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SEC Advice Rule Proposals: Regulation Best Interest, Disclosure Form CRS, & Title Reform

April 23, 2018 07:01 am 0 Comments CATEGORY: Regulation & Compliance

The Four Main Initiatives Of The SEC Advice Rule

After years of debate over the Department of Labor’s fiduciary rule, and a nascent movement of states adopting their own fiduciary standards, the SEC has finally issued the first proposal of its long-awaited “Advice Rule” to reform the standard of conduct for broker-dealers, after being authorized under Section 913 of Dodd-Frank nearly 8 years ago to harmonize the regulation of brokers and investment advisers with a uniform standard.

As it turns out, though, the SEC’s proposal is not actually a uniform standard that would require brokers to be fiduciaries, but instead would only partially lift the conduct standards for broker-dealers, with a new “Regulation Best Interest” requirement that would obligate brokers to act in the best interests of their customers when making an investment recommendation… but only at the time they actually make the recommendation. And not at all if the broker is implementing recommendations that were crafted while wearing his/her investment adviser “hat” under a dual-registered B/D-RIA firm.

To help further clarify the nature of the relationship between customers and their brokers, and investment advisers and their clients, given that the SEC is not harmonizing fiduciary regulation for investment advisers and brokers, the regulator also proposed establishing a new Disclosure Form CRS – short for customer/client relationship summary – which would provide a “simple, plain language” 4-page explanation of the consumer’s relationship with the broker or adviser, albeit with wording that will likely be hotly debated in the coming year.

In addition, the SEC’s Advice Rule would formalize an RIA fiduciary’s expectations under the Duty of Care and the Duty of Loyalty, proposes several new potential requirements for RIAs where their standards are actually lower than broker-dealers (in particular, for investment adviser representatives to have a Continuing Education obligation, and for RIAs to potentially have basic Net Capital requirements to ensure they can make good to clients in the event the firm must be liquidated and unwound), and raises the question of whether it’s finally time for “title reform” by proposing that brokers would no longer be permitted to use any title with the word “advisor” or “adviser” (though dual-registered brokers would still be permitted to do so given the RIA “adviser” hat).

Ultimately, the good news of the SEC’s Advice Rule proposal is that it does aim to at least partially lift the standards for brokers, with an aim to further clarify the nature of the broker’s relationship with the customer (and how it differs from an advisor’s relationship with its clients). Yet at the same time, introducing a “Regulation Best Interest” may be so on-the-nose that consumers will actually just be more confused about the difference between a “Best Interests” standard for brokers and a “fiduciary” standard for RIAs… which the SEC defines as the RIA being obligated to act in the Best Interests of its clients, too. And by exempting dual-registered brokers from both the obligations of title reform, and Regulation Best Interest itself, it’s not entirely clear if the SEC is really aiming to clarify the differences between brokers and investment advisers… or to simply induce all broker-dealers to launch corporate RIAs as a safe harbor for their advice-related activities to avoid ever really facing greater scrutiny of the broker-dealer model and how their advice is implemented in the first place?

Weekend Reading for Financial Planners (Apr 21-22)

April 20, 2018 03:00 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the official release of the SEC's new Advice Rule, which aims to lift the standards for brokers giving advice recommendations with a new "Regulation Best Interest" but stops short of imposing a full (and uniform) fiduciary rule, while also raising the possibility that brokers would at least be restricted from using the "advisor" or "adviser" labels (but not for hybrid B/D-RIA firms that actually comprise the overwhelming majority of all brokers in the first place).

Yet also in the news this week is the acknowledgement that advice itself continues to be increasingly central to both the investment adviser and broker-dealer model, with a research study from Cerulli Edge showing that the majority of clients are now receiving some kind of financial planning services from their investment adviser or broker (up from 1/3rd just 5 years ago), and a consumer study from J.D. Power which found that even as Millennials demand higher quality technology from their financial institutions, it's still the financial advisor relationship that actually drives Millennial loyalty to a firm!

From there, we have several articles about the insurance industry, including a recap of the highlights from the recent Intercompany Long-Term Care Insurance (ILTCI) conference about the latest trends in the LTC insurance industry (including that traditional LTC insurance is stabilizing but carriers are still rolling out more flexible hybrid life/LTC policies as well), a discussion of the rules regarding the important but often overlooked 2-year Incontestability Period for life insurance policies, and a look at how the fact that most people have declining needs for life insurance over time means that layering multiple life insurance policies with separate time horizons may be more cost efficient than just buying one large 30-year term policy.

We also have several advisor-technology articles, including a look at how some firms are starting to try to proactively leverage artificial intelligence to support the productivity of financial advisors, a second that looks at the growth of the new United Capital "FinLife CX" platform (which can be bundled to an advisor's existing CRM instead of requiring the advisor to use theirs), and the (re-)emergence of FinFolio 2.0 as a competitor in the space of portfolio accounting and reporting solutions for advisors.

We wrap up with three interesting articles, all around the theme of financial independence and retiring early: the first explores the growth of bloggers that show consumers (especially Millennials) how to live frugally in order to retire early, with the caveat that the most successful bloggers in the space may be achieving early retirement primarily because they earned a well-above-average income, not because of their frugal spending habits; the second goes deeper in exploring the "FIRE" (Financial Independence, Retire Early) movement that is attracting more and more interest from Millennials in particular; and the last is a fascinating discussion about whether and at what age someone should try to retire early to balance out their earnings and life potential with their desired standard of living and freedom... at least, for those who have the incomes that make it possible to save enough to do so in the first place!

Enjoy the "light" reading!

Why Prospects Need Help Preparing To Leave A Soon-To-Be-Former Advisor

April 19, 2018 02:28 pm 0 Comments CATEGORY: Client Trust & Communication

In the past, financial advisors encountered many prospective clients who were either previous do-it-yourselfers who didn’t already have an advisor, or individuals who had just gone through a “wealth creation” event like selling a business or retiring and getting a lump sum rollover from their pension. Which means they didn't already have an advisor. Increasingly, however, financial advisors are encountering prospects who already have a relationship with another financial advisor. And this distinction between working with prospects who already have an advisor and those who do not is important, because the dynamics of winning a new client away from an existing advisor are different than just winning a new client who has never worked with an advisor before!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore why it is difficult for some prospective clients to fire an existing financial advisor (even when that advisor is not doing a good job), and what financial advisors can do to help prospective clients prepare themselves to switch away from an existing financial advisor!

Many financial advisors have had the experience of talking to a prospect who was not being served well by their existing advisor (or “advisor” who was actually just a product salesperson selling them a bunch of stuff that may not have even been very good for them in the first place), where the prospect says they want to work with you, but then, at the last minute, decides to stay with the former advisor or broker after all. Oftentimes these prospects may abruptly cancel meetings, start to communicate sporadically through only email or voicemail, or simply just stop communicating at all. Unfortunately, in many of these cases, it is likely that the prospect is struggling with how hard it is for most people to “fire” their former advisor. After all, this is a relationship business, and most people don’t like to terminate relationships and fire people they have a relationship with (regardless of whether it was the healthiest relationship to begin with). The key point: we often underestimate how uncomfortable it will be for prospects to fire former advisors, and, as a result, don't do anything to help prepare these prospects for such potentially difficult conversations.

So what should financial advisors do about this? First and foremost, if you’re talking to a prospective client who is going to be leaving a soon-to-be-former advisor or broker to come work with you, then you have to prepare them for that conversation. One approach is just to say, “I’m so glad you’ve agreed to work with us, and we’re excited to start working with you. But I need to warn you that when you tell your former advisor you’re leaving, he’s going to try to keep your business and win you back. Have you given any thought to how you’re going to handle that situation?” And let the prospect talk through the challenge. Additionally, financial advisors may want to help clients think through scenarios such as what the client would do if the existing advisor offering to cut his or her fees to retain the client.

Because the reality is that by merely getting the client to talk through these scenarios (even without the advisor providing recommendations, which the prospective client could see as biased anyway), an advisor can still help a client better prepare themselves for that conversation. And, as a result, the client may be less likely to get caught off guard by an aggressive advisor who tries to retain their business (even after not serving them well in the first place), and less likely to be tempted to back down. Alternatively, prospective clients may even decide that it's best to start the transfers or the new financial planning process with the new advisor now so that they don't even have to confront the soon-to-be-former advisor, who will only learn once the money leaves.

Ultimately, though, the key point is to recognize that there is a real challenge and pressure that clients feel, in the moment, when they have to break the news to a soon-to-be-former advisor that he or she is being fired and the relationship is being terminated. Which means anything you can do to help them prepare in advance, even if it’s just to point out that it will be a challenge and invite them to think through how they’ll handle it – can make a big difference in bolstering their courage and confidence to actually do it, terminate their former advisor, and follow through on hiring you, when the time comes!

Understanding TWR vs IRR Return Calculation Methodologies In Performance Reporting Software

April 18, 2018 07:01 am 4 Comments CATEGORY: Investments

As one of the more common processes developed in advisory firms, there is a high level of interest by both advisors and clients in how investment performance is actually calculated. While it may seem straightforward in determining the ups and downs of a portfolio, there are actually quite a bit of assumptions and factors that take into consideration time periods, account values, and especially deposits and withdrawals, in addition to the actual performance of the underlying investments in a portfolio.

On the surface, it may seem straightforward in how these calculations are developed; however, in practice, there are often many areas and methods that are not as understood, and can become a source of confusion as advisors select a method for providing this critical information to clients, regulators, and other industry bodies such as GIPS.

In this article, Chris Hastings of Panoramix (a portfolio performance reporting software solution for advisors) provides a detailed reference for the different methods of calculating performance, why the various methods can produce substantially different return results (especially when there are substantial cash flows in/out of the portfolio), and some of the pros and cons of each method.

Ultimately, the reality is that there is no “right” choice for how to compute performance – because the “right” methodology actually varies depending on the context in which it’s being used - but advisors should be familiar with the different methods, and when they are most appropriate, so they can adequately defend their choices, and identify performance reporting software solutions that are capable of providing the return calculations they need.

#FASuccess Ep 068: Becoming A Non-Revenue-Producing Partner In A Multi-Niche Financial “Design” Firm with Heather Fortner

April 17, 2018 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 68th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Heather Fortner. Heather is a partner and the Chief Operating Officer of Signature FD, an independent RIA that calls itself a "financial design" firm and now serves more than $3 billion of AUM for nearly 1,000 clients.

What's unique about Heather's firm, though, is not just the nature of its holistic "financial design" process that aims to help clients with all their types of wealth – both money, time, and relationships – but serves its clients by organizing the firm and its advisory teams into "communities", or what essentially are a series of various niches, all under the Signature FD umbrella, including SignatureLaw, SignatureHealth, SignatureEntrepreneur, and more.

In this episode, we talk in depth about why and how Signature FD transitioned from a broad-based generalist firm into a series of niche communities, the way it has adopted Angie Herbers' "Diamond Teams" structure to grow and develop their advisor talent, the Entrepreneurial Operating System it uses – built from Gino Wickman's book "Traction" – to help ensure that every employee understands how they connect to their department's 1-year goals, the firm's 1-year goals, and the long-term outcome for the firm, and why SignatureFD uses an Industrial Psychologist as a part of the final screening process for everyone the firm hires to help really ensure they're a good long-term fit.

We also talk about Heather's own career track in the firm, from joining as a "client care associate" in the operations team nearly 15 years ago, to becoming the Director of Operations and later the Chief Operating Officer, getting involved in several industry Executive Leadership programs, and eventually making partner in the firm... in a world where it's still relatively rare for such "non-revenue-producing" members of the firm to have an opportunity to become a partner, especially women, despite the value that good executive leadership in operations can create for a firm.

And be certain to listen to the end, where Heather talks about how advisors can identify the "right" firm to stick with in the long run, and the skills that she believes are most important for everyone, but especially women, to develop to climb the career track in an independent advisory firm, and why she believes that the challenges of family dynamics and caring for children may be one of the biggest and most understated issues limiting the career growth of women in independent advisory firms today.

So whether you are interested in learning more about how large firms can serve multiple niche markets, how to best structure teams to grow and develop talent, or are interested in how non-revenue-producing employees can progress to executive leadership positions in an advisory firm, I hope you enjoy this episode of the Financial Advisor Success podcast!

Why It’s Easier To Market To A Financial Advisor Niche

April 16, 2018 07:01 am 1 Comment CATEGORY: Practice Management

Marketing A Financial Advisor Niche Featured Image

Most financial advisors spend relatively little on outbound marketing – which isn’t entirely surprising, given how hard it is to differentiate and stand out in a crowded marketplace. To the extent that financial advisors spend at all on marketing, it tends to be little more than 1% to 2% of revenues, most commonly on client appreciation events for their existing clients (and, perhaps, a few potential referrals).

Yet arguably, the primary reason that it’s so hard to market as a financial advisor is that we choose to market ourselves as undifferentiated generalists, rather than targeting a particular niche or specialization. Because the reality is that once you choose a specific target market, it becomes far easier to identify specific, targeted marketing strategies that can have a favorable return on investment. Once the financial advisor doesn’t have to fight as hard to differentiate in the first place.

For instance, an advisor targeting retiring architects might join the American Institute of Architects, write a guest post for the EntreArchitect blog, speak on the Business of Architecture podcast and for conferences of architects, while volunteering on Architect association committees and forming relationships with architect-specific centers of influence. For which the financial advisor will likely have little competition at all… because few other financial advisors go deep into the architect (or any other) niche.

In fact, one of the key benefits of targeting a specific niche is the opportunity to take advantage of unique marketing channels that may be highly effective at reaching that particular niche. And in a more cost-effective manner than the broad-based, generalized marketing that most financial advisors have long since found to be ineffective. Because whatever the niche is, there will be some combination of association and/or community organizations, conferences and events, magazines and blogs, and other marketing channels that are specific to that niche, where the financial advisor can focus their marketing efforts for greater return on investment.