Weekend Reading for Financial Planners (Jan 18-19)

Author: Michael Kitces

Team Kitces

Michael Kitces is a Partner and the Director of Wealth Management for Pinnacle Advisory Group, a private wealth management firm located in Columbia, Maryland that oversees approximately $2.0 billion of client assets.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

FINRA Probes Brokerage Firms’ Bank Sweep Accounts As Trading Commissions Dwindle (Mark Schoeff Jr., Investment News) – The use of proprietary money market funds or an affiliated bank as the default cash sweep option at brokerage firms (including both for retail clients, and the brokerage platforms that RIAs use for custody) has become increasingly common in recent years, and the relative importance of brokerage firms earning “net interest revenue” on those cash positions has only become greater since the recent collapse of trading commissions (which was historically a key revenue source for brokerage firms). And the practice has only received more scrutiny in the past 12 months, as a number of “FinTech” (i.e., robo-advisor and discount brokerage) platforms have begun to roll out their own (often proprietary) cash programs. Yet there’s a fundamental conflict of interest when brokerage firms default placing investors into their own proprietary or affiliated cash sweep options, with an average yield of just 0.25% while third-party money market funds average closer to 2%. Which is now raising regulatory scrutiny, with FINRA’s recently announced 2020 examination priorities including a focus on how brokerage firms are operating their cash sweep programs. Not that brokerage firms aren’t entitled to generate revenue for their services, but FINRA is concerned about whether investors understand the available (higher-yielding) cash management alternatives. Ultimately, though, it remains to be seen whether FINRA will actually limit current practices – e.g., by compelling broker-dealers and RIA custody platforms to offer a wider range of (higher yielding alternative) cash sweep options and a more favorable default – or simply increase the amount of disclosures that such platforms must provide to investors about the conflicts of interest in their lower-yielding default option.

TA Associates To Seek Nearly $2B For Orion Advisor Solutions (Luisa Beltran, Barron’s) – The big industry buzz this week is the news that private equity firm TA Associates is getting ready to sell Orion Advisor Solutions, with an anticipated asking price of $1.875 billion for the nearly 2,000 advisory firms with almost $1T of AUM that Orion currently serves. The rumor comes as TA Associates approaches the 5-year mark since it first acquired Orion (as part of a broader acquisition of Orion parent company NorthStar) in 2015 (as private equity firms typically target 5- to 7-year holding periods for acquisitions). The announcement of an impliedly imminent acquisition was denied by Orion CEO Eric Clarke, who stated that Orion doesn’t have any immediate plans to sell, though the company does field “an inquiry or two a day” from interested investors. And industry commentators have noted that Orion’s recent rebranding effort (to uniform disparate divisions under the single Orion brand), and their recent Advizr financial planning software acquisition, may leave them well positioned for a new acquirer to take over. From the advisor perspective, though, it’s notable that the increasingly popular domain of Advisor Technology means that an acquisition of Orion, if it occurs, will most likely be from another PE firm that simply hopes to grow it further, or a strategic acquirer (such as a competitor looking to consolidate, or a platform like an RIA custodian looking for new revenue streams after the loss of trading commissions), suggesting that even if a transaction occurs, it’s more likely to be a potential boost for Orion than a threat (as turned out to be the case when Fidelity acquired eMoney in 2015).

High-Growth Advisors Go All-In On Marketing (Jeff Berman, ThinkAdvisor) – According to a recent Broadridge study on financial advisor marketing, “growth-focused” advisory firms (which spend more than $5,000/year on marketing and self-identify as aggressively-focused on adding clients) average nearly double the AUM of their less growth-oriented peers (at almost $300M vs just over $150M of AUM, respectively), and 43% of those growth-focused firms acquired at least 20 clients last year (compared to only 16% of other advisors). Notably, though, the most growth-oriented firms were not simply doing more ‘traditional’ advisor marketing events (e.g., seminars), but instead were focusing more and more on ‘digital’ channels from social media marketing to digital paid advertising and marketing via online webinars, with 76% of firms investing into their websites and 45% into social media, but only 57% into in-person events. In addition, marketing-oriented firms were also more likely to be investing into their CRM systems to track their marketing results (to identify where their leads were coming from), and generally saw faster sales cycles (with 3.4 months from inquiry to close on average, compared to 4.3 months for ‘technology laggards’). Overall, the study found that the average cost per new-client acquisition was $929, which is a non-trivial marketing cost for a new client (and similar-to-higher than the rumored acquisition costs of robo-advisors), though still quite economically viable given the typical affluence of advisory firm clientele and their lifetime client value with 90%+ retention rates.

2.5 Million Emails, 14,299 Advisor Marketing Campaigns, and One Inescapable Truth (Michael Thrasher, RIA Intel) – This week, marketing automation and lead generation platform Snappy Kraken released its own “State Of Digital Marketing Report”, based on the company’s own on-platform data tracking of what advisors are doing that is actually working for them when it comes to marketing for clients online. Perhaps not surprisingly, the core finding of the study is simply that advisors who spend more time and effort on marketing (e.g., sending more email campaigns, more active on social media, etc.), are seeing greater results in terms of client growth, as well as compounding their future growth more effectively (with email lists of nearly 3X the recipients). Notably, though, the study found that the advisors who were most effective in their digital marketing did not use it ‘purely’ for business purposes, and instead also periodically shared information about their personal interests and family priorities as well. On the other hand, while advisors engaging both personally as well as professionally on social media were more successful in their marketing, the primary driver of traffic to advisor websites was still email (an estimated 69% of all traffic), compared to only 17% from social media ads and 16% from organic social media (the bulk of which came from Facebook at 67%, followed by LinkedIn at 26%, and Twitter at only 7%). And of course, when email is the primary driver of traffic, it also tends to become the primary driver of lead generation, though Snappy Kraken found that not only did email generate more leads due to the higher traffic, it also converted significantly higher as well (at 19.2% for email, compared to only 4.9% for social media ads and 4.1% for standard social media posts). However, Snappy Kraken found that it still takes ongoing email campaigns to build branding value, and that strong content is necessary (or prospects simply unsubscribe).

8 Digital Marketing Experiments Every Independent Financial Advisor Can Try (Kelly Moorman, XY Planning Network) – While financial advisors are often looking for ‘tried and true’ approaches to marketing that will be assured to work, the reality is that virtually all marketing is an ‘experiment’, as what works for one advisor (and their style, brand, and target clientele) may not work for another. Which means at some point, it’s necessary to test a number of different marketing strategies and approaches, to see what works for you and your prospective clients. And in the realm of digital marketing, it’s especially effective to engage in lots of marketing tests, because the digital nature of the medium makes it feasible to measure almost everything and actually see what’s working (or not!). Potential strategies to test include: try a “pop-up” or similar banner on your website, as a way to offer prospects something of interest in exchange for their email address (so you can begin to drip market them on an ongoing basis to establish an ongoing relationship), leveraging tools like BannerSnack or WisePops; if you’ve been already testing these messages (via pop-ups, or social media, or emails), try mixing up the actual text you use in your email subject lines or Calls To Action to improve the conversion rate; use more personalization to make prospects feel more connected (e.g., ask them to share their first name as well as their email address, and then send messages that populate “Dear <firstname>”); mix up when you send messages or share content, as people are creatures of habit such that sending messages at the same time of day likely hits the same people over and over (while others who aren’t online at that time may never see them at all!); try A/B testing key pages on your website that are meant to convert (from the layout of the text to the ‘offer’ you make to get people to engage, and even the font and color scheme); and check out in Google Analytics what people are reading on your site – if it’s older content that may be outdated, update it to be more compelling and currently relevant!

The Future Of Book Publishing (Ben Carlson, A Wealth Of Common Sense) – The available data on book sales suggests it’s brutally difficult for most authors to ever be successful in selling their books, with one study finding that out of 1,000 business books released in 2009 only 62 sold more than 5,000 copies, and another finding that the average non-fiction book sells less than 250 copies a year and fewer than 3,000 copies over its lifetime, and a third finding that the average book may only sell 500 copies. And the trend doesn’t appear likely to improve anytime soon, with a whopping 1.7 million books that were self-published in 2018 alone (likely more published than there is demand to read them!). Yet Carlson has still proceeded to publish 3 books over the years, and for those who are undaunted by the odds and still interested in doing so, offers a number of helpful suggestions: self-publishing is increasingly feasible with the tools in the marketplace, but also places a burden on you to handle the editing, formatting, and cover design (or at least find someone else who can help); traditional publishers give you their built-in infrastructure of editors, designers, formatters, and experience, and can help with credibility on platforms like Amazon (which dominates the space), but it’s still a slow process, and you’ll still be on your own to actually market the book (while you don’t have any control over the pricing); ultimately the value of the book is what you have to say to connect with your readers, which means you don’t necessarily have to get ‘too clever’ to come up with something new (per Steven Pressfield’s famous “Nobody Wants To Read Your Sh*t”), and instead simply use stuff you’ve written about in the past (that hopefully you have a passion for, because it’s a lot of work); and recognize that you will not likely make much money from the book (especially given the time involved, which may result in a less-than-minimum-wage equivalent)… though don’t forget the potential that a book has not to generate book sales but to establish the advisor’s credibility to get more clients directly.

SECURE Act Expands Uses For 529 College Savings Accounts (Ann Carrns, The New York Times) – While most financial advisors have focused on the SECURE Act headline that stretch IRAs have been eliminated for those passing away in 2020 and beyond, along with increases in the RMD age to age 72, another key change pertains to the use of 529 college savings accounts. Specifically, under the new rules, a 529 plan can now be used to repay up to $10,000 of a beneficiary’s Federal or [most] private student loans (plus another $10,000 to repay student loans of each of the beneficiary’s siblings). In addition, 529 plans can now be used to pay for Labor-Department-registered apprenticeship programs (which typically combine on-the-job training with classroom instruction via a community college). The apprenticeship change may be appealing for families that are otherwise concerned about saving into a 529 plan out of fear that the child may not go to college (which would turn subsequent 529 plan withdrawals of growth into non-qualified taxable-plus-penalty distributions). Though for most advisors, the more notable shift is likely the student loan option, which creates interesting scenarios where students may actually prefer not to use their 529 plan savings for college itself, and instead take out loans (especially if available at favorable interest rates or with subsidized interest), to be subsequently repaid with a now-qualified 529 plan distribution in the future (and allow for additional tax-free growth during the intervening years). Alternatively, the option may also be appealing if one child attends a less expensive college, and therefore has leftover funds that can be used to pay off student loans already incurred to pay for a sibling’s more expensive tuition. Not to mention that sometimes students end out being forced to borrow because of financial aid mistakes (e.g., with unduly early distributions from a grandparent-owned 529 college savings plan). Notably, though, to be eligible, the 529 plan must actually repay a loan of the beneficiary, not of the parents (though in theory, a parent could change themselves to be the beneficiary and then use a distribution to repay their parent-incurred student loan).

Fidelity Launches HSA For Advisors But Will Anyone Care? (Sam Steinberger & Davis Janowski, Wealth Management) – Last week, Fidelity announced that it will offer “full-service” Health Savings Accounts (HSAs) for RIAs via its Wealthscape platform (where Fidelity acts as the custodian and provides brokerage services to the HSA). The launch marks a broader trend of growing industry interest in the opportunities of HSAs, where Fidelity already has $5.4B of HSA assets under administration. However, with most people having relatively modest HSA balances of just a few thousand dollars, and often needed in relatively short-term time frames (e.g., to cover a medical expense subject to this year’s deductible!), it’s not clear whether there will be much appetite for financial advisors to drive HSA engagement (and actually manage HSA investments). Of course, the reality is that for more affluent clients, who can afford to take advantage of the tax benefits of an HSA and also pay their health insurance deductibles out of pocket, there is appeal to use an HSA as a long-term accumulation account that functions as supplemental savings for health-related expenses (including Medicare premiums) in retirement. Still, though, when the account size is modest (even if growing), and/or receiving small ongoing contributions every year, at best it seems that some advisors might expand their services to include HSA management, but that the opportunity isn’t large enough for most advisors to make HSA planning (and rollovers) a business focus even with the Fidelity platform solution.

Should Clients Take A 6-Month Lump-Sum Social Security Payment When They Begin? (Ginger Szala, ThinkAdvisor) – When prospective retirees delay their Social Security past full retirement age, they can earn 8%/year “Delayed Retirement Credits” that permanently increase their benefits. However, for those who have delayed, they also have the option of ‘backdating’ their application by up to 6 months, rendering them eligible to receive a lump-sum check for the 6 months of retroactive benefits (but in exchange, giving up the last 6 months or 4% worth of Delayed Retirement Credits). Which raises the question of when or whether clients actually should request the lump sum when available. In general, arguably the answer is “no”, because those who wish to delay – ostensibly in anticipation of living a long time and wanting a hedge against their longevity – were delaying on purpose, and claiming 6 months of retroactive benefits undoes the delay they already had previously determined they wanted to do! And for those with modest incomes (and modest tax brackets), claiming the retroactive lump sum – which is all fully taxable when received – could unwittingly push them into a higher tax bracket or trigger the phase-in of Social Security taxation. On the other hand, the reality is that sometimes people aren’t actually ‘running the numbers’ to determine whether a delay was best, and simply delayed because they were still working and otherwise didn’t need the money… which means once they do retire and begin benefits (past Full Retirement Age), they may wish to claim the 6 months of retroactive benefits as well to get a jump start on their retirement spending cash. And in some cases, prospective or current retirees may have a material change of health in their 60s, such that the original plan may have been to delay in order to maximize Delayed Retirement Credits (for themselves or a surviving spouse), but given a change in health and/or circumstances, may now wish to have claimed earlier after all… for which at least 6 months of retroactive lump sum benefits is better than nothing?

31 Simple Daily Habits That Separate High Achievers From Everyone Else (Christina DesMarais, Inc.) – One of the long-term keys to success is the ability to focus your energy to maximize productivity… which in practice is often a function of the habits you maintain. Accordingly, DesMarais profiles some of the key habits of successful and highly productive executives, with a number of suggestions that are relevant for financial advisors as well, including: if something comes across your desk that can be done in a minute, just do it now (as it can take longer to decide when else to do it, and then task-switch to do it then, than it does to just do it now when it’s in front of you); exercise regularly (and for many, as a habit first thing in the morning) or more generally make a habit of scheduling time for self-care; set aside a few minutes each night to reflect on all the day’s events (which helps the brain to process and move on from any lingering concerns); make connections by investing 15 minutes per day reaching out to talk with someone you wouldn’t otherwise have connected with but has some relevant interest or opportunity (or more generally, have at least one conversation outside of your ‘bubble’ of typical daily contacts every day); use time-blocking to get the most focus in your day (and cut down on task-switching distractions); don’t just maintain a to-do list but manage it by prioritizing every morning what is truly most important to get to; and say “no” often (because in the end, saying “yes” to something inevitably means saying “no” to something else, so it’s better to say “no” deliberately to something that’s not a priority than to let whatever comes last end out with a “no” because there’s simply no time left!).

How To Unpack Your Bad Habits The Next Time You Move (Tami Bulmash, Forge) – Moving to a new home (or especially a new city) can feel like a new beginning, and an opportunity to “change your place, change your luck”. Yet the irony is that because we are creatures of habit, it’s still all too easy to change to a new location but then unwittingly get caught up in the same habits and patterns (that may have been part of what you wanted to escape or break the cycle of in the first place!). Especially since for many, moving is a stressful event, and when stressed we’re even more likely to shut down and revert back to our old habits. Instead, though, Bulmash suggests that the act of moving is an opportunity to deliberately break the routine and start new habits that can be adopted, from how you engage in the moving process itself, to decluttering and getting rid of old things (and the habits attached to them), to altering your body’s routines and going a new direction instead.

Good Habits, Bad Habits (Michaela Barnett, Behavioral Scientist) – Habits and productivity have long been studied in academia, but the irony is that academia itself is actually an ideal location to study the connections between habits and productivity, as the highly unstructured nature of the academic environment is one where those who can organize themselves and maintain good habits thrive, while those who are otherwise intelligent and talented may still struggle to produce results. Accordingly, psychologist and academic Wendy Wood has researched habit formation extensively, and recently published her own book, “Good Habits, Bad Habits” about how we actually alter and adopt better habits – in other words, not only to break and end old bad habits but also how to actually sustain new behaviors to turn them into good habits. In fact, the very basis of habit formation is essentially just a learning exercise of connecting an activity to a reward… such that eventually, our brains just mentally shortcut to the activity without thinking about it (thus the “habit”) in anticipation of the reward. Which is important, because it means that new habit formation is less an exercise of willpower and self-control (to force oneself to do the new habit), but more a matter of simply connecting the desired positive habit to a positive outcome/reward and letting our brains’ own natural learning mechanisms take hold. And recent research actually finds that to the extent people who have good self-control do tend to be more successful, it’s not their ability to exert self-control over their habits per se that leads to success, but their ability to exert self-control to form the right habits (and then let the habits take control). As Wood’s research finds that just as it’s difficult to break a bad habit by exerting our willpower, it’s actually also difficult to break a good habit in the same manner (which again means forming good habits matter more than trying to sustain willpower to repeatedly overcome bad ones). Though Wood also finds that because repetition is so important for habit formation – and some of us don’t have consistent ‘repeating’ days, particularly as parents with young children – that it’s especially important to focus on trying to create some routine to your day wherever possible, to let the positive habits form and take hold in the first place! The key point, though, is simply to recognize that improving your own behavior is less about trying to force yourself to stop doing the things you don’t like, and more about finding and forming habits around the things you do like instead!

I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!

In the meantime, if you’re interested in more news and information regarding advisor technology, I’d highly recommend checking out Bill Winterberg’s “FPPad” blog on technology for advisors as well.