Weekend Reading for Financial Planners (July 21-22)

Posted by Michael Kitces on Friday, July 20th, 7:27 pm, 2012 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with an interesting Journal of Financial Planning article suggesting that a uniform fiduciary standard would not, in fact, reduce access of the mass market to financial advice or increases costs. We also look at an article from Bob Veres questioning why it is that more independent broker-dealers and registered representatives don't object to the Financial Services Institute's lobbying for FINRA as an overarching regulator for all advisors. From there, we look at several practice management articles, including one up-and-coming RIA custodian Scottrade Advisor Services, another on succession planning, and a discussion of how client communication supports business growth. We also look at a series of technology-related articles, including how to stay safe when using the cloud, a new secure client vault solution, a new retirement income modeling tool to do simplified/expedited basic retirement projections for clients, and a discussion of the incredible return-on-investment that firms see when adopting rebalancing software. We wrap up with a good discussion from John Mauldin of the current plight in Europe, a nice list of social media timesaver tips for those who are looking to dabble or have become active with social media, and an intriguing article from the Harvard Business Review showing how several companies are beginning to increase their sales and growth activity by eliminating commissions for better results. Enjoy the reading!

Weekend reading for July 21st/22nd:

The Impact Of The Broker-Dealer Fiduciary Standard On Financial Advice - This article by Michael Finke and Thomas Langdon in the Journal of Financial Planning seeks to determine whether a fiduciary standard restricts access to investment advice compared to the broker's suitability standard - a common criticism and concern of a uniform fiduciary standard - by examining whether the subset of states that effectively subject brokers to a fiduciary standard at the state level (in California, Missouri, South Dakota, and South Carolina, due to court cases that have interpreted brokers as owing such a standard to their clients) exhibit any differences from states with no fiduciary standard on brokers. The study concludes that there are no statistical differences between the two groups in the percentage of lower-income and high-wealth clients, ability to provide a broad range of products, the ability to provide tailored advice, or the cost of compliance. While some will debate whether this study's methodology is an accurate measure of fiduciary versus non-fiduciary duty, it will undoubtedly be cited for a long time to come in reference to the implications of the fiduciary standard on the ability to serve clients at a range of income and wealth levels and with a range of financial products and solutions.

Gaps Of Logic - This article by Bob Veres in Financial Planning magazine looks at the lobbying position of the Financial Services Institute, the primary lobbying organization for broker-dealers (after spinning off from the FPA), challenging many of their positions about the competitive landscape and regulatory oversight of RIAs versus broker-dealers, and their support of the so-called "Baucus bill" that would likely put FINRA on the fast track to be the regulatory for all advisors. What's more notable, though, is Veres' point that FSI's efforts to lobby for FINRA would appear to be adverse to the interests of many broker-dealers and underlying registered representatives, who often already state they're mired in compliance paperwork and costs that are manageable to the largest wirehouses but potentially fatally burdensome for the independent broker-dealers. Accordingly, Veres wonders why some of the FSI's broker-dealer members, and/or underlying registered representative members, don't protest; does the average registered representative really want more FINRA oversight?; does the average dually-registered advisor really want FINRA to oversee more of their RIA activity in addition to their broker-dealer activity?; do the independent broker-dealers really want to be part of a lobbying organization that's advocating for a regulator whose compliance burdens are crushing their margins and putting them out of business?

The Spirit of Scottrade: Little Firm Pushes Big Value - This article from Investment Advisor magazine is about Scottrade Advisor Services, the RIA custodian institutional side of the Scottrade retail brokerage firm. As the author writes, Scottrade is a midwest-based firm that focuses hard on delivering good service on a base of low costs, with a focus on partnerships with outside companies to offer a best-of-breed vendor support to its advisors. The quality service appears to be connecting well, as Scottrade now has more than 1,000 advisory firms, growing assets on the platform by nearly 50% per year for the past two years, drawing from both wirehouse breakaway brokers and those leaving independent broker-dealers (but apparently not drawing much from other RIA custodians). The firm apparently is also hospitable to newer, startup firms (a challenge with some other custodians), and is launching an "RIA in a Box" platform and compliance support. Scottrade certainly has a very long way to go to approach the size of major players like Schwab and Fidelity, but they are intent on becoming a major player in the RIA custodian space.

Succession Plan Success - This article from Glenn Kautt of Financial Planning magazine discusses Kautt's own succession plan experience in merging with another firm, but in the process provides some excellent perspective on the various succession plan options that are available when exiting a planning practice. Kautt discusses some of the metrics for a roll-up, just keeping the practice until you die, or selling to staffers. Notably, Kautt's own exit strategy was somewhat unique - a decision to merge the practice into another firm, with an expectation that he may retain ownership of the firm indefinitely and simply draw an ongoing dividend for his ownership, combined with a board governance model to protect the dividend and ensure the firm was run profitably for the indefinite future.

Research Shows Client Communication Key To Growing Your Business - This article is a summary of recent research by the FPA on how advisors communicate with their clients. Not surprisingly, 96% of advisors use email to communicate with clients, but the research also found that 1 in 6 advisors use LinkedIn, 1 in 10 use Facebook, another 1 in 10 use a blog, and about 1 in 20 use Twitter. In terms of time commitment, the results show that about 2/3rds of advisors spend more than 10 hours per week communicating with clients, and 25% spend more than 20 hours per week on communication alone. Notably, the results also showed that firms NOT sharing market/economic updates with clients were more likely to report a loss in clients or flat growth, and also showed that meeting with clients face-to-face at least once a year reduced client attrition. 

How To Stay Safe When Using The Cloud - This article by technology consultant Bill Winterberg of FPPad.com in the Journal of Financial Planning provides guidance about how to do due diligence and select vendors for storing cloud-based client data. Suggestions include determining from the provider whether they believe cloud security is their responsibility or not (it should be), whether the website transmits material securely (you should see the beginning of the website's address be "https://" instead of just "http://" when you're logged on), and review the provider's security protocols (including asking for a history of their vulnerability testing and any data breaches they've had in the past year). The article also includes a great list of "10 Key Elements of Cloud Security" for you to review as a part of your due diligence anytime you're evaluating a cloud provider.

A Better Client Vault Solution? - This article by Joel Bruckenstein for Financial Advisor magazine discusses ShareFile, a cloud-based vault/storage solution that Bruckenstein believes offers a good balance of price and functionality for advisors. A competitor to many more popular platform offerings like Microsoft SkyDrive, Google Drive, and DropBox, the ShareFile offering is produced by CITRIX, which makes the already widely used GoToMeeting platform. The key to ShareFile is that it maintains the level of security (including encryption for both storage and transfer of files), but also remains very usable for both advisors and clients (unlike most offerings that tend to sacrifice usability in the process of bolstering security). Bruckenstein recommends at least the Professional plan, which includes an Outlook plug-in for email transfer of encrypted files or secure links, encryption for stored files, and more; notably, the login page and use can also be privately branded for the planning firm. Notably, ShareFile also makes an API (Application Programming Interface) available, which allows it to be integrated into other software; although no providers in the financial planning space have adopted integrations yet, if ShareFile gains momentum, additional integration is likely in the future.

TECH TOOLS: Targeting Wage Earners - This article by Joel Bruckenstein in Financial Planning magazine discusses Retirement Income Optimizer, a web-based application (run from a desktop or mobile device) designed by Finance Logix intended to provide retirement income solutions to those of more modest means. Although the software actually hasn't even been fully released yet, Bruckenstein finds it notable for its approach in allowing simple and speedy data entry to determine an appropriate asset allocation to generate a client's desired retirement cash flows. Ultimately, the tool is still in the early stages, and will not replace a full-blown financial planning software package due to its relative simplicity, but the simplicity of the tool is actually the point - allowing for a greatly expedited retirement projection to make essential portfolio recommendations quickly and easily, which might be a great way to provide advice to the mass market, and/or be used in the initial stages of a planning engagement until a deeper analysis can be done later.

One Tool With Six-Figure Savings Potential - This article by Bill Winterberg for Morningstar Advisor discusses the benefits of rebalancing software, with a focus on the Total Rebalance Expert (TRX) offering. The firm's leadership includes an experienced principal with an investment advisory practice, suggesting TRX has a good understanding of advisory firms to deliver on their "tax-efficient and easy-to-use" solution (most firms are up and running in 3-4 weeks). The TRX software integrates with most major portfolio management software (including PortoflioCenter, Advent Axys, Black Diamond, Orion Advisor Services, Morningstar Office, and FinFolio), and can operate on either local services, a cloud-based solutoin, or hosted on a third-party provider. While the software isn't cheap (at about $10,000 for a firm with a few hundred million of AUM, with discounts for smaller firms), Winterberg notes that the TRX solution (and rebalancing software in general) has a remarkably strong six-figure ROI for most firms, as a combination of labor costs saved, and even new assets attracted as the firm delivers more efficient tax-managed solutions. 

The Beginning Of The Endgame - In his weekly missive, John Mauldin discusses the ongoing outlook in Europe, suggesting that the beginning of "the endgame" - when sovereign debt problems and the debt supercycle finally hit the wall, as the interest obligations on debt exceed the nominal growth of the economy - is underway. Yet at the same time, Mauldin notes how remarkable it is that Europe continues to stay together, and that their leadership has kept things from falling apart. Nonetheless, Mauldin notes that Europe remains with three major problems: too much sovereign debt in the peripheral countries, defunct "zombie" banks that were overleveraged with too much bad debt (sovereign and real estate), and unsustainable trade imbalances that will prevent the system from equalizing (even with bailouts) until wages in peripheral Europe adjust downwards (or they leave for their own currencies and devalue them accordingly). Yet it's still unclear whether the ultimate outcome will be a breakup, or a true fiscal union, as countries surrender their sovereignty for a truly unified Europe. Time will tell, but Mauldin suggests that the differences in cultures may be too problematic to overcome.

10 Social Media Timesavers For Busy Advisers - This article by Amy McIlwain on Investment News provides some nice tips on using and engaging in social media, whether you're using social media to communicate or simply to listen. Tips include using social media tools like TweetDeck or Hootsuite, creating an editorial calendar so you know what the lineup of content is in advance, using interns and/or delegating to staff for certain functions, setting up Google Alerts, and more.

A Radical Prescription For Sales - This article by Daniel Pink for the Harvard Business Review puts forth the intriguing notion that perhaps commissions are actually not the best way to motivate salespeople. In fact, a growing base of research is showing that contingent rewards work best with routine "algorithmic" tasks, like stuffing envelopes to turning screws on an assembly line; the reward helps to focus our attention on an otherwise boring task. However, for more complex endeavors, it turns out that such rewards are far less effective. While commissions may have still worked relatively well when sales itself was a dull and repetitive task -think door-to-door salesman - in the modern world, it turns out that a strong base income and bonuses tied to corporate (but not individual) goals can actually result in even more sales and/or business growth than just dangling the carrot. One wonders if the adaptation of this model would apply in financial services, too? Perhaps the growing success of advisory businesses over product sales suggests it already has?

I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!


  • http://www.premier-planning.com/ Jamie

    The article on the Retirement Income Optimizer is very interesting. A retirement calculator that will even have a mobile portion! :-) This will definitely make my retirement planning a bit easier. Thanks!

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