Weekend Reading for Financial Planners (Feb 27-28)

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.

After Growing To Near $100B In Custody, Apex Clearing Strikes SPAC IPO Deal To Disrupt Existing RIA Custody (Oisin Breen, RIABiz) – Apex Clearing was founded as a spin-off from the prior bankruptcy of Penson Worldwide, a broker-dealer that had succumbed to the impact of ultra-low interest rates in the aftermath of the financial crisis, with a tech-first approach to providing back-end clearing services that powered many of the early robo-advisors, including Wealthfront and Robinhood. Apex’s success and its reputation for strong digital chops, in turn, made it the platform-of-choice for a wide range of robo- and similar tech-based investment platforms for consumers, but the firm has struggled to gain traction amidst the RIA community, in part because it is so tech-centric, and the typical RIA doesn’t have its own developers to build their own overlay on top of Apex (as would the typical venture-funded startup). Yet in recent years, Apex has been making more moves towards serving ‘traditional’ RIAs, building out a more out-of-the-box front end for RIAs called Apex Extend, and hiring former Morningstar Chief Product Officer Tricia Rothschild last year. And now, Apex is “going public”, attaching itself to a SPAC that will ultimately bring Apex as much as $850M in cash to invest into its future… which is anticipated to be allocated heavily towards competing for traditional RIAs against the likes of Schwabitrade, Fidelity, and Pershing. In fact, in its filing documents for going public, Apex revealed that it has already grown to nearly $100B in custody assets – up from just $30B in late 2017 – though the growth appears to have been driven primarily by Apex’s capabilities in serving “robo” platforms and by offering cryptocurrency accounts. Which itself was a ‘surprise’ after Apex lost its deal with Robinhood in a high-profile switch back in 2018 (when it “in-sourced” its clearing, after Wealthfront made a similar change in 2017). Still, though, Apex appears to be increasingly staking its future with the more ‘stable’ market of independent RIAs, and with an $850M war chest of cash, will certainly have the financial capabilities to do so. The only question now is whether it will be able to execute successfully to win over service-demand-intensive RIAs?

State Regulators Probing Whether Investors Get Money’s Worth From Advisors’ [Subscription] Fees (Mark Schoeff, Investment News) – In recent years, the monthly subscription fee model for financial planning has become increasingly popular, which, alongside hourly, project, and other fee-for-service models, has created growing questions amongst the financial advisor community about the future of the AUM model. The growth of the model has also caught the attention of regulators – particularly state regulators, since subscription-fee-based advisory firms don’t necessarily manage assets and therefore are more likely to fall below the $100M AUM threshold for SEC registration – who are beginning to scrutinize whether consumers who are being charged monthly subscription fees are receiving commensurate (e.g., monthly) service, and have indicated that they are working on regulatory guidance for state regulators about how to oversee the new model. Yet as consumer advocacy groups like the Consumer Federation of America note, the question of whether consumers are receiving services commensurate with the fees they’re paying isn’t unique to the monthly subscription model, as there are also AUM-based firms that charge quarterly advisory fees without necessarily meeting with or making trades for clients on a quarterly basis. In fact, the irony is that in practice, subscription fee models typically result in clients paying a lower hourly rate equivalent for the advisor’s time than the AUM model (with investment-centric AUM advisors averaging an hourly equivalent of $368/hour for the time they spend doing investment management and meeting with clients, and top-decile advisors averaging $961/hour for their AUM fees). Which means the state regulators’ sweep of what services advisors provide for their fees may ultimately extend beyond just subscription fees to AUM fees as well. Though ultimately, the key issue remains the same across the board: regulators expect that fees be reasonable related to the services provided… and the services have to actually be provided.

Demand For RIA Talent Is Driving Compensation Higher (Jeff Benjamin, Investment News) – According to the latest Schwab RIA Compensation Report, the dearth of talent in the advisory industry is leading to an uptick of advisory firms outright recruiting and poaching the employees of other firms, with a massive 40% of RIA hires having come from other RIAs in the past year (followed by 33% recruiting younger talent instead from colleges and universities, 16% recruiting from banks and trust companies, 12% recruiting from wirehouses, and 10% trying to attract talent from independent broker-dealers). In turn, the demand for talent – and the shortage of supply – is causing RIA employee compensation to outpace general wage inflation (with cash compensation overall up 4% in advisory firms from 2018 to 2019, as compared to only 2.9% over the same time period for wages nationally), though the biggest bump came from senior relationship managers (whose median cash compensation was a whopping $240,000, up 19% over 2018), followed by operations managers (whose compensation was up 18% to $113,000 in 2019). Other notable highlights from the Schwab study included: base salary represents an average of 81% of total compensation for advisory firm employees (but an average of only 70% for revenue-generating roles); 77% of firms compensate staff with performance-based incentive pay; using equity ownership as a component of compensation is on the rise for mid-sized RIAs (up to 33% from 29% for firms with $250M to $500M, and up to 27% from 22% for those with $500M to $1B); and other perks like health insurance are also on the rise (with 99% of firms with more than $1B of AUM offering, but now also including 40% of firms with <$100M of AUM).

Larger RIAs Forging Career Paths For Client Service & Operations Staff (Diana Britton, Wealth Management) – While most of the industry has focused on the growing levels of advisor compensation revealed in the recent Schwab RIA Compensation Report, it’s notable that the demand for talent isn’t only an issue for advisor roles themselves. Instead, the research also shows an emergence of career tracks for those who don’t want advisory (or at least, business-development-dependent advisory) roles, including “client service” pathways that may start with a Client Service Associate who moves up to a Client Relationship Manager and then a Senior Relationship Manager (found in 42% of firms under $250M of AUM and 82% of firms over $1B in AUM), and Operations roles that grow from Operations Associate to Operations Manager to a Chief Operating Officer (found in 13% of firms with under $250M of AUM and 64% of firms with $1B+ in AUM). In turn, firms are building out the steps it takes for employees to move up through those tiers, including training and certifications, and the skill sets that must be learned and mastered to move up the line. Which is especially important as advisory firms increasingly struggle to find talent, as those that can develop their own career paths are ultimately able to hire younger (and less expensive) talent and train them internally, rather than being forced to make the highest bid for already-established talent in a hyper-competitive marketplace.

Not Just Giving Equity Away (Carolyn Armitage, Financial Advisor) – There are few things that create more buy-in to a firm than to literally have a piece of ownership in it, and as the war for advisor talent heats up, so too is the interest in giving employees a piece of the pie in the form of equity ownership participation. But as Armitage notes, “sharing” in the equity doesn’t mean literally giving it away; in fact, one of the things that makes equity ownership so powerful is the dynamic of risk, where having something at stake is a key aspect of what makes us so invested in seeing it through. In fact, paying for something often itself creates a whole other level of buy-in, from buying a home over renting it, or buying a car over leasing it, which means while giving employees a chance to participate in the firm’s equity doesn’t mean selling it for a ‘premium’ value – as often the whole goal of sharing equity more broadly is to create more buy-in for the team to want to help grow the firm (and their own share value) – asking employees to buy and pay a ‘reasonable’ price for the shares is an important part of the buy-in process. In addition, Armitage also notes that equity becoming a bigger component of compensation in advisory firms doesn’t necessarily mean facilitating a full internal succession plan, and consequently doesn’t forgo the possibility of still selling to an outside buyer in the future; in fact, employees may actually be even more excited to build the firm’s value and see it sold to an external buyer for top dollar when they’re actually participating in the financial rewards as well!

4 Ways To Give Clients A Wow Experience (Jon Henschen, ThinkAdvisor) – While providing clients good client service is important and valuable, the reality is that, in practice, it’s often just the “table stakes” that firms have to do in order to be competitive in the first place. In order to differentiate, it’s necessary to go beyond just good service to the level of “Wow” experiences – those that are unanticipated, above and beyond, and involve actions that resonate on a personal basis with clients (and thus are usually unique to each client). To fuel ideas for advisors, Janus actually partnered with client experience expert Joseph Michelli and author John Evans to create “The Book Of Wow“, which shares a wide range of “Wow” experiences that real advisory firms have created for their clients. Some notable examples include: getting to know clients’ passions, hobbies, charitable concerns, sports interests, etc., and trying to craft personalized gifts or planned activities that will connect with them on their passions (e.g., a baseball outing to see the client’s favorite team); taking a strong focus on what is not actually meaningful and “Wow”-ing to clients, and reallocating those resources towards what has more meaningful impact itself (e.g., stop printing and mailing quarterly reports that clients aren’t reading anyway, and instead curate one book every quarter that might be of interest to the client instead); and because it’s so time- and service-intensive to create “Wow” experiences, get focused on the 50 great clients that the firm can best serve and give Wow experiences to (who, in practice, under the 80/20 rule are probably driving the bulk of the firm’s profitability anyway!).

The First Four Contact Points That Make Or Break Your Service (Brett Davidson, FP Advance) – The Ritz Carlton hotel chain is legendary for its excellent service, but Ritz co-founder Horst Schulze notes in his book “Excellence Wins” that, in practice, the biggest driver of positive outcomes is that if the customer’s first four points of contact go well (in the case of a hotel, the phone reservation clerk, the doorman, the bellman, and the front desk), there are virtually never any complaints thereafter (while an early bad impression tends to sprout more complaints that follow). Accordingly, Davidson explores how the same “first four contact points” model could be applied in the context of an advisory firm: 1) the Reservations Department, which for an advisory firm is the process by which clients schedule the first meeting (is it a contact form on the website or a convenient Calendly link, how quickly is it responded to, and if the prospect has questions, how quickly can they reach a human being to service the issue?); 2) the Front Desk, which for an advisory firm is the difference between just having something in the front lobby area to direct people when they enter, versus actually knowing who is coming and greeting them with “You must be Mr. and Mrs. Miggins. We’re expecting you. Please take a seat here in reception. Can I get you tea or coffee?”; 3) the Bellman, which in the case of the advisory firm may actually be the first entrance of the advisor themselves, who should not leave prospective or new clients waiting too long in the conference room for them to enter (Davidson suggests 2 minutes, which is enough time for them to get settled, but not so long they feel ignored or forgotten about); and 4) the Guest Experience Manager, which for an advisory firm is about introducing prospective or new clients to the rest of the advisory team for them to get comfortable with as well. The key point, though, is simply that it’s the moments of onboarding that can set the tone for the entire advisor-client relationship, which means it pays to pay extra attention to exactly what that experience is like for a prospective or new client!

Welcome Aboard: The Importance Of Nurturing New Client Relationships (Advisor Voice) – At its core, “onboarding” is simply the process of welcoming new clients to the advisory firm, showcasing the value that the firm will provide, addressing any questions or latent worries they may still have about agreeing to come on board, and also getting to understand more about the new client themselves and what led them to the firm (which can help to inspire new marketing ideas and service offerings in the future). Not to mention that client onboarding is an opportunity to set clear expectations for the future of the advisor-client relationship (recognizing that most unhappiness comes from any gaps between expectations and subsequent reality, so managing expectations is crucial unto itself!). Accordingly, it’s important to recognize that the onboarding process goes far beyond just the practical needs of sending a “welcome packet” and asking new clients to sign the onboarding paperwork. In fact, Zurich’s research of Australian advisors notes that the majority (51%) cite that the onboarding process actually starts with the first appointment while someone is still a prospect – and expectations are already being set – and nearly 2/3rds of advisors subsequently seek feedback from prospects in their first year with the firm (half of those asking more than once in the first year alone). Key additional tips for a good onboarding experience include: recognize that it’s a team effort, not only in the onboarding process itself, but in determining what a good onboarding process should be (i.e., when setting/re-designing the firm’s onboarding process, include all internal stakeholders in the re-design in the first place!); a key part of onboarding is not just making the process good, but making it different in a way that distinguishes the firm from others; get clear on who the ideal client is, to ensure that a good onboarding process is built for that persona (recognizing that it’s impossible to please everyone all of the time, so at least be certain the firm is pleasing the clients that it intends to focus on!); try going through the onboarding process yourself (i.e., put yourself in the client’s shoes), and really see what the experience feels like; don’t forget that packaging does matter (like it or not, we often do judge a book by its cover, which means paying attention to everything from the company website to its front lobby and its stationery); and don’t forget that sustaining a good onboarding experience also means training the team to be able to deliver it consistently.

What Is The Optimal Number Of Clients For A Financial Advisor? (James Pollard, Advisor Coach) – For decades, financial advisors have been celebrated for the size of their advisory firms, from the amount of their Assets Under Management to the sheer number of clients that they serve. Yet as Pollard notes, financial advisors who celebrate having “hundreds” of clients, in reality, are just highlighting how superficial their advisor-client relationships really are, because the truth is that there just isn’t enough time to have meaningful relationships with that many people, and instead signals the advisor is likely just functioning as a mere facilitator or order-taker. In fact, research into brain physiology has shown that the human brain may not even be capable of maintaining more than about 150 real interpersonal relationships (and some of those slots are taken up by our own friends and family!). And economically speaking, the 80/20 rule usually holds – that 80% of an advisory firm’s profits are generated by the top 20% of its clients – which means the advisory firm often isn’t even gaining all that much by having such a huge number of clients over simply focusing on a small subset of them. Accordingly, Pollard suggests that at most, financial advisors should realistically seek out no more than 100 client relationships, and may actually be quite successful working with just 50 great clients (which in turn may mean not even needing to work more than 3-4 days per week, because clients still only need so much service and support as they’re living their own busy lives!). In fact, once advisors simply get clear on their “number”, it becomes possible to begin the transition; after all, if the firm only needs 50 great clients, it can begin to focus on who will stay, who should go and be referred out, what new clients need to be attracted to replace some of those who will be leaving… and the journey to a better work/life balance begins.

Advice Doesn’t Have To Be Complicated To Be Effective (Ben Carlson, A Wealth Of Common Sense) – Despite how long doctors have been around, it was only in the early 20th century that medical schools stopped just accepting anyone who was willing to pay tuition, and there was little known about germs or antibiotics and what actually led to better health outcomes (or not). In fact, despite hundreds of years of medicine emerging as a profession – from the 1500s to the 1800s – it wasn’t until the emergence of antibiotics (starting with penicillin in 1942) that human life expectancy began to materially improve, aided by just a few other major medical breakthroughs that at the time were revolutionary but now seem commonplace, including Dr. John Snow realizing in the 1850s that lives could be saved by keeping sewage out of the water supply, and Dr. Ignaz Semmelweis who realized that the simple act of doctors washing their hands before going from one patient to the next could save lives. Of course, the irony is that even though this research is now known, a recent MIT study still finds that only about 70% of people wash their hands after going to the bathroom (and 50% of those aren’t doing it properly/thoroughly), while just 1-in-5 airport travelers has clean hands… and just bumping that percentage from 20% to 60% would likely slow the spread of disease by nearly 70%. The key point: in the end, the best advice doesn’t necessarily need to be all that complex at all; sometimes, the biggest impact is simply by helping people actually change their behavior to get the “simple” things right.

Having Difficult Conversations: A Skill Every Financial Advisor Needs (Ashley Hunter, XY Planning Network) – “Hey, we need to talk” is for many people one of the scariest phrases in the English language, even though the reality is that we often recognize – at least after the fact – that the hardest conversations are the ones where major breakthroughs often happen. Which means that the best way to deal with difficult conversations is not to avoid them, but to learn how to have them more comfortably (and clearly, and effectively). Of course, the reality is that having another person tell us something that’s difficult to hear often creates an impulse to push back or lash out… for which the greatest anchor is already having a relationship of trust, which makes it more difficult for the recipient hearing the message to just reject or ignore it. In turn, deepening relationship trust with clients is all about listening and making them feel heard, and asking deeper and reflective questions that probe further, while focusing yourself as the advisor on being fully present to hear the client in the first place (and removing any distractions that may be around). Still, though, the reality is that provoking “strong emotions” – from sadness or fear to anger or shame – is still likely when difficult conversations arise, which is why it’s a good idea to actually ask for permission to broach a difficult topic before doing so, and the biggest key in the conversation itself is maintaining control of your own emotions to avoid being pulled further into the situation and escalating the tension further. Ultimately, though, the reality is that difficult conversations are called such for a reason, and in the end, the only way to really get more comfortable is to be willing to practice by having them in the first place.

Why People Pay Us To Tell Them What To Do (Philip Palaveev, Financial Advisor) – When complex problems arise, it pays to gain access to an expert who has the knowledge to help solve the problem, thus leading to solutions from lawyers on demand to the emergency room for health services. Yet as Palaveev notes, there are times where just having access to an expert on demand can be frustrating, because it takes time to explain our own situation and get a professional up to speed on a complex problem… which is not exactly a welcome delay in the moment of need itself. Accordingly, we see the rise of relationship-based experts – from concierge doctors to financial advisors – precisely because some people are willing to pay a ‘premium’ to have access to an expert who already knows them, has learned their entire history, and can more readily address the big challenges when they do arise. Notably, this doesn’t necessarily mean we’re paying that expert to be our “friend” in the relationship; instead, it’s about the expert’s knowledge, insight, and availability. In turn, Palaveev notes that relationship-based services necessitate relationship-based business models, which helps to explain both the popularity of the (ongoing recurring-revenue) AUM model and also the rise of the (ongoing recurring-revenue) subscription model as well. In fact, the rising demand for relationship-based services helps explain both why the AUM model remains so popular (while the more transactional hourly model struggles to make inroads), and also why in practice there has been remarkably little fee compression amongst financial advisors (despite all predictions to the contrary). After all, when someone needs surgery they don’t seek out the cheapest surgeon, nor does anyone want “three for the price of two” root canals; instead, when the stakes are high for problems that are complex, the irony is that clients tend to actually equate price with quality, thus why clients by and large are not complaining about the (AUM or other) fees that they’re paying, either.

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.