Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a rather scathing article by NAPFA Chairman Ron Rhoades on why FINRA not only shouldn't be the SRO for investment advisors, but is failing its original charter and should be disbanded altogether. From there, we look at two technical estate planning articles - one on the different ways that incapacity is defined for trigger powers of attorney or even the competence to sign a Will or trust in the first place, and the other on how beneficiaries can potentially try to "bust" trusts that are no longer working as desired. We look at three practice management articles this week, including Mark Tibergien's latest offering on the importance of managing expenses as well as revenue growth, reporting on the recent FA Insight study showing firms with more widely distributed ownership are consistently better performers, and results from an Investment Advisor / ActiFi study at what practice management issues are most important to advisors and where they're currently getting help (surprising result - broker/dealers may be stepping up far more than custodians). We also look at an interesting retirement income analysis from Joe Tomlinson suggesting that SPIAs might be particularly effective for retirement portfolios despite - and in fact, because - of low current rates, and an analysis by Geoff Considine about why advisors may be giving short shrift to Master Limited Partnerships in their portfolios. We finish with a sharp analysis by John Hussman about what's really at the heart of the ongoing global economic malaise, an interesting write-up by Bob Veres about several presentations about trust at the recent FPA Retreat conference, and a lighter article by Abby Salameh on RIABiz abuot how to take a breath and relax to avoid being overwhelmed as a busy advisor. Enjoy the reading!
Fees And Fiduciary: Good Business, Bad Marketing
As the financial planning profession continues its inexorable march towards a fiduciary client-centric standard of care that minimizes or outright avoids conflicts of interest, those most passionate about carrying the torch have often been the most vocal in promoting those standards within their own businesses. Yet recent research shows that from the consumer's perspective, "fiduciary" is confusing and the word "fees" evokes an outright negative response; the special meanings we attach to those words inside our industry have translated poorly to the general public. The key, then, is to figure out how to operate in the interests of clients, while communicating a message that is less about the battles being fought inside the industry and more about how the client benefits. Otherwise, while it's true that those firms doing the best job of truly serving clients may be rewarded with the most referrals, they may not be able to convert those referrals to clients and grow their businesses if they have dug themselves a hole they can't climb out of by using consumer-unfriendly terminology in the first place!Read More...
Will BrightScope Clean Up The Financial Services Industry?
Between FINRA, the SEC, 50 state investment advisor regulators, and 50 state insurance departments, the world of financial advising is highly regulated, albeit in a very piecemeal manner. As a result of this fractured regulatory dynamic, the reality is that it can often be remarkably difficult for a prospective client to really check out information about an advisor, potentially requiring contact to as many as 102 different regulatory agencies just to determine if the advisor has a clean conduct record.
A new company called BrightScope is seeking to change that dynamic. By collecting publicly available data on advisors from the various regulatory agencies and aggregating it together on a single site that is easily accessible by consumers, BrightScope is helping consumers understand the conduct history of their advisors, in a manner better than the problematic FINRA BrokerCheck system.
And in the long run, BrightScope hopes to expand this even further beyond conduct alone by establishing standards and metrics for everything from advisor experience to education and credentials to investment recommendation performance results. But in the end, will BrightScope really be able to clean up the financial services industry - reaching enough consumers to make itself relevant and turn its service into a viable business model - or is this just another short-term fad that will fizzle away?Read More...
Using Zillow To Efficiently Estimate The Value Of A Client’s Personal Residence
While most aspects of the financial planning update are getting easier, especially as account aggregation software becomes more prevalent - allowing the planner to automatically get regular updates from all client financial accounts, including those not under the planner's direct investment purview - the value of real estate continues to be a sticking point for many planning firms. How do you update the client's net worth statement without slowing the process down by waiting for the client to provide an estimate? Will the client's estimate really even be accurate, anyway? And the process can be even more problematic for firms that set fees based not on assets under management but net worth. How do you get a fair estimate of the value of property that relies on the client when the client's fee is impacted by that estimate? In an increasingly technology-driven world, there's now an answer: with real estate valuation services on the web, like Zillow.
3 Easy Ways Financial Planners Can Get Started On Twitter
As social media continues to rise in the digital age, financial planners are increasingly getting involved on platforms like Facebook and Twitter. However, fears and misconceptions about social media - along with a general uncertainty about exactly what the point is and why planners should get involved - have dramatically slowed advisor adoption. Yet the reality is that there are several simple and clear ways that platforms like Twitter can be used to create value for financial planners - including some easy ways, like helping the news find you and social listening, that pose no compliance hassles or risks, either! Keep reading for some tips about how to get started, what programs to use, and how to get start getting value from Twitter!
Weekend Reading for Financial Planners (June 9-10)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a quick recap of who said what at this week's Financial Services Committee hearing on the Bachus SRO legislation. From there, we take a deep dive into a long series of articles looking at how financial planning is changing. An interview with Rick Kahler explores how financial therapy is being integrated into his practice, and a Morningstar Advisor article looks at how personality types can help predict which kinds of behavioral biases your clients might exhibit. An article by Paula Hogan in the Journal of Financial Planning examines how to integrate financial planning from the economists' perspective - the so-called Life Cycle finance model - with the current world of financial and life planning, with a rising focus on planning for human capital... followed by another article looking at how several planners are being to incorporate human capital planning in their practices. Bob Veres looks at what we can do to ensure that planners really stay focused on planning, and don't allow themselves to be lured by "easier" business models. A panel discussion in Financial Advisor magazine explores how some executives at companies that serve and support advisors see the trends playing out. At the same time, a recent article on The Economist questions whether clients might sometimes seek advice more than they should, and how much advice we seek is really for practical reasons as opposed to psychological ones. And Dick Wagner raises the question of whether it's finally time to push the profession to financial planning 3.0. On a final note, we include a transcript of a recent speech given last weekend by financier investor George Soros in Italy; although a bit of a non-sequitur from the weekend reading theme of changes in the planning profession, the article provides such an amazing look at what's going on in Europe, that it just had to be included. Enjoy the reading!
The Salience of Financial Planning Fees – It’s Not Just About How Much You Charge, But How You Charge
When considering a purchase, we all evaluate the value that we will receive relative to the cost of the transaction. Yet research shows that some methods of payment make us more sensitive to the cost than others - which in turn can distort the cost-benefit analysis and change the decision, but also impacts the ability for sellers to raise prices without changing the buyer's willingness to pay.
For instance, research on toll roads shows that consumers are less sensitive to toll increases when they pay electronically than in cash; similarly, we are more willing to spend money when we pay by credit card than when the cost it made salient by paying in cash. The upshot of highly salient pricing is that it helps to ensure businesses don't raise prices unfairly and abuse their customers; the downside, however, is that it can make it more difficult for honest, fairly priced businesses to attract new clients and grow their revenues due to price sensitivity.
In the financial planning world, this helps to explain the popularity of both commission and AUM models, and the relative difficulties of hourly and retainer fee models - it's not just about how much the firm charges, but also about how the firm charges!Read More...
Research Reveals Cash Reserve Strategies Don’t Work… Unless You’re A Good Market Timer?
Cash reserve strategies that hold aside several years of spending to avoid liquidations during bear markets are a popular way to manage withdrawals for retirees. In theory, the strategy is presumed to enhance risk-adjusted returns by allowing retirees to spend down their cash during market declines and then replenish it after the recovery. Yet recent research in the Journal of Financial Planning reveals that the strategy actually results in more harm than good; while in some scenarios the cash reserves effectively allow the retiree to "time" the market by avoiding an untimely liquidation, more often the retiree simply ends out with less money due to the ongoing return drag of a significant portfolio position in cash. As a result, the superior strategy for those who want to alter their asset allocation through market volatility (the effective result of spending down cash in declines and replenishing it later) appears to be simply tactically altering asset allocation directly, without the adverse impact of a cash return drag. Nonetheless, this still fails to account for the psychological benefits the client enjoys by having a clearly identifiable cash reserve to manage spending through volatility - even though the reality is that it results in less retirement income, not more. Does that mean cash reserve strategies are still superior for their psychological benefits alone, even if they're not an effective way to time the market? Or do total return strategies simply need to find a better way to communicate their benefits and value?
The Problems With Trying To Benchmark Unconstrained Portfolios (Guest Post)
Benchmarking is a standard tool for investors and investment professionals to evaluate the results of an investment manager. In a world of investing within asset classes and style boxes, the benchmarking process is relatively straightforward – any particular investment offering can be easily matched to an appropriate benchmark. In a world of unconstrained, “go-anywhere” style managers, though, the benchmarking process is less certain. Common methods to determine an appropriate benchmark – such as an ex-post regression of what the fund was invested in – can obscure the actions of the manager, for better or for worse. Is the only solution to simply select an arbitrary benchmark and proceed accordingly? Can we eschew a benchmark altogether?
Social Media As Drip Marketing For Financial Planners In The Digital Age
The principles of drip marketing are not new; the concept of marketing by sending a series of messages to prospects over time to build familiarity and remain top-of-mind so that you're likely to be contacted when a need arises has existed for decades. In fact, drip marketing has only gained in popularity as the costs of distribution have declined - from the increasing efficiency of printing postcards, catalogues, and newsletters, to the almost negligible cost of sending messages via email (sometimes taken to its abusive extreme, "spam email"). Unfortunately, though, the challenge of most drip marketing is that it's still very impersonal, and it can often be a challenge to even identify a list of people to whom the messages should be communicated in the first place. Yet the growing world of social media creates the potential to take "drip marketing" to a whole new level, because it is more social - making it more personal and more engaging, with sharing tools to help the people who receive your content to refer you to their friends and family, and for those you want to reach find you!
