Nerd's Eye View blog

How To Find Your Niche As A Financial Advisor

May 5, 2014 07:01 am 13 Comments CATEGORY: Marketing

As more and more people earn their CFP certification and become financial planners, the mere fact that one is a financial planner is no longer the differentiator that it once was. In turn, financial planners find themselves increasingly compelled to focus into a niche where it's easier to stand out and win clients... being a generalist may bring a lot of prospects but few clients, while settling into a niche may narrow the field of prospects but results in an incredibly high likelihood that clients (in the niche) will say yes and choose to do business.

Of course, a niche is not just conceived overnight; in practice, it's established and refined over time. It starts with a target clientele, which leads to developing a unique expertise for working with those clients and the problems they face, and that in turn leads to the development of services and a business model to fit the clients and their needs. As services are delivered, new ways to focus on the clientele emerge, new expertise is acquired, the business model is further refined, and the process continues to iterate until a finely honed niche emerges.

However, that still leaves open the key question: how do you find or choose a niche in the first place? In truth, there are many paths to finding a niche, from focusing on a passion, to an area where you already have an affinity or connections, to your existing clients or even former colleagues in a prior line of business. For those who truly have "no idea" what to do, the easiest path may simply be to start taking anyone you know out to lunch, asking them what their needs and issues are, and beginning to define a vision for your business accordingly. By asking people what's important to them and unique about their concerns, you can find a niche of your own, and may even discover that your interviewees become the first people to refer clients to your new business.

Weekend Reading for Financial Planners (May 3-4)

May 2, 2014 02:52 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the latest research from the CFP Board on the gender imbalance in financial planning, which appears to be driven not only by a general lack of awareness of financial planning opportunities amongst women, but also a whopping $32k/year pay gap between similarly experienced male and female advisors. The research is part of a broader new "Women's Initiative" from the CFP Board to support the growth of female CFP professionals.

This week's articles also include a number of practice management topics, from the latest in how firms are being valued for mergers and acquisitions (the 2X revenue model is increasingly being replaced by more focused multiple-of-free-cash-flow measures), to a discussion of whether professional advisors should be paid based on the revenue they produce (or not) the way that brokers traditionally have been, to a look at how for many advisors the way to "break through" to the next level of the business is to recognize that things may need to be done differently in the past (i.e., sometimes it's crucial to "let go" of the way things have always been done in the business!). There are also a pair of social-media-marketing articles: the first is a primer on popular third-party review sites Yelp and Angie's list, which may be increasingly relevant for financial advisors now that the SEC has cleared the way for their use with its recent guidance; and the second is on the power of using YouTube for marketing your advisory practice (and how to easily get started).

We also have a few financial planning articles that are more technical in focus, including the latest research on "low vol(atility)" investing, whether advisors should focus more on establishing reverse mortgages earlier (even if only as a standby line of credit) rather than as a last resort, and how advisors can pair together large amounts of CDs and a modest allocation to equities to create the equivalent of various types of annuity guarantees at a far lower cost.

We wrap up with three interesting articles: the first is a summary of this past week's Finovate (financial innovation) conference, which has been typically focused on banking or direct-to-consumer technology solutions but is increasingly featuring platforms that are targeting financial advisors as well; the second dives into the growing Schwab "franchise" model, which is now up to 24 independent owner-operated branches, and in the judgment of the author (noted industry commentator Mark Hurley) may represent one of the best opportunities in the advisory landscape right now, as firms become increasingly squeezed around marketing (a challenge that Schwab is uniquely positioned to address thanks to the strength of its brand); and the last is an interesting discussion of how BMW is completing rebuilding the car-buying experience, using "product geniuses" and interactive car-buying presentations, with some striking parallels to the transition within financial services from salespeople to advisors and the adopting of interactive and collaborative financial planning experiences.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end! Enjoy the reading!

Estimating Changes In Retirement Expenditures And The Retirement Spending Smile

April 30, 2014 07:01 am 14 Comments CATEGORY: Retirement Planning

Most retirement research assumes that retirees spending from a portfolio will seek to maintain a "real" inflation-adjusted standard of living throughout their retirement, just as they implicitly would have if their portfolio had been paid out as a steady pension with an annual cost-of-living adjustment. However, despite the simplicity of this assumption, retirement research has increasingly shown that retirees actually experience a decline in real spending through their retirement, as the early "go-go" years transition to less active "slow-go" years and then finally wind down in a series of "no-go" years with little discretionary spending.

In a new study contributing to the literature on this subject, David Blanchett of Morningstar has issued a new study entitled "Estimating the True Cost of Retirement" that finds in reality, real retiree spending decreases slowly in the early years, more rapidly in the middle years, and then less slowly in the final years, in a path that looks less like a slow and steady decline and more like a "retirement spending smile" instead. Implicit in these results is an acknowledge that, despite the common fears, even the uptick of health care expenses in a retiree's later years are not enough to offset all the other spending decreases that tend to occur as retirees transition into the "no-go" years and other discretionary expenses fall significantly.

The implications of this research are not only that financial planners should be more cognizant to assume some level of real spending decreases throughout retirement (Blanchett's research suggests this may be especially true for more affluent retirees who tend to have more discretionary spending that winds down over time), but also that the traditional research may be somewhat overestimating the amount of funds needed to retire in the first place, as a lower average spending level across all the retirement years means it simply may not take quite as much to retire as is typically assumed or modeled in a typical financial plan!

The Rise Of The Financial Planning Academic

April 28, 2014 07:01 am 5 Comments CATEGORY: Planning Profession

The roots of financial planning are in insurance agents and stockbrokers who sought out a way to deliver better advice and guidance to their clients. Similarly, the roots of financial planning education have long been in "adult education" certificate programs that took experienced and active advisors back to school to gain the educational knowledge they needed to sit for the CFP exam and earn their CFP certification.

Over the past decade, though, we have witnessed the emerging rise of the "financial planning academic" - pioneering students who went through the first Ph.D. program from Texas Tech (supported in large part by an early $2,000,000 grant from the CFP Board with the specific vision of supporting a growing population of financial planning academics), earned their doctoral degrees, and are now beginning to go forth and establish undergraduate, graduate, and Ph.D. programs at other universities across the country. As the trend continues and the Texas Tech/CFP Board vision is fulfilled, the number of university-based financial planning programs continues to grow, and financial planning is well positioned to gain more academic credibility.

And as the financial planning academic community continues to grow, so too are the resources serving them. From the Academy of Financial Services, to the recently (re-)introduced academic track at the FPA annual conference, to the CFP Board's latest round of recently announced academic initiatives, including a new "think tank" financial planning research center and also a new academic Journal, financial planning is well positioned to continue its drive forward towards increasing academic rigor and recognition... including not only a rising volume of college-educated financial planners but perhaps spawning some research that will slay a few financial planning sacred cows and help to advance not only the financial planning body of knowledge but how it is applied by practitioners as well!

Weekend Reading for Financial Planners (Apr 26-27)

April 25, 2014 04:14 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the latest news in the CFP Board's lawsuit with the Camardas... which is that there is no news, the CFP Board is "still working on" going through more than 60,000(!) documents to prepare for discovery, and that the CFP Board may have already racked up 2,000 hours' worth of legal fees at an estimated cost of $600,000, preparing for a case that hasn't even gotten underway in court yet. Given that both the CFP Board and the Camardas are asking that the opposing party pay all the legal fees, the case may potentially be spectacularly expensive for the losing party, in addition to any other ramifications from the outcome.

Beyond that news, this week's readings include several articles related to retirement research, including a look at whether "dynamic" asset allocation strategies based on market valuation may lead to more sustainable retirement income than just rebalancing to the same static portfolio each year, a discussion of the current landscape of retirement preparedness for baby boomers (which suggests that while the average baby boomer is in danger, in practice there is an increasing gap between the retirement "haves" and "have-nots"), an overview of the "2 schools of thought" on retirement income planning (probability-based versus safety-first) and the differences between the two retirement planning approaches, a study of whether small-cap value stocks are as good for retirement income portfolios as they are for accumulation portfolios, and a study on the best time to annuitize a managed portfolio for retirement income that finds at best retirees should be waiting until their 70s if not later (or never).

We also have a few investment-related articles this week, from a look at whether the commonly discussed long-term benefits from rebalancing may actually be overstated, to an examination of whether it really makes sense to own commodities futures as a diversifier or return enhancer in a world where commodities themselves theoretically just rise on average at the pace of inflation (generating no real return). There's also an article that provides some good basic due diligence questions to consider whenever you're evaluating one of the increasingly popular "tactical" managed-ETF portfolio strategies.

We wrap up with three interesting articles: the first examines some recent research from Cerulli Associates which finds, contrary to common wisdom, that being referred is only a key factor for 1-in-9 affluent investors choosing an advisor, and that (by a small margin) "reputation" is actually the most common driver of the advisor selection decision; the second is a profile in the NY Times of an investment adviser who started out 8 years ago as a stock-picker but, despite some reasonable success, ultimately decided that using ETFs and index funds and managing holistically was what clients really needed; and the last by industry pioneer Roy Diliberto on how the world would be different if he could be "King for a Day" and set things right for the financial planning profession... with a lot of changes that will resonate with today's financial planners. Enjoy the reading!

Active, Passive, Strategic, Tactical – What’s Your Investment Management Style?

April 23, 2014 07:01 am 15 Comments CATEGORY: Investments

Historically, the active vs passive divide has been primarily a question of how to invest within an asset class. Is it better to utilize an active manager who will try to outperform an index (at the risk of underperforming it), or simply buy the index itself in the form of a fund that at worst should simply “underperform” by the margin of a very small fee. Either way, most investment managers will still implement a remarkably similar asset allocation – regardless of the active vs passive divide – based on the principles of Modern Portfolio Theory.

Yet a deeper look at MPT reveals that in reality, it may have never been intended as a model for strategic asset allocation in the first place. Markowitz himself advocated in his original research that MPT should not be implemented simply by looking at long-term historical averages, but instead by adjusting the statistical analysis of risk and return based on nuances not taken into account by formal computations alone.

The end point of this dynamic is that the active vs passive divide of investment management is actually split on two different dimensions: to be active or passive within asset classes, and whether to be strategic or tactical amongst them, leading to four quadrants of investment management styles depending on which combination(s) the advisor chooses.

Ultimately, this means that going forward investment managers must be more cognizant to frame their approach based on both dimensions, and recognize clearly where they can – or cannot – add value for clients. So what’s your investment management style? Tactical active, Strategic active, Tactical passive, or Strategic passive?

Vanguard Personal Advisor Services (VPAS): The First Low-Cost “Indexing” Solution For Financial Planning Services?

April 21, 2014 07:01 am 13 Comments CATEGORY: Planning Profession

As financial planning continues its rise, more and more advisors are getting the CFP certification, and an increasing number of firms – from insurance companies to wirehouses to RIAs and everything in between – have been incorporating financial planning into their offering to varying degrees. And now it looks like a new player is entering the space, likely to make a big splash: Vanguard.

In fact, the new “Vanguard Personal Advisor Services (VPAS) offering may have the potential to do to financial planning what their launch of the index fund has done to investment management: create a core, low-cost, basic "indexing" solution to everyone, above which any advisor must rise to deliver value and justify their cost. And priced at a 0.3% AUM fee with a $100,000 minimum (that may soon drop to $50,000), the “Vanguard Financial Planning Indexing” solution may be very disruptive to both “robo-advisors” and today’s traditional advisors as well.

Ultimately, this won’t be the end of individual financial planners – in fact, Vanguard’s move, including the decision to use real human advisors who are CFP certificants and not be a "robo-advisor" – validates the importance of financial planning and the value of getting it from a real human being. Yet at the same time, the sheer size that Vanguard already has creates the potential for it to instantaneously reach the requisite volume of clients to achieve both operational and marketing scale. For individual advisors to survive and thrive, it will become more necessary than ever to gain further expertise, specialize, establish niches, and create ways to differentiate themselves from the new low-cost financial planning “indexing” Vanguard solution.

Weekend Reading for Financial Planners (Apr 19-20) – Practice Management Edition!

April 18, 2014 03:01 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - Practice Management Edition! This week's edition kicks off with the results of the FPA's latest practice management study on time management, which finds that if you feel like you're not in full command of your time and schedule as a financial advisor, you're not alone; as the results show, only about 1/3rd of advisors are feeling in control of their time these days! The FPA study provides some suggestions of "what's working" for advisors who do feel in control of their schedules, and is part of their broader rollout of practice management guidance under the new Research and Practice Institution.

From there, we have a long list of practice management articles this week, including: how to protect your practice against thieves trying to commit wire fraud against your clients (and what you must do to avoid liability for a mistaken transfer!); how to craft a social media policy for your firm and roll out social media across your employees; the "right" way to attend a conference to get value (hint: meet as many people as you can); how the key to improving your firm is about trying to improve things one step at a time, rather than delaying until there are lots of problems and trying to fix them at once (which is overwhelming and rarely works); how to manage the coming "crunch" in advisor compensation as competition heats up (key takeaway: go big or go niche); ideas in better implementing common practice management tips; some wisdom in how to ensure your prospective merger with another advisory firm goes smoothly in the long run; and recent survey of CFP certificants suggesting that at least some advisors believe the recent CFP Board "scandals" have been taking a toll on its credibility.

We wrap up with three interesting articles: the first suggests that perhaps we should back away from trying to set financial goals for/with clients, and instead try to focus on the systems and habits that will make them financially successful in the long run; the second looks at the psychology of tax refunds and some research suggesting that for clients who have difficulty saving, getting a big tax refund might not be such a bad thing after all (and in fact, bigger may be better); and the last explores how being a successful leader means at some point, leaning to say "no" and limiting how people can access your time and attention, or you will struggle to achieve your own goals and priorities. Enjoy the reading!

Is There A “Robo-Advisor” Bubble? Wealthfront, Betterment, & LearnVest Raise $95M In Capital In Two Weeks!

April 16, 2014 07:01 am 19 Comments CATEGORY: Technology & Advisor FinTech

As the buzz around the "robo-advisors" continues, this week marks another two big announcements: Betterment has raised another $32M in a fresh round of venture funding, with another $28M for Learnvest, following on the heels of $35M from Wealthfront just two weeks ago. Collectively, the three platforms have raised a whopping $95M in just the past two weeks, with the total collective funding for the robo-advisor space approaching a quarter of a billion dollars.

Yet despite all this focus, the actual business and revenue growth results for robo-advisors has been fairly meager, at least so far. The latest fundraising for these three platforms brings their total venture capital funding up to more than $150M, despite the fact that after 3-5 years the companies have been around with "exponential" growth, they cumulatively have less than $5M of revenue. Collective across all the robo-advisor-labeled platforms, actual assets under management (not just fuzzy "advisements") is no more than a few billion dollars, which at the fee schedule for these platforms likely amounts to little more than $10M of revenue for platforms that have cumulative venture capital funding in excess of a quarter of a billion dollars. Which implies, to say the least, that at least a few of these VC investments probably won't work out so well.

Nonetheless, this doesn't mean the robo-advisor trend should be ignored, despite the fact that they have little more than roughly a 1/1000th market share of household investable assets. While there's still little evidence to suggest that robo-advisors are drawing any volume of clients from human advisors, they are demonstrating how the core of constructing and implementing a passive, strategic portfolio can be commoditized for an extremely low cost. In the end, we may look back on this 2009-2014 era as one that transformed technology-driven portfolio construction the way the introduction of the index fund transformed the world of stockpickers 40 years ago. Notably, the introduction of the index fund did not eliminate the need for or value of human advisors, but it did force advisors to continue to evolve their value proposition to keep up, as today's evolving robo-advisors will likely do as well. In fact, in the end, the primary players that get "disrupted" by robo-advisors may not actually be human advisors at all, but the custodians, broker-dealers, asset management, and technology firms that support them!

Sage Scholars Tuition Rewards – A “Loyalty Points” System For Providing Wealth Management Services?

April 14, 2014 07:01 am 6 Comments CATEGORY: Practice Management

As financial planning and wealth management become increasingly popular, advisors are increasingly experiencing a "crisis of differentiation" where it's difficult to distinguish themselves from the competition. This has not only slowed the organic growth rates of many advisory firms as it gets harder to generate referrals, but made client retention all the more crucial to maintain the revenue of an advisory firm.

A new offering for financial advisors called SAGE Scholars offers a unique new way for advisors to offer a "client perk" that can help to support retention and potentially generate referrals: Tuition Rewards, which are "rewards points" clients can accrue based on the assets under management (or potentially, the retainer fees) being paid to the advisor, as a rate of 5%/year of the AUM. Which means a client with $1,000,000 of assets with an advisor can potentially accrue a whopping 50,000 points per year, which can be used as a dollar-for-dollar discount for tuition amongst a list of 323 eligible colleges and universities (up to 1 year's worth of free tuition) for any family member (including children, grandchildren, nieces, nephews, etc.).

Ultimately, the reality is that many students can already potentially earn merit-based aid and discounts from many schools, but there is little certainty about whether the discounts will really be there when the time comes. From the advisor's perspective, then, offering Tuition Rewards as a form of "loyalty points" for clients can have a high perceived value for clients who wish to stay with the advisor, and be something that potentially generates "buzz" amongst clients to drive additional referrals as well. In an environment where it's difficult to find unique "client perks" that are relevant to clients in the first place, the SAGE Scholars program represents an intriguing new opportunity!