Weekend Reading for Financial Planners (August 8-9)

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Wealth Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, 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.

Schwab Will Keep TD Ameritrade’s iRebal But Stays Mum On VEO One (Ryan Neal, Financial Planning) – As the closing date for Charles Schwab’s acquisition of TD Ameritrade draws near, Schwab leadership is beginning to make announcements regarding the details of its anticipated 18- to 36-month integration plan for the two firms. The big news this week was that Schwab intends to keep the popular iRebal portfolio management tool along with the underlying Thinkpipes advisor trading platform, which are expected to be merged into Schwab’s existing advisor technology ecosystem. Which creates both a big sigh of relief for a large swath of TD Ameritrade advisors that rely on iRebal, and also a raised eyebrow of positive interest for Schwab advisors who may soon get access to the (free-at-TD-Ameritrade) software for themselves. Notably, though, while Schwab announced plans to keep iRebal and Thinkpipes, it made no announcement yet about the fate of TD Ameritrade’s broader VEO One platform, not only a key hub for TDA’s RIAs that use it to integrate with a wide range of third-party software solutions but also a crucial platform for AdvisorTech firms themselves that have built integrations to VEO One as a way to market and distribute to the independent RIA community (in a more open and easily accessible manner than Schwab’s OpenView Gateway platform).

Fewer Than 40k Advisors Joined Broker-Dealer Industry In 2019 (Jessica Mathews, Financial Planning) – Every year tens of thousands of new people join the brokerage industry, and tens of thousands leave… but according to FINRA’s latest Industry Snapshot, in 2019 fewer registered representatives joined broker-dealers than in any year since FINRA began to publish the data (going back to 2005), with a total of barely 39,000 reps joining the industry, as contrasted with more than 44,000 who dropped their brokerage licenses. Notably, though, the shift isn’t necessarily indicative of a net negative ~5,000 drop in the total headcount of financial advisors… but simply a recognition in the aggregate of how many financial advisors are opting to start their firms in the RIA channel and simply aren’t joining the brokerage industry in the first place. In fact, in just the past two years (since FINRA’s 2018 Snapshot), the number of broker-dealer-registered representatives has decreased by 5,500, but the number of SEC-registered investment advisers is up by almost 9,000 (plus the additional growth in state-registered investment advisers, not captured by FINRA’s Snapshot report). In addition, a growing number of broker-dealer representatives are dually registering as well, with almost 43% of FINRA-registered advisors also SEC-registered as IARs under an RIA, as the total number of broker-dealer-only representatives dropped by nearly 15,000 while the number of dual-registrants grew by almost 10,000.

What Investors Really Want To Talk About With Their Financial Advisor (Catherine McBreen, Iris.xyz) – The prevailing wisdom of the advisory world is that financial advisors should focus more holistically than on ‘just’ investments, and try to steer client conversations to a broader range of financial needs. And according to Spectrem Research’s latest report entitled “Communicating with Advisors and Providers”, investors (and especially affluent investors) really do want to talk about a widening range of non-investment issues including, in particular, planning for retirement, income generation in retirement, life stage information pertaining to their financial health, and other topics like estate planning. However, the #1 topic that clients want to talk to their financial advisors about is… Investments. Providing a powerful reminder that while advice is increasingly holistic, when the bulk of a client’s wealth is tied up in market investments that the financial advisor is responsible for managing… there’s no way around the reality that the advisor needs to be able to talk about the client’s investment portfolio (at least, until/unless the financial advisor is serving a different type of clientele where their investment portfolio isn’t their primary asset in the first place?).

Highlights Of The 2020 FA Insight Study Of Advisory Firms (FA Insight) – The latest FA Insight benchmarking study on (independent RIA) financial advisory firms is out, providing a look at the ongoing trends in the RIA marketplace (at least, the RIAs on TD Ameritrade’s platform, as the owner of FA Insight and the primary base for its advisor sampling). Overall, revenue did grow by an average of 9.5% for RIAs in 2019, albeit down from 13%+ in the prior year (due in large part to the market decline in the 4th quarter of 2018 that impacted the January 2019 billing on 12/31/2018 balances for advisory firms), and the typical firm’s client count was up by 6.6%. However, the pressures to reinvest into advisory firm infrastructure for growth put significant pressure on advisory firm margins in 2019, with overhead expenses rising to a median of 41.3%, and median operating profit margins falling to just 17.6%. Other notable trends included: social media marketing is on the rise, with the digital marketing channel accounting for 8% of new client activity, third behind only client referrals and Centers Of Influence as the leading source of business development; the ‘shift’ to non-AUM business models is still slow, with only 6% of firms collecting more than half of their revenue from fees not tied to AUM, but using a minimum fee to ensure profitability from each and every client is becoming increasingly popular; technology appears to be showing some improvements in back-office productivity, as the average number of non-revenue-producing support roles per advisor fell from a ratio of 1.3:1 down to 1:1 in 2019; and advisory firms are still investing heavily into people for growth, with almost 20% of firms citing the addition of new team members as a major contributor to growth, and 28% crediting the expertise of existing team members as a key growth driver.

Latest Data On The Mid-Year Pulse Of The Industry (Ensemble Practice) – With traditional industry benchmarking studies having a natural ‘lag’ due to the backward-looking nature of surveying a prior year’s full-year financials, practice management consulting firm Ensemble Practice engaged in a mid-year survey to better understand the ‘Pulse of the Industry’ in the midst of the pandemic environment. The results show that, overall, the RIA community has suffered “surprisingly little” damage as a result of the pandemic crisis (at least amongst Ensemble Practice’s G2 Leadership Institute firms that were surveyed, which notably do skew towards larger, more established, independent RIAs, averaging more than $1.7B of AUM). Overall, the average change in AUM is minimal at -1.2%, though new business activity is significantly diminished (with net new client growth barely 1/3rd what it was in 2019), such that even third-quartile positive growth was “only” 1.2%. As a result, the (slight) majority of advisory firms are still hiring (with 58% of firms hiring during the crisis, and the 53% ending the first half of 2020 with more employees than they started the year with), and layoffs still appear to be sparse across the RIA community at just 4% of advisory firms (though notably, 42% of advisory firms had resignations, ostensibly due to the demands of family and child care amidst the pandemic?). Because of the disruptions of the pandemic, the most significant changes for advisory firms were primarily around operational changes (56% of firms redefined an internal process and 33% changed a significant software system), or around reigniting growth efforts (with 46% of firms creating a new marketing initiative). Overall, the biggest budgeting changes for advisory firms increased higher spending on technology (33%) and marketing (20%), while spending cuts were primarily in incentive compensation (27%), consultative services (18%), and also marketing (at 22%, and implying a very split approach to the current environment where almost as many advisory firms cut their marketing budgets as increased them!).

Clients Appreciate Phone Calls Now More Than Ever (Emile Hallez, Investment News) – According to an ongoing survey from Hearts & Wallets, about 40% of those in March agreed with the statement “my financial advisor is a partner to me”, but the number spiked to 56% in May as communication between advisors and their clients spiked in the midst of the pandemic. And notably, the effect was pronounced specifically for those who work with a dedicated personal financial advisor, as only 16% of those who spoke with brokerage or 401(k) phone reps similarly agreed with the statement (a number that did not increase in the midst of the pandemic). However, the research did find that it was personalized communication – in the form of phone calls and emails – that had the biggest positive impact, with 75% stating they were satisfied and only 15% were unsatisfied by such communication (as contrasted with only 62% who were satisfied with generalized mass emails), dropping to only 2% who were dissatisfied after receiving multiple phone calls. Given the practical constraints of time, though, the research did show that advisors had to disproportionately reach out to their most affluent clientele versus all of them, with the most affluent clients (those with >$2M of AUM) reporting the most advisor communication, while the majority (52%) of those with less than $100,000 in assets reporting no contact whatsoever from their advisors. On the other hand, the research also showed that by and large, advisory firms are still not well equipped to give clients advice outside of their portfolios and on ‘traditional’ financial planning topics, with only 11% of those who became unemployed in the pandemic reporting that they were happy with the advice they received from their advisor.

9 Experiments To Try When Marketing Your RIA (Carolyn Dalle-Molle, XYPN Advisor Blog) – Advisory firms are often looking for a ‘magic bullet’ when it comes to marketing strategies – “just tell me what works and will get me a lot of new clients!” – but Dalle-Molle suggests that in the end, it’s better to think of advisor marketing as a never-ending series of experiments to figure out what works for you and your clients rather than a standard approach that will work for anyone and everyone. Which is important, because it means that effective advisor marketing is less about looking for the ‘answer’ and more about trying and experimenting with one or several things, seeing what works at least a little, and then doing more of that with more time and resources spent to get better at it. Of course, the question still remains: where to start in advisor marketing experiments in the first place? Dalle-Molle suggests several areas to try out, including: try a Google Search ad (which can be done for as little as about $10/week just to try getting a few clicks and seeing if anything happens); if you’re getting bored with (or just not feeling returns on) your current marketing, try mixing it up with a new topic or simply a new format (e.g., if you’ve been blogging, try turning it into a video); try mentioning and ‘advertising’ for your services more directly in your marketing content (yes, it’s good to produce valuable content to educate your audience, but at some point you do need to let them know what you actually do if you want them to hire you!); test different timing for your activities (e.g., send out your blog posts or social media posts at a different time of day to see if you get more uptake); and try changing up the labels on your website to see what really resonates with your prospects (e.g., try not labeling it “Schedule A Prospect Call” on your website, and instead simply try something like “Get Started Now” to invite prospects to begin the process with you?).

5 Ways Advisors Can Be More Persuasive (Jane Wollman Rusoff, ThinkAdvisor) – Robert Cialdini is known as the ‘Godfather of Influence’, having literally written the definitive book on the subject (“Influence, The Psychology of Persuasion“), and has had to adapt his training and research to a virtual environment for his own consulting business just as advisory firms have been adapting theirs as well. Key points from his interview about how advisors can apply the Influence research in the current environment include: when uncertainty rises, people become more reluctant to make a change out of fear of regret in making the wrong decision, which makes it more important than ever to help prospects through the uncertainty and/or to give them ways to minimize regret (e.g., “if you don’t like our services, you can terminate us at any time!”); advisors can enhance their credibility (and thus reduce uncertainty/fear from prospects that they may make the wrong decision) by focusing on five areas that include expertise (show their background, experience, and credentials), trustworthiness (which can be enhanced early in the prospect meeting by admitting a mistake of your own to show your vulnerability), similarity (we connect to those who are like us, so find points of similarity you can connect on), social proof (e.g., the reason why larger advisory firms tend to attract larger clients is in part that the size of the firm and number of clients helps to ‘prove’ that the firm must be good and trustworthy or it wouldn’t have all those clients in the first place!?), and scarcity (help to show people what they’ll lose out on by not working with you!). In a virtual environment, Cialdini notes that these principles still work, but it’s even more important to ask for comments and engage in more proactive interaction with the prospect, even going so far as to ask their advice and feedback on something to “co-create” the advice experience and help them feel more connected.

The Mission Must Be The Mantra (Phil Edelstein, Advisor Perspectives) – In his famous book of building a great business, Jim Collins’ “Built To Last” highlights a subset of companies that manage to create “cult-like cultures”, that are rooted not in bland values and corporate mission statements but in a “clear-eyed, absolutist, nearly religious belief in the way things should be done in their industry”. Yet when it comes to financial advisory firms, remarkably few are built with any such meaningful differentiator, instead commonly focusing in areas like “independence”, “personalization”, and “putting clients first”… all of which may be important, but are so commonly stated by every advisory firm they’re not meaningfully different, especially with a lack of any clear mission to accompany it. By contrast, Schwab didn’t just focus on putting clients first, it rebuilt the entire brokerage model; Edward Jones didn’t just focus on personalized service, it created an entire locally personalized small office model; Vanguard didn’t just try to create an index fund for investors to own the market, it created an entire corporate structure where the investors owned the company (Vanguard) providing the market as well! So how can advisory firms adopt a similar “belief-based” approach to differentiation? Edelstein suggests 3 core steps: 1) define your villain and your hero (i.e., what is the thing you’re fighting against, and what is the hero belief system you’re creating to conquer that villain); 2) make it real, by showing how what you do embodies that hero story to defeat that villain; and 3) get a clear picture of your “moths” (the prospective clients who will be drawn to the passion flame you’ve lit), so that you can figure out how to communicate to them and reach them with your message!

The Most Important Number In Personal Finance (Nick Maggiulli, Of Dollars And Data) – The traditional view is that “net worth” is the most important number in finance, the aggregate quantified measurement of someone’s accumulated financial efforts. Yet as Maggiulli points out, looking at net worth alone doesn’t necessarily convey how someone is really doing when it comes to creating that wealth and the health of it. After all, $1M in savings is arguably different than $1M in inherited wealth, which is different than $1M in (highly leveraged) real estate investments. Accordingly, Maggiulli suggests that a better measure is the “Lifetime Wealth Ratio” (LWR), which is defined as someone’s Net Worth divided by their Total Lifetime Income (which would include not only earned income but also ‘inherited’ wealth as income). In fact, for workers at least, this is relatively easy to determine by going to your MySocialSecurity account and looking up your lifetime earnings record (i.e., your total taxed earnings for Medicare!). For those whose LWR is at least 10%, it signifies they’ve been able to convert a non-trivial portion of their aggregate lifetime earnings into sustained wealth savings, while those with 25%+ are really growing their wealth, and those with 100%+ have managed to create significant wealth and convert their income into wealth. Of course, it’s important to recognize that the LWR will have a natural age bias, because younger people will not have had much time for their wealth to compound and add to itself, and those who have high incomes (above the amount it takes to cover the necessities) may naturally have a higher savings rate and an easier time generating a higher LWR. Accordingly, Maggiulli suggests that an even better approach might be to consider a “Wealth Discipline Ratio” that subtracts spending on basic necessities from income and then calculates the ratio, which more accurately reflects not just the conversion of income to assets but specifically of discretionary income into assets. Which, at the least, can provide a helpful perspective on who has had effective discipline in their discretionary spending, and who may need to focus more on the distinction between needs versus wants?

Appropriate Proxies (Mike Dariano, The Waiter’s Pad) – One of the best ways to find a good deal or a great business opportunity is to identify situations where people have attached the wrong “proxy metric” to measure success and come up with not just a way to do it better but a better metric to measure what is really meaningful. For instance, Billy Beane transformed baseball coaching by recognizing how walks can be better than hits, economics professor Tyler Cowen has raised the question of whether math GRE scores have become too overweighted in business schools, or in the context of financial advisors, most people think in terms of their chronological age of when to retire but not necessarily their ‘biological’ age based on the current health of their body. At its core is the simple recognition that wherever we can “count” something, we then begin to measure it, and optimize in an effort to improve that “score”. In the context of the advisory industry, there is perhaps no greater example than the AUM metric, which is both widely cited as not only a measurement of a firm’s size but also its implied significance/relevance/prowess and also widely criticized as actually being a poor measure of quality for what clients actually receive. Which raises the question: what metrics do you use to measure success or determine where to focus in your advisory business, is that really the right and best measure of success, what to prioritize, and where to focus, and if not, what would be a better proxy to measure?

How Will You Measure Your Life? (Clayton Christensen, Harvard Business Review) – When most people ask for advice, they’re looking for an answer, but Christensen suggests that in the end it’s better to give them a model to think about the world (or their life) differently, and then let them process the conclusion for themselves using the new model/tool you’ve provided them. For which one of the most important questions becomes: how will you measure your own life and its meaning and impact? In practice, we often look to external sources to ‘tell’ us what success and meaning are, from doing well in school and getting good grades, getting a good job, raising a family, building a career or business, etc. Yet those pursuits in and of themselves, without any higher purpose, can at best conflict (sacrificing family for job or vice versa), or worse take us down a problematic path altogether (e.g., building a business at the cost of engaging in illegal behavior to do it, à la Enron). Instead, once a higher purpose is identified, Christensen then suggests that we can allocate our resources across our various endeavors, from a relationship with a spouse and/or children, to contributing to the community, succeeding in a career, contributing to your church or synagogue, etc.; once the purpose is clear, it’s easier to determine the right allocation of time, energy, and talent. The key point, though, is simply that in order to make the best decisions in your life, it’s absolutely crucial to first start with the right yardstick to measure the outcomes.

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, and Craig Iskowitz’s “Wealth Management Today” blog as well.