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Weekend Reading for Financial Planners (Nov 17-18)

November 16, 2018 02:51 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the fascinating news that #4 independent broker-dealer Commonwealth Financial is launching a standalone RIA services division, not just to service its sizable base of dual-registered advisors but a growing segment who have dropped their FINRA licenses altogether... but want to stay with the broker-dealer anyway for their non-broker-dealer RIA support services instead, as the brokerage industry increasingly reinvents itself for a more RIA-fiduciary-centric future!

Also in the news this week is the news that Interactive Brokers is scaling up its RIA services division (at least for RIAs that are still primarily in the business of actively managing client portfolios and want ultra-low trading costs), and the announcement that Edelman Financial Engines is launching a new RIA custody relationship with Trust Company of America now that the latter is part of E-Trade... to get access to a soon-to-be-launched (and likely-to-be-lucrative) E-Trade Advisor Network as E-Trade mimics the successful advisor networks of Schwab, Fidelity, and TD Ameritrade (at least, for the subset of advisors who can participate).

From there, we have a number of investment-related articles this week, including a look at how advisory firms are choosing their investments these days (hint: it's all about fees, performance, and brand trust), a Morningstar highlight of Vanguard's TIPS fund as CPI slowly but steadily starts to rise, and a look at how the growing number of firms beginning to automatically convert their C-shares to A-shares after 7-10 years may itself accelerate firms to transition to the advisory model to maintain their revenue (for which the end of the year is a good time to take a fresh look at the advisor's own book of clients still holding C-shares). Also in the discussion of investments this week is a look at the "good" that Wall Street does accomplish, how to handle the situation when a couple doesn't align on their risk tolerance, and why webinars can be a particularly effective method to reach (lots of) clients in times of market volatility.

We wrap up with three interesting articles, all around the theme of pricing model innovation amongst financial advisors: the first highlights a new Simon-Kucher study on advisory firm pricing models that finds it's not actually so difficult to serve Millennials profitably... it just requires not using the AUM model and shifting to a more direct fee-for-service model instead; the second looks at some of the caveats of shifting to a flat-fee model, and how to build in "stabilizers" to ensure that the advisor/client relationship doesn't get too out of whack; and the last is a fascinating exploring of the "Good-Better-Best" approach to pricing models, where businesses offer three tiers and empower consumers to choose which they want for themselves.

Enjoy the "light" reading!

3 Reasons Why The Financial Advisor Market Size Isn’t Actually Shrinking

November 15, 2018 02:10 pm 0 Comments CATEGORY: Technology & Advisor FinTech

With Cerulli Associates estimating that nearly 50% of all financial advisors are over the age of 55, the headcount of financial advisors is projected to shrink, potentially quite substantially, in the coming decade. Which can trigger more industry consolidation (mergers and acquisitions) and succession planning (as existing clients of advisors leaving the industry will need go somewhere else for advice), but also risks further slowing the amount of technology development and new businesses entering the marketplace to serve financial advisors (as many investors don’t want to fund businesses in a shrinking marketplace! Yet as it turns out, looking at the total number of “financial advisors” may actually be the wrong way to measure the trajectory of the financial advisor marketplace to begin with… and when viewed properly, the opportunities for serving (real) financial advisors is actually on the rise!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1 PM EST broadcast via Periscope, we discuss why it’s so difficult to estimate the number of existing financial advisors in the first place, why many of the predictions regarding the trajectory of the financial advisor headcount aren’t taking into account some key drivers, and why, ultimately, looking to the number of CFP certificants may offer the best perspective on the opportunities within the industry… and whether the number of people offering (real) financial advice is decreasing or actually increasing.

Cerulli Associates, who delivers some of the best industry research out there, estimates that there are just over 300,000 financial advisors - a surprisingly difficult number to estimate given the overlap of advisors across RIA, broker-dealer, and insurance channels. The caveat, though, is that fewer than half of them even state that they actually give financial planning advice… suggesting that the majority are “financial advisors” in name only but are still predominantly focused on the sale of insurance and investment products. This isn’t entirely surprising, though, given that there are only about 82,000 CFP certificants (and not all of those are practicing or, if they are, offering “real” financial planning)!

Nonetheless, the industry projection is that the advisor headcount “must” inevitably decline, given how many of the 300,000 financial advisors are over age 55. Yet the reality is that financial planning isn’t a career that you retire from simply because you’re eligible for Social Security and Medicare. Retirement as a concept was introduced during the industrial age when most people worked with their hands, and after a certain age, people weren’t able to meet the physical demands of their jobs anymore. However, providing financial advice is an intellectual, not manual, endeavor. And when you consider the fact that highly experienced financial planners on average make over $400k after 30 years of experience and that, by the time they reach 65, they’re not really working at the same pace that they did in their 30s, it just doesn’t make sense that a lot of folks would simply walk away from that sort of job until they had no other choice!

The other reason that the declining headcount may be overstated is that it’s based on the assumption that the industry won’t be able to attract enough new financial advisors. On the one hand, it’s easy to understand why Millennials are reluctant to join an industry that’s still seen as primarily sales-driven, but the projections don’t take into account the number of industry entrants who are career-changers. Because, the financial industry isn’t alone in dealing with the effects of automation, and the earnings potential as an advisor makes it an appealing option for those who are mid-career and looking for new opportunities… especially for attorneys and accountants, who are already in roles that oftentimes overlap with financial services, and are facing even more pressure from technology (e.g., TurboTax and LegalZoom) against their more-transactionally-oriented services.

Of course, some have suggested that it doesn’t matter how many financial advisors are coming into the industry or not because they just won’t be needed in the age of “robos” and automation. Yet the rise of technology and automation doesn’t always play out as expected. The introduction of ATMs in the 1970s resulted in an unexpected increase in the number of human bank tellers, rather than the decline that was predicted at the time, because the technology made banking so much more efficient it expanded the reach of advisors and increased human job opportunities (on top of all the ATMs!). Similarly, automation in the financial services industry has the potential not to make human advisors obsolete, but rather could spur potentially exponential growth in financial planning by allowing advisors to efficiently serve larger segments of the population… recognizing that the true number of households being served with real financial planning is at best only about 15% of all the households in the US. Simply put, there’s a huge opportunity out there to leverage technology and hire more human financial advisors serve the other 85% of the households that aren’t being served today. Not to mention that as technology puts more pressure on advisors to justify their fees in the first place, more and more advisors are starting to offer comprehensive financial planning, which is why (despite the lack of growth overall in the financial advisor headcount) a record number of people have been sitting for the CFP exam for the first time in recent years.

Ultimately, the key point is to recognize that overall industry trends about the “shrinking” headcount of financial advisors may be misunderstood. Despite projections that the industry will shrink in the coming years, there are plenty of good reasons to be optimistic about opportunities for financial advisors. The retirement wave will take much longer to materialize than first thought, and instead of being a threat to financial advisor jobs, technological efficiencies will help the industry expand into underserved markets and will end up increasing the demand for financial advice in the long run. Which helps to explain why the number of financial advisors is up over the past 5 years, despite the anticipated wave of retirees and the rise of the robo-advisor movement!

In the meantime, for those who really want to get a handle on the opportunities in the financial advice industry and the advisor marketplace, perhaps it’s time to stop looking at the number of people called “financial advisors” who are simply registered to legally sell insurance and investment products, and look to the number actually being trained to give and get paid for financial planning advice (through programs like CFP certification)… which shows that the market for financial advisors has never been bigger and stronger than it is today!

Building The Five Pillars Of SEC Cybersecurity Requirements As A (Registered) Investment Adviser

November 14, 2018 07:07 am 2 Comments CATEGORY: Technology & Advisor FinTech

Over the past few years, several high-profile data breaches have hit major US corporations, including Target, Home Depot, and Equifax, bringing into sharp focus the need for individuals and businesses to protect and defend their personal data. And the matter is especially important for financial advisors, both given the importance of financially-related personal data in particular and the fact that the SEC and FINRA have been increasingly aggressive in enforcing against RIAs and broker-dealers with lax cybersecurity. And in fact, the SEC itself suffered their own data breach in 2016, despite numerous warnings from the GAO about potential security lapses.

Yet while keeping client data secure is an integral part of an RIA’s compliance requirements, there’s little explicit guidance from any regulatory body as to what, exactly, advisory firms are realistically expected to and need to do in order to meet those requirements.

Fortunately, there are steps that RIAs can take to develop, implement, and maintain a cybersecurity program that meets SEC requirements. In this guest post, Patrick Cleary, Chief Operations Officer at Alpha Architect, uses the concept of “brilliance in the basics,” a core tenet in the Marine Corps, to explain how paying attention to basic (but important) details, being proactive, defining the specific reasons why cybersecurity is so crucial, and (most importantly) avoiding complacency at all costs, is at the core of any successful cybersecurity program for an advisory firm.

And while historically financial advisors have had to choose between either outsourcing the task of building out a cybersecurity program, or trying to decipher a mountain of regulatory material that’s heavy on concept but extremely light on actionable information, Patrick details the specific steps that any advisor can take to develop a cybersecurity program. Starting with the National Institute of Standards and Technology’s (NIST) comprehensive Cybersecurity Framework, Patrick provides explicit step-by-step guidance that advisors can take to understand what it is that they should really be managing in the first place, how to develop proper safeguards for client data, how to identify a breach when it does occur, and what actions to take during and after any cybersecurity events.

While there are no silver bullets, or one-size-fits-all approach or solution, the key point is to recognize that, by using the NIST framework and Patrick’s actionable guide, advisors can put themselves in a much better position to protect their clients’ data as well as the viability of their businesses. So whether you are looking for a framework to develop a cybersecurity program, want to stay up to date with a constantly evolving and important aspect of practice management, or want to better familiarize yourself with the subject before talking to a third-party provider, then we hope you find this comprehensive article from Patrick to be helpful!

#FASuccess Ep 098: Deepening Client Relationships With A Political Niche To Find Shared Beliefs with Zach Teutsch

November 13, 2018 07:05 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 98th episode of the Financial Advisor Success!

This week's guest is Zach Teutsch. Zach is the founder of Values Added Financial, an independent RIA in the D.C. area that has quickly grown to more than $300,000 in recurring retainer fees since launching under 18 months ago.

What's unique about Zach, though, is that, in a world where we as financial advisors are typically trained to never talk about religion or politics with clients, Zach has specifically formed a niche in working with progressive Democrats, which undoubtedly drives some prospects away, but has also quickly accelerated the growth process for his firm in reaching the primary clients he wanted to work with anyway.

In this episode, we talk in depth about how picking a niche, even based on politics, can actually be quite effective, precisely because it helps to deepen the relationship with clients by having a shared set of beliefs. The kinds of clientele that Zach has been able to attract by focusing on a political niche, the way he's created a sliding scale retainer pricing model specifically to fit his target clientele, and how he's now developing his investment process specifically to combine impact and ESG investing, tax-loss harvesting, and an additional layer of charitable giving that his clients are uniquely engaged in.

We also talk about the rest of Zach's financial planning process with clients, which isn't just about working with progressives, but also simply the fact that most of his clients are high-income professionals in their 30s and 40s. The way he's developed a list of what he calls financial planning interventions that he uses to demonstrate why his average financial planning retainer fee of $10,000 a year is still so worthwhile to his clients, how Zach has developed a unique exercise of helping clients prioritize with a deck of custom cards with financial planning needs and goals written on them, the kinds of career-related advice that he often talks about with his clients, and the way that Zach handles budgeting conversations with his younger clientele.

And be certain to listen to the end, where Zach talks about how he balances out his own needs to generate income from his practice while giving back to his community with pro bono services, and how the way that he's chosen to structure his firm has, in his own words, gotten him to the point where he no longer feels like he has to choose between work that feels good and being financially successful.

So, whether you're interested in how Zach builds trust and by being upfront about who his ideal client is, how he helps his clients achieve their values-based goals, or why his "interventions" help demonstrate the value of his services, then we hope you enjoy this episode of the "Financial Advisor Success" podcast with Zach Teutsch.

The Defining Personality Traits Of (Successful) Financial Planners

November 12, 2018 07:03 am 0 Comments CATEGORY: Personal/Career Development

The conventional view in the financial services industry is that financial advisors must be extraverted to be successful so that they can find and develop a steady stream of new clients to work with. Prospective advisors who weren’t highly extraverted were often cautioned away – or outright avoided in the hiring process – and over time, an increasingly high volume of extraverts came to dominate the field.

Yet in our recent research study on the Financial Planning Process, a detailed look at the personality traits of 1,000+ financial advisors – using the “Big Five” framework of extraversion, conscientiousness, openness, agreeableness, and neuroticism – finds that in reality, extraversion is not the biggest predictor of success and staying power amongst financial advisors! Instead, while the majority of financial advisors are extraverted (and more so than the general population) the biggest traits that defined the longest-standing and highest-income financial advisors were being highly conscientious and very agreeable (but not necessarily extraverted!)!

In addition, the results of our research suggest that one of the biggest “deal-breaker” traits for success as a financial advisor is that they must have very low neuroticism (i.e., especially high emotional calm). In other words, not only do financial advisors often describe one of their key value propositions as helping clients to stay the course in times of difficulty and market volatility, but the most successful financial planners appear to be uniquely suited to do so with an unusually high level of emotional calm and low neuroticism as one of their natural personality traits!

Of course, the reality is that statistics describing a large swath of the population are still not necessarily definitive of the success or failure of any one individual. Yet nonetheless, it turns out there really is a “typical” profile of a financial planner, who is far more than just being extraverted… successful financial planners are also extremely conscientious, highly agreeable, and especially good at remaining calm during emotional times. Which suggests that perhaps it’s time to take a fresh look at how we identify and hire financial planners into the industry in the first place?

Weekend Reading for Financial Planners (Nov 10-11)

November 9, 2018 02:54 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the huge news that the FPA will be reorganizing its entire chapter structure, effectively disbanding its independent chapters and consolidating them into a single centralized "OneFPA Network" to leverage shared resources (from technology to accounting) and create better alignment from National to its chapters... though in a world where many FPA members were already citing that their local chapter presence was the primary reason they joined and stayed, it's not entirely clear whether FPA's planned change really addresses the organization's root challenges to remedy its waning membership and share of CFP certificants in the first place.

Also in the news this week is the latest news about coming wirehouse grid changes for 2019 that are taking a striking focus on both investing into their advisors (with higher payouts for earning CFP certification) and also more of a tech focus (with grid bonuses to advisors who get their clients to increase their digital engagement as well), and a preview of the SEC's coming changes to its advertising rules next spring that many hope will provide better clarify (and simply more reasonable regulation) when it comes to social media and digital advertising.

From there, we have a number of investment articles this week, from an interesting recent study by Fama and French showing that, even over a decade-long period of time, there's a material chance that value, small-cap, or even stocks overall fail to outperform (and that therefore even the past decade's underperformance of value could easily be just statistical noise), a review from Morningstar of the best 529 college savings plans (all of which are direct-sold, although the Utah my529 plan now has an advisor-supported option), and a good reminder of when and how to get more proactive in communicating with clients about rising market volatility (and when, perhaps, you shouldn't, as it may be more likely to alarm clients than reassure them!).

We also have a few articles about industry changes around the broker-dealer community, including suggestions on what brokers should consider when they get the news that their broker-dealer is being sold (or even if they just fear it might happen soon), how shifts in wirehouse culture over the past 10-20 years have undermined their retention efforts, and how last year's decision of Morgan Stanley and UBS to leave the Broker Protocol may ultimately be looked back upon as a major milestone in the industry... the point at which wirehouses in the aggregate recognized that their culture had become so watered down that they decided it was better to cut back on recruiting amongst one another altogether than risk continuing to lose brokers in the aggregate to the independent channels!

We wrap up with three interesting articles, all around the theme of the office spaces in which we work: the first is a look at how "natural light" has become one of the #1 perks in office space; the second explores how office space designers are looking at a possible future where there are no more desks and chairs in office spaces at all, shifting instead to a range of sofas of "softer" working spaces more conducive to personal interaction; and the last looking at the latest research on standing desks and finding that there may be more health benefits to them than recent critics have been suggesting after all!

Enjoy the "light" reading!