Weekend Reading for Financial Planners (May 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.

Altruist’s $50M Series B Raises Eyebrows… And Questions (Sam Steinberger, Wealth Management) – This week, ‘upstart’ RIA custodian Altruist announced a massive new $50M Series B investment round from a combination of venture capital investors and asset manager Vanguard, stating that with its accelerating growth, it is aiming to overtake Pershing as the #3 custodian for independent RIAs (behind only Schwabitrade and Fidelity). However, the company has not yet provided details of its actual growth rate of advisors and assets on the platform, raising questions of whether Altruist can overcome what is still a challenging pitch to get existing RIAs to go through the process of “re-papering” and switching custodians. At the same time, though, the large infusion of additional growth capital, including and especially from Vanguard, suggests that even Vanguard sees an opportunity for a new RIA custodial competitor (and that Altruist can become that competitor). On the other hand, back in February, Altruist announced that it was launching a new model marketplace to include Dimensional Fund Advisors (DFA) and Vanguard funds… raising the question of whether Vanguard really sees Altruist as a new RIA custodian, or simply another marketplace for Vanguard to distribute its own mutual funds and ETFs? And given that Altruist itself is actually built on top of Apex Clearing (which provides the actual custody and clearing services), some are suggesting that Altruist is functionally more akin to a digitally savvy platform TAMP that runs on top of a(nother) RIA custodian. Notwithstanding the troubles with categorization, though, Altruist’s new round of capital will give it a very significant runway to continue to reinvest and add more capabilities, and the firm has already been expanding its team with RIA custodial heavyweights (including most notably, former TD Ameritrade national managing director Pete Dorsey)… so whatever Altruist is, expect to see it even more visibly aiming to compete with other RIA custodians in the months and years to come.

2021 Charles Schwab Modern Wealth Survey (Charles Schwab) — This week, Charles Schwab announced the results of its annual Modern Wealth Survey, with this year’s report revealing Americans’ changing priorities around spending, saving, and mental health, in the aftermath of the pandemic. As background, Schwab’s survey is a mass-market survey with respondents having a median income of $55k and median investable assets of $37.5k. The more interesting findings revolved around what people think it takes to be wealthy and financially secure, shifting consumer priorities, and attitudes and behaviors surrounding financial planning. In particular, the latest survey indicates that Americans dramatically lowered the bar for what defines “wealthy” and what it takes to achieve financial security compared to pre-pandemic levels, with the net worth required to be considered “wealthy” at $1.9 million in 2021 as compared to $2.6 million in 2020, a 27% decrease. The net worth deemed necessary for “financial happiness” dropped from $1.75 million to $1.1 million, and the perceived net worth to achieve “financial comfort” decreased from $934,000 to $624,000. More generally, the results showed that more than two-thirds of consumers have re-prioritized what matters most to them, suggesting an opportunity not only to engage prospective clients in financial plans for the first time, but that plans should be revisited with existing clients as well. Overall, the Schwab study reports that one-third of investors state that they have a formal written financial plan (bearing in mind that it may very well be something they wrote down on a yellow pad or a computer file about their budget, versus what we may consider a “real” comprehensive financial plan). And the research shows that having a financial plan has a real impact on financial confidence, with 54% of those with a plan reporting that they feel “very confident” about reaching their financial goals, compared to just 18% of those without a plan. (Though notably, the cause and effect are unclear; do those who create financial plans feel more confident and driven to create them, or does the creation of the plan itself actually instill newfound financial confidence?) Either way, though, those with plans demonstrate healthier saving and investing habits, with 87% of investors who plan regularly rebalancing their portfolios, while only 63% of non-planners do; similarly, 80% of investors who plan consider risk tolerance when investing, versus 51% of non-planners. As to why a large swath of investors didn’t have a formal plan, 42% of the 67% who do not plan feel that they don’t have enough money to need a plan, and 22% perceive planning as too complicated, while only 16% reported that they think the issue is that planning is too expensive), suggesting that the biggest barrier to get consumers to adopt financial planning is not the cost, but the belief that you have to already have assets and be wealthy to ‘need’ a financial plan in the first place?

New Study Suggests New Keys To Attract Younger Clients (Jessica Mathews, Financial Planning) – With the ongoing aging of the Baby Boomer generation, there is a growing focus on advisory firms shifting to serve “younger” (i.e., Gen X and Gen Y) clientele. Except because next-generation clients come to the financial services industry with their own needs and their own context (coming of age not in the 1980s and 1990s when the stock market boomed, but the 2000s and 2010s when it has been especially volatile and economically challenging), a new generation of clients has a new generation of preferences. A recent consumer study from T. Rowe Price highlights a number of key distinctions, including: next-generation clients are unfamiliar with and especially turned off by industry jargon, and may not even feel comfortable pointing it out, so watch out for labels from “asset allocation” to “risk management” and even “holistic” (which means very different things to different people!); next-generation clients are still most likely to find an advisor through a referral, but are significantly (almost 3X) more likely to leverage online search or look at online reviews, and almost 10X more likely to look at advertisements to find new providers; next-generation clients are, not surprisingly, most focused on the financial issues that impact them at their current stage of life, which means more about savings for a child’s education or to purchase a house, rather than issues like estate planning; next-generation clients say they want someone who will not just tell them what to do, but motivate them and help them take methodical steps to get there (which means coaching and a structured ongoing meeting cadence and client service calendar matter more than just moment-in-time advice); and next-generation clients are substantially more open to “alternative” pricing, as traditional clients prefer AUM pricing 55% to 9%, but next-generation clients prefer flat fee/subscription pricing over AUM 36% to 33%.

To Raise Your Valuation, Simplify Your Business (Scott Hanson, Investment News) – As advisory firms try to grow and attract clients, it is common to make a number of exceptions for clients over the years who have unique and particular needs that may not fit the firm’s “standard” approach. Which is appealing in that being able to accommodate such clients is often the make-or-break to get them as clients in the first place (and the revenue they bring to the firm). Yet writ large across the entire enterprise, a large number of “exception” clients can increase revenue but may not increase the valuation of the business. After all, a wide range of client accommodations can substantively increase the amount of paperwork and “special processes” the firm must implement to keep it all in good order – especially in the investment realm for firms that engage in private placements and similar non-market-traded investments – which outright increases costs and reduces the profitability of the firm. In addition, such client variability can also make the firm less appealing to prospective buyers… after all, if the current owner and potential seller doesn’t want to take the time to ‘clean up’ and simplify the business, the buyer has the responsibility to do so. Which means that while the firm might fear that making changes to the process could cause them to “lose” some clients who liked their accommodations, the risk that not all clients will transition to a more standardized structure means the buyer is not willing to pay as much to acquire the firm because of the retention risk either. The key point, though, is simply that “more revenue at any cost” may be appealing during the early growth stages of a firm, but in the long run can impair the valuation, and firm owners who don’t want to do the “clean-up” it takes to simplify the firm’s offering and processes will risk getting a lower valuation from a buyer that recognizes they’re going to have to do it themselves anyway.

Navigating The Blurring Lines Between M&A And Recruiting (Larry Roth & Jeff Nash, Investment News) – In the past, independent advisors might change platforms (e.g., RIA custodians or independent broker-dealers) once or several times over their careers, until eventually, they were ready to sell and exit their firm and then the successor might, in turn, make new decisions about what direction to build the firm and how to affiliate it amongst the various platforms in the marketplace. However, as advisory firms continue to grow – to the point that some large firms now offer TAMP or other platform services to other advisors (from RIA aggregators to super-OSJs) – the reality is that in today’s environment, the decisions of when to merge or sell and when to switch platforms (or be recruited from one platform to another) are beginning to blend together. After all, in some cases, the recruiting packages to join or switch platforms can be akin to a “liquidity event” for an advisory firm itself, and the growing phenomenon of “tuck-ins” means advisors can often ‘sell’ and harvest the value of their equity and continue to be employed as an advisor and serve clients for many years thereafter (or even roll in a portion of their equity to the new enterprise and participate in the next stage of equity growth as well!). Of course, in many cases independent advisors want to be and remain independent – thus why they chose the channel in the first place – but with an ever-widening range of options to affiliate, there is arguably more choice than ever about how, exactly, an advisor wishes to monetize their practice in the long run.

How To Clarify Your Marketing So Your Ideal Clients Will Listen (Emily Campbell, XY Planning Network) – The traditional approach to marketing is all about trying to get a prospect to pay attention, at least for a moment, to the products or services that the business offers, in the hopes of enticing them to explore further. Yet when it comes to solutions like financial planning, in particular, the reality is that the client doesn’t buy “the Financial Plan”, per se, but instead how the financial plan and its recommendations will change their lives and their journey. Accordingly, the process of selling the value of financial planning is arguably more akin to helping the prospect see themselves as going through a story of transformation with the advisory firm… one that the firm can actually market in advance, using Donald Miller’s “Building a StoryBrand” as a template to do so. Or, as Miller puts it, prospects “want to know where you can take them. Unless you clearly identify that you offer something they want, it’s unlikely they will listen” and “if you confuse, you lose”. At its core, then, Miller’s StoryBrand is all about crafting a “story” where the prospect is the hero in a journey that they will go through by engaging the services of the firm. Accordingly, firms can incorporate the storytelling process to highlight their value by introducing a Character looking for something (the ideal prospect who wants “help to spend more time living and less time working”) and identifying the Problem they have (e.g., “If I am going to seek financial advice, I deserve an advisor who will listen to my goals and not try to sell me anything”). The Character then meets a Guide (the financial advisor, who can be positioned as the authority to solve that problem), who gives the client a Plan (which is a generic label in Miller’s framework, referring not to the Financial Plan but the plan of how the firm will help, such as stating “as a fiduciary, we’ll always provide honest advice, and you can leave with all your assets at any time”), calls the client to Action (if you don’t invite prospects to take a journey with you, they won’t!), and ultimately helps them Avoid Failure (e.g., “Don’t postpone your retirement. You’ve worked too hard for too long to not enjoy time with your family!”), allowing the story to End in Success (i.e., telling the prospect what their life will look like after they engage with you and your services). Ultimately, though, the point of Miller’s StoryBrand is simply to recognize that the key to explaining the value of financial planning is to explain how the Client will be transformed in the journey of going through the financial planning process.

Digital Storytelling: Bring Your Stories To Life Online (Maribeth Kuzmeski, Red Zone Marketing) – Most stories that we read come from books, but the reality is that the digital world has not only turned “books” from a physical paper print into a potential digital document, but allows for a much richer multi-media environment through which stories can be told. Which isn’t an entirely new phenomenon – as storytelling has also long existed in an audio (e.g., radio) format, as well as visual (e.g., movies and television). Still, though, the internet has made it possible for anyone and everyone to be a storyteller, and even to craft their own digital multi-media storytelling experience. For instance, Kuzmeski highlights how she has begun to take some of her blog posts and turn them into “digital stories”, that may run from 30 seconds to 2 minutes. The starting point is to simply write out the key points that will be made – a “storyboard”, that may include some key statements to be made (or questions to be answered), and ideas of images that might accompany the point. Once the key points are made, practice talking through them in sequence (which will form the voiceover narrative), and then use tools like Wibbitz to easily record and weave it all together. The key point, though, is that video allows for a unique format to connect with clients and prospects, and can turn even brief articles or “stories” into very visually compelling content… and tools like Wibbitz mean that “anyone” can do so, even without spending a lot of money on video editors.

It’s A Packaging Issue (Brett Davidson, FP Advance) – In the past, financial advisors primarily sold insurance or investment products, and for better or worse the reality was that prospects could understand the financial advisor’s “value” by the quality of the product that was implemented. As the financial advice business actually transitions to advice as the primary value-add, though, conveying the value of intangible advice itself is far more challenging, such that prospects often revert to the more ‘tangible’ aspects they can see (e.g., the advisor’s website or offices or even how the advisor dresses) to determine if the service is valuable. As a result, Davidson suggests that the key is to (re-)package the advice services that a financial advisor offers as a package of services, to highlight what the advisor will actually do for the prospective client. For instance, the advisor doesn’t just “bring peace of mind” to clients, the advisor provides regular meetings, keeps clients informed, monitors progress towards goals, works with existing advisors, introduces them to new professionals, updates them when tax laws change, explains the ‘noise’ of the financial media, etc. The key to this approach is that explaining “service packages” helps to focus on what the advisor will do and lets the client value those services, rather than just being focused on the cost itself. Of course, the reality is that if the firm serves a wide range of clientele, not one package may work for all prospects, so some customization may still be necessary. Nonetheless, the point remains that if the firm wants to highlight its value, don’t just talk about the expertise you have, but what you’ll actually do and the services that you’ll provide.

Investment Advisers With Under $100M In Assets Are Successful Too! (Max Schatzow, Adviser Counsel) – The big industry buzz this week was an article from Investment News entitled “Advisers, shoot for $100M in AUM before going indie” which suggested that advisors will struggle to be financially successful and overcome the costs of running one’s own business until they have at least $100M of AUM. Yet the reality is that there are currently almost 17,500 state-registered investment advisers (virtually all of which are under $100M of AUM, or they would be SEC-registered), and “only” about 13,500 SEC-registered investment advisers (with more than $100M), which means there are actually more RIAs with under $100M than over (which isn’t exactly a sign of mass failures or struggles!). And in practice, if one simply considers an RIA with “only” $50M of AUM, charging the proverbial 1% AUM fee, it’s not uncommon for a solo RIA to take home as much as 60% to 80% of its revenue (which would amount to $300,000 – $400,000+ of take-home income), or even more for firms that run with a lean number of more affluent clientele (as contrasted with the typical wirehouse advisor who at most is taking home $250,000 – $300,000 of income even at top payout rates). Which means the advisor who is “just” halfway to the $100M mark is actually earning far more than the average income of an advisor across all industry channels! Of course, the reality is that being a solo RIA does entail both the flexibility and burden of making all the decisions, including being responsible for one’s own compliance (and not all independent advisors want to be their own CCO). Which means that the limitation of being a “successful” advisor under $100M isn’t about the economics of the advisory business, but simply a reflection of what the advisor does or doesn’t want to take on and be responsible for themselves in the first place?

Do You Understand Your Client Roster? (David Leo, Advisor Perspectives) – Advisory firms have a strong tendency to “accumulate” clients over time, who may have varied needs and characteristics as the advisor’s marketing and business development strategies, their services and client offerings, and the referrals therefrom, all shift and evolve over time. Which is important because it means the current clientele of the firm may not represent or be the best fit for the current services that the firm is offering, and that from time to time it may be beneficial to do an “audit” of the existing clientele and see which ones really are a good fit or not. In turn, auditing through clients, and comparing them to the firm’s actual goals, allows the advisor to evaluate questions like: does the firm have the right number of clients (instead of just accumulating as many clients as possible, how many clients can/does the firm want to work with?); does the firm have the right quality of clients (i.e., clients who value the services the firm provides, and can pay a fee commensurate with that value, and the cost it takes to deliver that value); are there areas where the firm needs to improve in serving its (ideal) clients, based on any gaps between what quality clients want and are actually getting; which clients need to either have services adjusted down, or fees adjusted upwards, to bring them in line; and which are the ideal clients from whom the firm should be asking for introductions/referrals? The key point, though, is that it’s impossible to evaluate the profitability and fit of every client, until the firm sits down and does an honest reckoning of what each client pays, the service each client receives, and who is a good fit (or not) in the first place.

More Clients Doesn’t Always Mean More Profits (Karen DeMasters, Financial Advisor) – The financial services industry has long had a more-more-more approach to success, where the “most successful” advisors are often defined as those who are the fastest-growing advisors that are adding the most new clients. The caveat, though, is that because of the reinvestment costs of growth, and the potential inefficiencies that emerge as a firm takes on an increasingly variable range of clients, in the end having more clients often doesn’t actually mean the firm generates more profits for the business owner! Instead, mid-to-large-sized advisory firms often have similar or even lower operating margins than lean solo practices, the antithesis of the “economies of scale” that are ‘supposed’ to come with growth, as it means the firm may be generating a larger pie (of revenue) but the firm owner is keeping less of it (a smaller slice of profits). As a result, firms that actually want to drive profitability are often better served by having fewer clients who are more affluent (or more specifically, who pay a higher average revenue per client), and firms that want to get a handle on growing their profits should focus not on adding more clients but revisiting their client mix instead. For instance, if the firm simply divides clients into three categories – those with <$100k of assets, those with $100k – $500k, and those with $500k+ – what percentage of total clients are in the bottom tier or two that may take up a disproportionate portion of services for a very small slice of revenue and profit? The key point, though, is simply to understand that ‘blindly’ adding clients (and then being forced to hire more staff to support them) can actually get advisory firm owners further from their income growth goals, and that it really only takes 50 Great Clients to build an incredibly financially successful advisory firm (which means focusing not on “more” clients, but on getting clients who each generate more revenue per client and on whom the firm can focus all of its services and efforts!).

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 Craig Iskowitz’s “Wealth Management Today” blog, as well as Gavin Spitzner’s “Wealth Management Weekly” blog.

Gavin Spitzner contributed this week’s article recap on the 2021 Charles Schwab Modern Wealth Survey.