Weekend Reading for Financial Planners (Feb 13-14)

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.

Investments & Wealth Institute Readies Launch Of Open-Access Advisor Network (Samuel Steinberger, Wealth Management) – This week, the Investments & Wealth Institute (IWI), a membership association for financial advisors that is best known for its CIMA and CPWA designations (and more recently acquired the RMA designation as well), announced that it will be launching a new “networking destination” called The Hive, an online community for financial advisors (both IWI members and beyond) that will cater to ‘sub-communities’ from RIAs to prospective financial advisors to advisors of color. In turn, IWI announced that it is also restructuring its membership tiers, from an initial “Digital Membership” tier at $395/year, to a $790/year “Signature” tier and a $1,290 “Elite” tier (with the latter tiers including additional professional education offerings), and will also expand its “Find An Exceptional Advisor” directory of members to make it easier for consumers to find an IWI member to work with (akin to NAPFA’s Find An Advisor, FPA’s PlannerSearch, and the CFP Board’s Find A CFP Professional consumer portals). The move effectively broadens the focus of IWI from primarily serving its credential holders and a subset of more HNW-focused financial advisors, to hew more closely to the Financial Planning Association’s approach over the past decade with an ‘open-tent’ approach to financial advisor membership. Though ironically, over the past 10 years, IWI has added nearly 5,000 members in its focused market, while FPA membership has declined by nearly 5,000 members by pursuing its open tent strategy, raising questions of whether the open-tent model itself is simply no longer viable – in a more digital world where advisors can and do segment themselves into more focused groups and organizations – or if IWI will be able to execute the strategy more effectively to succeed anyway despite the FPA’s struggles?

Big Broker-Dealers Get Even Bigger (Jake Martin, AdvisorHub) – According to the latest research from Cerulli Associates, the largest broker-dealers are continuing to just get larger, with the portion of brokers working at the top 25 broker-dealers up to nearly 72% in 2019 (from just 58% in 2009), and the share of AUM amongst those firms increasing to a market share of 90% (up from 83% over the same time period). The driving force appears to be the depth of technology expectations that brokers have of their broker-dealers, from trading/investment platforms to tools to support client onboarding and client service, which are simply not economical for small-to-mid-sized broker-dealers to build and implement themselves. As a result, the broker-dealer marketplace is increasingly about finding the necessary economies of scale to make such investments, leading to both a dearth of new broker-dealers starting up, and shift of brokers from small broker-dealers to larger ones with better technology, and outright mergers and acquisitions as the largest broker-dealers continue to acquire their small- and mid-sized brethren (most recently including this week’s announcement that Cetera Financial Group’s 8,000 brokers will expand by another 900 with the acquisition of Voya). And with the industry increasingly shifting to the AUM model and operating as (hybrid or standalone) RIAs, broker-dealers are also increasingly finding themselves competing outright with RIA custodial platforms like Schwab and Fidelity, which further ups the stakes for the level of technology that smaller broker-dealers must bring to the table to compete.

RIAs Leveraging TAMP Tech The Most (Nicole Casperson, Investment News) – According to the latest “American’s Best TAMPs – 2021 Edition” report, turnkey asset management platforms are quickly growing into a multi-trillion sub-industry serving financial advisors, from mega-players like Envestnet ($229B of AUM) and SEI ($69B of AUM) and AssetMark ($67B of AUM) to more specialized offerings like Adhesion Wealth Advisor Solutions ($13B of AUM). Notably, though, while the TAMP business largely originated as a separately-managed-account offering for broker-dealers, it’s the RIA channel that is now dominating growth for TAMPs, especially given that independent RIAs lack the centralized staff and scale to facilitate trading and portfolio management internally (unlike brokers who may have the support of their broker-dealer’s home office), and having a TAMP provider that is paid in basis points also helps to buffer the advisory firm’s financial health in the event of a bear market (as the portfolio’s decline will be matched by a decrease in trading costs to the TAMP, unlike having full-time trading staff that still expect full salaries as employees even when markets fall). And of course, as advisory firms, and especially RIAs, increasingly focus on more financial-planning-advice-centric value propositions, it becomes increasingly appealing to outsource the investment management to keep the firm’s focus on its (internal) financial planning advice services to clients. Which suggests that as the industry continues to become more advice-centric, the outlook for TAMPs remains bright, notwithstanding their recent rapid growth?

Direct Indexing Looks Set To Disrupt The Retail ETF Market (Steve Johnson, Financial Times) – The core premise of “direct indexing” is buying a portfolio of individual stocks that emulates an index, but without using a pooled vehicle (e.g., a mutual fund or ETF) to facilitate the investment and, instead, using technology to ensure that the right stocks are purchased in the right amounts. But once technology enables the re-creation of an index without the index fund, it can also easily facilitate customization – whether factor tilts to value or quality, personal investment preferences like ESG, or to maximize tax-loss harvesting – resulting in a unique form of “custom indexing” that is threatening to disrupt the existing market of mutual funds and ETFs. The attention on direct indexing has grown rapidly in recent months, as Morgan Stanley acquired Eaton Vance (and its affiliate, Parametric, which was the #1 provider of direct indexing solutions), and shortly thereafter Blackrock acquired Aperio (the #2 direct indexing provider). Which is not only drawing the attention of investors and advisors, but even index providers themselves, who are now beginning to work with technology firms to figure out how best to license their index allocations to the direct indexing providers for advisors and investors to implement (and/or customize) those indices to suit their individual preferences. Thus far, direct indexing strategies have been primarily the domain of high-net-worth clients, and are beginning to emerge as institutional offerings, but given the size and scale of the retail investor market opportunity, predictions are rising that direct indexing will quickly reach retail investors by the middle of the 2020s as well for anyone who wants (and is willing to pay a little more to get) more than ‘just’ a simple standard index fund (which will likely remain cheaper in a mutual fund or ETF form… for those who are satisfied with nothing more than the out-of-the-box index solution?).

As Alternative Investments Boom, So Too Does The CAIA Designation (Gary Stern, RIA Intel) – Over the past decade, the combination of ultra-low interest rates (driving advisors and their clients to look for alternatives to traditional bonds) and the growth of pre-IPO companies in private markets (driving advisors and their clients to look for ways to access those private markets rather than just relying on publicly traded stocks) is driving substantial growth in the world of “alternative investments”, which in turn is fueling not only the growth of alternative investment platforms like iCapital and CAIS, but also professional designations for alternative investments like the Chartered Alternative Investment Analyst (CAIA). After all, the reality is that the reduced liquidity and reduced transparency often associated with alternative investments do increase the stakes for having the necessary education to do the proper due diligence. Which in turn helps to explain why the CAIA organization grew by more than 45% in just the 3 years, from under 8,000 members in early 2018 to over 11,500 today, with 4,230 people signing up for the September 2020 test for the CAIA designation. Notably, though, many alternative investments still have accredited investor requirements, limiting their accessibility – and also limiting the number of financial advisors who have a material number of clients who even could participate in such alternatives. Nonetheless, with the financial services industry increasingly trying to improve accessibility to alternatives – even including proposals with the SEC to make them more accessible in non-accredited-investor packaged formats – the ongoing rise of alternative investing suggests a continued rise in demand for alternative investment designations like the CAIA.

Does Your Client’s Portfolio Really Need Bitcoin? (Amy Arnott, Morningstar) – The price of Bitcoin has been on a wild ride in recent years, exploding upwards to more than $17,000 in late 2017, only to crash more than 70% in 2018, but then double in price in 2019, and nearly quadruple in 2020, with a current price now approaching $50,000. The growth is driven in large part by a shift in the positioning of Bitcoin itself, from what was originally an alternative digital form of currency, into something that is increasingly being viewed as an investment unto itself, with even large institutions getting on board (from MassMutual purchasing $100M of Bitcoin in late 2020 for its investment portfolio to Blackrock indicating that it is preparing several mutual funds that will be able to invest in Bitcoin futures). At its core, the bullish case for Bitcoin is that, because it is structurally limited to only 21M “Bitcoins” that can ever be mined, the permanently limited supply will support and over time increase its value as more dollars and demand chase a fixed amount of Bitcoins that can ever be traded, even as Bitcoin itself increases in popularity not only as an investment but potentially as a currency facilitating everything from international transactions to low-cost banking to a wide range of micropayment applications. (Not to mention that Bitcoin’s limited supply also arguably makes it an effective hedge against inflation, roughly akin to gold.) On the other hand, skeptics note that Bitcoin still has no ‘intrinsic’ value – unlike gold, it can’t even be used functionally in applications from machinery to jewelry – which means it remains subject to the whims and interest of investors to believe it does have a future, helping to explain its particularly wild down-70%-up-300% price changes from year to year, and leading Bitcoin owners to acknowledge that they’ll not just have to hold and stay the course but “HODL” (Hold On for Dear Life) through the volatility. In fact, Bitcoin thus far hasn’t even functioned as gold has, where the latter is often a vehicle that rises during times of crisis as a flight to safety, while Bitcoin fell 44% in the fourth quarter of 2018 (while the broader market fell 14%), and Bitcoin fell 38% during the early 2020 pandemic volatility (similar to the ~35% decline of the broader stock market). And of course, while Bitcoin supply is limited, the fact that the currency is purely digital doesn’t prevent alternative digital cryptocurrencies from arising and siphoning off the dollars currently flowing in (as some like Ethereum, Litecoin, and more already have). In addition, Bitcoin is still very expensive to invest in – at least at this point – with popular platforms like Coinbase charging a 0.5% fee per purchase plus an additional fee based on the source of funds that varies from 1.49% (via a bank account) to 3.99% (via a debit card) per purchase, and vehicles like the Grayscale Bitcoin Trust (an ETF of Bitcoin for accredited investors) which charges a 2% annual fee and has limitations on redemptions. As a result, Arnott suggests that, at best, advisors who want to invest in Bitcoin for their clients would allocate at most just a few percentage points, as while historical analyses may look appealing (given Bitcoin’s meteoric rise, “just” a 10% allocation to Bitcoin would have resulted in a 64% annual return but a 98% standard deviation over the past decade!), the past as always is not necessarily a predictor of the future and the sheer volatility of Bitcoin produces significant risk even if Bitcoin itself will survive and thrive in the long run.

The Tiny Word That Ruins Prospect Presentations (Dan Smaida, Advisor Perspectives) – The work “if” has many uses, but in the context of sales and business development, it’s often used as a way to paint a picture of the outcome that the advisor might help the client achieve… such as “If I had something that could…” (would you be interested!?) or “If you had a way to…” (would you find value in that/me!?). Yet in practice, when such what-if conversation threads arise, it’s usually quite obvious to all – including the prospect themselves – where the leading question is going, to the point that any experienced prospect who hears “What if I/you had…” just knows that a sales pitch is coming. Of course, the reality is that effective selling often does involve painting a picture of what a better future (with the advisor’s services) might look like, but Smaida suggests that if that’s the goal, it’s better to start with a more ‘consultative’ approach that asks open-ended questions. For instance, instead of “If I could show you a way to do X, would you be interested?” to simply ask “Would you like to be able to do X?” and let the prospect respond. After all, if that’s not actually what the prospect wants, it’s good to clarify upfront. And if it is what the prospect wants, it’s better to be concrete about what can be achieved instead of just talking about hypotheticals (e.g., “We can help you with X! I propose we take the next step together!” or simply “We have a way for you to do this!”). But the starting point is simply to turn a little more attention to the word “if”, consider whether and how you’re using it in ‘approach talks’ with prospects, and if you are, consider if such leading questions are really effective, or if, instead, it would be better to tackle the issue even more directly by simply clarifying what the prospect wants, that you can deliver it, and proposing to take the next step forward together?

Using An Emotional Appeal To Stand Out From The Competition (Jay Mooreland, Schwab Advisor Services) – When the reality is that investment decisions aren’t always made in purely rational terms, owing to a wide range of behavioral biases, one approach is to try to help clients be more rational… and the other is simply to appeal more directly to their emotional side. For instance, instead of simply talking about the advisory firm’s investment or even financial planning value propositions, focus on why you as the advisor got into the business and speak to your passions for helping clients… because in the end, human beings connect emotionally with other human beings (and connect with humans far more than businesses with ‘rationally’-oriented value propositions). For instance, if Advisor A “buys individual stocks and bonds for clients that help them control taxes” and Advisor B “provides clarity and confidence for investors through a three-step plan”, it’s the latter that is more likely to connect directly with prospective clients (who desire feelings of clarity and confidence!?). In turn, getting clarity on the (more emotional) value proposition also helps the financial advisor to more effectively craft a memorable ‘elevator pitch’ – which, again, isn’t about polishing the technical benefits of their services, but the emotional ones (e.g., “I create reliable income strategies so that my clients can enjoy their retirement without having to worry about what the market or economy does”). And as the (more emotional) value proposition and elevator pitch get clearer, it also becomes easier to communicate it consistently (from the firm’s website to its social media presence), better identify a target clientele who find resonance with that value proposition, and make it more actionable (from stories and hypothetical case studies to illustrate how the firm delivers on its value proposition, to having clear marketing calls to action designed to resonate with prospects seeking those kinds of emotional connections).

Oren Klaff’s 7 Step Buyers Process For Financial Advisors (Kristen Shea, LinkedIn) – One of the most frustrating moments in trying to get a new client is when someone says “yes” that they’re ready to move forward, but the truth is that they’re really not, and either the close falls through, or the prospect comes on board only to take no action steps to move forward (and after weeks and weeks of trying, the effort falls apart). The key is recognizing that the usual sales process – introduce an offer of value, be optimistic about how much it can help, overcome any objections that arise, and then repeat the process until someone says “yes” – is inherently flawed, because playing “objection whack-a-mole” with optimistic enthusiasm often just makes the prospect tired of playing the game… so they say “yes” not because they’re ready to move forward, but simply because it’s the only way to get out of the meeting when the advisor says “So what do you think? Are you interested?” (Because if the prospect says “no”, it’s just back into the sales pitch again!) So what’s the alternative? Oren Klaff, author of “Flip The Script“, suggests an alternative 7-step approach: 1) establish the advisor’s expertise to solve the client’s problem (e.g., “I’ve helped a thousand people retire successfully. Let me tell you what works best for people like you.”); 2) outline the obvious ways that the process might fail upfront (e.g., “most people will assume that fees are the best way to evaluate a financial advisor, but in reality the most expensive advisors may provide services you don’t need and the cheapest may not address all your concerns; with retirement, it helps to have someone like me on hand to help you avoid the obvious ways to fail like undue market risk or taking excess retirement distributions”); 3) outline less obvious ways to fail as well (e.g., “7 out of 10 beneficiary designations are not completed properly, and could create a crisis for your surviving spouse if something happened to you”); 4) list the obvious actions to take to get started (e.g., “a good place to start is simply getting a handle on all your current retirement assets and income sources”); 5) list the less obvious ways to get started (e.g., hacks to jumpstart the process, like optimizing when to start Social Security or planning for the transition to Medicare and choosing the right Part D prescription drug plan); 6) hand over autonomy to the client (e.g., “at least, that’s where I would start having done this more than 100 times already, but I’m not the boss of you, you can do what you want next”), and then 7) re-direct to keep in boundaries (e.g., when an objection arises, state “people are always worried about that issue, but in the end it’s never an issue. There are 25 things to worry about when choosing a financial advisor, but there are only 5 that really matter. Focus on these 5 and everything will be perfect. Focus on the other 20 and you’ll waste a lot of time…”). The key point, though, is simply about positioning the advisor as an expert, who can help with both the obvious and also the less obvious problems, by providing obvious and also the less obvious solutions, and let the client keep autonomy to make a decision but direct them to the (few) factors that really truly matter (and, hopefully, reflect well on the advisor!)!

How to Plan Your Life When the Future Is Foggy at Best (Kate Northrup, Harvard Business Review) – No one expected 2020 to turn out the way it did, from economic to market volatility, business to personal life disruption and turmoil, which for most was a challenge not only in planning their personal priorities but also in advancing in their business and career goals. Which is especially frustrating as financial planners, as we ourselves are highly inclined towards planning our own futures, and having a sense of being out of control is associated with higher levels of anxiety and depression and even mortality risk. Yet Northrup suggests that in the end, the vicissitudes of life (and especially 2020) don’t mean that we have to abandon planning altogether, but instead simply do so in a more adaptable manner that is less about the long-term goal and more about just targeting the next waypoint as a form of “micro-planning” instead. At its core, micro-planning is really just a matter of taking a longer-term goal and breaking it down into yearly/quarterly/monthly/weekly/daily practices that set you on the path for success – such that even if the long-term goal has to change, there is still positive momentum towards some more positive future. In turn, Northrup proposes her own 6-step micro-planning process: 1) Get clear on your Purpose (what are you trying to build towards in the long run?); 2) Set the Year (what do you have to accomplish in the coming year to make a positive step in the direction of the long-term goal?); 3) Set the Quarter (what’s working or not from the last quarter, and is there any step that needs to shift in the coming quarter to keep making progress towards the annual goal?); 4) Set the Month (are you on track for the Quarterly goal, taking at least some incremental step over the past month to keep moving towards that goal?); 5) Set the Week (with a weekly to-do list of what you need to accomplish in the coming week to keep some positive momentum); and 7) Track the Days (as to-dos are set for the week, the focus of the Day is whether you’re feeling you have positive energy – which you can track in a spreadsheet or a journal as you wish – to monitor whether you’re having more good days than bad, and over time see if you’re making progress towards a better outcome).

Learning From Your Mistakes (Fred Wilson, AVC) – As financial planners, in particular, we are hard-wired to plan in advance to avoid mistakes to the extent possible. Yet Wilson notes that in the end, if you talk to any successful person, one thing you’ll find is that they’ve made a ton of mistakes. In part, that’s simply because no one is perfect, but also because in the end, we don’t actually learn much from our successes, as while we try to replicate our successes when they work, it’s only when we fail or make mistakes that we really get a lesson about where the limits are and how to do something different or better next time. Which is important because it means that while we may try hard to avoid mistakes, and regret mistakes, and feel embarrassed by mistakes or angry at ourselves for making them, their positive value means that we should really be trying to simply own the mistake, fix the mistake, and then learn from it and simply try not to make that mistake again. Because in the long run, we can’t really avoid mistakes, but if we’re learning from the ones we’ve made to avoid repeating them, we’ll still be sustaining a positive forward momentum towards success.

Why You Should Practice Failure (Shane Parrish, Farnam Street) – Mistakes are one of the most powerful learning tools we have, as it’s only when we screw up and fail that we really get an opportunity to see what can and should be done differently (or not at all!) next time. Which means, in essence, that failure is a natural byproduct of trying to succeed, and part of the journey in getting better to reach the next stage of success. This raises the question of whether we should spend less time trying to minimize our risk of making mistakes or failing, and instead “practice” failure as a means of trying to learn (and reach the next stage of success) more quickly. For instance, at the dawn of the aviation age, Amelia Earhart talked about how pilots learned various airplane stunts like slips, stalls, and spins, not just for show but also because it trained them how to handle the same situation in a more dangerous context (e.g., when it happened unexpectedly and a quick reaction was necessary to avoid a disastrous outcome). Of course, doing dangerous stunts – and not actually having them be dangerous – also meant extensively studying the issue beforehand, understanding the risks, the critical variables to pay attention to and manage, and how to prepare the optimal response… and then the pilot went up in the air, and practiced the ‘failure’ of the airplane stalling out. The key is recognizing that there’s a lot that can be figured out in advance to plan for a problem, but only experience counts in the moment when there is no time to think the process though. Which means in the end, the best way to avoid failing when it actually counts is to practice failure and try to more often create those opportunities when failure might occur (when it’s safer to do so), such as deliberately practicing or role-playing tough client meetings and how to handle difficult conversations. Or as Earhart put it, “If we don’t practice failing, we can only safely fly on sunny days”.

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.

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