Weekend Reading for Financial Planners (Feb 8-9)

Author: Michael Kitces

Team Kitces

Michael Kitces is a Partner and the Director of Wealth Management for Pinnacle Advisory Group, a private wealth management firm located in Columbia, Maryland that oversees approximately $2.0 billion of client assets.

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

TD Ameritrade Hedges Its Bets That Schwab Can Swallow It Whole As DOJ Letter Lands (Brooke Southall & Tim Welsh, RIABiz) – At last week’s TD Ameritrade National LINC conference, RIA custodial head Tom Nally stated that his firm is proceeding “full tilt” on its own growth strategies, including investing into its VEO One platform, migrating advisors from the legacy VEO platform, maintaining a full push on recruiting new RIAs, and even making plans for its LINC 2021 conference… even as the firm continues to work diligently with Schwab on its prospective acquisition. Notably, though, the reality is that from a legal perspective under the anti-trust provisions of the Sherman Act and the Hart-Scott-Rodino Act, Schwab and TD Ameritrade must continue to operate as independent (and competing businesses) until the deal is truly finalized… which means even if there is full expectation that the deal will close, they cannot yet “jump the gun” and take their foot off the gas of their respective businesses. However, Wall Street merger-arbitrage investors are now predicting only a 70% chance that the deal will close, and Financial Planning magazine found nearly half of TD Ameritrade’s own RIAs are skeptical of the Schwab merger, as the Department of Justice has begun to make inquiries both to Schwab and TD Ameritrade, and other industry players, to figure out whether competitors will realistically be able to pick up the ‘competitive slack’ left by TD Ameritrade’s absence, and has announced an inquiry into four key areas: whether/how the RIA custody business is distinct from hybrids, independent broker-dealers, and wirehouse brokers; whether emerging RIA custodians like SSG, TradePMR, Folio, Betterment, Interactive Brokers, E*Trade, and Apex are truly viable alternatives to TD Ameritrade; whether/how TD has acted as the straw-that-stirs-the-drink force to make Fidelity and Schwab compete harder on price, software innovation, and service; and whether RIA custody is really an industry separate and distinct from the custody provided by banks, wirehouses, and IBDs (such that it still has healthy competition without TD Ameritrade). For which in the end, the Department of Justice could potentially block the merger… or alternatively permit the retail acquisition of TD Ameritrade to occur but require RIA custody business to be spun off and remain a separate competitor.

‘We Have To Rebuild’: Billion-Dollar Firm Execs Contend With Tech Challenges Of Schwabitrade Deal (Jessica Mathews, Financial Planning) – While industry media has largely focused on the potential plight of the “small” RIA in the prospective merger of TD Ameritrade and Schwab (given that TD Ameritrade over the past decade has disproportionately built its business attracting smaller RIAs that couldn’t meet Schwab and Fidelity’s asset minimums), the reality is that in recent years TDA has increasingly attracted the assets and business of larger “billion-dollar” RIAs as well, in large part due to its open architecture VEO platform that large firms could deeply integrate with. Which has arguably make the prospective Schwabitrade merger even more concerning to larger firms, as questions abound of whether Schwab will keep the VEO platform, and if they don’t, whether or how much disruption may occur as larger advisory firms that built deeply into the TDA VEO ecosystem may be forced to rebuild. Of course, it’s entirely possible that Schwab will maintain VEO, or at least bring in key elements that would maintain existing technology integrations for RIAs and popular advisor FinTech solutions. But over the past decade, it was TD Ameritrade’s open architecture system that heavily drove advisor technology innovation, as the open system made it feasible for any and every startup to build first (and easily) to TD Ameritrade… raising further concerns about whether future advisor FinTech innovation may become more limited (even if Schwab honors all the existing VEO integrations). Of course, it’s also possible that Schwab’s acquisition of TD Ameritrade will result in even more breadth in their technology platform… but given Schwab’s history of running a more closed tech ecosystem (at least relative to TD Ameritrade), the primary focus thus far is tilted towards the risks for RIAs that the Schwabitrade deal may force required changes in their own advisor technology stacks.

Schwabitrade Glass Half Full? (Bob Veres, Inside Information) – At the upcoming T3 Advisor Technology conference, the dominant conversation is anticipated to be the prospective merger of TD Ameritrade into Schwab, and in particular about the fate (and potential death?) of TD Ameritrade’s VEO open architecture platform… which has been popular amongst RIAs, but arguably even more vital for advisor technology startup companies that consistently have built first towards and then launched on VEO (because of the accessibility of its open architecture). Yet given the reality that Schwab remains the ‘big gorilla’ that has the largest market share, even advisor technology firms that built first on TD Ameritrade often did so as a way to gain a foothold in the RIA community in order to then establish a relationship with and gain access to Schwab Advisor Services (i.e., using adoption amongst TD Ameritrade RIAs to validate why they should be granted integration access to Schwab RIAs as well). Still, though, the end result is that if Schwab acquires TD Ameritrade, then the pathway for innovative new technologies to Schwab’s large market share of RIAs (even if via TD Ameritrade) is potentially lost in a merger. However, Veres suggests that there is still a case for optimism, as the prospective disruption of RIAs on the TD Ameritrade platform creates a new market opportunity for RIA custodian competitors, both to step up on their own service and technology, and even to build their own increasingly large advisor technology ecosystems to compete with Schwab’s traditionally more-closed approach (as TD Ameritrade did). And the blossoming of the advisor-tech ecosystem, which, with an explosion of new choices in the past decade, may have already accelerated to the point that more closed platforms in the future simply won’t be viable (because advisors won’t accept having the majority of hundreds of FinTech solutions cut off from them). Which means the open question may not be if an open architecture RIA custodial platform will exist after the Schwabitrade deal closes (if it does), but simply which competing RIA custody platform will attempt to don the open-architecture mantle?

SEC Issues Warning On Coronavirus Investment Scams (Melanie Waddell, ThinkAdvisor) – With the coronavirus permeating the news, the SEC in a recent Investor Alert is cautioning investors to watch out for coronavirus-related investment frauds. In particular, there is a growing number of internet (and social media) promotions with fake “research reports” that certain companies are working on medical solutions to prevent, detect, or cure coronavirus… and that their stock prices will soon vault up to a (significantly) higher target price. The fraud is that, in practice, the companies have no such products, and the promoters already own the stock – usually a thinly-traded microcap stock – in the hopes that an investor stampede into the illiquid stock based on those rumors will cause its price to rapidly appreciate, and give the “pump-and-dump” fraudsters a chance to sell into the artificially-created buying interest (and once it becomes clear that the company hasn’t actually had a coronavirus medical breakthrough and the hype ends, its stock price reverts, causing potentially-significant losses for the defrauded investor). Of course, financial advisors generally don’t pursue such investment rumors in the first place (and should already be wary to buy thinly-traded microcap stocks); the SEC Investor Alert is an important reminder for advisors to pass on to their clients that they should not be persuaded by online rumors to invest into a ‘coronavirus stock’ with their own investment dollars outside the advisors’ purview.

Vanguard Broadens Reach With Entry Into Private Equity (Dawn Lim, The Wall Street Journal) – Vanguard is known primarily as the company that builds low-cost, broad-based index funds that give investors a chance to participate in the aggregate returns of the market… which makes it especially notable that, this week, Vanguard announced that it is launching a new fund specifically to invest into the often-controversial-and-opaque world of private equity. Initially, Vanguard only intends to offer the new private equity fund to endowments, foundations, and other institutions that have appointed Vanguard as a financial advisor, but is anticipated to be made available in the future to wealthy individuals who use Vanguard’s Personal Advisor Services platform. Recent new Vanguard CEO Tim Buckley maintains that the new offering isn’t straying from the vision of Vanguard founder Jack Bogle (who advocated for keeping investing simple and ‘dirt cheap’ for everyday individuals), though even Buckley acknowledges that the offering isn’t for everyone and may only be ‘suitable’ for some clients. Still, though, the increasing volume of investment activity occurring within the realm of privately-held companies, as both the total number of publicly-listed US companies continues to shrink and the ones that do IPO tend to do so later in the growth cycle (and potentially after the bulk of the largest returns have already been generated), is driving more and more focus on whether investors must participate in private markets or lose out on previously available opportunities for investor wealth creation. The Vanguard fund is anticipated to invest into a mix of different private equity strategies, and will itself be sub-advised by Boston-based HarbourVest Partners, in the hopes that it will gain more traction than Vanguard’s last foray into the market (in 2001 in a partnership with Hamilton Lane, which was ultimately abandoned after lackluster investor interest in the aftermath of the tech crash).

Is The Wave Of Advisor Retirements About To Break? (Michael Thrasher, RIAIntel) – For the better part of 10 years, industry analysts have warned about the aging of financial advisors and the dearth of young people entering the industry to replace them, with the total headcount of financial advisors flat (within a narrow 1% band) every year since 2012… but a recent report by Cerulli Associates suggests that now, the time has come, and that the number of advisors will begin to outright decline (by 0.4%, 0.9%, and then 1.4%) in the coming three years. In fact, Cerulli collectively estimates that over the decade of the 2020s, more than 111,500 advisors (more than 1/3rd of the just-over-300,000 financial advisors in total) will retire. The looming decline of experienced advisors, and shortage of talent to replace them, is anticipated to accelerate new recruiting and retention strategies amongst both RIAs and broker-dealers, along with a recognition that the people today who want to be financial advisors are motivated more by a desire to help people reach their financial goals than simply the compensation potential (that the industry has traditionally highlighted in its recruiting efforts). Accordingly, Cerulli suggests that firms focused more on providing comprehensive financial advice to clients will better be able to attract talent, while those that direct training heavily towards product knowledge and sales strategies will languish. Still, though, even with an uptick in advisor recruiting efforts, Cerulli anticipates that the total number of financial advisors will continue to decline… and/or that experienced financial advisors will find it lucrative enough to stick around (especially given the talent shortage) that they may not retire as quickly as anticipated when the time comes?

The Secret Sauce To Digital Leads: Geography, Persistence, And A Business Development Staff (Davis Janowski, Wealth Management) – The challenge of getting new clients as a financial advisor has long supported a wide range of “lead generation” services, from newsletter and then seminar marketing platforms of the 1980s and 1990s, to “digital lead generation” platforms of the 2000s and 2010s. The appeal of digital lead generation services, in particular, is their relative ease and lower cost to launch (i.e., it’s much less expensive to launch a website, set up an email newsletter, and offer a webinar than it is to stand up an entire platform doing physical mailers for in-person seminars), especially against the backdrop of what appears to be an increasingly digital future for the world at large, and the relative success of robo-advisors in attracting digital-only clientele despite the lack of any bricks-and-mortar office locations to meet clients. Yet in practice, Janowski notes that most digital lead generation platforms for financial advisors have been more hype than results, many that have launched are no longer around, and the ones that are often fail to provide ‘quality’ leads (either those who aren’t affluent enough to meet the advisor’s minimums, or too far away for the client to realistically drive to the advisor’s office to meet). However, other advisors are finding that at least some of the third-party lead generation sites really do work… and that the caveat is simply that advisors need to be better prepared to wade through some bad-fit prospects to find the good ones, and still need to be prepared to pursue the prospects and engage in a sales process (i.e., the lead-generation platforms are providing leads to potentially do business with, not pre-closed clients who are ready to sign!). In fact, some firms specifically hire a ‘business development’ person (rather than the lead financial advisor/founder) whose job is to gather all the inbound leads and engage them to determine if they’re qualified to work with the firm, a reasonable fit, and interested in a first meeting. In addition, some advisors also report that geography can be a key factor, as denser metropolitan areas may provide more leads but also face more competition, and that advisors in a more rural geography may actually fare better.

A Trail Of Broken Funnels (Samuel Steinberger, Wealth Management) – While the number of marketing tools and solutions for financial advisors are increasing, from lead generation platforms to email and other digital marketing tools, advisor adoption of such solutions has been lackluster… which at least in part appears to be due to the fact that most advisors are so unfamiliar with marketing (as opposed to sales), that they aren’t certain how to vet which offerings are good (or not) and how to actually implement them in the firm. For instance, advisors often show a preference for lead generation platforms that charge a flat fee (which fixes the cost for the advisor), but in practice the structure tends to incentivize platforms to provide a higher quantity of leads over ones that are quality… while platforms that charge based on conversion (e.g., revenue-sharing based on clients that actually close and come on board) may be more expensive in the long run, but also have better-aligned incentives to ensure that the advisor actually gets quality leads that turn into business. Other solutions showing increased interest for advisor marketing include using email campaigns, client appreciation events, webinars, and podcasts. Either way, though, firms that spend on digital marketing strategies and lead generation need to be prepared to actually field those leads, which means having the readiness and capacity to proactively reach out when they do make an inquiry, recognizing that conversion rates from even the leading platforms like SmartAsset’s SmartAdvisor, Zoe Financial, and WiserAdvisor may only be in the 5% to 10% range, which means advisors should expect that only 1 out of every 10-20 leads will actually turn into a client. Still, though, given the substantial lifetime value of a single long-term client, it often literally only takes 1 new client per year for a particular advisor marketing platform to be a good Return On Investment.

Schwab To Pay Cash For New Retail Accounts Offering Customized Asset Management (AdvisorHub) – This week, Schwab announced that it intends to “fight back” more aggressively against competitors like Goldman Sachs, JPMorgan Chase, and Bank of America Merrill Lynch that have been offering more and more hard-dollar cash offers to woo prospective clients (with one firm offering nearly $36,000 to move an affluent client’s account, and another offering up to $25,000 for a new $10M account), by offering their own cash incentives in response to entice investors to move their accounts to Schwab (and in the hopes that by quashing competitors’ up-front pricing strategies, Schwab can persuade the industry to abandon the expensive practice). Still, though, the shift is notable from the financial advisor perspective, as most advisory firms don’t have sufficient capital to pay outright incentives for clients to join the firm, increasing the risk that a war of accounts across the brokerage firms will squeeze advisors unable to offer similar incentives out of the picture. In the meantime, though, Schwab indicated that it is ramping up its effort to create and launch direct indexing solutions as an alternative to mutual funds and ETFs, as a way to otherwise bring down costs for investors on Schwab’s platform (by making it feasible for them to eschew the mutual fund or ETF wrapper fee), as the firm continues to try to use its size and scale to make the Schwab platform more appealing over competitors.

9 Ways Advisors Can Add Value For Clients (Jamie Hopkins, Investment News) – While the financial advisor industry is increasingly focused on trying to choose the ‘right’ advisor business model (e.g., commissions, fee-based, advisory AUM, or subscription), Hopkins notes that in the end the true differentiator should not be pricing but value (as in the end, any compensation structure can be justified if the advisor leverages it to add value!). Key financial advisor value factors include: helping clients to simplify (e.g., by consolidating accounts/providers); cost reduction (helping clients reduce their costs, which in some cases can more-than-recover the advisor’s own fees); access to products (e.g., only certain advisors can offer DFA funds, which aren’t even available directly to clients without an advisor); tax planning and broader financial planning; and behavioral coaching to help clients avoid making mistakes that can be even more costly. Ultimately, though, the key point is simply to recognize that even with a variety of compensation models for advisors, it’s better to focus on differentiating by the value the advisor creates for that compensation, than the type of compensation itself.

Talk Less. Listen More. Here’s How. (Kate Murphy, The New York Times) – While the typical person engages in multiple conversations every day, it’s not often that we can say we had a conversation where someone really listened to us, and where we truly felt heard and understood. In some cases, that’s simply because we don’t have the time to listen, while in others it’s because we’re more focused on shaping our own narrative (e.g., what we’re trying to communicate to get a certain message or point across), and often it’s simply because we’re distracted (by that smartphone that keeps buzzing new notifications). Yet ironically, Murphy finds in her recent book “You’re Not Listening: What You’re Missing And Why It Matters“, that in practice it’s much easier to recognize what it means to be a “bad listener” (e.g., interrupting, looking at a phone, responding in a negative way, etc.), than actually recognizing what it takes to be a good listener (not to mention that there are many courses and organizations to help us talk, from training as a public speaker to Toastmasters, but remarkably little to teach us how to be a better listener). Notably, though, it turns out that being a good listener isn’t actually about the listening, per se, but also about how you respond, and the degree to which you facilitate the clear expression of another person’s thoughts back to them. Or stated more simply, good listeners don’t just listen… they ask good questions that give people a chance to explore their own thoughts further (and learn to control their own galloping thoughts to avoid interrupting or adding their own comments when they’re not necessary).  The key point to Murphy’s work, though, isn’t just that being a good listener is about being interactive, but also that it’s a skill that can be learned and practiced (for improvement) as well.

Confessions Of A Comprehensive Financial Planner (Meg Bartelt, Flow FP) – The ‘traditional’ view of financial advisors is that we are experts, who study and learn and accumulate knowledge, which clients then pay us to impart to them by analyzing their situation and providing recommendations. In practice, this viewpoint is often reinforced in our own journey as financial advisors, which increasingly starts off with educational programs to earn CFP certification, along with a never-ending requirement for continuing education and an expectation to attend industry conferences to learn even more wisdom that might be imparted to clients. Yet after going through George Kinder’s EVOKE life planning training, Bartelt found that in practice, the driving force in working with clients is increasingly about being a better listener, helping them find their own journey, and pushing our own expertise into the background (or at least, to be secondary and only come after the life planning process). Which is important not only for better financial planning, but the fundamental realization that in the end, most clients actually really do know what needs to be done, from the essential elements of our ideal life, to what we need to do to live that life, and even what the obstacles are that are blocking us and how to overcome them; the real issue is simply that most of us haven’t even been given the space, time, and empathy to figure it out for ourselves in the first place… a space that a good financial planner can embrace. Which in turn raises the question of where a financial advisor’s actual expertise fits in… which really does matter in the “Knowledge” phase of helping a client to formulate a concrete plan (and one that is sensitive to the technical rules of taxes, investments, and finance). But the Knowledge phase is only one of 5 in the EVOKE process of Exploration (describe the ideal life), Vision (prioritize the ideal life), Obstacles (what could get in the way), Knowledge (write a specific plan for that ideal life), and Execution (work the plan)… and the other four are more about facilitating the client’s own journey, than they are about prescribing to them how they should proceed. Or stated more simply, it’s not about being the Expert, but the Knowledgeable Guide instead.

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 as well.