Weekend Reading for Financial Planners (October 10-11)

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.

Bank Of America Launches Free Financial Planning Tool For Clients (Jeff Berman, ThinkAdvisor) – Less than 2 months after Charles Schwab made waves in the advisor industry by launching a new “Schwab Plan” solution that allows all Schwab clients to create their own financial plan in a customized version of MoneyGuidePro (for free!), now Bank of America has announced its own free financial planning software solution for clients, dubbed “Life Plan“. Similar to other financial planning software, Life Plan will allow clients to identify their financial and other goals (from retirement to buying a home, budgeting to improving credit), project whether they’re on track to meet their goals, track their ongoing progress towards goals, receive guidance from the software about changes to make to accomplish their goals, and will have the option of connecting with one of Bank of America Merrill Lynch’s financial advisors virtually or in-person for a deeper planning relationship. Notably, though, similar to the Personal Capital approach, BoA’s Life Plan is intended primarily for its clients not already working with a BoA or Merrill Lynch financial advisor, and instead appears to be an initial form of planning engagement for self-directed clients that may lead them to the firm’s financial advisors if/when they want more help and advice.

The End Of An Era… And TD Ameritrade (Jessica Mathews, Financial Planning) – After a nearly year-long process, this week the Schwab-TD Ameritrade (or “Schwabitrade”) deal finally closed, ending a multi-decade run for the discount broker and consolidating the #3 RIA custodian into what was already the largest, and now even-larger, competitor. In fact, Schwab’s newly combined RIA custody business will now have more than $2 trillion in collective RIA assets. Yet as the deal itself closes, the merger integration process is only just beginning, with estimates that it will take 18 – 36 months to do the actual heavy lifting of integration. Still, though, the initial wave of changes is being felt immediately, as more than half a dozen senior executives from TD Ameritrade – including now-former RIA custodial chief Tom Nally – were let go, and the popular TD Ameritrade LINC national conference for 2021 was canceled (with attendees encouraged to attend the upcoming virtual Schwab IMPACT event instead). The real question for most existing TD Ameritrade advisors, though, is how the transition itself will work, and what will (or won’t) survive the merger from an operations and systems perspective. In his initial comments at the final closing announcement this week, Schwab’s head of Advisor Services, Bernie Clark, indicated that Schwab plans to build the “next edition” of its platform that will be a single unified offering of Schwab and TD Ameritrade… but with Schwab’s Advisor Center at its core, and selectively retaining key TD Ameritrade systems like iRebal. In addition, the Schwab and TD Ameritrade branch referral networks are also expected to be consolidated, but with question marks about which branches of each will survive (given that Schwab and TD Ameritrade often had local retail branches near each other in competitive markets, many of which will now be redundant). Still, though, Schwab continues to pledge to use its size to its advantage for RIAs, insisting that its current economies of scale will allow it to continue to support “every size advisors” without any platform minimums, though it may still be more than a year that Schwab and TD Ameritrade platforms continue to operate entirely separately and as-is before it’s truly time for systems integration.

Goldman Sachs Lifts Two Superstar RIA Recruiters, Tipping Hand On Big 2021 Launch Into RIA Custody (Oisin Breen, RIABiz) – Earlier this year, Goldman Sachs made waves when it acquired Folio Financial, which included its Folio Institutional RIA custodial platform that never accumulated significant size and scale (with fewer than 500 RIAs on the platform) but was known as an early innovator in everything from digital onboarding to the use of fractional shares (though it was also criticized for the use of trading windows and limited support for trading beyond just equities and mutual funds). And now this month, it was revealed that Goldman Sachs was hiring former RIA custody directors from Schwab and Pershing, in what appears to be a phase of gearing up for a new RIA custody offering from Goldman Sachs to compete in the marketplace just as Schwab closes its acquisition of TD Ameritrade and eliminates a competitor. The question, though, is where exactly Goldman Sachs will focus its new custody business, which may not necessarily be in the small-to-mid-sized market where TD Ameritrade previously competed, but instead, may be focusing “upmarket” on the breakaway broker movement from wirehouses where the Goldman Sachs brand carries significant cachet. Still, though, a new RIA custody offering would bring a significant (and arguably beneficial to the RIA community) new competitor that may help to prevent an increasingly consolidated oligopoly of RIA custodians (with Schwab and Fidelity combined controlling an estimated 80%+ of the entire RIA custody marketplace) from becoming too complacent.

Morgan Stanley To Purchase Eaton Vance For $7B As Direct Indexing And ESG Heat Up (Brian Chappatta, Advisor Perspectives) – It’s not news that the mutual fund industry is under intense pressure, facing net outflows, and in search of consolidation and economies of scale, but it was still head-turning news this week when Morgan Stanley announced that it was buying fund manager Eaton Vance for about $7B (and a 38% premium over Eaton Vance’s closing price on Wednesday). With its $500B of AUM, the Eaton Vance acquisition pushes Morgan Stanley’s core asset management business over $1 trillion of AUM and follows on the heels of other major mutual fund acquisitions (including Franklin Resources buying Legg Mason, and Investor acquiring Oppenheimer, both earlier this year). The real news, though, is that more than half of Eaton Vance’s assets are actually in Parametric overlay services or custom portfolios, where Parametric was an early leader in so-called “Direct Indexing” strategies going back to the 1990s (now known as its Custom Core offering), and also has an active customized-indexing offering that allows investors to adapt their portfolios to specific ESG (environmental, social, and governance) filters. Which means, in practice, Morgan Stanley didn’t ‘just’ acquire a traditional mutual fund manager that may be distributed through its nearly 15,000 advisors – though vertically integrated asset management has always been a component of the wirehouse model – but that Morgan Stanley will now be well-positioned to offer direct indexing and customized ESG solutions directly to its ultra-HNW clients as investment management continues its evolution.

ESG Offerings Boost Referrals For Financial Advisors (Jessica Mathews, Financial Planning) – According to a new report from J.D. Power Research, 76% of clients who say their firm ranks well with ESG state that they “definitely will” recommend their firm to friends and family… whereas amongst firms that don’t rate highly on social causes, only 32% of clients stated that they would provide a referral. Notably, relative to the overall marketplace, ESG has still maintained ‘only’ a fairly narrow niche, with growing flows of $10.4B into sustainable investing mutual funds in the second quarter (which is nearly double the pace from 2019), though that’s against a tide of $137B that flowed out of stock mutual funds overall in Q2. Yet while the breadth of interest in ESG is still limited, the J.D. Power research suggests that for clients where ESG investing does matter, it really matters, and it can quickly turn clients into strong advocates for the firm… an interest that seems to have heightened further in recent years, and perhaps further accelerated by the pandemic and a tough year for the adverse impact of climate change.

Stock Investors Are Younger And More Racially Diverse (Aaron Brown, Bloomberg) – In recent years, the growth of new zero-commission direct-to-consumer investment apps like Robinhood and Acorns has raised significant concerns about the investing risks being introduced to the next generation of investors. But a recent Yahoo Finance/Harris poll found that their availability is quickly having a dramatic impact on the racial and age gaps in individual stock ownership. In fact, the data shows that while in 2016 almost 20% of white households owned individual stocks compared to fewer than 5% of Black or Latino households, in just 4 years the participation of the latter groups has jumped to almost 12% each, effectively cutting the racial gap of those participating in stock investing in half. Similarly, the data shows that younger Americans are now more likely to own stocks than those in their prime (middle-aged asset accumulation years). Ultimately, though, the significance of this isn’t ‘just’ that trading apps may be having a real impact in encouraging young people to invest more and earlier in equities, and closing the racial wealth gap. It’s also that a more diverse base of stock investors can also influence capital flows, shareholder voting, and ultimately the behavior of the corporates that they invest in, while also tying more of the public’s fortunes more directly to the path of the stock market. On the other hand, the recent poll does raise some concerns as well… in particular, that a whopping 43% of retail investors are trading with leverage (thanks also to the ease such investing apps have created for buying stocks on margin), which could result in a significant sentiment shift against the markets if a sustained bear market wipes those young leveraged investors out completely in an ill-timed margin call.

How Do You Scale Special? (Stephanie Bogan, Financial Advisor) – For many financial advisors, the very concept of “systematizing” and standardizing their financial planning experience flies in the face of the individual attention and client-specific customization that makes financial planning special and each client’s plan unique. Yet Bogan suggests that, in the end, the reality is that the core services of financial planning – from discovery to analysis and recommendations, balance sheets and portfolio allocations, retirement projections and withdrawal strategies – really are substantively similar for almost every advisor and firm. In other words, personalized customized financial planning itself isn’t actually all that special and unique anymore, and doing the process differently for every client just reduces its efficiency in the process. Instead, the key to differentiation is to actually create a process that is meaningfully different from what others already provide – with unique touchpoints that will be compelling to the particular target clientele that you serve – and then systematizing the firm’s unique process to help ensure that it can provide its unique offering on a consistent and scalable basis. For instance, one advisor went from the typical broad-based generalist who creates a unique plan for each client into a specialization of working with optometrists, where he established a clearly defined service model that fit their needs, developed expertise that would help them better manage their optometry practices, refined his data-gathering process to be specific to the optometrists he was serving, and then structured his meetings to fit into the optometrist’s appointment style… and in the process, doubled his practice in 15 minutes (and in 3 years, nearly doubled again). Or stated more simply, the key to scaling special is not about doing something different and unique for every client, but instead doing something different and unique for a particular type of clientele, and then systematizing that unique offering to scalably serve as many of those particular clients as possible.

How Do You Create Client Intimacy Without Proximity? (Bill Kanarick, EY) – For a relationship-driven business like financial planning, one of the biggest challenges of the pandemic outbreak has been figuring out how to maintain intimate client relationships in a virtual world. As while Zoom and similar video-conferencing platforms facilitate virtual communication, for many, the level of connection and intimacy still isn’t the same as sitting face-to-face for an in-person meeting. The end result is that consumers – both those using financial services and across the spectrum of industries – are unhappy with their current customer experiences, as even though last year 90% of customers said brands were failing to meet their experience expectations (and that was before the pandemic!). Yet the irony is that the pandemic itself has been so disruptive that even previously high-touch firms have had to reinvent themselves along with everyone else, effectively resetting the playing field and allowing anyone and everyone to have a fresh chance to compete on intimacy and connection. The key, according to EY, is that it’s all about turning customer data into a more personalized journey and experience for them, with one study showing that more than 2/3rds of Americans are willing to share their personal data to have a more customized experience (as long as companies are transparent about their data collection practices and commit to data privacy regarding the information that is collected). Unfortunately, though, the challenge is that most companies – in a wide range of industries, including financial advisory firms – struggle to link all of their data together in a way that makes it actionable and can facilitate automation. The starting point, though, is simply to think every step of the process through from the client’s perspective and try to identify the areas that can best connect with clients about whatever would be on their minds at that moment, and provide them with the information they need to know that everything is OK and on track.

Why The All-Virtual World Won’t Work (Philip Palaveev, Financial Advisor) – If you think of the most emotional moments of your life where you were deeply connected to another human being – whether laughing or crying, in joy or in sadness – the memories that arise are almost certainly in-person human-to-human connections, not virtual on-screen conversations. As while the transition to the digital world in the midst of the pandemic has shown that we can “get the work done” remotely and via screenshare and video call, it doesn’t necessarily result in the same level of intimacy and personal – and emotional – connection. In fact, not only is it often a struggle to gain the same level of non-verbal cues from a virtual meeting as an in-person one, but one study found that so-called ‘Zoom fatigue’ is caused at least in part by our brains constantly searching and scanning for the missing non-verbal cues and other information we can’t get as well in a virtual meeting. And another study found that people who shake hands with others are found to be more open and honest. Accordingly, Palaveev suggests that the amount of work that can be done virtually helps to highlight all the tasks that may someday be automated away altogether, and that asking the question about why we might still want to meet with clients in-person, face-to-face, helps to highlight what is truly unique and different about having a relationship with a human financial advisor. Thus, while many view financial advice as a market-based relationship – we sell advice services, and consumers buy them – Palaveev suggests that a better model is to view the advisor-client relationship as a form of ‘communal sharing’ (akin to how we relate to family, local community members, or a close-knit team), where intimacy is a key part of the equation, and while we can form some emotional connections online, it’s still not the same as in-person human relationship intimacy.

Being Smart Is Not Enough: On Geniuses And Butterflies (Shane Parrish, Farnam Street) – When it comes to business innovation, it’s not enough to have a great idea; for it to be successful, the idea has to be shared, promoted, and bought into across the entire organization. Yet in practice, Parrish notes that most businesses focus far more on the creators of these great ideas (the so-called “geniuses”), and not enough on the “butterflies” that actually propagate the ideas into action. Which is important, because it means that not only do the ‘smarts’ of geniuses matter in the hiring process and the building of teams, but also the social skills of the butterflies that help ideas get disseminated. In his book “The Secret Of Our Success: How Culture Is Driving Human Evolution“, author Joseph Henrich highlights how it’s really the cultural infrastructure of an organization to share, teach, and learn (not just ideate) that actually determines success; after all, if an organization has a strong enough social culture, it actually takes very few geniuses to create new ideas, and they can still propagate quickly and be adopted by all (while a gaggle of geniuses walled off from each other may have to reinvent the same idea over and over again just to spread it to everyone!). In the end, this doesn’t mean that ‘smarts’ don’t matter and that a business doesn’t need some people to innovate. But when the social fabric is strong and there are many butterflies in the business as well, it’s far easier for the few ideas that matter to get around much more quickly and have a real positive impact.

We Learn Faster When We Aren’t Told What Choices To Make (Michele Solis, Scientific American) – In a perfect world, we would learn from every experience, whether a success or a failure. Yet in practice, we don’t always draw the same lessons, often due to some well-known biases, including a positivity bias (we weigh rewards more heavily than punishments) and a confirmation bias (we better take to heart the outcomes that confirm what we thought was true in the first place and discount the outcomes that would prove us wrong). But a recent study finds an even more fundamental bias to how we learn (or not) from our experiences: whether we were in control of the choice that led to the outcome in the first place. Specifically, the researchers gave study participants a series of scenarios with gains for positive outcomes and pain for negative outcomes, and either let people make the choices that determined the outcome or instead ‘informed’ them of the suggested decision for them to implement. The results showed that with ‘forced choice’ scenarios, participants were more objective in taking in the results… but less likely to actually learn from them. By contrast, when the choice was within the participant’s control, the positivity bias was actually more present… but also helped to adapt behavior and learning more quickly in the process. In other words, while our brains do exhibit certain biases, our brains also appear to be hard-wired to learn more effectively from those biases, which may not always produce the ‘right’ outcome (given the nature of biases), but researchers found does tend to produce faster and more stable learning that can manage a wider range of conditions that we may face in our environment. From a practical perspective, though, the key insight is simply to recognize that if you want someone to learn something, it’s not enough to just guide them through the motions – steering them towards the ‘right’ choice and letting them experience the outcome – but instead empowering them to make the decision themselves and then getting out of the way, which both contributes to the learning process and makes it more likely for them to actually adapt their future behavior based on the learned outcome!

On Being A ‘Noob’ (Paul Graham) – In the gaming world, being a “noob” is shorthand for being a “newbie”, someone who is relatively inexperienced or otherwise lacking knowledge or familiarity. In a social context, feeling like a “noob” is an unpleasant feeling, one of being ‘low status’ and feeling challenged about an awkward and unfamiliar situation at best, or outright feeling “stupid” and belittled at worst. As a result, our brains often try to steer us in the direction of the familiar and the comfortable, where we already have expertise and confidence, where we can feel high-status and knowledgeable and not feel like a “noob”. Yet as Graham notes, there are really two different situations in which the feeling of being a noob can arise… when we just actually aren’t knowledgeable about something, and when we’re doing something novel (where we may just not be knowledgeable… yet). Which means our brains are effectively conditioned to not put ourselves in situations of newness… which in turn can limit our new learning, our new experiences, and our new opportunities, from journeying to a new destination to moving to a new place to live, to venturing into a new line of work or a new business opportunity. Which means that perpetually avoiding those feelings of ‘noobness’ may feel more comfortable… but also can become more limiting of our future opportunities. Accordingly, Graham suggests that in the end, it’s important to embrace the reality that sometimes you will feel like a noob… because in the end, it’s the only way we ever learn and find new and better opportunities.

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.