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The Conflicts Of Interest Between RIAs And Their Custodians (and Brokers And Their B/Ds)

September 14, 2017 10:27 am 3 Comments CATEGORY: Practice Management

The need to manage conflicts of interest is a central issue in meeting an advisor's fiduciary obligation to clients, whether it's part of an RIA's fiduciary duty under the Investment Advisers Act of 1940, or any financial advisor's obligation when serving any retirement investors under the Department of Labor's fiduciary rule. Yet the reality is that prospective conflicts of interest go beyond just those that financial advisors may face with the product compensation they receive for implementing various insurance and investment products. In fact, financial advisors often face direct conflicts of interest with the very platforms they're affiliated with, particularly when it comes to practice management advice in how to grow their own business and serve their clients!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the conflict of interest that exists between RIA firms and their RIA custodian platforms (as well as between brokers and their broker-dealers), and why advisors should perhaps be a bit less reliant on their platforms for financial planning education and practice management insight, given the "conflicted advice" they're receiving!

A straightforward example comes up in the context of whether financial advisors should aim to serve "next generation" clients - in particular, the next generation heirs of their existing clients. Concerned about the assets that might leave their platform, RIA custodians regularly encourage and urge advisors to build relationships with the heirs of their clients, so that the assets don't leave. Yet ultimately, that just emphasizes that to the custodian, the "client" isn't even the client - it's simply their pot of money, that the custodian wants to retain, regardless of who owns it... which means pursuing the assets down the family tree. By contrast, financial advisors who are focused on their clients - the actual human beings - would often be better served by simply focusing on who they serve well... which means if the firm is retiree-centric, the best path forward is not to chase pots of money to next-generation heirs when their retired clients pass away, and instead is simply to go find more new retirees! In other words, advisors are getting advice from their RIA custodians to pursue next-generation clients is often based more on what's in the custodian's best interests, not necessarily what the advisor's best interests for their practices!

Another way that RIAs sit in conflict with their RIA custodial platforms is that in the end, one of a fiduciary advisor's primary goals is actually to proactively minimize the profit margins of our RIA platforms! Thus, advisors try to minimize transaction costs, lobby for lower ticket charges on trading, pick the lowest-cost share classes that don't have 12b-1 fees or revenue-sharing agreements, find the optimal balance in selecting No Transaction Fee (NTF) funds versus paying transaction fees based on the size of the clients' accounts and what will be cheapest for them, obtain best execution pricing regardless of order routing kickbacks, and minimize client assets sitting in cash. And all of this matters, because how do RIA custodians actually make money? Ticket charges, revenue-sharing from asset managers, getting basis points on NTF funds, order routing revenue on execution, and making a 25+ basis point interest rate spread on money market funds. Which means the better the job that the RIA does for its clients, the less profitable they are for their RIA custodian (a fact that advisors are often reminded of by their RIA custodian relationship managers!), and RIAs have a fundamental conflict of interest between being "good advisors" for their custodial platform and watching out for their clients' best interests.

Notably, this phenomenon is not unique to RIAs. It’s perhaps more noticeable because we usually talk about RIAs as being fiduciaries that are minimizing their conflicts of interest, but it’s equally relevant for those who work on a broker-dealer platform as well. Because as product intermediaries, broker-dealers ultimately make their money off of transactions, and it is impossible to sell financial service products without a broker-dealer! Yet the challenge is that the B-D can make more when they are offering both compliance oversight and getting a slice of GDC on all transactions, as opposed to just a compliance oversight slice of advisory fee business. Which means that while a fee-based business model may be more stable and valuable in the long run for a financial advisor, able to grow to a larger size and sell for a higher multiple, B-Ds are often at risk for making less money as their advisors shift to fee-based business that makes more for them (or alternatively, forces the B-D to increasingly try to reach into the advisor's fee-based business with ever-expanding "compliance oversight").

The point is not to paint every B-D or RIA custodian in a nefarious light - as they're just trying to run their businesses - but it's crucial to understand that in many situations, what's best for the broker-dealer or RIA custodian is not necessarily best for the advisor on the platform. Which is concerning, because too many advisors don't seem to acknowledge these inherent conflicts of interest, especially since advisor platforms are often the primary place they go for financial planning education and practice management insight, not realizing the conflicted advice they are receiving. And so, while it can be great to take advantage of some of the resources that these platforms provide, advisors should still be careful to consider whether the advice they receive is really in their best interests as an advisor, or ultimately about maximizing revenue for the platform instead!

Predicting Wealth Building Behavior With DataPoints Assessment Tools

September 13, 2017 07:01 am 7 Comments CATEGORY: Retirement Planning

The Millionaire Next Door became a NY Times Bestseller in 1996 by revealing how little we understand about millionaires, and the behaviors that help people to become millionaires. While the traditional view was that wealth comes from an inheritance, or becoming an executive in a major corporation, and that you can identify millionaires by their high-end suits, luxury cars, and large houses in affluent neighborhoods, in reality a huge swath of millionaires become such simply by living frugal lives of cheap suits, practical cars, and modest homes, which allows them to convert a substantial portion of their income into wealth over time.

Of course, having a healthy income, and willingness to take calculated risks for success, do clearly help in the wealth-building process. But the key point was that not only is affluence not necessarily correlated to outward signs of wealth, but in reality some of the greatest wealth-building behaviors come from not flaunting that wealth and being “socially indifferent” to trying to keep up with the Joneses.

Now, a company called DataPoints – founded by Sarah Stanley Fallaw, the daughter of The Millionaire Next Door author Thomas Stanley (and herself trained as an industrial psychologist) – is turning The Millionaire-Next-Door insights about wealth building behaviors into a series of assessment tools that financial advisors can use.

For advisors who are trying to expand their practices to work with “younger” wealth accumulator clients, the DataPoints assessment tools provide a unique research-based approach to actually understand which prospects are likely to be successful wealth accumulators, and which prospects should be avoided because the assessment reveals in advance they will be especially difficult to work with. And for new and existing clients, a rigorous wealth building assessment tool as a part of the discovery process can help the advisor understand where to focus their advice and efforts to help the client actually change their financial behaviors for the better.

In other words, while as financial advisors we increasingly find ourselves talking about the “behavioral” value of financial planning advice, DataPoints is actually creating tools that help to measure what a client’s wealth-building behaviors actually are. Which on the one hand makes it easier to be effective with clients – as we can get a better understanding upfront of the client’s financial tendencies – but also makes it possible to actually measure the success of the advisor-client relationship by the extent to which the advisor actually helps their client (measurably) change their financial behaviors and attitudes!

#FASuccess Ep 037: Leveraging Unique Centers Of Influence To Grow A Niche Advisory Firm For Doctors with Johanna Fox Turner

September 12, 2017 07:01 am 5 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the thirty-seventh episode of the Financial Advisor Success podcast!

My guest on today's podcast is Johanna Fox Turner. Johanna is the founder of Fox and Company, a fee-only financial planning firm that specializes in working with physicians.

What's unique about Johanna's advisory business, though, is the sheer volume of rapid success that she's had with her recent pivot to specializing in doctors. After having already spent more than 10 years building her fee-only advisory business, and more than 30 years working as a CPA with a separate accounting firm, focusing into a niche has transformed her growth, from a practice that had steadily grown to 150 clients over a decade, to one that is now fielding 4 prospect inquiries a week from doctors, and has a waiting list to accept new clients! And 100% of her doctor clients work with her virtually, through email and video conferencing!

In this episode, Johanna details not only why she decided to make a shift to a niche advisory firm working with doctors - on a purely virtual basis - as an experienced 60-year-old advisor, but how she actually went about marketing her new niche, the unique Centers of Influence - two leading bloggers for doctors - that she's been able to build relationships with to generate a high volume of referrals, and why answering online questions in a niche can generate substantial new business, even as answering similar questions on “Ask An Advisor” Q&A sites like Nerdwallet generates no results at all.

In addition, we talk about the way that Johanna completely restructured her advisory fees into a three-tiered retainer structure to serve her niche (because the Centers of Influence she gets referrals from don’t believe in the AUM model!), what scheduling and video teleconferencing software she adopted to work with those new clients, and the 5-meeting financial planning process she uses to work with clients, built heavily around using eMoney Advisor not only to do financial planning, but also making the eMoney portal a central part of her value proposition with clients.

And be certain to listen to the end, where Johanna talks about how she broke the news of shifting into a niche to her existing clients, and why despite her fears, her existing non-doctor clients haven't left even as she focuses into her new doctor niche... although, ironically, she voluntarily decided to transition out nearly 1/3rd of her smallest clients just to help create capacity for the new growth she’s now experiencing!

So whether you’re curious about the unique Centers of Influence that can be cultivated in a niche, want to understand how an existing advisor can pivot into a niche, or simply want a glimpse of how an advisor has customized everything from her pricing and business model to her services and deliverables to fit her specific target clientele, I hope you enjoy this episode of the Financial Advisor Success podcast!

Advisor Platform Comparison: Wirehouse vs RIA Aggregator vs Independent RIA

September 11, 2017 07:01 am 18 Comments CATEGORY: Practice Management

Social Image Wirehouse vs RIA Aggregator vs Independent RIA

The wealth management industry has evolved significantly over the years, now offering a variety of different business models and platforms for advisors, from traditional wirehouses and independent broker-dealers, to independent RIAs, and increasingly the RIA aggregator and network platforms that support them. As a result, it’s become increasingly challenging for advisors to simply figure which model and path is the best to choose!

In this guest post, Aaron Hattenbach shares his experience working as an advisor in 3 different wealth management models: Wirehouse (at Bank of America Merrill Lynch); RIA Aggregator (with HighTower Advisors); and ultimately transitioning to his own fully independent RIA (his current firm, Rapport Financial).

And so if you’ve ever wanted a comparison between working at a wirehouse, an RIA aggregator, and an independent RIA, from someone who has actually had experience in all three, Aaron’s guest post here should provide some helpful perspective – whether you’re a veteran of the industry considering whether to make a change, or a new financial advisor trying to decide where to start your career.

Conducting in depth research in advance goes a long way in sparing you the potential headaches and risks that can come with moving your practice from one firm to another… given that every time you move your practice to another firm, you run the risk of losing your valuable and hard earned client relationships! And so I hope you find today’s guest post to be informative, as you consider what may be the best potential path for you!

Weekend Reading for Financial Planners (Sep 9-10)

September 8, 2017 02:58 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a series of big news stories around broker-dealers, including the announcement that LPL is going to force most new hybrid advisors who join the platform to use LPL's own corporate RIA (and not outside RIAs, nor even the RIAs of its OSJs), the news that Mass Mutual is cutting its MetLife annuity trail compensation by a whopping 73% for advisors who left the MetLife broker-dealer in recent years (a potentially troubling precedent), and the emerging trend of smaller broker-dealers "tucking in" to larger B/Ds by becoming a branch OSJ in order to avoid the compliance and technology burdens of running a B/D while maintaining their team and culture.

From there, we have a few practice management articles, including one on how trying to make all your clients happy can actually reduce the success of the business (as it hopelessly divides the limited resources of the business), another on why it's better to try to win new client business by being "different" than just showing how you're "better" (in large part because few consumers will believe you when you say you're better anyway!), and a third on how to handle the news when you find out you're losing a great client (by changing your own mindset to focus on the capacity opportunity it creates!).

We also have several more technical articles this week, from a discussion of how it's not enough to just talk about "success" and "failure" risk of a retirement plan because there are really several different degrees of "bad" (from not maintaining a desired standard of living, to not being able to support a basic floor standard of living, or true depletion and bankruptcy), to a fascinating study that looks at what investors really want from an advisor's investment reporting (and how it's not only a performance reporting issue but also a trust issue), and a look at how our understanding of investor risk profiling is beginning to change with a more nuanced understanding of the different factors at play (which should only get better as we gather more big data on how investors really do behave).

We wrap up with three interesting articles, all focused on the theme of overcoming our own personal hurdles and demons: the first looks at how for successful advisory businesses, one of the greatest "risks" is becoming satisfied that the business is good enough, and never asking pushing it to be great (which leaves substantial upside on the table!); the second is the story of investment writer Morgan Housel, who was a lifelong sufferer of severe stuttering, but went through a personal shift that has allowed him to at least partially overcome his disability, to the point that he is now working actively as a professional speaker on behavioral finance and investment issues; and the last is the story of writer Jeff Goins, who transitioned from being "just" a successful writer to an entrepreneur and business owner, and grew the business to more than a million dollars of revenue... making himself miserable in the process, and ultimately leading him to make a difficult decision to "downsize" the business, which while scary ultimately led him to be substantially happier, and to take home substantially more in profit as well!

Enjoy the "light" reading!

CFP Board Quietly Raises Certification Fees By 17% But To What End?

September 7, 2017 12:07 pm 8 Comments CATEGORY: Planning Profession

While the CFP Board has done a lot to justify its certification fees over recent years – from increasing the number of CFP certificants over the past 10 years by nearly 50% (despite the fact that the number of financial advisors is down over the past 10 years), to raising the status of the marks with its ongoing successful public awareness campaign – an important but little-noticed announcement was buried half way through the CFP Board's recent monthly email update: the CFP Board will be increasing its annual certification fee from $325 per year to $355. And while this increase may seem modest, because $145 of the total certification fee is earmarked for the public awareness campaign, the reality is that this is a 17% increase on top of the $180 portion that actually goes towards operations of the CFP Board. Which raises the question: why such a large increase, and why now?

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the recently announced 17% increase in CFP Board certification fees, as well as why accountability of the CFP Board to its certificants is important, and why it is concerning that the CFP Board has given no substantive explanation for why it is pushing through such a large increase – and particularly for an organization coming off of a $1.3M surplus in 2015 and with over $20M in reserves.

Of course, fee increases aren't unusual in the long run for any organization, as it's essential to keep pace with rising staffing costs due to inflation. And this is still only the first increase the CFP Board has put in place since 2011... which, even then, was just tacking on the $145 surcharge to cover the public awareness campaign. It has actually been nearly 10 years since the CFP Board raised its core certification fees, relying instead on the rising number of new CFP certificants paying those fees to fund growth instead. Additionally, both the public awareness campaign and CFP Board satisfaction ratings appear to suggest the CFP Board is making some good progress.

Nonetheless, accountability is crucial, and especially since the CFP Board has been prone in recent years to taking actions without soliciting much input or holding public comment periods. In fact, while the CFP Board did put forth a recent public comment period on proposed changes to their Code of Ethics and Standards of Conduct, the reality is that their Disciplinary Rules and Procedures require the CFP Board to do this, and it has been over 5 years now since the CFP Board put forth a public comment period on any other changes to the 3 E's (Education, Exam, and Experience) – effectively eschewing the practice ever since the CFP Board got "voted down" in negative public comments regarding increasing the number of required CFP CE credits.

Which raises the question once again of why a 17% fee increase, and why now? Especially on top of the fact that the organization is already running a substantial operating surplus of $1.3 million dollars in 2015 and has more than $20 million in net reserves available. Was there a major downturn on the CFP Board's 2016 Form 990 that we just can't see yet? Is the CFP Board trying to raise more revenue internally for its Center for Financial Planning initiative, even though the organization originally said it would be funded separately (especially in light of the fact that the CFP Board tried to put through a $25 fee increase last year in the form of a "voluntary donation" that certificants were going to be defaulted into)?

Unfortunately, the reality is that we just don't know, because the CFP Board gave no substantive explanation for why it is pushing through such a large increase beyond saying that it "supports the operations of CFP Board in fulfilling its mission and strategic priorities". And so, while it's not necessarily a negative for an organization to raise its fees over time, the question remains: why does the CFP Board now, all of the sudden, need another $2.3 million in its operating budget for 2018? And what does it take to get some transparency and basic explanations from the CFP Board on why it is pushing through a 17% fee increase?