Nerd's Eye View blog

One Young Breakaway Broker’s Story Of Navigating The Broker Protocol And Choosing An RIA Custodian And Technology

September 15, 2015 07:02 am 21 Comments CATEGORY: Practice Management

The reality of starting out as a financial advisor is that it's hard to know what type of advisory firm structure will be best in advance; often, the best strategy is just to dive in, get a job at any reasonable firm that will allow you to launch your career, and after you get some experience, decide whether it's really the right fit for the future. Of course, the caveat to this approach is that if it turns out you do need to make a change later, that change can be scary - so frightening, in fact, that many advisors never make the subsequent changes they should, fearing the unknown and finding comfort in an (admittedly not ideal) current firm or environment.

In this guest post, financial advisor Noah Morgan shares his own transition process in making the leap, first from his original advisory firm to an independent broker-dealer, and then subsequently to an independent RIA. Accordingly, Noah gained a wide range of experience and perspective about what it's like to make these transitions, from vetting RIA custodian platforms to navigating the Broker Protocol and compliance concerns, to selecting the entire suite of technology necessary to sustain the new advisory firm.

So if you're an advisor who's currently unhappy at your current firm, and considering the process of transitioning to something new, hopefully this will be helpful to you in gaining an awareness of the issues that you need to consider if you're really going to make a switch in the future!

Best Practices For Internal Succession Planning Of Financial Advisory Firms

September 14, 2015 07:02 am 14 Comments CATEGORY: Practice Management

The process of executing an internal succession plan within an advisory firm is a challenge, even in the best of circumstances. And the stakes are high. When an advisory firm is created, the founder takes the “risk” of foregone income for a period of years while trying to get the business off the ground… yet when a successor takes over, in many ways the risk is even more severe, as it's no longer just the danger that the business doesn’t succeed, but the more substantial financial risk that the successor won’t be able to repay his/her lenders for the significant capital that was borrowed to execute the deal!

Yet unfortunately, while there have been some books written about how founders should aim to execute a succession plan, remarkably little has been written from the perspective of internal successors, and the steps they should take to maximize the odds of completing a successful succession of the founder’s firm.

Until now. In the new ‘must-read’ book for advisory firm successors, “Success and Succession” (just released this week!) explores how internal successors can best navigate the challenges of completing a succession plan. Written from the perspective of two successful advisory firm internal successors, Eric Hehman and Jay Hummel, along with industry veteran (and successfully-exited founder) Tim Kochis, the book provides guidance on not only the key operational and financial issues faced in executing an internal succession plan and how to manage them, but the emotional challenges that will inevitably arise – for both the successor and the founder – which must be navigated to successfully complete a succession transition!

Weekend Reading for Financial Planners (Sep 12-13)

September 11, 2015 02:22 pm 19 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the latest industry data showing that mergers and acquisitions of financial advisory firms is running at a record pace for 2015, both in terms of the number and the size of advisory firms. Also in the news this week was an interesting new study showing that the bulk of current ETF growth is being driven by independent RIAs, especially firms with over $500M of AUM, that have collectively added half a trillion dollars to ETFs in just the last 12 months!

From there, we have a few practice management articles, particularly focused around the 'necessary' topic of compliance, from a look at the kinds of 'boilerplate' provisions that really are important to include in an advisory agreement with clients, to a discussion of the recent Notice of Proposed Rulemaking from the Treasury's FinCEN division that may require SEC-registered investment advisers to adopt Anti-Money Laundering (AML) compliance rules, to a look at a large RIA that recently received a huge fine from the SEC not because it had significant compliance breaches that harmed clients but because the firm failed to engage in their internal compliance oversight processes necessary to know that employees were acting properly (in other words, it's not enough to be compliant, you need a process to demonstrate that you've confirmed you're being compliant!).

We also have a couple of technical planning articles this week, including: a look at Qualified Longevity Annuity Contracts (QLACs) that were heralded last year as a savior for retirees but thus far have seen very little adoption; recent new research from Wade Pfau, finding that given the impact of investment costs and overpriced stock and bond markets the "safe" withdrawal rate might be under 2%(!); a good article about the key differences between Designated Roth Accounts (the Roth version of an employer retirement plan) and a Roth IRA; and a discussion of the research of Dr. Brigitte Madrian, whose research 15 years ago on the power of automatic enrollment of employer retirement plans indirectly spawned the explosion of the target-date fund industry.

We wrap up with three interesting articles: the first raises the question of whether it even makes sense for financial advisors to retire at all, given how rewarding financial planning is both emotionally (given the deep client relationships) and financially (where it often pays more to keep an advisory firm for several years rather than sell it); the second article looks at the rollout of a new post-CFP designation, called the "Certified Financial Transitionist", originally designed to help train advisors to work with clients who experience "Sudden Money" events, but arguably relevant for virtually any/all advisors (after all, doesn't virtually every client come to us because they need help with some kind of transition!?); and the last raises the question of whether it's finally time for financial planning to shift from an industry where "best practices" are often based on little more than a combined of tradition, intuition, and the school of hard knocks, to a profession where true best practices are established via thorough research and the application of the scientific method to cultivate an "evidence-based" approach to effective financial planning.

And be certain to check out the latest Bill Winterberg video at the end - the latest segment of his FPPad Tech Tour video series for 2015, featuring an interview with yours-truly where Bill reveals, for the first time ever on video, how many blue shirts are actually hanging in my closet!

Enjoy the reading!

The ETF Problem With Stop Loss Market Orders

September 9, 2015 07:01 am 24 Comments CATEGORY: Investments

Now with more than $2 trillion in assets, the exchange-traded fund (ETF) has exploded onto the investment scene in the past 20 years, with the bulk of the growth occurring even more recently, built on the base of popular ETF features from their tax efficiency to relatively low cost to their ability to trade intra-day like a stock (and unlike a traditional mutual fund).

Yet ironically, in recent weeks the popular feature of being able to trade intra-day has turned into a liability instead, as market volatility has triggered a number of extreme (but short-term) situations where ETFs have traded at a significant discount to their intrinsic net asset value, in some cases as much as 30% below intraday NAV for an hour or few at a time.

For those advisors and investors who trade infrequently anyway, this kind of intra-day volatility may be a “non-issue” that was literally not even noticed by those who owned the ETF securities. Except those who panicked and sold at the market’s open based on overnight news. Or, unfortunately, those who were using Good ‘Til Cancelled (GTC) stop loss market orders.

In fact, the recent volatility of ETFs highlights that when it comes to using stop loss orders in particular, advisors and investors must be especially careful about how those trades are structured, in a world where ETFs with ‘temporary’ bouts of illiquidity can trade at dramatic discounts. At a minimum, those who wish to continue to use stop loss orders as a form of risk management may seriously want to consider using stop loss limit orders instead, with a gap between the stop loss and limit thresholds that is wide enough to still trigger a sale when the underlying NAV is falling, but reducing the risk of triggering a market sell order at the nadir of an ETF’s short-term “flash crash” price!

Why Robo-Advisor Technology Still Won’t Help Most Financial Advisors Reach Millennials

September 7, 2015 07:01 am 32 Comments CATEGORY: Technology & Advisor FinTech

While much has been written about the disruptive “threat” of the robo-advisors, the reality is that even after several years, their market share is still a miniscule fraction of 1%. Robo-advisors have had limited success, even in areas with little or no head-to-head competition against traditional financial advisors, like working with Millennial clients.

In fact, the struggles of most robo-advisor platforms have been so significant, they’ve been increasingly pivoting to work with established financial services firms, or to become available to individual financial advisors, in the hopes that such partnerships will allow robo-technology firms to gain the volume and scale they need to succeed.

Yet the caveat is that individual financial advisors rolling out web-based “robo” tools to reach Millennial clients will probably be even less successful than the pure robo-advisors have been! After all, the challenge of client acquisition costs is equally difficult for human advisors as it has been for robo-advisors, yet most existing advisory firms are even less attuned to the challenges of how to effectively execute a digital marketing plan!

Ultimately, this doesn’t mean that “robo-advisors-for-advisors” solutions will be worthless for all, but the key point is to recognize that advisors who want to serve Millennials must start by crafting a service model that is actually relevant and valuable for Millennials, have a means to market to Millennials, and then add a robo-technology solution on top to aid with the implementation. Advisors won’t be able to “out-robo” a robo-advisor; at best, the opportunity is to leverage robo-advisor technology as a part of a broader holistic service offering for Millennials, where advisors can focus on their strengths, and use technology to improve the efficiency of the process... but only for advisors who can solve the marketing challenge first!

Weekend Reading for Financial Planners (Sep 5-6)

September 4, 2015 02:25 pm 17 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big news that Edmond Walters, founder and CEO of the popular eMoney Advisor financial planning software, has abruptly resigned from the company, barely 6 months after being acquired by Fidelity, in what is rumored to have been a significant culture clash between the aggressive entrepreneur and Fidelity's more conservative and traditional corporate culture. In the wake, questions now abound regarding the future fate of eMoney Advisor, in the hands of Fidelity's leadership to execute, but without eMoney's visionary founder.

From there, we have a few more articles on industry technology news and practice management advice, from an announcement that account aggregation provider Quovo just raised a fresh $4.75M round of venture capital to expand its solutions for advisors, to a look at the "new" (to North America) financial planning software Figlo, a great reminder from Mark Tibergien that if your advisory firm's greatest asset is its people then the firm should be investing in them that way, and a discussion from Kelli Cruz reinforced the point by noting that most firms have a remarkably mediocre process for recruiting and hiring new staff members despite the incredible importance of building a good team!

We also have a couple of technical planning articles this week, including: a reminder of the prohibited transaction rules for IRAs and how a small mistake can not only trigger a small distribution but disqualify an entire IRA account; a look at some of the latest research and policy discussions in Washington about retirement, including a growing recognition that solutions may need to become more sophisticated given the significant gap in life expectancies across higher vs lower income individuals; and a look about whether it's really possible for an investment strategy that produces favorable returns to continue to "work" even after it is widely known and "everyone" starts doing it.

We wrap up with three interesting articles: the first looks at a new book by Barry Schwartz entitled "Why We Work" and whether the idea that human beings are "lazy" and unmotivated to work and will only do so when financially incentivized to do so could actually be the very thing that is damaging our motivation to work and leaving us so disengaged; the second is a brief reminder of the importance of balancing work and rest, and that while working excess hours is a fine way to get through a crunch, but on a sustained basis can actually result in less total productivity even with more hours; and the last is a 'mea culpa' from Bob Veres on behalf of all industry journalists, noting that our industry media may have become so obsessed with the idea of growing the biggest advisory firm that it has failed to remember that we all have our own definitions of success, which may be as much about what happens in our personal lives, and the quality of the service we provide our clients, beyond just trying to finish with the largest pile of AUM.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the 'surprise' announcement that eMoney Advisor's founder and CEO Edmond Walters has resigned, and big news about account aggregation provider Quovo that both raised $4.75M of venture capital this week and also announced a major integration with financial planning software provider Advicent (makers of NaviPlan and Figlo).

Enjoy the reading!

MailBag: Asking Clients To Do Business After A Webinar/Seminar, & Finding Niches Using Psychographics Vs Demographics

September 3, 2015 07:01 am 12 Comments CATEGORY: MailBag

Many readers of this blog contact me directly with questions and comments. While often the responses are very specific to a particular circumstance, occasionally the subject matter is general enough that it might be of interest to others as well. Accordingly, I occasionally post a new "MailBag" article, presenting the question or comment (on a strictly anonymous basis, of course!) and my response, in the hopes that the discussion may be useful food for thought.

In this week's MailBag, we look at whether it’s best to ask people to schedule an appointment or engage with you immediately at the end of a webinar (or seminar) versus just following up with them later. And we also look at whether it’s best to define a target niche clientele based on their background and demographics, or to focus on their “psychographics” instead!

Don’t Just Focus On Risk Tolerance For The Portfolio, Because Goal Risk Tolerance Matters Too!

September 2, 2015 07:01 am 16 Comments CATEGORY: General Planning

The traditional approach to risk tolerance is fairly straightforward – determine how much risk clients can tolerate, and give them a portfolio consistent with that risk tolerance level.

Unfortunately, the problem with this approach is that it can produce a portfolio disconnected from the reality of the client’s goals. Sometimes the portfolio will be more aggressive than it needs to be to achieve the goal. In other situations, a conservative client may end out with a conservative portfolio that will just doom an aggressive goal to failure.

To avoid such mismatches, then, the real key is that risk tolerance should first be applied to the goal itself, and determine whether the goal – and the portfolio necessary to achieve it – is consistent with the client’s risk tolerance. If the “goal risk” is too high, the real solution is not finding a portfolio to achieve the goal, but finding a new goal that isn’t too risky for the client to tolerate in the first place!

Essentialism And The Paradox Of Success As A Financial Advisor

August 31, 2015 07:01 am 24 Comments CATEGORY: Personal/Career Development

Building a business as a financial advisor (or really, almost any business) is a constant effort of getting “more” – more clients, more revenue, more staff to serve them… in a process that can often leave the advisor feeling less and less in control as the demands of the business become overwhelming.

In the new book “Essentialism”, Greg McKeown makes the case that this “Paradox of Success” – the focus that makes entrepreneurs succeed becomes their undoing as the demands on their time increase due to the very success they created – can only be resolved by taking a systematic approach to creating focus on what is truly essential for the advisor to be doing. The classic approach of doing more and more – of multitasking and multifocusing – just leads to less and less productivity. Which means it’s actually the disciplined pursuit of less – what McKeown calls living the life of an “Essentialist” – that leads to more in the long run.

And ultimately, the lessons of Essentialism translate not only into personal success, but the entire design and focus of a business, where in a similar manner a strategic “focus” that goes in too many directions at once leads to little progress at all. By contrast, it’s the focused “Essentialist” business that puts all of its energy towards a single niche or specialization that can make the most progress and gain the momentum that sets the stage for future success as well.

Weekend Reading for Financial Planners (Aug 29-30)

August 28, 2015 01:31 pm 18 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big news that the world's largest asset manager, Blackrock, decided to buy the #3 robo-advisor FutureAdvisor for $150M, with plans to pivot the company from its current direct-to-consumer focus to instead become a robo-advisor-for-advisors solution for Blackrock's institutional partners (i.e., banks, broker-dealers, insurance companies, and perhaps RIAs).

From there, we have a few articles on this week's market turmoil, including a discussion of the unusual market volatility in ETFs that occurred on Monday morning (when many ETFs traded at materially different prices than their intrinsic NAV), a second article from ETF.com looking at the details of how an "ETF flash crash" occurs (important to understand if market volatility picks up again soon!), and a separate article discussing the unrelated but also problematic technology outage this week at BNY Mellon that left hundreds of mutual funds and ETFs unable to properly price their value for several days this week!

We also have several practice management articles this week, including: a discussion of a smarter marketing (or "smartketing") process that integrates both prospecting and sales efforts in an advisory firm; a look at how some advisors are adopting video as a part of their marketing and/or client communication process; a discussion of some practice management "gotchas" to watch out for that can undermine the value of your business (e.g., remember that unlike talking to a compliance attorney, communication with your compliance consultant is not privileged and can be used against you!); a warning that growth rates, referrals, and profitability are declining at many advisory firms (and how it can be resolved by focusing on a narrower target clientele to differentiate); and a reminder of how important it is to communicate complex concepts to clients visually and not just verbally (and better yet, make a standardized graphic to illustrate key concepts that you can use over and over again!).

We wrap up with three interesting articles: the first provides some good reminder tips of what to do and what to say when market volatility occurs (hint: proactive communication and active listening are essential!); the second provides an interesting look at the history of the Investment Company Act of 1940 (which just recently celebrated its 75th anniversary!); and the last is an article from the Harvard Business Review reporting on an interesting study that finds the rise of technology is actually making social skills more important than ever for career success (and the best jobs are those that require social skills and include high-level cognitive challenges, like financial planning!).

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the announcement that Blackrock is acquiring the robo-advisor FutureAdvisor, the Salesforce launch of their new Financial Services Cloud, and the latest practice management white paper "X-Cell" from Kaleido.

Enjoy the reading!