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Weekend Reading for Financial Planners (Mar 31 - Apr 1)

Posted by Michael Kitces on Friday, March 30th, 4:13 am, 2012 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights a new analytical tool from Morningstar that can apparently help you to benchmark your (AUM) fees against the industry, an interesting perspective on what really makes clients refer you (hint: it's about what's in it for them, not for you), and a look at how easy it is to build a website these days (yet how many advisors still haven't done so). We also look at an article about how to have difficult conversations with clients, and two industry trends articles about Hartford's departure from the variable annuity space, and Prudential's departure from the long-term care insurance market (with Genworth stepping up to fill the void). We finish with an article about fixed income strategies that advisors are using in today's marketplace, a look at how the term financial planner is being misused around the world and what the Financial Planning Standards Board has to say about it, and a lighter look from the Harvard Business Review at two lists you should maintain every day - what you will focus on doing, and what you will commit to ignoring - to enhance your productivity and success. Enjoy the reading!

Weekend reading for March 31th / April 1st:

How RIAs Can Learn if They're Undercharging Or Overcharging Clients - This article from Financial Planning magazine discusses the brand new service "FeeCheck" from Morningstar, available on its Advisor Workstation. The services draw on data from PriceMetrix to estimate typical fees charged by advisory firms based on a range of factors, from the composition of the underlying portfolio to the amount of assets that the client has invested. The concept is to provide firms with a way to benchmark their fees relative to an industry average for a comparable client, investment situation, and service offering, to determine whether too much or too little is being charged. The platform will also include a "CommissionCheck" service for brokers to make similar comparisons for their own business model. It's not clear, however, whether the service will allow firms to accurately benchmark a total comprehensive fee that includes both investment management and financial planning services, or whether the offering is predominantly for investment-only firms.

Understand Why People Make Referrals And You May Just Attract More Of Them - This article by Stephen Wershing on Advisors4Advisors explores the dynamics of client referrals, emphasizing up front that clients don't give you a referral... a referral is something they give to their friend. In fact, Wershing notes research that emphasizes the primary reason most clients will make referrals is not to help you, but to help their friends, improving their social standing amongst their peers, and thereby benefit themselves socially. Accordingly, the solution for getting more referrals from clients is not to ask for referrals more often, but to more clearly define the value you offer and your target client, so that your existing clients will be better prepared to make a referral when the time is right; similar to what I have written previously on this blog, if you want more referrals, the key is not to ask more times, but to make yourself more referrable, and in fact being a comprehensive financial planner can actually make it harder to be referred!

How To Overcome Web-Fright - This article by Jennifer Hoyt Cummings with Reuters explores how many financial advisors have been reluctant to get up and running on the web; an astonishing number of advisors still don't have websites, and a search for their name in Google turns up nothing, or perhaps a listing from a third-party service like financial information company BrightScope. Yet the reality is that getting a basic but professional-looking website in place is remarkably cheap, for what is increasingly becoming not a marketing advantage but a minimum expectation just to be acknowledged as a legitimate business at all. While a few firms suggest that not having a website is viable, generally because they work in a narrow niche like the ultra-ultra high net worth marketplace, or a small town of 2,300 people, most firms that haven't taken the leap yet can do so with low costs and fast set-up times, whether through discount offerings from a broker or custodian, web development companies dedicated to financial advisors, or a standalone website design firm.

Not So Rosy Outlook - Despite its confusing name, this article from Financial Planning magazine is not about the financial or economic outlook, but how the planner can have a conversion with a client about a not so rosy outlook, like a retirement that's coming up short. For instance, before diving into a difficult conversation, ask the client to rank on a scale of 1 to 10 how comfortable they are talking about the topic in the first place; if the score is low, focus the conversation on how to get the client more comfortable, before moving on to the difficult discussion and solutions. Be aware of your tone and volume, and your own sitting position and nonverbal communication. If you can't get their stress level down, find an excuse to take a break - get a glass of water, and invite the clients to stand up and walk around to get one too. Make sure you ask what they understand, and see what their concerns really are, without assuming. Help to ground them in what's realistic and within reach. Overall, this article provides some nice tips that are good to practice for renew practitioners, and good reminders even for those more experienced.

Genworth Bets on Long-Term Care as Insureres Flee Market - This article from Bloomberg discusses the ongoing consolidation in the long-term care insurance industry. Following on the heels of the recent announcement earlier in March that Prudential will stop issuing new individual long-term care policies, Genworth - which generated a whopping $3 billion in LTC revenue last year - has reaffirmed its commitment to the space. Notably, the primary challenge in the marketplace is the persistence of low interest rates; the AALTCI estimates that every 0.5% drop in investment return pushes premiums up by about 15%, which means the extended low interest rate environment is taking its toll. Genworth, apparently, hedged much of this interest rate risk, and is betting that rates will ultimately rise to improve profitability to the business. The article also notes that ironically, because it can be difficult for insurers to raise premiums - as a consumer protection - many insurers are simply choosing to stop offering LTC if it's not a primary part of their business, rather than go through the challenges of premium increases with regulators, even at the risk of ultimately diminishing competition amongst long-term care insurers. 

The Rippling Effect of Hartford's Restructuring - Following on the heels of Prudential's withdrawal from the LTC insurance business was Hartford's announcement this month to cease issuing variable annuities, despite being one of the leading providers in the space for much of 2003-2008. Hartford variable annuity business dropped dramatically after the financial crisis, due in part to a dramatic redesign of its offering to "de-risk" the company's exposure to the product after the market decline hit its existing business hard. Nonetheless, it had appeared that the company was positioning for a rebound of its variable annuity, until the abrupt news that it was exiting the marketplace entirely. The change in heart is apparently due to significant pressure from its shareholders, especially hedge fund manager John Paulson, that the company needed to focus on its core business and shed less profitable lines. 

Top Strategies For Fixed Income - This article in Financial Planning magazine provides a nice overview of how advisors are dealing with fixed income investing in today's low interest rate environment. Generally, the article notes that advisors have been movng away from plain vanilla government bonds, reaching at least a little further up the risk ladder in pursuit of better yields and total returns. Alternative categories include the beaten-up mortgage-backed securities market that include some diamonds in the rough, actively managed bond funds with managers who can be opportunistic when good deals are found, sovereign debt of other countries with higher yields (with or without currency hedging), and senior secured private debt (senior bonds issued by private companies not on the stock exchange). Notably, planners have also been looking at traditional fixed-income alternatives like high-dividend-paying stocks, master limited partnerships, and immediate annuities, and even charitable trust structures with retained income interests.

The Term Financial Planner Is Widely Misused - This article on LiveMint.com is an interview with Noel Maye, the CEO of the Financial Planning Standards Board (FPSB), the non-profit association that develops and maintains the CFP marks outside the United States. The interview highlights the emergence of financial planning globally, as lives become more complicated, consumer protectionism rises, and the evolution towards relationship-based advice. Maye notes that while the US was first on the scene with financial planning, its regulatory evolution is now lagging, in part due to the incredible number of regulators involved at the state and Federal levels. Maye suggests that ultimately, too many firms in the financial services industry failed to deliver on their advice to consumers and their obligations, and the rising regulatory backlash is the result.

Two Lists You Should Look at Every Morning - This article from the Harvard Business Review blog suggests that as the pace of information continues to accelerate, the only solution is to get control of it by making two lists: Your Focus List of what you will pay attention to, and your Ignore List of the distractions you'll commit to ignoring. As the article highlights, most accidents happen because we allow ourselves to get distracted at what turns out to be a crucial moment. And with the never-ending onslaught of information, you can't just make the lists once and put them in a drawer, or you'll forget them. You need to remind yourself every day to ignore what can be ignored, focus on what can be focused on, and follow through on what you're committed to.

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!


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