Weekend Reading for Financial Planners (August 22-23)

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 Launches Free Financial Planning Software Solution For Consumers (Janet Levaux, ThinkAdvisor) – This week, Schwab announced the launch of Schwab Plan, a MoneyGuidePro-style goals-based financial planning software solution that Schwab clients can use for themselves to see if they’re on track for retirement. Similar to advisor-driven financial planning software, clients complete a 15-minute data gathering input questionnaire on their retirement goals, target retirement age, Social Security benefits and other income sources, risk tolerance, and asset allocation (including account aggregation for held-away assets), and then receive retirement projections, a Monte Carlo analysis of the results, and an interactive dashboard with sliders to alter plan assumptions and the ability to create what-if scenarios. Notably, though, Schwab doesn’t see Schwab Plan as an alternative to financial advisors, but simply a first step for self-directed clients; for those who have further questions, they can be connected directly to one of Schwab’s financial consultants via telephone, email, or chat, for further advice, or enroll into Schwab’s paid Intelligent Portfolios Premium for direct access to a CFP professional for a monthly subscription fee. From the Schwab perspective, the big news of Schwab Plan is an ever-growing focus on adopting financial planning (rather than investments) as the leading message to attracting and engaging clients. From the industry perspective, though, Schwab giving away a MoneyGuide-style financial plan and unlimited access to the software for free to all clients will simply emphasize even more how advisors must differentiate themselves by the value they add on top of what increasingly-free-and-accessible software can provide to clients directly.

Advisors May Be Struggling To Adopt Model Portfolios (Nicole Casperson, Investment News) – From the perspective of asset managers, “model portfolios” are a distribution dream come true, with the ability to provide models to advisors that they can use (and may be built of the asset manager’s own funds and ETFs) through model marketplaces, and tech providers have quickly attached themselves to the trend in a bid to earn revenue-sharing by having advisors adopt model portfolios through their model marketplaces. Accordingly, in just the past few months alone, Envestnet, Franklin Templeton, Orion, and Oranj have all announced major partnerships with asset managers to provide model portfolios. When it comes to advisors, though, adoption has still been… lackluster, as a recent YCharts survey showed that only 1 in 10 advisors are actually using model marketplaces to access third-party portfolio strategies, and only 39% are even considering whether to use one in the future. Similarly, a study from Cerulli in June also found that only 16% of advisors are using asset allocation models as their primary portfolio construction process. The problem, in part, appears to be the breadth of model marketplaces themselves, with advisors often reporting there’s an “overwhelming” number of third-party models to choose from, such that any time-savings from using model marketplaces is lost in the time it takes to research and evaluate which models to use in the first place (not to mention the obligation to do ongoing due diligence on them as well). Though the biggest blocking point is simply that in the end, if advisory firms have conveyed to their clients that they provide portfolio management services, there’s a risk of becoming overly reliant on them, with 76% of advisors expressing concern about making a third-party portfolio manager such a key part of their own investment management value proposition to clients. As a result, even with the stress of the pandemic, 84% of advisors in the YCharts survey stated that they don’t intend to make any changes to adopt third-party model portfolios going forward.

Tech Snafus Spur The Majority Of Under-40 Advisors To Consider Ditching Their Firms (Michael Fischer, ThinkAdvisor) – In a recent Broadridge survey, 89% of advisors stated that their desktop and other firm-provided software tools have become critical… and yet 77% of advisors said they had lost business as a result of not having the appropriate technology tools to interact with clients during the pandemic. And notably, the snafus were related not only to the technology to execute for clients – though a whopping 82% of advisors said that paperwork time still detracts from their time spent working with clients – but also simply the tools to communicate with clients, as 63% of advisors stated that they were trying to communicate with clients once per week during the pandemic, and 51% of Millennial advisors saying they were in contact with some clients daily during the crisis. As a result, nearly half of all advisors reported that they are thinking of leaving their current firm specifically for another with better technology tools (and for advisors under 40 age, the number is even higher at 59%, compared to ‘just’ 32% of advisors aged 60 to 79).

The Powerful Evolution In Fee Structures (Bob Veres, Advisor Perspectives) – Starting in the 1990s, when the overwhelming majority of all financial advisors worked at broker-dealers and were compensated by commissions, a new business model known as Assets Under Management began to emerge, with predictions that it would soon become the dominant model (and naysayers in the existing model suggesting that would “never” happen). Yet now, 20 years later, fee-based advisory accounts have in fact become the dominant model, from the rise of RIAs to even the shift to fee-based brokerage amongst the top broker-dealers… which in turn is leading to questions of what the “next big thing” will be, calls that the next new model will be monthly subscriptions, retainer fees, and other ‘fee-for-service’ models, and naysayers suggesting that nothing will disrupt the AUM model. But according to Veres’ latest comprehensive fee study on financial advisors, once again advisor fee models appear to be in flux. While 49% of advisory firms still don’t charge anything for an upfront financial plan – effectively using the financial plan as a freemium loss leader – and the median financial planning fee was ‘just’ $2,500 – $3,000, the results did find that ‘just’ 37% of advisory firms charge only AUM, while 33% charge a mixture of AUM and monthly fees, 13% are charging AUM but sometimes hourly fees, and younger advisors are disproportionately more likely to adopt flat monthly subscription, hourly, or other fee-for-service models (implying an ongoing growth in adoption as those advisors become ‘mainstream’ and more-experienced-but-more-likely-to-be-AUM advisors retire in the coming decade). Still, though, nearly 73% of advisory firms were still charging ‘primarily’ AUM fees, which makes it unclear if the AUM model is really on its way out, or if fee-for-service models are simply expanding the marketplace; nonetheless, the data at the least shows that even AUM-centric advisory firms are increasingly adopting various monthly, quarterly, and hourly fee-for-service business models as a complement to their AUM fees, even if they’re not (yet?) becoming a replacement altogether.

Why I Refuse To Offer Hourly Planning (Lorraine Ell, Financial Planning) – Between media personalities hawking stocks and aggressive financial salespeople hawking high-commission products, there are a lot of bad “financial advisors” out there… so many that Ell even published a book about it, aptly entitled “Bozos, Monsters, and Whiz-Bangs: Bad Advice from Financial Advisors and How To Avoid It“. On the one hand, the challenges from error-prone self-directed investors to problematic financial salespeople speaks to the value of holistic financial advisors who are truly focused on (and compensated for) advice itself. Yet on the other, Ell notes that often advice alone isn’t enough, as even giving recommendations and ‘telling’ clients what to do doesn’t necessarily ensure they’ll follow through and actually implement it. As a result, Ell suggests that hourly financial planning can be a problematic business model, as while it doesn’t necessarily have the transactional conflicts of giving advice as a guise for selling products, it is still fundamentally “transactional advice” and doesn’t necessarily ensure the follow-through necessary for clients to actually implement the advice to their benefit (and/or creates an expensive ‘nickel-and-dime’ feeling for clients who are ‘on the clock’ every time they follow up with their advisor for additional help). Which suggests that at best, hourly advice may be suited for only a smaller subset of prospective clients who really are good at follow-through and just need some upfront guidance on where to focus. Accordingly, Ell shares how she has deliberately stopped offering standalone hourly financial planning as a solution for clients, and instead requires all clients who will engage the firm for help to engage it holistically on an ongoing basis for upfront advice and subsequent implementation.

I Lost Clients When I Set A $10k Fee Minimum. That’s OK. (Dave Grant, Financial Planning) – One of the advantages of having a flexible fee model as an advisor is that it expands the breadth of clients that you can work with. The caveat, however, is that expanding the breadth of clients – particularly when they’re in different business models and expect different service models – is that it makes the advisory firm itself increasingly inefficient. As a result, after 6 years of building an ever-widening range of clientele, Grant decided to implement a new $10k minimum fee for clients… including not just new clients, but also his existing clients as they were transitioning into retirement. Not surprisingly, some clients did leave in response to the fee increase (which was very sizable for some), but in the end Grant acknowledges that the clients who stayed clearly value what he has to offer, while those who left, by definition, didn’t fully value it. Or viewed another way, clients who reject a fee increase (or a minimum fee as a prospect) are really just acknowledging that the business and its services aren’t the right fit for them (thus why they don’t value it, even though other clients who stay clearly do!). On the other hand, Grant also wanted to be certain that the new fee model didn’t overconcentrate risk in any one client, and as a result also implemented a maximum ($30,000) fee as well. Though, with a clear lifestyle goal for what Grant wants his practice to achieve, the biggest upshot of having a clear minimum (and maximum) fee is that it becomes crystal clear exactly how many clients the firm needs to support Grant’s desired lifestyle… and with a $10k minimum fee, it takes remarkably few clients to have an incredibly financially successful business!

Client Communications Have Changed. Needs Have Not. (Joseph Finora, ThinkAdvisor) – While the pandemic has created volatility in markets and uncertainty in life, the core issues of financial planning, from retirement to estate planning, taxes to insurance needs, remain the same. And if anything, the accelerated pace of economic and life events only quickens the pace and needed frequency of financial planning conversations with clients. The good news, though, is that it’s becoming increasingly clear that what really matters is the frequency of communication and that the important financial planning conversations are occurring… not necessarily whether they occur in person, or via telephone, or Zoom video call. Of course, that does mean for a lot of advisory firms there is a need to adopt new digital communication channels to engage with both prospects and clients, but a recent Fidelity study finds that 90% of advisors are now leveraging at least one digital marketing tactic or communication channel. Not surprisingly “telephone” continues to be the most used channel, but half of advisors under 35 (and 40% of those aged 36 to 54) are using video for prospecting as well, and 1/5th are using video for client meetings as well. And once a new communication channel is adopted and goes into general use, it often remains, with advisory firms surveyed stating they anticipate a doubling in the use of video conferencing tools in years to come.

To Gain Client Trust, Boost Virtual Service (Jeff Berman, ThinkAdvisor) – For many advisory firms that hadn’t been big technology adopters in the past, the pandemic has forced a rapid shift towards utilizing available digital tools. As a result, in recent months Fidelity saw a 103% increase in the adoption of e-signature capabilities, and Schwab reports that over 1/3rd of firms are now using its new Digital Account Opening tool (and seeing improved efficiency with a reduced NIGO rate in the process). Yet ultimately the digital shift isn’t just about the adoption of the tools themselves, but what it enables with respect to the client relationship – where a lower error rate and faster processing of (now-digital) paperwork can better engender client trust – but also because of the flexibility it gives the advisory firm. Because just as many industries are suddenly seeing an uptick in employees relocating – as it’s no longer necessary to be in a particular geographic location to have access to a desired job, if it can be done virtually anyway – advisory firms are also accelerating the shift towards being a “location independent” financial advisor, which starts with digital paperwork processing (eliminating the need to have a physical office and in-person meetings to onboard accounts), and now is shifting towards doing more digital marketing to be able to attract prospective new clients regardless of location as well.

Going ‘Full Curbside’ During Coronavirus To Attract Premium Clients (Kimberly Foss, Financial Planning) – The rapid shift to a ‘fully digital’ communication approach in the spring as the pandemic broke out and forced one state after another to close was a significant disruption to many advisory businesses. Yet because the impact occurred with all firms simultaneously, as the shutdown spanned the nation, Foss found that being able to adapt quickly to engage with clients digitally actually became a positive differentiator, helping her to land a big new client who called in the midst of the market meltdown, who in turn referred her to another prospective client singing her praises because she had been able to adjust to a Zoom-based video communication style while many other advisory firms were lagging. Because ultimately, it turns out that establishing and maintaining client relationships isn’t really about meeting in-person per se, but simply meeting clients ‘wherever they are’ (however you must!), showing that you care, and being able to adapt to their needs. When it comes to retail businesses, this has meant the adoption of ‘curbside delivery’, to save customers the trouble and risk of coming into the store to pick up their purchases. So what will be the equivalent of “going full curbside” for an advisory firm serving its clients in a more-digitally-driven future?

The Secret To Productive Group Meetings Over Video (Tomasz Tunguz) – Even when meetings could still occur in person, brainstorming in groups has always been a challenge, as only one person can speak at a time (stymieing everyone else with ideas to get out), many people don’t participate or ‘free ride’ from the back of the room, and some people want to contribute but can’t because they are glossophobes (the fear of speaking in public). Yet, while transitioning to a virtual environment has been even more challenging for a lot of teams, Tunguz notes that when it comes to brainstorming and other collaborative group meetings, it may actually be better, and the key is collaborative document tools like Google Docs. In the virtual format, Tunguz creates a Google document with 10 pages for a 10-person meeting (one page with each person’s name on top), in the first 10 minutes everyone in the meeting is asked to find the page with their name on it and make their top 3 suggestions on whatever topic they’re brainstorming… and then after that, it’s hands-off-keyboards, and the list is coalesced in front of everyone to discuss. Which means no one can hide (everyone must write on their page), no one gets silenced while others talk (because everyone contributes in parallel), and the glossophobes aren’t intimidated (it’s written, no one has to speak their ideas if they don’t want to!). The end result: a brainstorming meeting (and other group meetings) that ends out being even more productive because it wasn’t in person! (Try it!)

Don’t Delegate Using Email (Cal Newport) – In most business settings, delegation occurs via email, where we jot off a task that someone else needs to do from now on, and the use of email to delegate has only become more common in the pandemic work-from-home environment where in-person hand-offs often can’t happen anymore. Yet Newport suggests that ultimately, email is not a good way to delegate tasks. The key issue is that when we delegate via email, we tend to do it too briefly to delegate effectively in the first place, with too much temptation to opt for the easy temporary relief (quickly forwarding a message and saying “look into this and get back to me!”), instead of taking the time to really delegate properly. Which not only may result in delegated tasks that don’t get done correctly, but can increase the stress for the recipient who isn’t certain what to do with the delegated task (or ends out in time-consuming back-and-forth emails to clarify, which eliminates any time savings anyway). So what’s the alternative? Newport suggests instead to adopt task board software like Trello or Asana or Microsoft Flow, clarify the relevant tasks to be delegated as standalone cards on the task board, and then clearly assign who will be responsible for what. An additional benefit of the task-board-based approach is that it gets easier to see how much has been delegated, to better understand the recipient’s overall capacity and how much is being piled upon them. For those who prefer to remain in some form of email mode, Newport suggests at least using a ticketing system like FreshDesk, which again makes it easier to append notes and track the work being done to both delegate more effectively and understand how much is being delegated to avoid overwhelm. The key point, though, is simply that forwarding an email to delegate has “too little friction”, making it too easy to delegate poorly, so creating a rule of “no email by delegation” helps to ensure that the delegator takes the time necessary to really delegate properly.

Your To-Do List Is, In Fact, Too Long (Peter Bregman, Harvard Business Review) – It’s a common frustration for most of us that there’s always more things to do on the to-do list than we can get done… a phenomenon that seems to have only gotten worse as technology makes it easier and easier to capture everything we’re thinking of into lengthy to-do lists. The temptation when we can’t get through everything is just to try to ‘work harder’ and do more, beat ourselves up for failing to do so, or try to leverage technology to make ourselves ‘more efficient’ to get through more of the list faster. Yet in practice, we can still only get ‘so much’ done, and trying to get through an unmanageable number of to-dos just ignores the reality that it’s an unmanageable number of to-dos! So what’s the alternative? Bregman suggests to still start by making that comprehensive list of all the to-dos you can think of… but then take out a clean sheet of paper, write down the one thing you must accomplish… and then put away the long list until that one thing is done… and then once it is, pull the big list back out, pick the next most important thing to be the one thing, can do nothing until that gets done, too. In other words, the key to recognize is that your master to-do list isn’t a working list of what to do, it’s simply a memory list of all the things you might be working on. So separate out the long memory list from the short one-item working task – because in reality, we can only ever get one thing done at a time anyway – and then be strategic about what one thing from the memory list really needs to be worked on at any particular time!

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.