The September CFP CE quiz is now available in the Members Section!

Weekend Reading for Financial Planners (June 2-3)

Posted by Michael Kitces on Friday, June 1st, 7:14 pm, 2012 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with two articles about the ongoing debate in Washington on the Investment Advisor Oversight Act of 2012 (the so-called "Bachus SRO legislation"), including a scathing report from the Project on Government Oversight on why FINRA would be a poor choice of SRO, and a second article about why in the end there probably won't be any action on the Bachus legislation until next year anyway but it's still important to take it seriously now. From there, we look at a few practice management articles, from an interesting look at how young Generation Y agents are changing marketing and business development in the insurance industry, to the importance of having a good first-six-weeks process in your firm to ensure that your own new Generation Y hires will stick around for the long run, to the importance of choosing the right name for your firm, knowing how to sell to develop your business (even as a professional!), and that the key to growing your business is to deliver an experience that is remarkable - as in, literally, something worth remarking about. There's also an article about whether Veralytic is really a useful tool for advisors evaluating life insurance on Advisors4Advisors (a response to a post on this blog from a few weeks ago), an examination of how advisors have shifted their investments before and after the financial crisis, and a look at how the due diligence burden on really evaluating ETFs has become far more complex with the proliferation of ETF innovation. We wrap up with Bill Gross' latest missive from PIMCO about the Wall Street Food Chain, and how the 1% at the top may be disrupted more than they expect as the global deleveraging process continues. Enjoy the reading!

Weekend reading for June 2nd/3rd:

Non-Partisan Watchdog Group Writes A Scathing Letter About FINRA - This article from RIABiz highlights a recent letter from the Project on Government Oversight (POGO) to the House Financial Services Committee, arguing against the Investment Advisor Oversight Act of 2012 (the Bachus SRO legislation) and in particular against FINRA serving as an SRO. The POGO letter was especially critical of FINRA's effectiveness, "undermined by its inherent conflicts of interest, its lack of transparency and accountability, its lobbying expenditures, and its executive compensation packages, among other issues." Despite the criticism, FINRA maintains that it is the best agency for the job, continuing to emphasize that the SEC conducts too few advisor exams. The article also includes at the end a full copy of the POGO letter.

Duane Thompson Says Bachus Bill Will Croak In Congress But Others See Danger Aplenty - This article from RIABiz provides a nice summary of the current state of the Bachus SRO legislation. Thompson notes the reality that to move forward, the legislation must ultimately pass out of the House Committee on Financial Services, then get passed by the entire House, and then go to the Senate for approval - and the odds of this happening, especially approval in the Democrat-controlled Senate, are virtually nil in the current Washington environment. Yet incoming chairman of NAPFA Ron Rhoades points out that ultimately, the legislation may still be the template for what comes to pass in a few years, and consequently it's important to be proactive on the issue now. The article provides a good summary of the debate between the Financial Planning Coalition and FINRA, and Thompson notes at the end that there may be a third alternative to consider - besides FINRA or a new SRO - that the SEC could outsource inspections to another private organization.

How Young Insurance Agents Are Changing The [Insurance] Industry - This article from the Insurance Journal provides an intriguing look at how the insurance world is changing as Generation Y enters the industry. And much of the change is coming as a result of the digital age and social media. In fact, the article highlights several young insurance agents, who are growing their businesses virtually, using social media and email, and completing eliminating the store-front insurance agency. A survey of young insurance agents showed a whopping 75% have a Facebook page, 74% use LinkedIn, 29% are on Twitter, 85% use smartphones, and 10% writing a blog - all for their work as an independent insurance agent. Notably, 94% of these more virtual insurance agents still report that building relationships is essential for success - but how the relationships are built is entirely different. For instance, instead of just creating a document to answer Frequently Asked Questions, one agent answered the 100 most common questions through a series of 100 blog posts, each of which includes a video of the agent directly answering that question. Is this an advance look at some ways the financial planning world will also change in the digital age?

The Six-Week Solution to Succession Planning - This article by practice management consultant Angie Herbers in Investment Advisor magazine discusses how to better connect with and retain junior advisors hired into your practice. And retention is more important than ever, as Herbers notes there's a squeeze underway for hiring experienced junior advisors, as the demand outstrips the supply, pushing up both the cost to hire and the consequences of turnover. Herbers' solution is to avoid hiring experienced junior planners, and instead hire them fresh and develop them yourself - especially since you may literally be able to hire two people for the price of one, which increases the odds that you'll have at least one who works out in the long run. And in hiring, the first six weeks on the job are crucial - that's typically the time window when the young planner makes an initial decision about whether he/she intends to stay for the long run, and if that initial six-week impression is bad, it's almost impossible to fix later. To help address this, Herbers prescribes a six-week training process (detailed in the article) that focuses not only on the work the planner must do, but how the firm works, why it succeeds, who its people are, and why it's a great place to be for the long run. In short, "this is a process that's designed to 'sell' an advisory firm, its management, its team, its services, and its client-centeredness to new advisors."

Living Into A Firm's Name - This article provides an intriguing look at the importance of a firm's name - as author Lazetta Braxton puts it, "the firm's name offers a window into the firm's ethos." That may sound extreme, but as Braxton notes, "a trusting financial planner-client relationship develops when the firm demonstrates who it says it is by name and confirms its name through action" - which means getting the right name, and living up to (and "into") that name, is crucial, so that your clients will associate good thoughts and a good experience whenever the firm's name comes to mind. So how might this play out? If the firm's name is the surname of the founder, then the firm's perosna should represent a living manifestation of the founder's guiding principles. If the firm's name is inspired by its location, then the spirit of the locale should be embodied into the firm, as the firm has an implicit agreement to uphold the shared image of the community. Concept-based firms provide more flexibility, but it's important to be cautious, as not everyone interprets certain concepts or images in the same way, due to their own experiences and culture. The bottom line is that a (new) firm should take its naming seriously; you may be stuck with it for a long time!

You Must Know How to 'Sell' to Develop Your Business - This article by Vern Hayden in the Journal of Financial Planning explores the importance of sales skills, even - or especially - for financial planning professionals. Drawing on an analogy to how he chose a surgeon for a hip replacement, Hayden notes that ultimately even doctors are in a position to "sell" someone on selecting them as the professional of choice. Yet the reality is that selling is a skill - one that needs to be trained and practiced like any other - because being a great planner is not always enough to ensure someone won't use the planner across town instead. Hayden emphasizes that it's crucial to understand both the objective (the facts) and the subjective (how the client feels) to really understand the client, and more importantly to make the client feel understood. Ultimately, you may need to help take clients out of their comfort zones to get them to where they need to go, which requires Education, Participation, Visioning, and Building Trust. As Hayden notes, "There are times we all have to 'sell' -- even good ideas."

Be Worth Remarking About - This article by Carl Richards for Morningstar Advisor explores how important it is as an advisor to set yourself apart from the competition - and that saying things like "we put clients first" or simply "we're different" just doesn't cut it anymore, because everyone says something similar! Richards suggests that in reality, marketing is "about who you are and the experience your provide, not the fancy words you put on your website." So how can you be remarkable? Richards' first tip is to stop talking about whether you're a fiduciary, and just act like one regardless; so many people have a bad experience with advisors that simply delivering a genuinely good experience can itself generate extensive referrals! Second, tell your story - your personal story, the one that helps people to connect with you as a person. Third, make it easier for your story to spread - for instance, by telling it through social media where it can be shared with others, or setting up a monthly breakfast for clients and encouraging them to bring friends. 

Is The Veralytic Report A Useful Tool For Advisors In Evaluating Life Insurance - This article by insurance guru Glenn Daily on Advisors4Advisors is largely a response to a recent article on this blog about financial planners using Veralytic to evaluate life insurance policies (and in the process help to reform the industry). Daily's review of Veralytic is somewhat mixed, as he criticizes that the reports may be oversimplifying some very complex insurance issues (even while noting that the reports are so long that many don't even read the detail that is there!), and that Veralytic and its ratings may not be flexible enough to really accommodate all of the different policy types and issues that are out there. Ultimately, though, the alternatives are still limited, and Daily recommends that in the end the best course of action is simply for insurance regulators to require better disclosures in the first place; in the meantime, though, it's still unclear whether Veralytic is "better than nothing" and/or whether Veralytic's tools will eventually improve enough to address more of Daily's concerns. In reading through the depth of Daily's analysis, though, I wonder if some planners will simply conclude it might be better to avoid many of these more complex policies in the first place, rather than using tools like Veralytic to evaluate them?

From Best Return to Safety and Liquidity - This article from the Journal of Financial Planning's "Trends in Investing" study examines how financial planners have changed their investment vehicles since 2006. In the early years, advisors were seeking investments that provided broad market exposure, tax efficiency, customization, and healthy returns. Since the financial crisis, though, the focus has shiftd, and now the focus is increasingly on the best risk-adjusted return, with an increased overall focus on safety and liquidity. The accompanying charts show that since the financial crisis, there has been a dramatic increase in the use of ETFs and even cash and equivalents, along with a significant decline in the use of individual stocks (trends that have hardly budged since 2009); on the other hand, a rise in annuities and life insurance after the financial crisis is easing back to levels close to where they were in 2006. Notably, the article also notes a major rise in tactical asset allocation, with 57% of advisors having re-evaluated their asset allocation strategies over the past 6 months.

Assessing the New Generation of ETFs - This article from Investment Advisor magazine notes that as the ETF indutsry expands - not only in terms of assets, but also product innovation - that advisors must evolve in the depth and sophistication of their due diligence evaluations of ETFs. Early on, ETFs were relatively homogenous and provided transparent exposure to broad equity indexes and sectors with only small differences between funds - as a result, advisors focused primarily on cost (from expense ratios to bid/ask spreads) when evaluating ETFs. As the number of ETFs has exploded from 100 to 1,500 in the past 10 years, though, cost alone is inadequate to compare. Instead, the author emphasizes that advisors should ask what underlying instruments are being used to provide exposure - for instance, is the commodity ETF getting exposure via futures, physical storage of the commodity, or commodities-related equities, and is it structured as a '40 Act ETF, an exchange-traded note, or a limited partnership? Second, how are the underlying investments selected, weighted, and rebalanced - even amongst relatively plain-vanilla-looking equity ETFs, there can be big differences. Third, what exactly is the investor trying to gain exposure to - as ETFs become increasingly finely sliced, there is more opportunity than ever to get exactly the desired slice of exposure... or to unwittingly get the wrong slice. The bottom line is that while cost certainly remains relevant, it's necessary to go far deeper to assess today's ETF marketplace. 

Wall Street Food Chain - In his latest missive, Bill Gross of PIMCO gives an interesting overview of the current marketplace, noting that in practice few of even the infamous "1 percent" are really innovators like Jobs and Gates; most feed primarily off money, not invention, and their net worth floats on an ocean of credit. Yet Gross warns that this has significant implications for the whales at the top of the food chain as the financial system deleverages; "future changes, which lie on a visible horizon, may not be so beneficial for our ocean's oversized creatures." This is coming about because soaring debt/GDP ratios in previously high quality countries have shifted funding from a private market function to a central bank function - to such an extent that lower quality and lower yields threaten to push the system to a breaking point as investors ultimately demand higher returns, fleeing to real assets like land, gold, and tangible things, or simply stuffing their proverbial or literal mattresses with cash and waiting for better times. Gross recommends favoring credit quality (higher rated sovereigns with a positive outlook), intermediate- to short-term bonds, and for equity investors, stable cash flow global companies well exposed to what high growth markets there are. 

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!

Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

For ConsumersFor Advisors

Blog Updates by Email

Nerd’s Eye View Praise

@MichaelKitces Twitter

Out and About

Tuesday, October 13th, 2015

*Understanding Longevity Annuities and their Potential Role in Retirement *Generating Tax Alpha with Effective Asset Location @ FPA Southern Wisconsin

Thursday, October 15th, 2015

*Future of Financial Planning in the Digital Age *Cutting Edge Tax Planning Developments & Opportunities @ FPA Mid-Tennessee

Monday, October 19th, 2015

*Cutting Edge Tax Planning Developments & Opportunities @ IMCA Advanced Wealth Management Conference