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Weekend Reading for Financial Planners (November 25-26)

November 24, 2017 01:01 pm 7 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a look at the latest part of the Senate Republican tax plan generating buzz amongst advisors… that all investment sales may be required to use FIFO treatment in the future, eliminating the specific lot identification method, which would substantially curtail tax loss harvesting strategies.

Also in the recent news is the announcement that the military is overhauling its traditional 20-or-nothing pension system to a slightly scaled down version of the pension combined with government involuntary plus matching contributions to the Thrift Savings Plan (and a choice for enlisted military with less than 12 years of experience about whether they want to stay in the old system or switch to the new one). And there’s also a timely article on providing ideas for client holiday gifts, just in time for Black Friday sales!

From there, we have several articles about pricing and marketing advisory services, from a look at how to properly set and then communicate your fees, to an outsider’s perspective on how financial planners should be pricing their services (or rather, offering a menu of variously-priced services), and a good reminder about how it’s impossible to effectively market the value of your services until you get a clear understanding of your internal business strategy on how you plan to create (and differentiate) your value to your intended target market.

We also have a few practice management articles, including: how a growing number of advisory firms are shifting from lifestyle practices to enduring businesses (which provides more upside value potential to sell the business, but introduces substantial complexity along the way); a good primer on how a valuation expert looks at the real issues involved in trying to determine an advisory firm’s value; and a look at what today’s RIAs may be missing in how the DoL fiduciary rule will apply to them (including during the current “transition BICE” period until the full rule takes effect in July of 2019).

We wrap up with three interesting articles, all around the theme of how the advice industry, and the needs to be successful in the industry, are changing: the first looks at the challenges in attracting women into the financial planning profession, noting that the real challenge may not be the concern about whether there’s “too much math” or not, but that too many financial planning jobs are still overly sales-oriented, too inflexible, and too unwilling to given upwardly mobile Millennials the autonomy they crave; the second explores the emerging field of financial therapy, and how just as financial planners have been blurring the line between advice and product sales, so too is financial therapy blurring the line between advice and making (and treating) mental health diagnoses; and the last notes that as more advisors master the technical skills in financial planning, it’s the communication skills that are increasingly important, especially in a world where money remains such a taboo subject, which means perhaps it’s time to rename the “soft skills” to something more commensurate with the gravitas they are taking on in the path to being a successful financial planner!

Enjoy the "light" reading!

The Wealth-Limiting Risks Of Diversifying Too Soon – Redwoods, Bushes, and Pear Trees

November 22, 2017 07:01 am 30 Comments CATEGORY: Investments

Good diversification is a staple of financial planning advice, though the principle long pre-dates financial planners. From the aphorism “don’t put all your eggs in one basket”, to Talmudic texts from 3,000 years ago directing people to split their wealth evenly between cash, real estate, and business, the virtue of limiting exposure to risk from diversification is an “accepted truth”.

Except the reality is that, when you look to those who achieve the greatest wealth or have the greatest impact, virtually none of them ever diversify… or at least, not throughout most of their years. After all, if Bill Gates had “just” diversified into the S&P 500 after Microsoft IPO’ed, he’d have barely 1/40^th of the wealth he does today. In fact, most of those on the list of the richest billionaires are people in their 60s, 70s, or 80s, who have held a concentrated interest in their businesses for nearly their entire lives. Like the redwood tree, they waited a very, very long time before branching out… and as a result, were able to grow the tallest.

Of course, that doesn’t mean that diversification is always bad. Most “trees” are actually short bushes and shrubs, that grow just a few feet tall, but are still able to broaden their shoots and leaves enough to grow healthy. In the investing context, it’s the equivalent of a person who diligently saves and invests in a portfolio for decades, and retires with “comfortable wealth”.

Still, it’s important to recognize that diversification isn’t literally always the winning strategy, and for those who are young and have a long time horizon, arguably not even a necessary one. In fact, the weakest tree is the Bradford Pear – known for growing a V-shaped trunk, effectively diversifying itself from the start… in a manner that virtually ensures the tree will eventually either collapse under its own weight, or succumb to external forces.

For those who have decided they have “enough”, the satisficing strategy of the bush may be just fine. But for those who decidedly want to generate more wealth or have more impact, perhaps the redwood strategy is underrated after all? In fact, the highest-risk losing strategy may actually be the pear tree strategy of trying to have it both ways at once!

#FASuccess Ep 047: Pursuing An Operations Career Path In An Advisory Firm With HIFON Study Group Support With Shaun Kapusinski

November 21, 2017 07:01 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome everyone! Welcome to the 47th episode of the Financial Advisor Success Podcast!

My guest today is Shaun Kapusinski. Shaun is the Director of Operations for Sequoia Financial Group, a hybrid RIA based in Akron, Ohio, that manages more than $3.7 billion across private client and institutional divisions spanning four office locations.

What's unique about Shaun, though, is that while he started out in the industry over 15 years ago like many advisors of the time – as a "financial advisor" selling life insurance for a career agent life insurance company – he made a shift early in his career to the operations side of the business, and has since been able to grow his career by following an Operations career track inside of an advisory firm, rather than the more traditional paraplanner, then associate advisor, then lead advisor career track.

In this episode, we talk in depth about the organizational structure of this mega advisory firm, how they split apart a division of "Shared Services" including centralized paraplanners, a centralized investment team, and centralized operations (all supporting advisors with local client service associates in multiple locations), the core technology stack of Tamarac, eMoney, and Microsoft Dynamics that Sequoia uses to run the business, and why the firm is looking to make a shift from Dynamics to Salesforce Financial Services Cloud for the next stage of growth.

We also talk about Shaun's own fascinating career track, from starting out as a life insurance agent, transitioning to an operations role early in his career, why he believes that getting an MBA is even more valuable for those in an Operations role at an advisory firm than getting the degree as a financial advisor, and Shaun's perspective on why "growth" is such an imperative for advisory firms – because it's the growth that creates the career track opportunities in operations in the first place!

And be certain to listen to the end, where Shaun talks about the study group he created, called HIFON – short for High Impact Financial Operations Network – which gathers together operations team members from advisory firms across the country. And in recent years, HIFON has grown to the point that it's no longer just a study group, but an emerging membership group for the operations staff of advisory firms, with not only study group opportunities, but also private discussion forums, private vendor webinars, and even shared data about what technology various advisory firms are using!

So whether you are trying to figure out how to grow the operations side of your business, interested in making a transition to operations yourself, or simply interested in learning about the resources such as HIFON that are available for operations team members, I hope you enjoy this episode of the Financial Advisor Success podcast!

Giving Referral Thank-You Gifts That Actually Make Someone Happier

November 20, 2017 07:01 am 2 Comments CATEGORY: Client Trust & Communication

Stearman Biplane Ride and Barnstorming Show For One

Receiving a new client referral has a substantial value for a financial advisor – so much that advisors often provide “thank-you” gifts, either as a simple expression of gratitude, or even as a means to encourage more referrals. Of course, regulators want to be certain that advisors don’t inappropriately “buy” prospective client referrals – in a conflicted or undisclosed manner – and consequently FINRA Rule 3220 limits client gifts to just $100 per year, and the SEC similarly expects RIAs to establish their own gift-giving (and gift-limiting) policies. Nonetheless, the fact remains that referral “thank-you” gifts are relatively common.

Except often the biggest challenge of giving a good referral thank-you gift is simply picking the “right” gift – something that is commensurate with the value of a referral (not too big nor too small), is appropriately personalized and relevant to the recipient, and will likely be appreciated and well-received by the referrer. Which for some advisors, is so stressful that it’s actually easier to give nothing at all – beyond perhaps a simple verbal statement of “thanks” – than risk giving the “wrong” gift.

Yet recent research on happiness suggests that the best thank-you gifts might not actually be giving a “thing” at all, but instead gifting an experience, or giving someone an opportunity to themselves spend on others. And in the modern digital age, a growing number of online platforms make this possible – from online experience-buying sites like Excitations and Xperience Days, to donation sites like DonorsChoose to help teachers fund classroom projects, or even TisBest, which simply sells “charitable gift cards” that the recipient can then redeem as a donation to any one of 300+ charities.

The virtue of such services is that ultimately, it puts power in the hands of the recipient to select the final gift – whether an experience, or a donation to someone else – which helps to reduce the risk of making a poorly-matched gift. But in the end, the true value of gifting experiences or the gifting the opportunity to spend on others is that it increases the likelihood that the recipient will actually feel happier after receiving the gift… which is perhaps the most powerful way to express gratitude for a referral.

Weekend Reading for Financial Planners (November 18-19)

November 17, 2017 02:55 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that the CFP Board has decided to issue a second draft of its proposed changes to the CFP Standards of Conduct, which is expected to be released in mid-December with a comment period running in January of 2018. Also in the news this week was a new report from PIABA that points out 5 out of the 13 "public" members of FINRA's Board of Governors (who are supposed to represent consumers and have no ties to the industry) actually do have substantive ties to the financial services industry, which raises the significant conflict-of-interest concern that the majority of FINRA's Board is actually comprised of industry representatives (whereas it is supposed to maintain 13-out-of-24 board seats with non-industry public governors).

From there, we have a number of articles on mergers and acquisitions of advisory firms, including a discussion of some of the key factors that drive an advisory firm's valuation (beyond just its size and revenue), what an "earn-out" is and why it's often used as part of the terms of an advisory firm acquisition, and how the ongoing wave of industry consolidation is likely to progress in the coming years as a small subset of mega-firms begin to emerge.

We also have several investment-related articles, from a discussion of how the "p-hacking" phenomenon (of doing so many tests for statistical significance that, ironically, it becomes inevitable that there will be a large number of false positives) may have inappropriate spurred the "investment anomalies" research, a look at the rapid rise and fall of many ETFs (which also appears to be tied to how many ETFs are being launched on spurious anomalies research), and an explanation of how Research Affiliates formulates its own forward-looking return assumptions (important for both portfolio design, and determining reasonable investment assumptions to plug into financial planning software).

We wrap up with three interesting articles, all focused around the theme of financial services industry change: the first raises the question of whether, as the Broker Protocol unravels, if it's time for the SEC to step in and formally codify a version of the Broker Protocol for all firms (broker-dealer and RIA) under Regulation S-P; the second looks at whether it's time to ditch life insurance illustrations and instead demand and require that insurance companies provide more detailed projections (which more clearly explain what are guaranteed costs and what are uncertain assumptions that could be manipulated); and the last suggests that perhaps the best way to fix the compliance woes at broker-dealers is for independent B/Ds to become more stringent on their hiring processes in the first place, vetting prospective brokers and weeding out the bad ones, so that they don't have to create compliance procedures that cater to such a low level "lowest common denominator" broker (to the detriment of all the rest of the good and honest advisors at the broker-dealer). Which is especially important in today's environment of broker-dealer consolidation, where large swaths of brokers – good and bad – may be getting absorbed into other broker-dealers in the coming years!

Enjoy the "light" reading!

The Latest Advisory Industry & FinTech Trends From #SchwabIMPACT

November 16, 2017 02:36 pm 3 Comments CATEGORY: Technology & Advisor FinTech

While it is becoming increasingly clear that "robo-advisors" are not disrupting human financial advisors, the adoption of robo technology by financial advisors themselves is beginning to shift the competitive landscape... both amongst financial advisors themselves, and the technology vendors who serve them, as the very role and value proposition of financial advisors themselves begins to get re-defined.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I'm interviewed by Neesha Hathi, Executive Vice President and Chief Digital Officer at Schwab, at the Schwab IMPACT 2017 conference, about the latest advisory industry and FinTech trends – including the Robo 2.0 trend currently rolling through the industry, why Robo 2.0 will spur the rebirth of next generation financial planning software, and why it's the rise of better “small data”, rather than “big data”, that is likely to be most important to advisory firms in the coming decade.

One of the biggest trends rolling through the advisory industry right now is rise of “Robo 2.0”. Robo-Advisor 1.0 was all about companies like Betterment and Wealthfront, which made convenient and easy-to-use tech tools for opening accounts, investing those accounts, and managing them over time, and offered directly to consumers. However, we’ve learned that only a small subset of consumers actually want to buy these solutions directly, while there is a large base of financial advisors who want to use these same tools within their own businesses. As a result, Robo 2.0 tools are focused on facilitating the ability of financial advisors to quickly and easily open investment accounts, get the dollars actually transferred, invested, allocated in reasonable models, and model management tools to make it very easy to allocate and rebalance models along the way. The good news for advisors is that these trends drive efficiencies and lower business costs. But the challenge going forward is that now that all of this can be done with a click of a button, advisors need to find new ways to add value for their clients.

Looking forward a bit further, the biggest change we’re likely to see in the industry 5 to 10 years from now isn’t actually the adoption of Robo 2.0 tools, but instead, the rebirth of next-generation financial planning software as investment management receives less attention. As advisors are forced to focus on other areas of financial planning – everything from HSAs and healthcare conversations, to debt management issues, and cash flow planning more generally – advisors are going to need better financial planning software tools to help clients with these issues. Which presents a huge opportunity for those who are interested in building tools oriented towards financial planning, and advisors who want to focus more on financial planning... while for those still mostly focused on investments, the next decade is going to present more of a competitive business challenge.

Another trend that many have predicted will influence the next decade is artificial intelligence, machine learning, and big data. But I’m very skeptical about the discussion of these technologies coming into advisory businesses. Because the reality is that so many of the challenges in what we do for clients are not big data problems. Instead, it’s small data – i.e., the uniqueness of every advisory firm and the clients they serve – where better insights are needed. So while there will certainly be some applications for large firms to leverage big data and bring insights on the entire industry, at the advisor level, the most exciting advancements are in the small data areas that are directly relevant to firm owners and their clients. For instance, automated business management and benchmarking data that makes it easier to track the components of business growth and performance, and tools that automate the many business management reporting processes that advisors are manually doing today.

The bottom line, though, is simply to recognize that we’re in the midst of some big FinTech trends within the advisory industry right now. So if you are an advisor who wants to stay relevant and continue to add value to your clients in the future (or a tech provider who wants to make the tools to help advisors do so!), it is important to understand how these trends will shape financial planning in the future!