Weekend Reading for Financial Planners (September 19-20) 2020

Executive Summary Enjoy the current installment of “Weekend Reading For Financial Planners” – this week’s edition kicks off with the news that despite concerns from fiduciary advocates that the Department of Labor’s new “fiduciary” rule will undermine consumer protections by allowing “fiduciary commissions”, the annuity industry is mounting a challenge […]

Executive Summary

Enjoy the current installment of “Weekend Reading For Financial Planners” – this week’s edition kicks off with the news that despite concerns from fiduciary advocates that the Department of Labor’s new “fiduciary” rule will undermine consumer protections by allowing “fiduciary commissions”, the annuity industry is mounting a challenge to the rule out of a concern that it is still too stringent in attaching a higher standard of care to sales of annuities into IRA rollovers, raising the question of whether a final rule will be issued in the coming months or not (and if it is, whether it will again be challenged and struck down as the last DoL fiduciary rule was).

Also in the news this week are some interesting new industry studies, including a look at the growing interest from industry providers to gain adoption of Health Savings Accounts amongst financial advisors to use as a supplemental retirement savings account for more affluent clientele, and another study finding that 44% of investors (and 68% of Millennials) would consider switching away from an advisor who did not align with their political views (stoking fears amongst some advisors that political discussions will cause lost clients, but signaling an opportunity for others that being more upfront about the advisor’s politics can actually better bind clients who share similar political views).

From there, we have a few articles on industry trends around advisor platforms, including a veritable explosion of new recruiting efforts from broker-dealers that have transitioned to virtual recruiting (as it’s now easier to vet a new platform from the comfort of your home office!?), the ongoing tension that RIAs face in choosing which RIA custodian on whom they both depend and may compete with (as the Schwab-TD Ameritrade merger creates a veritable oligopoly of mega providers), and the options for advisors to consider if they don’t have enough in assets under management to affiliate with one of the mega RIA custodians.

We’ve also included a number of marketing articles this week, from a look at how anticipated SEC revisions to the advertising and (anti-)testimonial rules could create an upheaval in advisor marketing in 2021, how “expertise marketing” is different than traditional advisor marketing and is all about finding synergies that build compounding marketing momentum over time, and why it’s so important to consider the Client’s “Lifetime Value” and not just the top-line revenue growth of the firm to understand the health of an advisory firm and its marketing efforts.

We wrap up with three interesting articles, all around the theme of what clients really want from the advisor-client relationship: the first explores a recent Spectrem Group study that finds, despite the rise of robo-advisors and more and more online technology, that more consumers are relying on financial advisors now than in the aftermath of the financial crisis a decade ago (though at the same time, there has also been an uptick in self-directed investors relying on increasingly sophisticated technology solutions); the second provides an interesting perspective from the client’s point of view (literally, written by a client who has had many financial advisors over the years) on what really matters when it comes to client retention; and the last recaps a keynote session from this week’s Morningstar conference about how the future of the financial advice industry is changing, where the AUM model and in-person meetings won’t vanish, but a growing range of virtual meetings and non-AUM fee-for-service business models are opening new doors of opportunity to grow advisory businesses!

Enjoy the ‘light’ reading!

Michael Kitces

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.

Annuity Distributor Group Mobilizes Anti-DOL Fiduciary Rule Campaign (Kim O’Brien, ThinkAdvisor) – When the Department of Labor proposed its last fiduciary rule in 2015, industry product manufacturers and distributors challenged the new rule, claiming that it was inappropriate to subject their product salespeople to a fiduciary rule intended for advice-givers, and ultimately prevailed in the court system, vacating the rule. The industry’s challenge was led by lawyer Eugene Scalia, who in the years since has been appointed Secretary of Labor by President Trump, raising concerns that he would re-propose a new less-stringent and more salesperson-friendly fiduciary rule alternative. And with the SEC’s non-fiduciary Regulation Best Interest taking effect on June 30th of this year, the Department of Labor did in fact proceed with a proposal for its own new ‘fiduciary’ rule that, similar to Regulation Best Interest, would nominally apply a “best interests” obligation on product salespeople at the time of sale to a client, but still otherwise allow for the industry’s conflicts of interest (including the receipt of potentially significant commission compensation). The shift under Scalia to a new DoL fiduciary rule that would for the first time allow ERISA fiduciaries to receive upfront commissions created a wave of backlash against the Department of Labor from fiduciary advocates who claimed it not only failed to advance fiduciary protections but would actually undermine ERISA fiduciary protections that had been in place since 1975… but now, as it turns out, the rule is also being opposed by the insurance and annuity distributors that are concerned the new rule would still go ‘far enough’ to significantly disrupt the current landscape of independent annuity agents. At its core, the concern is that the new DoL fiduciary rule would extend its commissions-allowed-but-recommendations-still-best-interests obligation to 401(k) rollovers (including into IRA annuity products)… which would permit annuity agents to still earn commissions, but subject the quality of those IRA annuity recommendations to a new ‘best interests’ standard. Which the annuity industry suggests will raise the cost of doing business (by subjecting annuity agents to higher compliance oversight standards), and make it challenging for independent annuity agents to work with multiple carriers (ostensibly due to the significant differences in commissions from one annuity carrier to the next, which would still be highly scrutinized under the proposed rule, as well as the more complex commission overrides that IMOs and FMOs receive on top of what their affiliated annuity agents sell). On the other hand, when fiduciary advocates think the new rule doesn’t go far enough, and the product manufacturing and distributing industry thinks it goes too far already, ironically the question arises: will both sides ultimately agree to the current proposal as a compromise, if only to avoid the risk that the next version of the rule would be even less favorable to their position in the future?

Cerulli Says Renewed Emphasis On Health Care Planning Is Coming (Investment News) – Health Savings Accounts (HSAs) have been available for more than 15 years now, but according to a recent Cerulli survey, employees rank HSAs last out of a dozen options when asked where they would allocate an additional $1,000. Yet the irony is that HSAs are actually one of the only options for ‘triple tax free’ benefits (tax-deductible contributions, tax-deferred growth, and tax-free withdrawals), with significant flexibility given their ability to be used not only to cover current medical expenses associated with high-deductible health plans, but also to be accumulated and used as a ‘supplemental’ tax-free account for medical expenses in retirement (as withdrawals can be made tax-free for Medicare in later years). In practice, though, Cerulli finds that only a slight majority of those with investable assets of >$2M treat their HSA as a retirement savings vehicle, and only 1/3rd of those with $500k to $2M, even though the latter arguably have significant room to save into an HSA alongside their 401(k) and other retirement accounts. In fact, defined contribution plan recordkeepers are now one of the fastest growing segments trying to advocate for HSAs, with more than 40% participating in the HSA market last year (up from just 21% two years prior), even as the aggregate assets in HSAs are still dwarfed by traditional 401(k) plans and IRAs.

To Clients, Agreeing On Politics With Their Advisor Is Mattering More (Michael Thasher, RIA Intel) – It’s long been recognized that people tend to form relationships with others who share their beliefs and values, but a recent Hartford study finds that phenomenon holds true not only amongst our personal friendships, but increasingly in consumers’ selection of financial advisors as well. In fact, the study found that 75% of investors now report discussing politics with their advisors, 57% believe it is important that they align on political views, and 44% would outright switch financial advisors if he/she did not align with their own political views. Notably, the results were particularly strong amongst younger clients, with 91% of Millennials stating that an alignment of political views with their advisor was important (compared to only 48% of older generations) and that 68% would consider a new advisor if discovering they weren’t aligned (compared to only 27% of older generations). From the advisor perspective, the polarization of political views amongst clients raises significant concerns that if the client asks about and draws the advisor into a discussion about politics, it may be a potential ‘minefield’ where a wrong step by the advisor may well lose a client with opposing political views. On the other hand, the fact that clients are increasingly likely to select advisors who align with their political views means that advisors who are willing to be more politically vocal may actually attract clients more rapidly than ever (at least, the ones who align with their own beliefs!).

Virtual Recruiting Efforts Are Paying Off With Digital Office Visits (Ryan Neal, Financial Planning) – In an industry where relationship-building has ‘always’ been done in-person and face-to-face, the pandemic’s socially-distant environment has been challenging for many advisors to find new prospects… and even harder for many broker-dealers to find new advisors to join, where in-person recruiting is just as disrupted as other forms of in-person prospecting. Yet in practice, just as advisory firms have shifted to a virtual environment of meeting with prospects via Zoom, so too are broker-dealers shifting to a new virtual recruiting model, including virtual office tours and online technology demonstrations. In fact, in many ways, it turns out that recruiting is easier in a virtual environment, where advisors can explore new alternatives from the comfort of their own homes (and not the scrutiny they may face trying to make contact at the office), and engaging in virtual tours and recruiting isn’t as ‘obvious’ as flying to a competing broker-dealer’s hometown for a ‘vacation’ to do an on-site visit. As a result, some firms are reporting a significant increase in their recruiting efforts, with Raymond James doing 300 virtual office ‘office visits’ in just the past few months (compared to 650 in-person visits in the entirety of last year), and Ameriprise already hosting more than 1,000 advisors in digital open houses since March (which is 6X the pace of 1 year ago). Which means ultimately, while some in-person recruiting may return – as there are certain connections that are difficult to make and seal in a virtual-only environment – the forced switch to virtual recruiting due to the pandemic will likely become a fixture of recruiting (and how advisors evaluate new platforms) even after the pandemic is over.

The Love-Hate Relationship With RIA Custodians (Allan Boomer, Financial Planning) – For the independent RIA that manages client portfolios, a relationship with an RIA custodian is essential for everything from technology to trading, and from client statements to clients’ asset safety. Yet at the same time, because RIA custodians effectively become an extension of the RIA-client relationship, customer service problems with the RIA custody reflect poorly on the RIA, the custodian’s business decisions can create significant disruptions for the advisor-client relationship, and there’s an ever-present awkwardness of most RIA custodians also being engaged in a ‘retail’ business with investors that can compete directly with the RIAs on their platform. Yet in practice, there are few alternatives for RIAs, in part because just four RIA custodians – Schwab, Fidelity, TD Ameritrade, and Pershing – collectively hold upwards of 80% of all RIA assets (soon to be concentrated even further as the Schwab-TD Ameritrade merger closes this fall). The end result is what Boomer characterizes as an oligopoly, where a small subset of companies control an entire industry, control prices (e.g., Schwab cutting their trading commissions to $0 last year and forcing virtually every competitor to follow suit within weeks or even days), slow down innovation (as Schwab acquires TD Ameritrade and is not anticipated to be keeping the entirety of VEO’s innovative open architecture), and make it difficult for new competitors to enter the market. And the tension becomes particularly acute when RIA custodians only make money off of RIAs’ clients (as RIAs currently don’t otherwise pay for custody services), and therefore implement changes that force RIAs’ clients into vehicles or solutions for the RIA custodian’s own enrichment (e.g., defaulting clients into cash sweep solutions at their own affiliated bank deposit accounts). Still, though, Boomer acknowledges that RIA custodial platforms have been integral to the growth of the RIA movement, and with more than $4 trillion in assets on their platforms, aren’t likely to want to do anything that would overturn the apple cart. In addition, for startup independent advisors, the reality is that affiliation to an RIA custodian’s national brand platform often imbues an additional level of trust and credibility into the new advisor’s firm. Still, though, when advisors have too few choices, RIA custodians know their risk of losing RIAs even with poor business practices is limited… which arguably means the need for RIA custody competition is greater than ever as the “Big 4” RIA custodians soon become the Big 3.

Alternatives To The Big RIA Custodians For Low-AUM Firms (Jessica Mathews, Financial Planning) – One of the big challenges for newer RIAs, as well as younger advisors breaking away from broker-dealers, is that they need an RIA custodian in order to grow their firms larger, but many of the leading RIA custodians only want to work with firms that are already ‘larger’ (and thus can be more profitable for the RIA custodian out of the gate) with minimums that can be tens or even $100M+ in firm-wide AUM. For fast-growth advisors, there’s often an option to ‘make their case’ for why they’re on a fast track for growth and will soon enough achieve the RIA custodian’s minimums (in which case platforms will often waive their minimums for some period of time to give the advisor the opportunity to grow and hit their target). But for those who don’t necessarily have the confidence, ability, or simply the interest, in being a fast-growth ‘larger’ RIA, what’s the alternative for lower-AUM RIAs in search of a solution? One path is to join Schwab, which recently announced that it was eliminating its asset minimums and pledged to work with all RIAs regardless of their size. Another option is to affiliate to an independent advisor organization that is able to provide access to a larger RIA custodian with reduced or no AUM minimums for its advisors (which the organization can achieve by aggregating together the assets of its various advisors into a single enterprise relationship with the custodian). Alternatively, some RIA custodians like Shareholders Service Group (SSG) specifically focus on newer or smaller RIAs with little or no current AUM, and many Turnkey Asset Management Platforms (TAMPs) can provide outsourced asset management services to advisors and automatically bundle in a custodial relationship.

Revised SEC Rules Could Help Large RIAs Advertise & Upheave Social Media (Gary Stern, RIA Intel) – Testimonials have long been a staple of how consumers choose service providers, from the law firms that show the clients they’ve earned settlements for, to the rise of services like Angie’s List to see verified reviews on thousands upon thousands of local providers. Yet when it comes to financial advisors, the use of testimonials has long been banned, under the (in)famous “Rule 206” of the Investment Advisers Act of 1940, which prohibits client testimonials under the auspices that it may be misleading advertising as advisors will ‘inevitably’ cherry-pick testimonials rather than providing a representative sampling of client reviews (good and bad). Yet late last year, the SEC proposed its first significant revision since 1979 to the anti-testimonial and other advising rules, recognizing that rules predating, not just the rise of third-party review services and social media, but the entire internet itself are no longer as relevant for modern times. For many RIAs, the opportunity to finally share real-world results of satisfied clients is being welcomed with open arms, though for others the concern remains that when testimonials only ever highlight happy clients, permitting them will at best just confuse consumers as ‘every’ financial advisor highlights similarly-positive, and thus likely undifferentiated, testimonials. On the other hand, relaxing the rules could at least alleviate common sticking areas, like whether a client “liking” an advisor on a social media platform constitutes a potentially banned testimonial (which would no longer be the case under the new rules). And arguably, expanding room for testimonials will create opportunities for advisors to share real-world case studies that highlight their truly differentiated expertise, which would be a positive for consumers trying to choose who to work with. Though, because it still takes time and resources to bring together such testimonials and related marketing materials, the fear is that large firms (with dedicated marketing teams) will benefit at cost of smaller firms (that don’t have such resources). Either way, with a final version of the proposal anticipated to come later this fall, 2021 is likely to be a new era of advisor marketing!

How Good Advisor Marketing Happens In The Expertise Economy (Kirk Lowe, Nasdaq) – In the modern expertise economy, financial advisors create value by having expertise that clients lack and need access to, filling the “expertise gap” to solve the client’s needs and help them achieve their goals. Yet the irony is that few advisors engage in “expertise marketing”, which has existed in other channels and industries but has rarely been adopted in the realm of financial advisors. At its core, expertise marketing is about creating “micro influence”, where advisors take steps to demonstrate the depth of their expertise and become known as an “influencer” in their ‘micro’ domain of specific expertise. In the past, this might have included highlighting expertise via television or billboard ads, then through seminars or videos, and now more recently through ‘modern’ tactics like blogging with strong SEO or podcasting. What makes becoming a micro-influencer distinct from ‘just’ marketing to demonstrate one’s expertise, though, is the momentum and synergies that get created when one doesn’t simply highlight their expertise but becomes known as the expert in that domain (i.e., a micro-influencer). Accordingly, Lowe emphasizes that it’s important to engage in marketing activities that build positive compounding momentum (i.e., blogs, podcasts, books, white papers, and other content that can be found for months and years to come), rather than ‘sunk cost’ marketing that is largely once-and-done (e.g., seminars, digital ads, email blasts, etc., that don’t sustain as soon as the spending stops). So if you audit your own marketing strategies, the question becomes: how much time and effort are you putting towards strategies that can build the long-term momentum you’re seeking (that you can employ consistently for an extended period of time to allow the compounding to work)?

Client Lifetime Value Is About More Than Just Top-Line Revenue (Gretchin Halpin, Advisor Perspectives) – In an advisory business where firms are so often valued using a multiple of gross revenue as a rule of thumb, it’s easy to succumb to the viewpoint that more revenue is always better. Yet the reality is that advisory firms face service demands based not only on the amount of revenue they’re servicing, but the raw number of clients to whom they must respond when advice and service requests come. Accordingly, it’s important to understand not just the revenue growth of the firm, but also the revenue and profitability opportunities of each client… measured in the form of “Client Lifetime Value” (CLV). The essence of the Client Lifetime Value is calculating what a particular client relationship will be worth to the business, both now and in the future, which is measured by looking at the revenue the client generates, their profitability, and the average number of years they would be expected to remain as a client, compared to the cost it takes the advisory firm to obtain the client (i.e., the “Client Acquisition Cost”). Of course, revenue and profit potential over time can get complicated – especially when considering some clients may be adding dollars in the early years (as they approach retirement), withdrawing dollars in the later years (after they retire), and referring along the way. Still, though, a CLV approach makes it clear that not only are some clients far more valuable and profitable for the firm, but it’s a function of not just the amount of revenue they pay, but also their likely tenure (are they long-term clients or more likely to leave in a few years as performance hoppers), and their profitability (i.e., a high-revenue high-service client may be less valuable than a medium-revenue low-service-demands client). And of course, once you understand what a ‘good’ long-term client is really worth… it also allows the firm to better focus how much it will (or can, or should) spend on marketing to achieve that growth.

The Investor-Advisor Relationship In 2020 (Catherine McBreen, Iris.xyz) – The advisor-client relationship is in the midst of a significant upheaval, as technology plays an increasing role in how advisors and clients interact (a trend only accelerated by the pandemic), but robo-advisors providing technology alone continue to struggle to grow and compete with human advisors. In fact, research by Spectrem Group finds that more consumers are “advisor-dependent” (relying on financial advisors to support their financial decisions) now than a decade ago (21% today versus 13% in late 2009), when advisor trust was at all-time lows (in part because of the collateral blame assigned to financial advisors for being part of ‘the financial system’ that nearly collapsed in 2008). On the other hand, “self-directed” investors are also at new highs (39% compared to just 32% in 2009), as those who lean self-directed are utilizing technology more than ever to guide themselves as well (and likely feel more comfortable to be self-directed given the decade-long bull market as Spectrem also finds that the percentage of investors who ‘enjoy’ investing themselves is up to 57% in recent years from just 44% after the financial crisis). In turn, consumers who are turning to advisors increasingly expect them to be more holistic, with an ever-rising percentage stating that “a complete, all-inclusive, goals-based approach” is important when working with a financial advisor. Though ultimately, the biggest driver of advisor satisfaction continues to be communication and how the advisor helps clients during times of distress (where, notably, Spectrem finds that independent financial planners rated well 56% of the time, compared to only 38% of advisors at ‘full-service’ brokerage firms).

My Life As A Client: Just Listen To Me! (Lenny Liebmann, Wealth Management) – Liebmann is a 62-year-old founder of a technology consulting firm, who has been working with financial advisors for nearly four decades. And through it all, Liebmann has had ‘good’ advisors and ‘awful’ ones, but notes that the difference isn’t about how much money they make him, or how successful they appear to be… it’s how well they listen. Because as Liebmann notes, too often in his experience it’s obvious that advisors are only listening for specific cues that matter to them – investment objectives, risk tolerance, anticipated big-ticket outlays, etc. – and not to how the client actually feels about their money. In Liebmann’s case, this includes a consideration of the ethical concerns about money and how it’s used – i.e., that Liebmann doesn’t want to finance “Big Tobacco”, or companies that provide weapons used on children in the Middle East, or Amazon’s “further monopolization of online retailing”. Of course, advisors may quickly point out that excluding such companies may potentially impair portfolio returns, and that there are other ways to support important causes after maximizing returns. But as Liebmann notes “You may disagree with my take on these investments. I don’t care. It’s my money, not yours. And I’d rather have you listen and act in accordance with my wishes than be dismissive of my politics.” Accordingly, the advisor who’s earned Liebmann’s business is one who isn’t dismissive of his views, and who answeres his phone calls and emails promptly… who, as Liebmann notes, “…has my business for life. And he’s going to be able to pass my business on to his son, who he is training to take his place. [And] Given my influence among family and friends, he’ll probably get a lot more business than just mine.”

The Future Of Financial Planning Takes Emphasis Off The Assets (Jeff Benjamin, Investment News) – The pandemic has disrupted many aspects of the advisory business, but increasingly it’s becoming apparent that the changes brought about by COVID-19 are less a matter of “disrupting” the business of financial advice, and more an acceleration of the trends that were already in place but are now gaining adoption more rapidly. For instance, many advisory firms were already conducting at least some client meetings virtually and fewer in-person… and the socially distant Zoom era has simply accelerated the trend (while in-person meetings will likely remain, but be relegated to a subset of the ‘most important’ and weighty conversations but also of the less frequent variety). In fact, with the growing demand for financial advice, and more and more providers entering the marketplace, arguably the biggest challenge is becoming “how to stand out and differentiate” amongst a growing sea of advice providers. For most financial advisors, the key appears to be focusing on a niche or specialization, crafting unique expertise where the advisor can stand out from more and more advisors at firms large and small who all claim to offer comprehensive personalized financial planning advice. The added opportunity of focusing into niches is that advisors create more opportunities to add value beyond just portfolio investment returns, whether in terms of tax and estate planning, budgeting and cash flow, or an even-more-niche-specific domain, opening the door to clients who may have limited assets but still have the wherewithal to pay meaningful advice fees (e.g., by having a significant income and/or net worth, albeit not in the form of investable assets). Not that there’s necessarily anything wrong with the AUM model – which in the end, continues to hold up well for the bulk of investors – but in the end, the AUM model is limited both for those with very small portfolios and those with very large ones, thus leading to a growth in alternative fee-for-service models to reach those blue oceans of underserved (and still potentially lucrative) clientele.

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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