As 2017 comes to a close, I am once again so thankful to all of you, the ever-growing number of readers who continue to regularly visit this Nerd’s Eye View blog, and have been kind enough to share the content with your friends and colleagues as well (which I greatly appreciate!). Over the past year, the cumulative readership of the blog has grown yet another 25%, with more than 200,000 unique readers coming to Nerd’s Eye View last month. And we’re gearing up for a number of major new upgrades in early 2018 as well, from new CE opportunities, to back-end changes to our platform that will help to further improve your own reader experience.
Yet notwithstanding how many of you have made reading the Nerd’s Eye View a weekly habit, I realize that the sheer volume of articles can feel overwhelming at times, and that it’s not always possible to keep up with it all. And once published, blog articles are usually quite quickly left in the dust as the next new one comes along.
Accordingly, just as I did last year and in 2015 and 2014, I’ve compiled for you this Highlights list of our top 20 articles of 2017 that you might have missed, including some of our most popular episodes of the Financial Advisor Success podcast. So whether you’re new to the blog and #FASuccess podcast and haven’t searched through the Archives yet, or simply haven’t had the time to keep up with everything, I hope that some of these will (still) be useful for you! And as always, I hope you’ll take a moment to share podcast episodes and articles of interest with your friends and colleagues as well!
In the meantime, I hope you’re having a safe and happy holiday season. Thanks again for another successful year in 2017, and I hope you enjoy all the new features we’ll be rolling out in 2018, too!
Don’t miss our Annual Guides as well – including our list of the “15 Best Conferences for Financial Advisors in 2018“, our “2016 Reading List Of Best Books For Financial Advisors“, and also our recent new advisor tech guides, “Comparing The Best Portfolio Rebalancing Software Tools” and the “Advisor’s Guide To The Best Online Meeting Scheduling Tools“, as well as our ever-popular “Advisor’s Guide To The Best Financial Planning Software (For You)“!
2017 Best-Of Highlights Categories: General Financial Planning | Tax Planning | Investments | Practice Management/Career Development | Industry/Profession Trends | Retirement Planning | Advisor Technology/FinTech | Financial Advisor Success Podcast |
General Financial Planning
The Happiness Spending Threshold And What It Really Means To Live Within Your Means – “Try to ‘live within your means’” is a staple of prudent financial advice – recognizing that not everyone earns the same income (“means”), and therefore not everyone can afford the same lifestyle. Thus, rather than trying to keep up with the Joneses – and their lifestyle spending – you should live within your means, instead. Yet the challenge is that at some point, there is more than enough income to satisfy most of life’s basic needs… to the point that “living within your means” may actually seem like overspending relative to what it really takes to make us happy. In fact, while the research shows that how we spend our money can impact our happiness, there is also some evidence of a “happiness threshold” – that beyond about $75,000/year of income (albeit with some regional variability perhaps), earning more income and the more affluent lifestyle it can afford doesn’t actually appear to improve our emotional well-being anymore. Which means for those who do generate a substantial income, “living within your means” may actually not be very good advice, as it can create inappropriate expectations of what “appropriate” spending should be, lifting those with high incomes into the realm of “overspending” relative to what it actually takes to make us happy in the first place! Or viewed another way… what does it really mean to “live within your means”, and is there a point on the income spectrum where that advice is no longer relevant or prudent?
Why Two Incomes Aren’t Always Better Than One – The conventional view in financial planning, and personal finance in general, is that couples (including parents with children) are better off having two incomes instead of just one. As long as the second spouse can earn more than the cost of child care, the additional income is a net contribution to the household finances. Except a deeper look at the actual behavior of family spending reveals that most dual-income couples end out simply buying more expensive cars and bigger houses, and actually end out having a higher percentage of fixed expenses than single-earner houses, resulting in greater risk and more financial fragility if someone were to happen to one of them. Which means at a minimum, being a dual-income couple is only stabilizing to the household’s finances if they are able to “constrain” themselves to living on just one spouse’s income (and save the other’s). In addition, research on income and career trajectories find that for some professions – such as finance, law, and many high-level corporate jobs – income growth is very “non-linear”, where someone who works 50% more hours doesn’t just make 50% more income but might make 100% more instead (as they get raises and promotions and open new opportunity doors). Which means for many couples, concentrating on one earner’s income and career can actually produce more income than splitting career and household duties. Of course, to each their own about their preferred division of household responsibilities and career opportunities. And households that choose to concentrate earnings must also be more cognizant of managing their risks, from the consequences of an untimely death or disability, to the fallout of divorce (especially for non-working couples). Nonetheless, the point remains that couples and parents choosing to be a dual-income family do not necessarily always enhance their household financial stability by doing so… at least, not unless they can live their lives as though they were still a single-income household!
Individual Tax Planning Under The Tax Cuts And Jobs Act Of 2017 – In the waning hours of 2017, Congress and President Trump passed the Tax Cuts and Jobs Act (TCJA), in what is arguably the biggest tax overhaul in decades. From the corporate perspective, TCJA is substantive tax reform, with the elimination of numerous deductions, a reduction of the corporate tax rate from 35% to 21%, and the repeal of corporate AMT. For individuals, the legislation is less simplifying “tax reform” and more of a series of major adjustments, which nonetheless will reshape tax planning for years to come. An expansion of the Standard Deduction, coupled with a reduced debt limit of just $750k on mortgage interest deductibility, a cap of only $10,000 on the deduction state and local taxes (whether for sales, income, or property taxes), and the repeal of miscellaneous itemized deductions, will mean that the overwhelming majority of taxpayers don’t even itemize in the future. On the other hand, the introduction of a new Qualified Business Income (QBI) deduction for pass-through businesses, allowing S corporations, partnerships, LLCs, and even sole proprietorships to deduct 20% of their business income as an above-the-line individual deduction, provides significant tax incentives to form a business… albeit with a large risk of tax abuses as well, especially since the door is open for employees to try to recharacterize themselves as independent contractors to be paid as consultants because “Specified Service Businesses” (including lawyers, accountants, doctors, and consultants) will retain the QBI deduction as long as their income remains below $157,500 (for individuals, or $315,000 for married couples). From the financial advisor perspective, the good news of the tax legislation was that the FIFO provision (that would have eliminated specific lot identification for investment sales and required all investments to use FIFO reporting) did not make the final law, and many financial advisors may find they too are able to take advantage of the new QBI deduction in their own businesses (albeit with the income phaseout as a Specified Service Business). However, the bad news for financial advisors is that, with the repeal of miscellaneous itemized deductions, the standard investment advisory (AUM) fee is no longer a deductible expense for individuals! (Although for those who were subject to the AMT, it already wasn’t.)
The Passive Investing Mirage And The Disintermediation Of Active Mutual Fund Managers – The prevailing view is that financial advisors are in the midst of a massive shift to passive investing, as the FPA’s latest Trends in Investing survey shows that since the financial crisis, advisor adoption of ETFs has skyrocketed from 40% to 88%, as actively managed mutual funds are forsaken. A deeper look at the data, though, reveals a more nuanced shift underway, as the use of mutual funds has “only” declined from 85% to 80% over the same time period, and 61% of advisors still report buying individual stocks as well. In fact, the percentage of financial advisors who state that being “passive” is best has actually declined over the past several years, to a mere 15%. Instead, the overwhelming majority of advisors state that they prefer a “blend” of active and passive… most commonly, by being “passive” underlying investment vehicles (e.g., ETFs) but tactically managing those ETFs themselves. Or viewed another way, advisors aren’t shifting from active to passive; instead, they’re shifting from strategically (passively) owning active mutual funds, to actively (tactically) managing passive ETF vehicles. The appeal of such an approach is that it allows the financial advisor to insource the process of managing the portfolio models instead (which is increasingly easy using modern rebalancing software tools), and cut the cost of the third-party mutual fund manager along the way, reducing the total all-in cost of the portfolio for the client without needing to trim their own advisory fee. Or stated more simply: the idea that financial advisors are shifting from active to passive is just a mirage, as they’re actually just disintermediating mutual fund managers and doing it themselves instead (and using ETFs as their investment building blocks).
Adopting A Two-Dimensional Risk Tolerance Assessment Process – The industry-standard risk tolerance questionnaire posits a series of questions about time horizon, need for income and liquidity, and attitudes about risk and market volatility, to calculate a blended “risk score” and determine the appropriate investment portfolio to go with it. The problem with this one-dimension approach, though, is that by averaging together scores in both risk tolerance (willingness to take risk) and risk capacity (financial capacity to bear risk), clients can end up with portfolios that are riskier than they can tolerate. The alternative is to measure risk tolerance and risk capacity separately, and then score them on a two-dimensional scale that considers the contributing role (and limiting nature) of each. In other words, clients should take no more risk than they can bear, and no more risk than they can tolerate. In this context, it is perhaps no surprise that most financial advisors are very negative on the typical industry Risk Tolerance Questionnaire (RTQ), because most really don’t properly measure the dimensions of risk. Instead, the better approach is to either use a standalone tool to assess pure risk tolerance (willingness to take risk), complete a financial planning process to understand the client’s financial capacity to take risk, and then blend the two back together two-dimensionally to determine the appropriate portfolio (and/or whether the client simply has goals that are too risky to be accomplished with any reasonable portfolio, given their tolerance).
Practice Management/Career Development
2017 Financial Advisor Compensation Trends And The Emerging Shortage Of Financial Planning Talent – After years of forecasts of a shortage of financial advisors, the latest industry benchmarking data in 2017 suggests that the prediction may finally be taking hold. Over the past two years, financial advisor compensation was up 6.5%/year across the board – from paraplanners to lead advisors – with base salaries growing even faster, especially amongst the largest independent advisory firms that are both winning the bulk of new clients, and are the most likely to be working with affluent clients (which generate the most revenue, and therefore support the highest advisor compensation). In fact, the average Paraplanner with 4 years of experience is now earning total compensation of $65,000/year, with experienced service advisors earning $94,000/year (with 8 years of experience) and lead advisors skilled at developing new business averaging $165,000/year (while top-quartile advisors earn more than $250,000 and the top practicing partners are averaging nearly $500,000/year in a combination of salary, bonus incentives, and partnership profit distributions!). Of course, there can still be substantial variability, both regionally and from one firm to another. Nonetheless, the rising talent shortage is increasingly leading advisory firms to poach employees from other firms, to start building deeper talent pipelines with colleges and universities, and use third-party recruiting firms to help source and screen talent, with the average time to hire a financial advisor now up to a whopping 4-6 months. Yet with the number of CFP certificants up by nearly 50% in the past decade, perhaps the real challenge may not merely be a shortage of financial planning talent, per se, but the industry finally discovering that as investment management is increasingly commoditized and firms seek to add value through financial planning and wealth management as the “anti-commoditizer”, that the number of true financial planners was never enough to meet consumer demand in the first place?
Financial Advisor Fees Comparison: All-In Costs For The Typical Financial Advisor? – The standard rule-of-thumb is that financial advisors charge 1% AUM fees, but the reality is that with graduated fee schedules with breakpoints on larger account sizes, the median advisory fee for high-net-worth clients is actually closer to 0.5% than 1%. At the same time, though, the true all-in cost to manage a portfolio is typically more than “just” the advisor’s AUM fee, given the underlying product costs of ETFs and mutual funds, not to mention transaction costs and various platform fees. In fact, a recent financial advisor fee study from Bob Veres’ Inside Information reveals that the true all-in cost for financial advisors averages about 1.65%, not “just” 1%, for a “typical” $1M account! And for smaller accounts, the costs are even higher! Notably, though, the fact that the true all-in cost for financial advisors is higher than just the traditional 1% AUM fee also helps to explain the rising adoption of ETFs by financial advisors – it provides a means to reduce the total cost to the client, without taking anything out of the financial advisor’s pocket; after all, if advisors can cut their average underlying expense ratio from 0.65% to 0.3%, their total cost to clients drops by nearly 20%, without the advisor themselves taking a pay cut at all! Also notable in the latest advisory fee study, though, is a rising tendency for advisors to attribute more and more of their advisory fee value to financial planning advice – and not just investment management advice – as the all-in cost of an advisor is really a combination of financial planning advice, investment management, underlying product expenses, and platform fees. Which raises the question of whether advisors may soon begin to unbundle their advice and investment management fees altogether, in an effort to show an ever-lower investment management fee (competitive with robo-advisors) while supporting their core fees for financial planning advice?
Another Reason For Putting Your Advisory Firm Fees And Minimums On Your Website – Most financial advisors prefer to have the “fees and minimums” conversation face-to-face with prospects, who are told “come in for a no-obligation introductory meeting and ‘we’ll talk’ about what it takes to work together.” The advantage of this approach is that it gives the advisor an opportunity to explain the nature of what he/she does, and the value of the services provided, to give proper context to the cost of financial advice. And if necessary, gives the advisor the flexibility to make an on-the-spot decision to offer a fee discount or make a concession about minimums. However, the problem with not being transparent about advisory fees is that it can undermine client trust from the start (by effectively saying “We believe in a fiduciary duty… but aren’t willing to be transparent enough to just tell you our costs up front”), and makes it even harder for clients and Centers of Influence to refer the advisor (out of fear they’ll refer a friend or family member who are below your unpublished minimums only to have you reject them). In addition, not being transparent about fees and minimums prevents your website from effectively screening out non-qualified prospects, increasing the risk that you spend time meeting with people who were never going to be able to do business with you anyway (which now you won’t find out until after wasting time in the prospect meeting). Perhaps most significant, though, is that because most of us as financial advisors like and want to help people, waiting until the prospect meeting to have the conversation about fees and minimums can make it especially hard for advisors to stick to those fees and minimums and not make an on-the-spot concession (even if it’s a bad business decision in the long run, because it’s still awkward to reject prospects to their face). Which means the biggest benefit of putting your advisory firm fees and minimums on your website is simply that sometimes it may help to save you from yourself!
Optimal Design Of A Financial Advisor’s Office: Insights From The Financial Planning Performance Lab – The traditional financial advisor’s office is set up with a desk (or conference room table) where the advisor sits behind on one side, with chairs for clients to sit across on the other side. Yet recent academic research finds that while this “traditional” office setup may be effective to help convey the advisor’s business professionalism, the formality of the arrangement – and the implicit power dynamic of having the advisor on one side and clients on the other – can actually increase stress levels for clients. As it turns out, advisors who really want to better engage with clients should configure their office with comfortable sofa chairs set around a low table – more akin to a living room – as a means to literally eliminate the (physical) barrier between the advisor and client to form a more collaborative relationship. Other research-driven tips about the optimal design of a financial advisor’s office include: artwork is good, but focus on pictures with natural scenes rather than abstract art; include some live green plants, which have been shown to be soothing to many people; keep the colors neutral or use soft colors like blues and violets (and not orange and red, which are shown to increase blood pressure, pulse, and respiration); try to maximize natural light over fluorescent lighting (which tends to create washed out environments that some clients may associate with uncomfortable clinical settings); and consider using a sound masking device to help minimize external distractions around the office environment while meeting with clients.
Finology And Finding The Higher Purpose Of The Financial Planning Profession – The late industry pioneer Dick Wagner was known for often saying that “Money is the most powerful and pervasive secular force on the planet”, and that in a world where “money” is essential for survival (as it’s how we convert our productive labor into a common unit of exchange to buy whatever we need, and if we run out of money we have “survival-level” problems as we risk losing access to food, shelter, and clothing), money competency itself is a modern world survival skill. Yet unfortunately, money is a challenging subject for most – as it remains one of the most taboo subjects in modern society, at the same time that many lack the “numeracy” skills to make basic money decisions. In his book “Financial Planning 3.0” (published shortly before his untimely death last year), Wagner explored these issues and how arguably, our relationship with money deserves its own category and field of study – more focused to individual psychology than economics, but more focused towards financial and economic issues than psychology – which Wagner dubbed “Finology”. In fact, Wagner suggested that the future of financial planning, as we transition from our product-centric roots, and beyond just giving (technical) financial advice, may be one where financial advisors become “finologists” whose primary role is to help clients navigate the powerful forces that money exerts in their lives, recognizing both the interior and exterior dynamics of our money decisions.
The 4 Different Types Of Fiduciary Financial Advisors – The rise of the Department of Labor’s fiduciary rule has brought a heightened attention to the importance of working with a financial advisor who is a fiduciary. However, the reality is that in today’s environment, there are actually four different types of “fiduciaries”, each with their own (significantly different) rules and requirements. For instance, Registered Investment Advisers (RIAs) are fiduciaries under the Investment Advisers Act of 1940, where the advisor’s fiduciary duty originates under the Advertising section… which means RIA fiduciaries are primarily required to clearly disclose all of their potential fiduciary conflicts of interest, but don’t actually have to eliminate most of them, and the rule applies only to RIAs (and not registered representatives of broker-dealers). By contrast, under the new DoL fiduciary rule, advisors must not merely disclose but actually have plans to formally mitigate untenable conflicts of interest… yet while the rule applies both to RIAs and broker-dealers (and even insurance agents), it only applies when giving advice regarding retirement accounts (and not taxable investment accounts). In turn, the CFP Board has its own requirement for advisors to be fiduciaries – an obligation that it is in the midst of updating with somewhat more stringent requirements – but the CFP Board’s rules only applies to CFP certificants, and the most the CFP Board can do is simply revoke their CFP marks and publicly admonish them (but not fine or otherwise penalize the advisor, nor take away the advisor’s license to practice). And a number of associations and network groups – like NAPFA and the XY Planning Network – have their own requirements for fiduciary oaths, when the fiduciary duty applies, and what conflicts are and aren’t permitted. Which means until we find better regulatory harmony, consumers may still have to be wary even when working with a “fiduciary” advisor, because not all fiduciaries are the same.
The DoL Fiduciary Class Action Lawsuit That Will Really Transform Financial Advice – The looming rollout of the Department of Labor’s fiduciary rule has left the industry scrambling to adopt processes and procedures to oversee the fiduciary rule’s new requirements, particularly when it comes to managing various compensation conflicts of interest, to ensure that all advisors providing advice to retirement investors can fulfill their duty of loyalty to the client. However, the reality is that being a fiduciary actually entails two core duties: the first is the duty of loyalty (to act in the client’s best interests), and the second is the duty of care (to provide diligent and prudent advice, and only in areas in which the advisor is competent to provide such advice). After all, a fiduciary obligation is relatively meaningless with only a duty of loyalty, if there’s no expectation (or requirement) of competency: without a competency standard, consumers would still be harmed by unwitting negligence, even if there was no intentional effort (or conflicted motive) for self-enrichment. Which is important because while Financial Institutions are focusing on how to prepare to meet their Duty of Loyalty obligations, most are still exposed to the risk of a class action lawsuit for failing to meet their fiduciary duty of care! After all, when most financial advisors have no actual training or expertise to provide comprehensive financial advice, beyond a basic 2-3 hour regulatory exam (which primarily tests securities law, not best-practices advice), how would most “financial advisors” even know what the “best” advice was for the client in the first place (until they pursue bona fide educational certifications like the CFP marks or other post-CFP educational programs). Unfortunately, right now there is no universally accepted minimum competency standard for financial advice… though in the coming years, there may soon be an explosion in growth for programs like CFP certification or the RMA designation, as Financial Institutions recognize and then try to minimize their exposure to a class action lawsuit for failing to meet the fiduciary duty of care.
Does Monte Carlo Analysis Actually Overstate Tail Risk In Retirement Projections? – The most common criticism of using Monte Carlo analysis for retirement planning projections is that it understates the risk of “fat tails” that can derail a retirement plan by failing to fully account for occasional bouts of extreme market volatility. Yet the irony is that over the long term, Monte Carlo analysis may actually be overstating tail risk, as in the real world markets that have significant declines typically have recoveries (as valuations literally get cheaper), while overly dramatic bull markets often end with a crash (or at least a severe correction)… while with traditional Monte Carlo analysis, the probability of returns is assumed to be the same every year (independent and identically distributed), effectively ignoring the old investing maxim that what goes up must come down (and vice versa). Accordingly, a comparison of Monte Carlo analysis and actual historical sequences reveals that, even when using long-term historical returns, 6.5% of Monte Carlo results are actually worse than even the worse historical long-term sequence of returns! Or viewed another way, a 93.5% probability of success in Monte Carlo is actually akin to a 100% success rate using actual historical scenarios! And for those who assume below-average long-term return assumptions – given today’s high market valuations and low yields – Monte Carlo projections may end out showing 50% of their scenarios as outcomes that are worse than any in history (even those who retired on the eve of the Great Depression!). The key distinction is that while Monte Carlo analysis actually does underestimate the risk of fat fails in short term returns (e.g., daily, weekly, or even monthly data), the fact that market valuation and mean reversion eventually takes hold means that on an annual basis markets don’t exhibit fat tails at all (and the only “surprise” is not a black swan but an unusually large number of “golden swans”, or years of exceptionally high returns!). Which means using Monte Carlo analysis may actually be a more conservative way to project retirement than simply assuming lower straight-line returns or using rolling historical returns!
Dynamic Retirement Spending Adjustments: Small-But-Permanent Vs Large-But-Temporary – The original “safe withdrawal rate” approach was simply to set retirement spending low enough to survive even the worst historical sequence of returns we’ve ever seen, and if markets turned out more favorable, the retiree could increase their spending the future. The caveat, however, is that the safe withdrawal rate approach actually has a whopping 96% probability of leaving over 100% of principal after 30 years (based on rolling historical time periods), and a high likelihood of more-than-doubling remaining principal by the end of retirement. In addition, from a practical perspective, many retirees would prefer to spend more in the early years of retirement, and either trim later simply because life slows down, or make downward adjustments later if/when/as bad market returns or an unfavorable sequence unfold. Except there’s very little research available on how to conduct such “mid-course corrections” with a dynamic spending strategy. Which is important, because it turns out that the most intuitive approach – to simply cut spending for a few years if there’s a market downturn, such as a 10% spending cut for 3 years whenever there is a bear mark et- is actually remarkably ineffective at ameliorating the consequences of a bad sequence of returns. Instead of such “large-but-temporary” cuts, the better approach is to make a series of small-but-permanent cuts – for instance, by forgoing a 3% inflation adjustment each year that the market is down (which cuts spending in the future year, but also every subsequent year, as the base for future inflation adjustments for spending is also reduced). All of which can be agreed upon up front, and commemorated in a Withdrawal Policy Statement, to help ensure that clients have buy-in to the dynamic spending plan.
The Evolution Of The Four Pillars For Retirement Income Portfolios – There has been a substantial evolution over the decades in the research on how best to generate retirement income from a portfolio. In the 1950s and 60s, with the initial rise of a portfolio-based retirement, the leading strategy was simply to buy the bonds and spend the interest (by literally “clipping the coupons” from the bearer bonds of the time). Until the inflation of the 1970s ravaged the purchased power of bond interest, leading to a massive shift in the 1980s to purchase (high-quality) dividend paying stocks instead (as businesses that can raise prices over time generate dividends that are better able to keep pace with inflation). Yet the bull market of the 1980s led to a realization that once equities are included in a portfolio, it’s necessary to plan for both the dividends and the capital gains, leading to a more total-return-style approach to retirement income portfolios by the 1990s. In addition, planning for a retirement portfolio still necessitates planning for the principal as well – which, obviously, can’t be spent down too quickly or early, though nonetheless most retirees want to spend all of their money in retirement (not to just live off the growth alone). As a result, modern retirement income portfolios must combine together these four core pillars of retirement income (or really, of retirement cash flows): interest, dividends, capital gains, and principal. Unfortunately, the each successive pillar is less stable than the prior, and concentrating on one pillar alone can expose the portfolio to unique risks… which means best practices are to actually diversify across the four pillars to generate long-term retirement cash flows!
Differentiating The Next Generation Of Financial Planning Software – From year to year, change feels small and incremental when it comes to financial planning software. But from a longer-term perspective, there have been several major stages of financial planning software solutions, from the product-centric “needs-based-selling” illustration tools of the 1970s and 80s, to intensive cash-flow based planning software of the 1990s (e.g., NaviPlan), to goals-based financial planning software of the 2000s (e.g., MoneyGuidePro), and account-aggregation-driven Personal Financial Management (PFM) tools of the 2010s (e.g., eMoney Advisor). Which raises the question – what will the next disruptive financial planning software of the 2020s be? Arguably, as financial planning expertise itself becomes more focused and specialized, there may be room for several breakout financial planning software niches, from tools that focus on real tax-based financial planning (with accurate modeling of year-to-year income and tax changes), to those that are built to do better planning around spending and cash flow, software that is more relevant to the needs of planning for Gen X and Gen Y clients (from better representations of career/income growth, to modeling student loan debt strategies), true retirement distribution software (that illustrates the benefits and trade-offs of actual retirement income products), more interactive and collaborative financial planning software tools, and planning software that is built to proactively monitor and trigger alerts for advisors when there is a new planning opportunity. In fact, arguably one of the biggest inhibitors to the growth of fee-for-service financial planning today is that in the end, most financial planning software is still too product-centric, built to illustrate the need for an insurance or investment product, instead of actually operating as a tool to facilitate the delivery of advice. But with the industry shift towards real advice being accelerated by the DoL fiduciary rule, the timing has never been better for new financial planning software competitors to try and capture new market share for emerging fee-for-service financial planning business models!
3 Real #FinTech Disruptions Looming In The Financial Advisory Industry – The advisory industry has been abuzz with the risk of technology disruption for the past several years, from the rise of robo-advisors to the potential for blockchain, even as the business financial advice itself remains relatively unaffected. Yet in practice, often some of the biggest disruptive business models are not simply those that bring new innovation in technology, but those that innovate new business models – especially freemium and cross-subsidy models that give away something “for free” because there’s an opportunity to make money in other ways instead. For instance, in today’s world, consumers get to use services like Google Maps for free, because Google profits from advertising instead (but nearly put Garmin GPS devices out of business in the process!); in the advisory context, RIAs typically receive “free” technology and support services from custodians (an ever-present competitive threat to independent technology firms), because those providers make money directly from the business of custody, clearing, and trading of client accounts instead. Yet arguably, the advisory industry remains ripe for new forms of disruption, where a business model succeeds by giving away for free what people are used to paying for today. For instance, what would happen if an RIA custodian or broker-dealer developed such robust technology that it could actually charge competitively for the software (e.g., for a small ongoing basis point pricing) and give away the custody, clearing, and trading services for free? Or could technology reach the point where it’s so easy to manage model portfolios (with both a wide range of rebalancing software and the recent rise of Model Marketplaces), that we don’t even need mutual funds or ETFs at all anymore, instead choosing to own the underlying stocks and bonds directly (e.g., all 500 stocks in the S&P 500) because the software can easily manage the proper allocations (an “Indexing 2.0” solution that both saves on the intermediary cost of mutual funds and ETFs themselves, and is at least partially subsidized by the superior tax loss harvesting benefits). And with the ongoing rise of financial planning and the commoditization of investment management, will there come a point where we as financial advisors will innovate new business models for ourselves – for instance, what if the future of financial planning is simply to charge for the financial planning advice, and just give away the investment management services entirely for free?
Why Broker-Dealers (And Large RIAs) Launching Robo-Advisors Are Missing The #FinTech Point – In recent years, a wave of robo-advisor software solutions have pivoted to robo-advisor-for-advisors platforms, from Blackrock buying FutureAdvisor and Envestnet acquiring Upside Advisor to the shift of Vanare-now-AdvisorEngine and JemStep to the advisor channel, as both large RIAs and especially broker-dealers seek to capitalize on the opportunity to have better technology for serving next generation clients. Yet the reality is that while large firms that tend to have a concentration of Baby Boomer clients may want to expand their client base and serve Gen X and Millennials, robo-advisor solutions actually just help efficiently facilitate the onboarding and managing of a next generation client’s investment account… without actually solving the problem of how to market to and attract next generation clients in the first place! In other words, until broker-dealers and RIAs get better at digital marketing to prospective (next generation) clients, there’s little value to deploying robo-advisor technology; and as even the leading robo-advisors like Betterment and Wealthfront have shown, reaching a critical mass of next generation clients online is challenging, as the companies combined still have less than $20B of AUM after nearly 6 years (which is less than 0.5% of the aggregate assets of RIAs, and less than 0.1% market share of all investable assets!). And the problem may be especially challenging to broker-dealers, as their centralized compliance oversight of independent registered representatives makes it especially hard to do the kind of rapid-iteration digital marketing that is necessary to compete in the online environment for next generation clients. Notably, this doesn’t mean that the “robo” tools themselves are bad to adopt – at least from an operational efficiency perspective – but the point remains that robo tools are really just about operational efficiency, and not a solution that actually attracts next generation clients in the first place!
Financial Advisor Success Podcast
#FASuccess Ep 007: Matthew Jarvis On Building a Highly Profitable Lifestyle Practice by Age 35 – In one of our most popular episodes ever on the Financial Advisor Success podcast, Matthew Jarvis shares the story of how he bought out and transformed what had been a relatively stagnant and struggling advisory firm int he midst of the financial crisis, into a business that 10 years later has over $100M in AUM for nearly 150 clients, and generates more than $1M in revenue. And thanks to Matthew’s intense focus on efficiency, the firm operates at a more-than-50% profit margin with just 2 staff members, while Matthew takes over 80 days of vacation every year, in what for most advisors would be the ultimate lifestyle practice… which Matthew has achieved at the age of just 35 years old. In this episode, Matthew shares the details of his advisory business, how he structures his service model and client meetings, the internal staff and technology infrastructure he uses, his “one page financial plan” approach with clients, the business development training course that has helped him add 10-20 new clients every year for the past four years, and his strategy for “time blocking” to maximize his personal productivity.
#FASuccess Ep 024: How Mindset Drives Success And The 7 Freedoms Of Limitless Advisers with Stephanie Bogan – The conventional view of practice management advice is that the key to success is to incorporate industry best practices into your own advisory firm to accelerate its growth or maximize its profitability… and the only thing holding us back is our ability to execute the tactics. But as Stephanie Bogan illustrates so effectively in this episode of the Financial Advisor Success podcast, the biggest blocking point for most of us is not simply our ability to execute Best Practices in our advisory firms, but the ways our own mindset gets in the way, from the reality that most “time management” challenges for financial advisors are really just an inability to say “no”, to the immense amount of revenue that advisors often leave on the table by not sticking to their advisory fee schedule and client minimums (out of a fear of being rejected by a prospect even when he/she isn’t a good fit in the first place), and how Stephanie herself overcame her own mindset challenges as a 24-year-old woman who launched her own practice management consulting firm (which she managed to sell a decade later for a 7-figure buyout check). Because the reality is that often the greatest inhibitor to growth for an advisory firm isn’t a marketing problem, or even an execution problem, but the limiting beliefs that the founder imposes on themselves and the business… which means changing your mindset can literally change your entire advisory business!
Bonus Podcast Episode
#FASuccess Ep 020: Building A Successful Business By Giving Away 99% Of What You Do For Free with Michael Kitces – One of the most common questions I get is “Does Michael ever sleep”, and how it is that I can run a successful business where I give away so much content for free, every day of the year. In this episode of the Financial Advisor Success podcast, I share my own career story, from how I ended out in the financial services industry because my mother was a sales assistant for a life insurance agent almost 50 years ago, to how I navigated the early stages of my career after failing as a life insurance agent and getting turned down for a $24,000/year paraplanner job, to why and how I eventually launched the Nerd’s Eye View blog (and who gave me the critical nudge I needed to succeed), and how I now get paid by giving away 99% of what I do for free. You can also hear about the exact time management strategy I use to manage my own days, weeks, and months of the year, how I allocate my own time across my various businesses, from our advisory firm, to New Planner Recruiting, and XY Planning Network, the way I finally learned to delegate, and why digital marketing has been the key to my success as an introverted financial planner!