Weekend Reading for Financial Planners (Jan 30-31)

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.

What The Heck Is Going On With GameStop? (Karen Wallace, Morningstar) – This week, the news cycle of investment markets erupted with the explosive rise of struggling retail gaming store GameStop (ticker: GME), which was recently trading at less than $20/share for the past several weeks, and suddenly rose to more than $300/share this week… along with some other retail businesses facing challenges in the coronavirus pandemic environment, including AMC movie theaters and Express (the clothing retailer). In fact, because these companies have already been facing significant challenges, a number of investors (including some sizable hedge funds) have been shorting the stocks, so much that GameStop’s short interest was 260% of its entire float (i.e., there were more than twice as many shares being shorted as there are total shares available in the market in the first place). Which caught the eye and interest of a popular Reddit investing forum, r/WallStreetBets and its 3.4 million readers/traders, who, this week, began to pile into GameStop shares and buying GameStop call options via Robinhood and other retail brokerage platforms… which triggered a giant short squeeze, causing the short sellers to experience significant losses, which leads to them buying more shares to close out the short position, which in turn drives up the price further due to the short covering purchases, which causes even more pain for short sellers who have to close out their positions, all of which was further amplified by the associated call option trading that resulted in a parallel “gamma squeeze” on top of the short squeeze, as call option market makers had to buy shares to cover their call option exposure as well, leading to an explosive price-boosting feedback loop. In fact, the volatility was so extreme, it led to one hedge fund, Melvin Capital, requiring a $3B cash infusion to help cover its losses. And because brokerage platforms themselves face liability exposure if they can’t properly settle the trades – which can be difficult when a single share has been re-loaned and re-shorted several times to produce the 260% short interest – Robinhood, TD Ameritrade, Interactive Brokers, and others – halted or limited trading in the short-squeeze stocks altogether for a period of time (which in turn drew the ire of regulators and politicians because retail investors were largely cut off from trading while hedge funds and other institutional investors retained the ability to trade into the ongoing volatility), and leading Robinhood to raise $1B in fresh capital for itself overnight to ensure the stability of its own platform. Ultimately, though, the volatility in GameStop and select other stocks doesn’t appear to be any kind of fundamental breakdown in markets themselves, but simply an example of what happens when investors excessively short a stock (i.e., short and gamma squeezes aren’t a new phenomenon… this week’s market volatility in select high-short-interest stocks just happens to be a colorful modern-times example). However, the disparity in how retail versus institutional investors have been allowed to trade amidst the volatility may draw longer-term regulatory attention and potential market reforms.

Schwab And TD Ameritrade Customer Service Challenges Test Advisers’ Patience And Loyalty (Jeff Benjamin, Investment News) – While some post-merger “hiccups” are not surprising with a merger the size and scale of Schwab acquiring TD Ameritrade, concerns and outright complaints are rising amongst RIAs at both Schwab and TD Ameritrade about service delays and mistakes. The source of the problem actually appears to be a confluence of factors, from Schwab’s challenges in adapting to a virtual work environment after the coronavirus pandemic outbreak, to turnover in the TD Ameritrade service team after the merger closed (and many realizing or at least anticipating that they will not likely retain their jobs once the integration is complete, and/or being pre-emptively hired away by competitors). In fact, Schwab claims that its problems are not driven by the merger at all – especially given that it is still only in the planning stages of the integration process – but instead in an uptick in growth for the RIA community itself, leading to an “unprecedented spike in volume” in December and January. Still, though, reports are emerging of wait times as long as 45 minutes to talk to a TD Ameritrade representative, week-long processing times for asset transfers, and a rise in NIGOs (often with little explanation beyond a form simply being stamped as Not In Good Order, and raising concerns that the forms themselves weren’t wrong but that the TD Ameritrade staff overlooked something or simply don’t have the capacity to process it all). All of which is concerning not only because it is outright time-consuming for the advisor, but also because mistakes of the RIA custodian can reflect poorly on the advisor and damage the advisor-client relationship… and are leading competing RIA custodians, from Pershing to TradePMR to SSG, to proactively market their own RIA custodial capabilities as some advisors begin to look for alternative solutions.

Fiduciary Advocates Call For Renaming SEC’s Regulation “Best Interest” (Melanie Waddell, ThinkAdvisor) – With Gary Gensler, widely viewed as a consumer/investor advocate, awaiting the process of being confirmed as the new SEC Commissioner, fiduciary advocates are raising the question of whether the SEC’s Regulation Best Interest needs to be re-named to something besides “best interest” given that it is literally not (by the SEC’s own admission) a fiduciary best interests standard. The concern arises not only from the literal consumer confusion over the difference between a broker’s “Best Interest” conduct standard, and an RIA’s “Fiduciary” obligation (which is defined as acting in the clients’ best interests), but also because the SEC’s “Best Interests” language conflicts with decades of legal history and precedential court cases that define what a “best interests” standard means in fiduciary terms. Notably, though, renaming the rule would itself require a formal amendment to the rule, which is not a trivial undertaking in itself, given the SEC rulemaking process, and it is not yet clear whether Gensler will have an interest in engaging in new rulemaking, or perhaps simply applying more stringent enforcement standards and guidance to Reg BI itself as written. Stay tuned for indications of where Gensler’s regulatory agenda will be focused if/when he gets through the Senate confirmation process in the coming weeks.

How To Close Prospects In The First Meeting (Erin Botsford, Investment News) – For any advisor who wants to build their own client base, the essential first step is learning how to prospect for and actually close new clients (i.e., finding them and actually convincing them to sign an agreement to work with and pay a financial advisor!). Yet, because it’s a lot of work for the consumer to find and select a financial advisor, the reality is that not a lot of people are actually willing and ready to start working with an advisor at any particular time, and those who are, typically need some kind of “triggering event” that causes them to decide that now is the time to actually act and get a (new) financial advisor, whether it’s changing jobs (or retiring from one), a marriage (or a divorce), a new baby (or a death in the family), or something else of similar impact. The significance of this framing is that it means prospecting isn’t simply about finding people who might work with you as their financial advisor, but specifically in trying to identify the triggering events that would lead them to be willing and ready to actually take action, and then communicating with all prospects to figure out which ones are facing (or approaching) one of those triggering events. Alternatively, for those who may not already have a clear triggering event, Botsford suggests identifying “disturbing tracts” – topics that may unearth a problem the prospect has, that they may not have even realized that they had, but can culminate in a triggering event that would lead them to take action. For instance, Botsford had one affluent couple who were in a second marriage, where both members of the couple had children from the prior marriage, but their investment account was titled as joint with rights of survivorship… inevitably disinheriting the children of whichever member of the couple died first, such that simply identifying the issue in front of them immediately motivated them to take action to avoid the substantive but unintended and undesired outcome.

One-Sentence Emails That Will Close A Prospect (Sara Grillo, Advisor Perspectives) – Formulating the “right” email to communicate with a prospect, one that sets the “right” balance of being respectful of their time and space while trying to find out if they’re ready to do business and move forward, is a skill that takes time to craft and hone. But as Grillo notes, in the end, advisors often “overkill” the length and depth of emails, using the email as a channel to give information instead of simply a channel to give enough information to make a decision or take an action instead. And in reality, while advisors have a tendency to give information – sometimes a lot of information – often the best breakthroughs come from saying less and allowing the silence to fill the room (often leading the other person to want to speak up and fill the void which usually results in an important moment of communication). Accordingly, Grillo suggests that often the best way to drive action is simply to send a one-sentence email… and then wait and let the other person respond to fill in the ‘silence’ and reflect back what they want or need to actually move forward. In practice, Grillo suggests this can be accomplished by simply making the subject line of the email the entire email itself (in that single sentence or statement), from “Look at this <link to article>” to start a conversation with a prospect, “Easy question: Can I add you to my newsletter list?” to help a prospect take the next simple step, or even “Would love to hear your thoughts about working together…?” Notably, the point of the one-sentence email arguably isn’t really to “close” the prospect on the spot, per se – as in practice, the one-sentence question or statement will usually provoke some question in response about what the prospect needs to move forward to take the next step. But in the end, that’s still a key step forward. And it saves a lot of time to prompt a prospect about what they need to move forward, instead of trying to guess by just taking an inordinate amount of time to write out everything they might possibly want to know, hitting send, and hoping they don’t accidentally drown in information overload.

What Is Your Minimum Effective Dose Of Marketing? (Steve Wershing, Client Driven Practice) – A “minimum effective dose” is the smallest amount of something that must be produced and consumed in order to get the desired effect (without doing too little to get no effect, but no more than is really necessary to avoid wasted effort or supplies)… and while it’s a particularly timely topic as COVID-19 vaccines are distributed (and everyone tries to figure out the relative importance of single versus double doses), the reality is that the minimum effective dose concept is just as applicable to marketing as well. After all, when it comes to marketing, the reality is that one dose is rarely enough; virtually all great brands are built by growing awareness over time, from the Geico gecko to Miller’s “great taste, less filling”, or the Dos Equis “most interesting man in the world.” Yet at the same time, there comes a point where the message has sunk in, the brand awareness has been achieved, and it’s really just a matter of waiting for the prospect to be ready to do business on their schedule (not necessarily about doing “more” marketing to them). Still, though, the fact that most marketing messages must be repeated is why blogging and social media can be valuable (it’s marketing repetition), why drip marketing is so effective, and why it’s important to at least explain that the firm is accepting referrals and who the ideal referral would be (even if the firm doesn’t outright ask for names on the spot, awareness that the firm is accepting referrals is still highly relevant!). The key point, though, is simply to recognize that marketing isn’t always about more, more, more… it’s really just about doing “enough” to get to the minimum effective dose, and figuring out what that minimum effective dose should be in the first place as something to shoot for.

Why Resumes Are Overrated (Caleb Brown, New Planner Recruiting) – “Submit your resume and cover letter…” has long been a staple of the hiring process for most companies. Yet the reality is that, in the end, resumes are often a poor reflection of who will really be capable of doing and excelling in any particular job. In part, this is simply because resumes are often laboriously created to put on one’s best look, and may either overstated relevant experience, gloss over problems, or simply succumb to one’s own self-perception biases about blind spots (e.g., when someone writes they’re detailed, organized, and hard-working on their resume, all it really means is that they believe they possess those traits, which may be true or simply their own blind spot that they’re not actually as detailed or organized as they think they are). Similarly, even when accomplishments are listed, they’re often hard to verify (as former employers tend not to give detailed reviews and feedback for fear of their own liability exposure around negative employment events), and just because success occurred in a prior environment still doesn’t mean the skills will translate to the new firm (where even just small nuanced differences in firm fit and culture could limit someone’s prior success in a new role). So what’s the alternative? Brown suggests, instead, that it’s better to evaluate candidates with a screening process that asks them to demonstrate the actual skills that the new role would take. For instance, a paraplanner might be evaluated by being given a case study of a hypothetical client and being asked to put together at least part of a sample plan, or to create a one-page brief that summarizes a number of client scenarios where they have to prioritize which should be tackled first and which will likely take the most time, or even to engage in a mock role-play and show how they would talk through a particular client or prospect situation. In other words, don’t rely on what the resume tells of prior experience; the best way to evaluate fit is to give candidates an opportunity to actually show their current work and see for yourself.

Job Interviews Don’t Work (Shane Parrish, Farnam Street) – While the job interview is a(nother) staple of the hiring process for virtually every business, the irony is that there is, at best, only limited evidence that job interviews actually help us pick the best candidates and a real risk that it simply leads us to hire people similar to us (with whom we have a natural rapport in a job interview), leading to a homogeneous team that is prone to groupthink. Or stated more simply, in practice conversational job interviews tend to maximize the role of unconscious biases that lead us to hire who “feels” right or gives us a good “gut” feeling (with research also showing we have a tendency to hire people who are more attractive, those with deeper voices, and men who are of above-average height, given common unconscious preferences for these traits despite their lack of any predictive value in job capabilities), instead of actually evaluating their competency to do the work itself. So what’s the alternative? For firms that do want to retain some interview process, the starting point is to use a “Structured” interview, where every candidate answers the same predefined series of questions (ideally ones that delve at particular key personality traits necessary to succeed in the role), and then ask interviewers not to rate the candidates, per se, but the extent to which their responses demonstrated the trait in question. Another alternative is to use “competency-related evaluations”, where candidates are given work samples of potential tasks and see how they actually execute the task (which may even be scored on a blind basis to further reduce any risk of unconsciously biased scoring). The key point, though, is simply to recognize that the best way to evaluate candidates is to give them consistent questions and tasks that can actually be compared from one candidate to the next, which makes it easier to ignore extraneous information and focus on what really makes one candidate comparably better than another (or not!).

Hiring Isn’t Rocket Science: Why The Most Boring Strategy Is Best (Laszlo Bock, Behavioral Scientist) – When it comes to interviews, a lot of people swear by a certain special interview question that is the “perfect” question to suss out one’s true strengths or fit to the role, with such bizarre or surprising options as Tony Hsieh’s “On a scale of one to ten, how weird are you?” to Ryan Holmes (of Hootsuite) “What’s your spirit animal?”, or Ashley Morris of Capriotti’s “What would you do in the event of a zombie apocalypse?” Yet in the end, responses to such questions usually just result in a reliance on one’s “gut” to then make the best hire, instead of a careful evaluation of who really can do the job best. Instead, Bock suggests that the real key to effective hiring is not the creative flashy questions, but simply implementing a “boring” but very structured and consistent interview and evaluation process, including 1) clearly define the job attributes (i.e., a well-written job description, and the attributes that are most necessary to excel in that position); 2) ask for a work sample that shows how the person actually does their work; 3) ask behavioral questions (e.g., “give me an example of a time when you solved an analytically difficult problem?”), and ask the same questions in the same order to all the candidates; 4) have more than one person evaluate candidates and average their scores to make a decision (i.e., the “wisdom of crowds” is highly effective in the interviewing process); and 5) go back a year or two later and see if the candidates hired actually worked out based on the criteria used (and if not, make updates to what the key attributes, work samples, and behavioral questions should be to better identify the right candidate next time!).

Why You’re More Creative In Coffee Shops (Bryan Lufkin, BBC) – Coffeehouses and cafes have long been recognized as creative oases, in a manner that even the remote work-from-home environment cannot seem to fully replicate. To some extent, this is because, for many, work-from-home is not just an opportunity to work quietly away from co-workers, but also an added pressure to manage the distractions from home chores to children schooling-from-home. Yet the reality is that coffeehouses aren’t exactly “quiet”, either, with the hustle and bustle of other patrons, raising the question of why creativity still seems to spark so effectively in such environments? As research in recent years has shown, though, the key actually is that coffeehouses have a little more distraction than a quiet work-from-home environment… with just the “right” amount of ambient stimuli to boost abstract thinking abilities (which helps to explain why having background music and ambient noise can actually help, even and especially in an otherwise-quiet work-from-home environment!). Similarly, the variety of visual stimuli at the coffeehouse – from the art on the walls to the patrons and waitstaff moving around – also helps to stimulate our senses. Not to mention that because coffeehouses are known as places to gather for work and creative thinking, going to one, to do so, puts one in an environment with others trying to do the same which can be motivating unto itself (akin to feeling inspired to keep working out at the gym in part because everyone else at the gym is working out as well). Of course, until vaccines are more widespread, the coffeehouse may still not be an option for many – if only as a reprieve from a work-from-home environment – but the principles of creating visual and audio stimuli (e.g., background noise, being near a window to look out) – can still be applied to make even a work-from-home environment more creatively stimulating.

Post-Pandemic Office Trends (Justin Paterno) – As the rolling case count of COVID-19 begins a decline that is anticipated to only extend further with the ongoing rollout of vaccines, companies and workers are beginning to think more about what the future of office work will be like when it is safe to fully return to them. As even though the world has managed to keep working in a work-from-home environment, many companies and workers themselves report looking forward to a return to the office… not necessarily to do the work itself, but because offices are still a place to meet and interact in a manner that is difficult to replicate virtually (from brainstorming on a whiteboard to the casual hallway conversations that can spark new inspiration). In addition, for many people, the separation between work and home is valuable in and of itself, where the office provides a place to show up to, a cadence to the morning routine in getting there, and also forms an important communication signal to co-workers and managers (e.g., the steadfast employee who suddenly stops coming into work on time may be signaling a problem they need help with, in a manner that is difficult to identify in a virtual work environment). Yet when it comes to actually doing the work itself, researchers are finding that productivity has held steady (and by some measures may even be higher) when working from home, where the lack of distractions from in-person co-workers can also help our focus in completing key tasks and projects. As a result, Paterno suggests that the future of the office will probably be a much more flexible one, with certain “core hours” where everyone is expected to be in the office for meetings and collaboration, but also allows for work-from-home or other remote time to do the focus and creative work (which may even vary by team, where those doing deep work only come to the office once a week, but sales or creative teams that rely more on collaboration may come in more frequently?).

Are Videogames The Future Of Remote Work? (Christopher Mims, Wall Street Journal) – In a world of remote work with no physical office spaces, a new type of “virtual workspace” is emerging… not just in the form of a forum, chat space, or whiteboard that multiple team members can virtually contribute to, but an entire virtual world, a kind of video game environment where workers create their working space within the virtual game world itself (e.g., “think early Zelda or Final Fantasy, but instead of roaming the countryside slaying monsters, you’re puttering around an office”)! In fact, the creation of virtual work worlds is itself becoming a hot new category of startup, with companies like Gather, Teamflow, and SpatialChat. For some companies, use of such virtual workspaces is limited to larger-scale company events and classes – from happy hours to town halls to daily stand-up meetings – but others are using them as a full-scale substitute for the office work environment, where employees are expected to log in and be “in” the virtual office whenever they’re working at their work-from-home desks. At their core, though, the common denominator for them all is providing a way for employees to move around in a 2-dimensional virtual world, and be able to engage and video chat with others who are “nearby” (such that, literally, those in close proximity in the game world can be overheard, while those further away are out of virtual earshot). Which isn’t just about office gossip, but actually facilitating communication where one can signal their willingness and interest to be engaged in conversation by whether they place themselves in a more ‘crowded’ team space or sequester themselves in a more distant part of the virtual work environment. Not to mention that it may still feel more natural to “walk” up to someone in the virtual world to talk to them, than to just select their name from a chat directly and message them. Of course, interacting in a virtual world will require the establishment of a new set of ‘social norms’ about how to interact with others. But advocates of the approach argue that in reality, video-game-based virtual work environments are actually a more natural fit to the spatially oriented ways that we are accustomed to interacting with others.

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.