Weekend Reading for Financial Planners (Apr 24-25)

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.

Morgan Stanley Sells E*Trade RIA Custody Unit to Axos (Samuel Steinberger, Wealth Management) – Last year, Morgan Stanley made waves by acquiring online brokerage firm E*Trade, which was primarily not even about E*Trade’s “retail” brokerage business but its lucrative Corporate Services unit that manages stock plans and equity compensation for a wide range of publicly traded companies… but important to advisors, also included E*Trade Advisor Services (and the advisors formerly part of Trust Company of America, which E*Trade itself acquired in 2018). For the advisor community, the Morgan Stanley acquisition raised both concerns about the long-term appeal of affiliating to E*Trade Advisor Services (as independent advisors often view themselves as competing against “Wall Street” wirehouses, and may not want to affiliate with an RIA custodian owned by one), and simply whether Morgan Stanley would support the RIA custody services unit it had acquired (which is not central to its business model given Morgan Stanley’s existing base of nearly 15,000 brokers). And so it perhaps comes as no surprise that this week, Morgan Stanley announced that it was selling the E*Trade Advisor Services unit to Axos Financial, which is currently a combination of online bank, clearing business, and ‘robo-advisor’ (having acquired WiseBanyan in 2019). Notably, though, Axos doesn’t appear to simply be acquiring E*Trade Advisor Services to bulk up its retail business; instead, the company has stated that it intends to leverage the scale of its existing systems, plus the E*Trade Advisor Services acquisition and its $13B of custody assets, to become an active competitor for RIA custody against the likes of Schwabitrade, Fidelity, and the ‘other’ RIA custodians that compete for business today. Ultimately, it remains to be seen how Axos will position E*Trade Advisor Services (and the former TCA “Liberty” platform) to compete for RIA business… but in an environment where the Schwab/TD-Ameritrade merger drew scrutiny for its potential limitations on competition in the RIA custody business, arguably the RIA community is still looking for any level of additional competition to the existing incumbents?

EY Report Details Good, Bad, and Ugly News for Wealth Managers (Michael Thrasher, RIA Intel) – In its latest report on how wealth management clients are adapting in the aftermath of the COVID-19 pandemic, an EY report finds that overall, affluent clients are becoming more risk averse and focused on diversification and security, and more focused on achieving personal goals aligned to their purpose. The significance of this shift is that it’s no longer “just” about the core services that an advisory firm provides and how it will engage clients, but the way it connects to the transformation that clients are trying to achieve by choosing to work with a financial advisor. In addition, clients increasingly are indicating a desire for more reliable “digital services”, not as an alternative to their financial advisors, but a value-add from their financial advisors that they would even be willing to pay for separately (especially Millennial clients and very high-net-worth clients, who also showed a strong preference for wealth managers that better take into account diversity and inclusion). Other notable trends in the study included that clients want: more contact with their financial advisors; technology to leverage training and education for them as clients; the ability to view their entire financial picture in one place; and more access to specialists for their specific needs. On the other hand, clients are still signaling some concern about the level of data they share with advisors, with 72% ready to share their financial goals and ambitions, but only 41% are willing to share investment data from other providers, and only 20% are willing to share transactional data from their spending.

New Study Highlights What Services Should Be Included In Advisor Fees (Catherine McBreen, Advisorpedia) – With a growing focus on what is an “appropriate” advisory fee, and what value advisors must deliver to justify their fees, Spectrem Group has released a new study highlighting what affluent clients actually want to see included in their advisory fees. The results show, perhaps not surprisingly, that the #1 answer is “investment management” at 68%… but notably, at only 68%, implying that nearly 1/3rd of consumers are specifically looking to hire a financial advisor for non-investment-management advice. Accordingly, the next highest response – at 65% – was financial planning itself, followed by the various modules of financial planning, including retirement planning (44%), tax implications (35%), estate planning (24%), insurance coverage analysis (only 4%), and education planning (only 2%). This preference for comprehensive financial planning advice over the more modular was also highlighted in the fact that 70% of wealth investors believed that having an advisor to help ensure they follow the plan on an ongoing basis is also valuable, and 71% outright preferred a plan that is ongoing over one that is static. On the other hand, the fact that a limited number of investors wanted more targeted advice – e.g., 4% wanted Social Security guidance, 4% wanted health insurance guidance, and 1% wanted real estate guidance – also suggests that it is actually the narrower and more specific services that give advisors the opportunity to differentiate by specializing in those areas, rather than offering the broad-based services that many clients want but virtually all advisors already offer.

The Power of Financial Habits (Samantha Lamas, Morningstar) – The fundamental tension of most financial decisions is a balance between something we “want” (that grants immediate pleasure) against something we “should” do (that only offers benefits later, like saving for retirement). And while we may be intellectually aware of our “shoulds”, our brains are hard-wired to enjoy the pleasure of immediate gratification, which makes it very difficult to actually get around to doing the “shoulds” and putting them into practice. Lamas highlights that because of this tension between wants and shoulds, one of the best approaches is to simply bypass the system by creating good financial habits… because the whole point of turning something into a habit is that we don’t have to think about whether to do it or not in the first place (we just “do”, on autopilot!). In fact, a recent study from Morningstar found that some financial habits are especially well-correlated to our reported well-being, including “always pay debt in full when possible”, “don’t spend more than you make”, “save at least 10% of your income”, and “invest in line with your risk tolerance” (though notably, other rules of thumb scored less well, such as “avoid borrowing from your 401(k)”, “organize finances regularly”, and “start investing early”). Ideally, habits are established by automating a behavior through technology (e.g., “pay yourself first” approaches to saving by automatically reallocating dollars from the direct deposit checking account to the savings account), though Lamas notes other important points to establishing good financial habits, including considering the environment (if you want to have a better habit of not spending more than you make, delete those shopping apps from your smartphone!), and making sure you create some reward incentives for yourself (e.g., splurging on a fancy coffee drink or spending some time reading a guilty pleasure novel after a small financial win!).

Five Superpowers Of Investing Success (Josh Brown, Reformed Broker) – The traditional view of business and investment success is that it takes the intelligence and special genius of those like Bill Gates, Steve Jobs, or Warren Buffett to have breakout success, but Brown notes that while having some ‘table stakes’ level of intelligence certainly matters, there are other key traits that actually reveal why some of the most intelligent people struggle while other ‘only reasonably intelligent’ people have far more investment and financial success. In particular, the key traits Brown identifies are: Restraint, as being able to put aside what you want now in order to achieve what you want most (but in the future) is a crucial discipline for success, and being able to visualize what that success looks like in the future is crucial to inspiring us to engage in the necessary restraint to get there; Curiosity, as the reality is that the world itself changes, and what worked previously, or to get us to where we are, may not work in the future, so a natural level of curiosity to keep up with the pace of changing markets is crucial; Creativity, which is ultimately about not just getting stuck on the way the world and your financial situation are today, but having the creativity to see a future that may be different (to re-shape your path accordingly); Patience, which is similar to Restraint and the discipline it entails, but is more about the ability to self-control through what may be protracted periods where it seems like something is not working but being able to maintain confidence and keep the faith that it will work in the long run; and Courage, when sometimes you need to be able to find the bravery to take the action that needs to be taken, or the action that no one else is taking because they can’t see things from your perspective and only you know what must really be done if you can just muster the courage to do it.

The Delusions Of Crowds: Why People Go Mad In Groups (William Bernstein, Next Big Idea Club) – Financial theorist William Bernstein is well known for his seminal investment books, including The Intelligent Asset Allocator and The Four Pillars of Investing, and has recently released his latest book, “The Delusion Of Crowds: Why People Go Mad In Groups“. As the title itself implies, the book explores how while, in general, markets are viewed as being highly efficient, due to the collective ‘wisdom of the crowds’ to set the price of investments, that sometimes the crowd runs amok as a collective group… resulting in fantastic financial bubbles (and subsequent collapses). And while bubbles themselves have been highlighted heavily in the past two decades, from the tech bubble (and crash) of the late 1990s to the real estate bubble (and crash) of the late 2000s, Bernstein notes that such bubbles have a longstanding history, as documented in “Memoirs of Extraordinary Popular Delusions And The Madness Of Crowds“, which was published by Charles Mackay in 1841(!) about everything from the stock market manias of Paris and London in 1720 to the Dutch tulip craze of the 1630s. Which Bernstein suggests isn’t just a matter of humans being strange, but a naturally selected behavior to imitate the crowd because that’s how our species survived (from staying with the herd for safety, to learning key skills for survival from shooting a bow to carving out a kayak by imitating others who had already learned them). So how do we distinguish general imitation from bubbles? Bernstein suggests four key elements: financial speculation dominates all conversation (i.e., people no longer casually talk of weather, family, or sports, but of stocks, bonds or real estate); sensible professionals quit reliable good-paying jobs to speculate in those assets; skepticism is met with anger; and observers begin to make outlandish financial forecasts (e.g., not gains of 10%/20%/30% but 2X/3X/10X). And unfortunately, these trends can become cemented by the tendency of our brains to form a narrative around the events we’re seeing, such that even bubbles that “shouldn’t” make any sense are rationalized to the point that they seem to, even to the point that the narrative controls over the underlying data that may no longer support it. Which is why it’s so crucial to always start (and stay focused on) the data first and foremost.

Good Culture And Toxic Culture (Tony Sirianni, AdvisorHub) – AdvisorHub recently implemented a new study of the culture at various financial services firms, an area that employees (including financial advisors) overwhelmingly say is very important (at 88%), but in practice face a wide range of approval about the culture of their firms in particular. Overall, the AdvisorHub Culture study finds that most advisors (76%) are proud of their firm’s culture, though notably this varies significantly by channel, with 82% of advisors at independent and regional firms reporting favorably on their firms’ cultures but only 43% of wirehouse advisors reporting the same. Which arguably does a lot to explain the breakaway broker movement and why so many financial advisors have been leaving the employee channel for independent channels. The irony that Sirianni notes, though, is that the woes of wirehouse culture appear to be largely “self-inflicted”, a result of the rise of certain wirehouses ditching the Broker Protocol and adopting an approach of aggressively pursuing Temporary Restraining Orders (TROs) against their former brokers who leave (regardless of how many years or decades those advisors may have given to their firms before deciding to leave). And the cultural harm of TRO practices is only amplified by the reality that what firms try to limit – e.g., taking client phone numbers – is ignorant of the modern social media age, where a departing advisor can simply announce on their Facebook page or LinkedIn or Twitter accounts that they’re changing firms and the clients who “follow” them will likely see the announcement of their own volition, anyway. Though notably, as the use of employment contracts with restrictive covenants is now on the rise at a growing number of independent advisory firms as well, the question arises whether independent firms may soon self-inflict the same culture challenges that wirehouses are now struggling with if they, too, try “too hard” to prevent their advisors from making a change in their own careers?

Shift Your Hiring Goal From Culture-Fit To Culture-Add (Rianka Dorsainvil, Investment News) – It’s a common saying in the world of hiring that it’s better to hire for culture fit and attitude and then train for skills. Yet while it arguably is more important to be certain someone is a “fit” for the organization and can learn the skills than hire someone who has the skills and isn’t a good fit (which just makes it likely they’re going to end out leaving in the future anyway), Dorsainvil notes that in a world of trying to broaden the industry’s diversity and inclusion, hiring with too much of a focus on “culture fit” can pigeonhole a firm into a very narrow homogeneous group of team members that can eventually be blind-sided by a lack of diverse perspectives when the business faces new challenges. So what’s the alternative? Dorsainvil suggests focusing not on culture fit but on culture add – finding team members who are an exceptional fit for the position and can bring something additive to the organization’s perspective and culture. Notably, though, because most firms tend to lead with a detailed job description that focuses on the desired skills, hiring for culture-add also may mean adding a disclaimer to job descriptions suggesting that if people believe they’re a good culture-add to the business, they should apply even if they don’t meet all the required qualifications (and at least make their case!), re-evaluating the hiring process to avoid unwittingly introducing bias into the hiring process (e.g., remove names and contact information and schools from resumes before the hiring committee reviews them so candidates are viewed based on qualifications alone), and being certain that the opportunity is listed in a wide range of places to attract a more diverse pool of applicants to begin with.

10 Steps to Creating a Data-Driven Culture (David Waller, Harvard Business Review) – The rise of the computer (and then the internet) has meant that businesses now have more data than ever before at their fingertips to sift through and analyze in order to make more data-driven decisions for their businesses… yet, in practice, most companies struggle to effectively incorporate all that data into their decision-making process. Yet while many suggest that this is because the data that’s produced often isn’t “usable” without some additional tools, Waller’s research suggests that, in the end, the real blocking point is cultural, in that the business simply doesn’t have a culture of looking to the data first to make a decision. So how can a company shift its culture to become more data-centric? Waller offers up 10 tips, including: a data-driven culture has to start from the top (i.e., if the founder/leader of the organization doesn’t insist on data to back up decisions, the rest of the organization isn’t going to feel like they need to, either); it’s not enough to just aim at being data-driven in general, the real benefit comes in taking some time to figure out what the key data points and metrics are that really drive the business forward (so that when business decisions are made, their impact and consequences can be tracked!); when making data-driven decisions, don’t just quantify an expected outcome, but also its uncertainty (e.g., are you 90% confident in this outcome, or only 50% confident… and if it’s only 50%, what would it take to become more confident?); be certain that everyone has access to the key data in the first place (which may sound trivial or obvious but is often a large practical blocking point!); and remember the importance of training on the data tools being used, but don’t train too far in advance when it’s not really relevant yet (instead, “just-in-time” training when the tools are being rolled out is most likely to gain adoption).

Coping With A Sense Of “Overwhelm” (Patty Kreamer, Advisor Perspectives) – Despite the reality that the COVID-19 pandemic has largely eliminated our commutes and has reduced the ‘distractions’ of the office, few financial advisors can say they have felt less overwhelmed over the past year. In part, this is because change itself can create a lot of turmoil and make us feel overwhelmed. And in part, the result is simply because when so much change occurs, it’s easy to lose track of what we really need and value in our lives (which means rapid change can unwittingly result in a significant misalignment between our needs and values and how we’re actually living our lives). Accordingly, Kreamer suggests that the key starting point is to get back in touch with our needs and values… by actually listing out a series of needs from achievement to adventure, fame to family, freedom to health, power to service, that advisors can check off to get in touch with their needs (full list in article), and then following it with a similar list of values (i.e., personal qualities or passions) including autonomy, competency, creativity, honesty, humor, knowledge, loyalty, order, and reason (again, full list in article). By marking off their needs and values, advisors can then take a fresh look at their lives and whether they’re aligned to their needs and values. For instance, one advisor had “nature” as a need, and realized that spending all her time in various “caves” (home, car, office) and the loss of connection with nature was contributing to her feeling of overwhelm (remedied by starting every morning with a walk, and every weekend with a hike). Another advisor valued honesty but was at a firm engaging in ‘questionable’ behavior that it was keeping quiet in the hopes of blowing over… and the advisor realized that the real key was that he needed to leave the firm and find some place that was better aligned with his values (which eliminated his mental distraction of what to “do” about the problematic behavior of his firm, eliminating his sense of overwhelm). So are you clear on your top needs and values, and is there anything in your life that’s misaligned for you (that you could begin to take the steps to remedy)?

Making Better Use Of Networking Time With Office Hours (Sonya Dreizler, Morningstar) – After a certain point in an advisor’s career, as we establish ourselves in our personal, business, and professional communities, there comes a time where people may start to reach out with the proverbial (or actual) request to “pick your brain for a moment”. The good news of such inquiries is that they create powerful networking opportunities to find new business and establish new relationships. The bad news is that they can often be inefficient, splintering the advisor’s time in not-always-productive ways (especially when it turns out they were just trying to get a crack at your advice services for free). Dreizler has addressed this challenge by implementing a form of “Office Hours” – akin to what you might have experienced in college, in being able to drop in to see a professor or teaching assistant to “pick their brain”… but only on their terms, in their location, at their specified time. In the advisor context, Dreizler conducts her office hours for a set 1 hour every week, where up to four attendees can pre-register via her email newsletter or website through a dedicated registration page (which completes the process automatically via templated emails, Calendly, and a Zoom integration). When Office Hours is approaching (for Dreizler, on Wednesdays at 11AM), she checks briefly in advance to see who has registered, and what their questions are. Notably, Dreizler conducts the Office Hours with all 4 registrants at once, and sets expectations… that the session in total will be 40 minutes long, that she’ll answer questions as best she can, and then invites each person to ask a question where she and the whole group spend 5-8 minutes discussing. In practice, some sessions have a more ‘natural’ conversation flow as questions are similar, while in other Office Hours they may be more disjointed, but the wider-ranging calls still provide opportunities for all the call participants to get engaged and even learn something new from each other as well!

Decrease Distraction With A Personal Kanban System (Tim Maurer, Forbes) – For most financial advisors, the only thing we’re taught about growing a business and being successful is ABC – Always Be Closing – and that the best (and only) way to judge the value of our time is by how much time we’re spending meeting with prospects to grow the business. Yet in reality, as the advisory firm grows and becomes more successful, creating a personal time management system to maintain our own focus becomes increasingly important… relying on time management and organizational skills that we’re never actually taught in the business. Especially given the reality that in order to do the ‘deep work’ of advising clients (or analyzing their financial situations), we need to be able to bring focus to the time… which means having dedicated time to do that work. Maurer suggests that at its core, advisors can divide the time of their days into four core processes: Serving (interacting with clients and prospects), Analyzing (research and number-crunching), Learning (advancing our own professional knowledge), and Collaborating (working with the team, engaging in company meetings, etc.). Given this system of organizing our tasks into groups, we can then set our focus using a personal Kanban board (Kanban is Japanese for “signboard” or “billboard”, and is implemented as a series of columns or boards where ‘notes’ are tagged into each column to track its progress). Maurer suggests creating a Financial Advisor Kanban Board that defines the different modes and a color for each (e.g., Purple for Serving, Blue for Analyzing, Orange for Learning, and Green for Collaborating), and then a series of columns to track our focus time, including Options (where all new tasks land that are “options” of what we might be doing), Waiting (tasks that are waiting on someone else’s action first but you don’t want to lose track of), This Week (what you’re hoping to accomplish this week), Now (what you’re working on Now, which can be no more than 3 at a time… forcing you to truly prioritize), and Done (where you can check items off and give yourself a pat on the back!). Maurer uses Trello to manage his personal Kanban board (and offers a template of a Financial Advisor Kanban Board to use), though in the end the real point is just the organizational structure and flexibility to keep track of what we’re working on and make sure we’re clear on what really, truly, has our Focus to get done Now.

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 Bank of America study.