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Weekend Reading for Financial Planners (Sep 24-25)

September 23, 2016 12:41 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with an announcement that there’s a new “fiduciary registry” being launched by the Institute for the Fiduciary Standard, with public support from TD Ameritrade and Pershing Advisor Solutions. The new registry aims to highlight firms that proactively embrace a more holistic fiduciary standard than the still-limited versions currently adopted by both the SEC (pertaining to RIAs) and the Department of Labor… and in the process, raising the question of whether firms can still compete by trying to be the ‘most fiduciary’ as a differentiator at all.

From there, we have several articles on advisor technology this week, including a recent study finding that if advisors want to reach younger “HENRY” clients (High Earners, Not Rich Yet) it’s essential to serve them in a more tech-savvy manner, software reviews of new retirement tools Last Advisor and Nest Egg Guru, and a look at the recent announcement that eMoney Advisor is aiming to build out a substantial suite of DoL compliance tools to complement its core financial planning software.

We also have a series of articles looking at the continuing evolution of DoL fiduciary’s impact on advisory firms, from a prediction by Ric Edelman that as many as half of all of today’s financial advisors will be driven out by the DoL fiduciary rule (clearing the way for more fiduciary- and client-centric advisors to take their place), a look at whether some advisors are selecting applying fiduciary rules in today’s environment (e.g., by building fiduciary portfolios but ignoring the more holistic demands of the fiduciary standard on the business), a prediction from Cerulli that the fiduciary standard will lead to more ‘cookie-cutter’ portfolios and less freedom/flexibility for most advisors, and a prediction that despite the push for economies of scale to handle compliance concerns a look at other industries suggests solo financial advisors and small RIAs will continue to survive and thrive going forward.

We wrap up with three interesting articles, all focused around the theme of the wealthy: the first is an excerpt from a new book entitled “Capital Without Borders”, that studied how ultra-high-net-worth clients engage with family wealth managers; the second is a look at how the “pentamillionaire” (with more than $5M in investable assets) is becoming the new millionaire, as there are now more than 1,000,000 US households that have reached the pentamillionaire status (having grown by 38% in just the past 5 years); and a fascinating exploration of how in theory it’s the poor who have to work extreme hours and the rich who have time for leisure, but in practice it’s turning out that 1-in-5 men in their 20s without a college degree is long-term unemployed (and that 3/4ths of their newfound ‘leisure time’ is being spent playing video games!), while higher income individuals have experienced the greatest decline in leisure time over the past generation.

And be certain to check out Bill Winterberg’s “Bits & Bytes” video at the end, which this week recaps the highlights of a new hackathon for advisor technology development, hosted this week at the 2016 eMoney Advisor Summit.

Enjoy the “light” reading!

Why I’ll Spend $100 On #FinTech That Saves Me One Minute A Day

September 22, 2016 07:51 am 2 Comments CATEGORY: Practice Management

One of the great virtues of technology is its ability to make us more personally productive. Yet in a world with more and more paid apps and software-as-a-service solutions, it’s easy to quickly spend a lot of money on technology tools. Even though many solutions are really built to solve problems so minor, it may save you no more than a minute or two a day.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I discuss why it is that despite the miniscule improvement in efficiency, I will still happily spend $100 for a technology tool that saves me as little as one minute a day.

The key is making such investments in personal productivity is to recognize that saving as little as one minute a day is actually 5 minutes a week, or 20 minutes a month, or a non-trivial 4 hours a year. That’s a half a day’s additional productivity, eeked out a minute at a time.

And the real opportunity is not just to spend money to save a minute a day, but the cumulative impact of buying multiple tools, that each save a minute or two a day. A handful of software solutions and smartphone apps that save 15 minutes a day is suddenly 75 minutes a week, or 5 hours a month, or more than a week per year. That’s an entire extra week that could be a family vacation, or taking on an extra client, or for me a chance to accept another speaking engagement or two.

Of course, the reality is that save a minute (or 15) a day doesn’t mean you’ll necessarily bill a client (or more generally, get paid) for that extra 15 minutes of work. But the time savings mean that all the little things that grind down our daily productivity are a little less cumbersome. It’s a little more time to answer emails, check in with a team member, or follow up on a client or prospect. And it makes it easier to take full days to get big projects done.

As a result, I personally spend money on a wide range of “minor” personal productivity tools, from social media management tools including Buffer, MeetEdgar, and CoSchedule, to notetaking app Evernote, autotext software PhraseExpress, Feedly Pro, Zapier, and more.

The bottom line, though, is simply to recognize that often the biggest breakthrough for being more productive is not about making a “big” change that frees up a lot of time, but the cumulative impact of little changes that add up to a lot over time. Which in the end means that even spending $100/year to save 1 minute a day can actually have a 900% Return On Investment for a successful professional!

Financial Literacy Effectiveness & Providing Just-In-Time Training By Financial Advisors

September 21, 2016 07:01 am 7 Comments CATEGORY: Client Trust & Communication

Financial Literacy Interventions - Decreasing Effectiveness Over Time

Many financial advisors are involved in providing financial education, from delivering a financial literacy course in schools, or lending our expertise to create financial education resources. An activity that for us is no doubt driven by seeing first-hand the damage that can be caused by financial illiteracy and making ignorant financial decisions.

Yet a recent meta-analysis of over 200 prior studies on financial literacy programs finds that providing long-term financial education is remarkably ineffective. In fact, the researchers found that interventions to improve financial literacy explain a statistically significant but practically irrelevant 0.1% of subsequent financial behaviors.

The problem appears to be driven primarily by the fact that, as with so much of our education, concepts and skills that we don’t use can quickly atrophy. Which means trying to make children financially literate when they’re in school may still result in them to grow up and struggle with financial illiteracy as adults.

So what’s the alternative? An approach called just-in-time training, which aims to provide financial education at its moment of maximal relevance and usefulness – when the financial decision itself arises, and the education can be immediately applied.

The caveat, though, is that the likely provider of financial education in such circumstances would be the financial services product provider, who may have an untenable conflict of interest against helping someone to become financially literate, if doing so might actually talk them out of buying the company’s product. Or alternatively, there’s a risk that the financial services company could frame the financial choices in a manner that “nudges” the consumer towards a not-necessarily-beneficial outcome.

Yet arguably, this may be a perfect role for financial advisors to fill, particularly as financial advice increasingly shifts from product sales to bona fide independent third-party advice. For instance, just as drug companies can market their products to consumers, but still have to recommend “consult a doctor before taking this drug”, so too might financial services product providers be required to direct consumers to consult an (independent) financial advisor before buying at least the more complex financial services products (while “robo-financial-education” technology solutions might help to step in for simpler product and financial decision education). And financial advisors can also help consumers navigate the often emotional and not-always-rational aspects of financial decision making as well.

Which raises the question: while financial advisors have historically supported financial literacy programs on a pro bono basis, should a key element of the financial planning business model include not only offering financial advice and helping consumers to evaluate their financial trade-offs and decisions, but also as a financial education provider of just-in-time training on key financial concepts as well?

Profits Falling But AUM Fees Still Rising As Financial Advisors Defy Robo-Competition

September 19, 2016 07:01 am 4 Comments CATEGORY: Practice Management

Median RIA AUM Fee Schedule As A % Of AUM

For the past several years, the prevailing view has been that the rising “threat” of robo-advisors and their 0.25% AUM fees would inevitably cause fee compression for financial advisors who would struggle to compete for growth.

And the latest financial advisor benchmarking study from FA Insight finds that in fact, the growth rates for financial advisory firms did fall substantially in 2015 (though they remained positive), as measured by AUM or revenue. However, this appears to be driven primarily by weak market performance in 2015; the more stable growth rate based on clients fell only slightly in 2015.

And this slight decline in client growth rates isn’t entirely surprising either, given that the benchmarking data reveals that nearly 1-in-3 advisory firms raised their prices in the past 2 years, and another 1-in-5 plan to raise their AUM fee schedule again in the next 2 years. Overall, the median advisory fee remains at 1% on the first $1,000,000 of assets – exactly where it’s been since 2009 – and the average advisory fee as a percentage of all AUM (which includes all breakpoints for larger clients) rose from 72bps in 2014 to 78bps in 2016.

On the other hand, advisory firms are also recognizing that to stay competitive, they also must do more for clients. Accordingly, the latest data reveals that firms are expanding their services for clients, hiring more professional financial planning staff, and investing heavily into their own technology, to justify their value proposition and current fee schedule… albeit at a near-term cost of overhead ratios that rose for the first time in 8 years, and a nearly 25% decline in advisor profits in 2015 (despite clients, revenue, and AUM all being up for the year).

Nonetheless, the implication is still that once advisory firms get through this reinvestment phase, that the outcome will not be the financial advisor fee compression that some have been predicting. Even after 4 years of the robo-advisor movement, a mere 5% of advisory firms report that they have any plans to cut their AUM fees at all to compete, even as robo-advisors themselves are showing signs of growth struggles. Instead, the long-term outcome appears to be that financial advisors will continue to charge substantively similar fees to what they charged in the past, but will be compelled to deliver more value than ever to justify their AUM fees, while also focusing more than ever on the need for operational efficiencies and focused marketing!

Weekend Reading for Financial Planners (Sep 17-18)

September 16, 2016 02:51 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the big news that State Farm is pulling the ability of over 12,000 of its insurance agents to sell securities products (mutual funds and variable annuities) next April when the Department of Labor’s fiduciary rule takes effect, implicitly acknowledging their agents are not providing (fiduciary) advice, and redirecting customers to a “self-directed” customer call center instead… a precedent that may or may not be repeated in the coming months as more major firms reveal their DoL fiduciary plans as the April 2017 effective date looms. Also in the news this week was an announcement the Financial Engines, the massive provider of 401(k) managed accounts and retirement investment advice, is pivoting fully into financial planning as it rebrands its 125 Mutual Fund Store branch locations into “Financial Engines Advisor Centers” to provide personal financial advice.

From there, we have several technical articles this week, including a reminder that with open enrollment coming on October 15th it’s a good time to review retirees’ Medicare Part C and Part D plans, a discussion of why it’s so important to ensure that retirement account beneficiary designation forms are up to date (and how it may be impossible to fix a botched stretch IRA after the fact), and a look at all the different ways that long-term care insurance can potentially be deducted for tax purposes (depending on whether it’s purchased directly as an individual, or under various types of business entities).

We also have a series of articles on retirement trends around spending and (continuing to) work, from one study that found we’re materially happier when we have a substantial account balance in a checking or savings account (even if the cash is ‘idle’ and not invested), to another that notes new research studies are finding the ‘traditional’ even spending plan throughout retirement is actually a terrible way to maximize our happiness, how more and more advisors are talking about at least part-time work in “retirement” to help handle today’s low-return environment and the uncertainties of a long retirement time horizon, and a look at whether the growing number of retirees choosing to continue work suggests that perhaps a multi-decade retirement shouldn’t be the goal in the first place and that instead it’s better to simply plan for a series of “Acts” punctuated by “Work Intermissions” instead.

We wrap up with three interesting articles: the first is an article by John Bogle about how the DoL fiduciary rule is here, it’s time to get used to it, and its arrival was really just the inevitable culmination of growing consumerism as businesses increasingly have to respond to consumer demands; the second is a fascinating profile of Robert Moses, who was arguably the most powerful figure in the history of New York City, responsible for building many of its most famous bridges, parkways, and landmarks, and who simultaneously exhibited an incredible Competence to achieve results and terrible personal behaviors that made him widely hated (yet still incredibly successful); and the last is a look at the rising role of technology in financial planning, and how artificial intelligence may be able to help advisors have better conversations and create more engagement with clients… an inevitable future that we’ll eventually get used to, despite the fact that now it still seems a bit “creepy”!

And be certain to check out Bill Winterberg’s “Bits & Bytes” video showing the awards announcements for all the Best In Show winners of the 2016 Orion Fuse hackathon, including Best Work Saving Development from Orchestrate, Best Business Intelligence from industry newcomer Sisense, and the overall Best In Show winner from compliance provider RIA In A Box!

Enjoy the “light” reading!

Managing “Reverse Age Bias” Against “Older” Financial Advisors

September 15, 2016 08:11 am 1 Comment CATEGORY: Practice Management

A major challenge for new financial advisors is gaining the trust of clients who are typically much older than them… as it can be hard to gain the trust of clients who look at you like one of their children (or grandchildren!).

However, the reality is that age bias isn’t unique to newer and younger advisors. A form of “reverse” age bias also exists from younger clients towards “older” and more experienced advisors, where the client may fear that the advisor is going to retire (or even pass away) before the advisor can fulfill their long-term relationship to serve their client!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at some strategies that experienced advisors can pursue to address this client fear. After all, it is legitimate for clients to be concerned about being repeatedly forced to go through the work of finding a new advisor over and over again if their existing “older” advisors keep retiring before they do!

In fact, given this fear, the best way to address age bias against experienced advisors is to have a solution that ensures continuity for clients. This could be establishing a succession plan, such that the business will outlive the founding advisor (which means clients can continue to be served by the business, even if it’s not the original advisor who’s servicing them). Or the approach could be to simply sign an “exit planning” agreement that contractually obligates another (larger) firm to buy the practice and continue to serve the clients, again ensuring from the client’s perspective that they won’t have to search for a new advisor as soon as their current advisor retires.

Alternatively, it may be more appealing to simply shift the nature and focus of the business itself, away from “long-term” relationship-based financial planning (that’s hard to deliver on with a limited time horizon), and instead focus on hourly or project financial planning work, which is more “transactional” in nature and doesn’t have the same high stakes for clients.

In any event, though, the bottom line is that it really is reasonable for clients to raise the concern: “I don’t want to have to start over finding a new financial advisor by working with an experienced one who may retire soon (or that I may outlive altogether).” But that’s not an insurmountable challenge for an experienced advisor. It simply means limiting and narrowing the scope of the financial planning engagement, or ensuring that ultimately the client’s relationship is really with the advisory firm, and that they can continue to be clients of the business long after the original founding advisor has moved on!

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Weekend Reading for Financial Planners (Sep 24-25)

Why I’ll Spend $100 On #FinTech That Saves Me One Minute A Day

Want CE Credit for reading this article?

Financial Literacy Effectiveness & Providing Just-In-Time Training By Financial Advisors

Profits Falling But AUM Fees Still Rising As Financial Advisors Defy Robo-Competition

Weekend Reading for Financial Planners (Sep 17-18)

Managing “Reverse Age Bias” Against “Older” Financial Advisors

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