making financial planning more efficient (and more widely adopted in a large enterprise) is primarily an advisor training issue, not an advisor software issue.

On the other hand, there’s still substantial room for financial planning software companies to increase their own value proposition by developing what their financial advisor users actually want and need, which is not “simpler” financial planning software, but instead to become even more comprehensive and in-depth, to help financial advisors get even better in creating and demonstrating value to their own clients!

Weekend Reading for Financial Planners (August 17-18)

August 16, 2019 02:58 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the release of the latest edition of Morningstar's "Mind The Gap" study, which analyzes investor returns based on asset-weighted flows in/out of mutual funds and ETFs, and finds that while the behavior gap does persist, it is "just" about 0.45%/year over the past decade, and is actually positive (i.e., investors on average outperformed) when it comes to asset allocation funds (as the low volatility of such diversified funds appears to drastically reduce the tendency to try to market-time them in the first place).

From there, we have a number of insurance-related articles this week, including a discussion in The Wall Street Journal of Madoff-whistleblower Harry Markopolos who claims that GE and its long-term care insurance unit in particular may be "the next Enron" and that the LTC insurer has understated its future liabilities to the tune of $10s of billions, how the pricing of insurance products (or the participation rates of fixed indexed annuities) is deteriorating in the face of now-falling interest rates, and a new Private Letter Ruling from the IRS that will allow RIAs to receive their advisory fees directly from a fee-based annuity without triggering a taxable event (and in fact, will effectively be paid by the client on a pre-tax basis for any annuity with embedded gains!).

We also have several practice management articles, from the ongoing rise of non-compete agreements at RIAs to prevent employee advisors from taking clients when changing firms (notwithstanding the fact that RIAs historically have been the bastion of no-hands-tied independence), to the business management hazards of valuing an advisory firm based on a multiple of revenue alone, the "exploding" number of options for advisory firms to borrow in order to acquire other firms, the practical challenges of trying to grow by acquisition and actually close on and integrate a newly acquired advisory firm, and the practical value of benchmarking studies as a means to not just evaluate the firm's AUM and growth relative to peers but also its productivity and efficiency in allocating its resources across the firm.

We wrap up with three interesting articles, all around the theme of how to actually make a good decision: the first looks at the "anatomy" of a Great Decision, which ultimately comes down to making a principles-based decision, and using a broad multidisciplinary lens to consider the issue from all angles before making the decision; the second looks at how thinking about decisions more probabilistically as "bets" is a better approach that naturally considers the role of luck and hidden information (and recognizes that the key to a good decision is not to guarantee a good outcome, but simply to minimize the odds of a bad one); and the last discusses the so-called "37% rule", that the best amount of time to allocate to a decision is 37% of the total time designated to the project (but after 37% of the time has passed, it's time to execute the decision and do the best you can with whatever you've got at that point!).

Enjoy the "light" reading!

Kitces & Carl Ep 14: Projection-Free Financial Planning To Avoid A False Sense Of Precision

August 15, 2019 07:03 am 5 Comments CATEGORY: Kitces & Carl Podcast

Developing trust is one of the most important things financial advisors can do to establish lasting relationships with their clients. For which developing a comprehensive financial plan is often an opportunity not only to deliver value as a financial advisor but to deepen client trust by demonstrating the advisor understands them in the first place. Once clients have stepped into the proverbial Cone Of Trust, though, does a client really want (or need) to review and discuss a full-blown financial plan? Or would they rather just be told, very simply, what they specifically need to do to meet their goals and solve their problems? Alternately, is it still preferable for clients to review their plan in depth so that they might better understand where they are today and how decisions they make now will affect their plan in the long run… no matter how complex or lengthy their financial plan might be (and how much trust they’ve already imbued with from their financial advisor?)?

In our 14^th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards explore the various functions that a physical financial plan deliverable plays in the financial planning (and client relationship trust-building) process, share their viewpoints on how written financial plans can be used effectively to help clients, and discuss what ultimately matters most for clients, regardless of whether their financial plan is one page or requires a 2” binder and color-coded tabs.

Generally speaking, there are two (if not more) camps when it comes to the usefulness and structure of financial plans. Some advisors feel that detailed financial plans give a false sense of security by predicting future outcomes with unwarranted certainty; instead, these advisors prefer to establish trust and develop empathy without using the financial plan as a central conversation tool. Once a strong connection is formed, and they understand the client’s core issues and concerns, they often find it easy to discuss “good” behaviors the clients can follow to avoid mistakes and stay on track and do so using simple terms that apply to and make sense for the client. Interestingly, the level of trust that clients have in their advisor may often influence the degree of understanding they want/need to derive from their advisor, and/or their willingness to accept the recommendations being provided, based on the financial planning discussions they have together.

Other advisors, meanwhile, prefer to develop and discuss a detailed plan with clients and feel that their clients appreciate the clarity a good plan provides for their current financial situation, and that clients value understanding how different outcomes of important decisions considered today (such as funding education, modifying spending habits, and retiring early) will affect their overall financial picture years into the future. This is especially important because clients often fail to realize the powerful impact small changes in behavior and compounding growth can have on saving goals. Not to mention that delivering the financial plan itself can often be part of the trust-building process… as clients may not be willing to take the plan recommendations unless they’re also backed up by a thorough analysis (even if the client won’t read the analysis once they see it’s there and trust that it’s been done).

In the end, the key point is simply that advisors can use financial plans as effective tools for helping clients stay on track and make smart decisions, and that different advisors have their own distinct styles of conveying this feedback. Clients, too, are unique, and they have different preferences about how much of a full plan they want to see. Regardless of how advisors create and implement financial plans, though, clients need to be confident that their advisor is competent and that their recommendations are credible… which means either in advance of developing the plan or as part of the plan delivery process itself, it’s still essential to first establish real trust in the client relationship.

Fee Severability: The Next Big Issue In The Regulation Of Financial Planner Compensation?

August 14, 2019 07:06 am 8 Comments CATEGORY: Regulation & Compliance

Back in early 2015, the White House directed the Department of Labor to propose and implement a new rule that sought to impose a fiduciary standard on broker-dealers… or as the President’s administration put it, “Wall Street brokers who benefit from backdoor payments or hidden fees and don’t put the best interest of working and middle class families first.” At the time, the Administration argued that “bad incentives and bad advice” meant that consumers were losing upwards of $17 billion per year to their retirement accounts, implying that any compensation that was based on the sale of a financial product was unduly expensive and inherently “bad”, especially when contrasted against (good) “firms who choose instead to put their clients’ interests first [under a fiduciary assets-under-management model].”

But, as is often the case, such black and white distinctions are rarely so cut and dry, as no fee model is completely without some underlying conflict of interest between a business that wants to get paid and the consumer trying to decide if their services are worthwhile. Especially since in practice, the cumulative costs for clients of advisors who charge under the AUM model can add up to far more than even the most expensive, conflict-ridden financial product.

Yet, at the end of the day, while a client who pays a 1% annual fee over the course of seven years on the assets that an advisor manages will end out paying the same amount as someone who pays a 7% upfront commission on an annuity, the reality is that the fee on the annuity is a “sunk cost” (i.e., it’s paid up front to the salesperson and can’t be recovered by the client after the fact), while the client paying 25 basis points every quarter can “fire” the advisor at any time, and simply stop paying the fee if/when they are no longer happy with the level of service they’re getting. Which is why it’s not surprising (and the actual data shows) that advisors under the AUM fee model spend far more time servicing their clients than sales-based brokers. In other words, since the fees under the AUM model are more “severable”, the advisor has a natural incentive to provide more and ongoing service, and the consumer enjoys better protection by being able to terminate the service as soon as it’s not up to snuff.

However, in many cases, there are still hoops that a client has to jump through to sever themselves from the AUM-based advisor, including going through the process of finding a new advisor, opening new accounts, and transferring their money to a new firm. Which can create inertia, and could be one of the contributing factors to the fact that AUM-based advisors have such a high client retention rate (even sometimes in the face of mediocre service)… because in some cases, it’s not that the advisor provides such great service, but simply because leaving is such a pain.

For even more “severable” fee structures, consumers can turn to the newer retainer and subscription fee models. Though perhaps the model with the greatest fee severability is the hourly model, where there are no ongoing or recurring fees and which, by definition, terminates at the end of any meeting where the client doesn’t engage the advisor for any subsequent meetings or service.

All of which leads to the question of whether or not (state-level or Federal) regulators are scrutinizing retainer, subscription, and similar fee-for-service compensation models for advisors (i.e., those models with higher fee severability) properly and, in turn, underappreciate the added consumer protections such models naturally provide. Which, ironically, can end up pushing advisors back towards those models with lower fee severability and less consumer protection, where it’s easier for advisors to charge more and get away with doing less.

Ultimately, the key point is that, if the objective of regulation is to better protect consumers, then it’s important to recognize the role that fee severability plays in the process, as certain types of models (e.g., fee-for-service models which have been gaining traction in recent years) already have more of those key protections naturally built in. And while regulators continue to struggle with finding ways to make the more traditional sales-based models less conflicted and more transparent and severable, perhaps the focus for regulators when looking at the fee-for-service models is simply keeping them that way?

#FASuccess Ep 137: The Evolution Of How Financial Advisors Solve Client Problems Across Industry Channels, with Lou Tranquilli

August 13, 2019 07:05 am 2 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 137th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Lou Tranquilli. Lou is the founder of Tranquilli Financial Advisor, an independent RIA based in Clinton, NJ that oversees more than $100 million of assets under management for 110 clients.

What’s unique about Lou, though, is the way his advisory firm has evolved over more than 25 years across every channel of the industry, having started out as a traditional life insurance sales agent, shifting to the broker-dealer model, then becoming a hybrid RIA, and now making one more recent transition to the independent RIA channel.

In this episode, we talk in depth about how Lou structured his independent RIA as an experienced practitioner. From why he chose Trust Company of America as his custodian rather than one of the traditional big four custodians, the way he brought together an integrated technology stack built around his custodian, to how, despite criticisms that solo advisors will need more size and economies of scale to compete, the increased efficiency of technology to support his solo RIA over his prior broker-dealer actually allowed him to reduce his staff support and increase his profit margins after making the transition.

We also talk about Lou’s journey through the industry itself, from starting out as a traditional life insurance agent in the 1990s and embracing the sales job, even making top of the table with MDRT, to deciding to walk away from the insurance sales job after a decade of tiring of the environment where, as Lou puts it, you’re out of business every minute you’re not calling somebody, and to walk away from his insurance renewals in order to transition to a recurring revenue AUM model that would allow him to focus more on serving existing clients. How Lou hired a marketing director to help him craft and then focus into a niche and triple his firm in under four years, and the way he sought out confidants and formed a study group to get ongoing feedback and guidance from peers on how to continue to refine his business.

And be certain to listen to the end, where Lou explains how despite the fact that he’s always been focused on trying to help clients solve their problems, his own advice role and the services he provided were impacted and materially different as he switched from one industry channel to another.

So whether you’re interested in learning about how Lou went independent and lauched his own RIA, how he outsources his staffing needs, or how a business development manager helped him grow, then we hope you enjoy this episode of the Financial Advisor Success podcast.

What The Australian Financial Services Royal Commission Signals For U.S. Fiduciary Rulemaking

August 12, 2019 07:03 am 1 Comment CATEGORY: Regulation & Compliance

For almost half a decade now, the United States has tried to implement Federal-level regulations requiring that those who are in the business of providing financial advice to serve as fiduciaries and be required to put their clients’ interests ahead of their own. Thus far, however, these regulatory reforms have failed to hold, as financial services industry product manufacturers and distributors have vehemently argued that such rulemaking would end out preventing consumers from receiving their (conflicted) financial advice in the first place, due to the “cumbersome” requirements inherent in any such fiduciary regulation.

The irony, however, is that despite all this tumult about the potentially adverse impact of fiduciary regulations in the U.S., another set of fiduciary regulations have been established and operating for the past six years in Australia, and are far more comprehensive and disruptive than anything proposed (or even hinted at) in the U.S.

In this guest post, Ashley Murphy, founder of Arete Wealth Strategies (a fee-only financial planning and investment management firm serving Australian/American expatriates), discusses the background and impact of Australia’s fiduciary reforms to its financial services industry, some recent developments as the Australian government evaluates the effects of their fiduciary efforts, and what the implications might be for the U.S. fiduciary movement going forward.

Originating in the aftermath of the Great Recession and first passed by the Australian Parliament in 2012, the Australian “Future of Financial Advice” (FoFA) reforms, which went into effect the following year, sought to address pervasive problems in an Australian financial services industry, which, at the time, lacked oversight and was rife with poor “advice”, scandal, and even outright fraud. It was against that backdrop that lawmakers passed two separate acts – the Corporations Amendment (Future of Financial Advice) Act 2012, and Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 – which (among other things) sought to require financial advisors to act in their clients’ best interest, place a general ban on any payment that might influence any advice or recommendation, and require advisors to provide clients ongoing fee and engagement disclosures, at levels far beyond what the SEC has required of broker-dealers under Regulation Best Interest.

Despite ongoing criticism and intermittent tweaks to the original Acts, there is evidence that FoFA has (at the very least) accomplished some its original goals, as the number of complaints against advisors has decreased, and despite concerns that regulation would reduce access to advice in reality more and more Australians are seeking out financial advice after FoFA (suggesting a general increase in the public’s confidence in and therefore willingness to engage with the industry).

Nonetheless, a subsequent formal inquiry to investigate misconduct in the banking and financial services industry, known as the Hayne Commission, found that up to 90% of advisors who worked for firms that manufacture and sell financial products were still giving conflicted advice that wasn’t the in the best interest of their customers… even though the advisors were compensated solely by fees and/or salaries (because the advisors were still largely controlled by their product-manufacturing employers). Moreover, even when banks were found to be in violation of FoFA rules, the penalties were so lax that misconduct continued to be remarkably profitable.

Notwithstanding the industry condemnations from the Hayne Commission, critics feel that the final report fell short and failed to include some key recommendations, including a once-discussed outright ban on asset-based (i.e., AUM) fees and a potential breakup of vertically integrated financial services firms (to force a separation between products and advice). Nonetheless, the findings did throw light on the need for further regulation and enforcement in Australia’s financial services industry, and industry consultant Rice Warner suggests that Australians are receiving better advice at a lower cost and are experiencing better financial outcomes after Australia’s fiduciary reforms.

Ultimately, the key point is that the ongoing evolution of the reformation of Australia’s financial advice industry could serve as a model in the U.S., as regulators struggle with implementing a fiduciary standard. Because, while the SEC’s Regulation Best Interest, which is slated to take effect at the end of June, 2020, is a step in the right direction, it’s possible that the rule will only lead to further confusion among consumers who can’t tell the difference between salespeople and advisors, leaving the proverbial door open for increased regulation in the years ahead. While Australia’s experience shows that lifting fiduciary standards actually can result in an increase in the levels of advice delivered to consumers, as eliminating low-quality advisors and reducing the level of conflicted advice leads to an increase in trust that ultimately creates more opportunity for financial advisors to survive and thrive.