Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with an article about the FPA, its declining membership, and prospective organizational changes as the CEO retires in 2014. From there, we look at a number of practice management articles, including an overview of the emerging niche of firms that provide quality lead generation for financial advisors, how to sustain a study group, the importance of e-delivery of documents not only for your firm but for your clients, a new software package to help with investment advisory fee billing, and two marketing articles - both emphasizing the value of being unique and different and having a niche to grow the business effectively. From there, we look at an interesting interview with Jeremy Grantham about investing opportunities, a striking article that suggests the giant pile of cash corporations are sitting on may be a bad sign and not a good sign, an article from the Journal of Financial Planning about a new way to manage tail risk for client portfolios, and coverage of an emerging new product called a "stand-alone living benefit" designed to provide all the lifetime income guarantees contained in today's variable annuities but wrapped around a client's own investment account instead. We wrap up with a slightly more light-hearted list of investing tips and maxims that would probably be a good reminder for almost any planner and his/her clients. Enjoy the reading!

Weekend reading for June 30th/July 1st:

FPA Mulls Lower Membership, New Management - This article from Wealth Management takes a look at the Financial Planning Association (FPA), the largest membership organization for financial planners, which boasts 23,500 members but is down 13.5% since 2004 (although most of the decline came during the 2008-2009 recession). About 2/3rds of the membership are CFP certificants, and about 2/3rds work at RIAs. The membership attrition is blamed largely on the FPA's fiduciary stand (although as noted previously in this blog, that position is questionable), and the recession (although notably other organizations have continued to grow since 2008). The article points out that FPA is considering a restructuring of the national organization, possibly making it more decentralized - a change that may coincide with the hiring of a new CEO, as current CEO Marv Tuttle has announced that he will be retiring when his current contract expires in 2014. The FPA is also focusing further on practice management programs, including a new fiduciary training for the financial planning process rolling out later this year.

How One Firm Is Supposedly Cracking The Lead Generation Code - This article from RIABiz highlights a firm called My New Financial Advisor, which offers consumers a free retirement report and then asks them if they would like a 30-minute consultation with an advisor; a huge number say yes, and the program is reporting advisors have been converting leads into clients at a whopping 65%-70% rate. Building on public media appearances by the first's CEO and founder Frank Troise, the platform has generated upwards of 50,000 leads - so many that it's having trouble finding enough advisors to keep up with the consumer demand! From there, the article highlights a number of other offerings in the "lead/referral generation" space, including Advizent, Paladin Registry and InvestorWatchdog, and Vestorly. Although it's not entirely clear which companies will win, the clear takeaway is that the space for companies that help advisors generate leads and clients is definitely heating up.

The 20 Rules For A Successful Study Group - This article from Advisor Perspectives provides some nice tips for how to sustain a successful study group, noting that often people find such groups initially energizing but that they often become more stale with less useful guidance as time goes on. In fact, the article suggests that if the study group begins to make rules requiring people to come to the next meeting with a new idea, case study, outside speaker, or investment idea, the group may already be slipping into irrelevance. So how do you keep your study group from slipping? The article provides 20 good rules to set up front, including an acknowledgement from everyone up front that the study group may not go on indefinitely and that it's ok to end it when it's just not useful anymore.

E-Delivery: Are You Doing Your Part For Your Clients? - This article by Dan Skiles from Investment Advisor magazine makes the point that while many advisory firms are thinking about e-delivery for the firm - reducing paper and mailing costs and improving office productivity - the change also has many important benefits from the client perspective. For instance, while some still worry about internet and email security, the reality is that your client's home mail box - with an envelope often clearly indicating a financial statement is enclosed - isn't actually secure, either. In a word where clients often complain about getting too much mail, electronic delivery of documents that can be quickly filed by dragging and dropping to a virtual envelope may also be well appreciated - especially when new clients come on board and get inundated with the initial flurry of paperwork. Because the default is still paper in most cases, though, it requires overcoming inertia to help clients get on board with e-delivery.

Billing Made Easier - This article by Joel Bruckenstein in Financial Advisor magazine reviews a new software package called billPort, intended to help investment advisory firms manage their often-painful billing process. The software plugs into Advent, APX, or PortfolioCenter (although it requires a local installation and doesn't work with cloud-based solutions, yet), and after a relatively substantial setup process, ultimately making the process of creating invoices and doing the actual billing to be relatively painless. The software will also soon be able to export the billing details out to QuickBooks, too. Overall, Bruckenstein suggests that some improvements can still be made, but given how painful billing is for many firms, billPort may be worth looking into sooner rather than later.

Don't Be Better, Be Different - This article by marketing consultant Steve Wershing on the Financial Planning magazine blog makes the point that when trying to convince a new client to come on board, most advisors focus on why they're "better" when they should really be trying to accentuate how they're different. Saying you're better at everything just isn't credible, because everyone says they're great, and it's not necessarily clear what "better" even means since it's often in the eye of the beholder. Instead, Wershing suggests that you talk about what's unique and different about you, your firm, and your offering, and let clients choose for themselves whether it's "better" for them. And notably, if you serve a well-defined niche of target clients, it's even easier to come up with offerings that are differentiated, making prospects more interested in becoming clients and turbocharging referrals from existing clients. 

To Grow, Think Small - This article by financial planner Dave Grant discusses the importance of niche marketing for financial advisors. What's notable, though, is Grant's point that not only does having a well-defined niche improve the focus of the business; it also creates an environment where planners can more effectively refer to other planners. For instance, if four planners collaborated, one targeting doctors, the next targeting teachers, another on lawyers, and still another on restaurant franchise owners, then the four together could market and build business for all of them, because they would not even be competition given their niches. 

Strategist Sees 'Ho-Hum' Returns For Next 7 Years - This article from CNN Money is an interview with investment guru Jeremy Grantham of GMO, who has a track record of making impressive calls (he forecasted the technology and housing bubbles, and wrote in March of 2009 that it was time to be a buyer). In the interview, Grantham makes several intriguing points, noting that the best opportunities may come at the asset class level rather than from individual stocks because most people are unwilling to step aside from massively mispriced markets even if everyone is talking about it. Grantham also notes that looking forward, the outlook for stock returns is lean (4% real returns), the outlook for bond returns is even more lean, and that foreign markets are more reasonably priced than US markets (and Grantham suggests 100% of the latter should be in high-quality blue chips). Grantham also remains bullish on commodities - noting that demographic demand trumps are still positive - but that futures are too complicated and unprofitable, and that investors should take advantage of rising commodity prices by buying companies who own the stuff in the ground. 

Too Much Cash - This article from Research magazine makes the interesting point that the upwards-of-$2 trillion of cash on corporate balance sheets may actually be a bad sign for the economy and markets, unlike the traditional approach that suggests lots of corporate cash to deploy is a bullish sign for markets. The basic point is that when companies feel compelled to hoard so much cash, it may be a sign that even the companies think the economic environment has become too risky and volatile; notably, many big companies, including Microsoft, Google, and Intel, have so much cash they could repay all their debt several times over, but they hold cash nonetheless. Unfortunately, though, cash on balance sheets is not only idle in the economy, but is also expensive for the company to manage as staff are hired just to be responsible for managing the money. Notably, the S&P 500 now has a total market capitalization of $12 trillion, but in reality a whopping 15% of that - $2 trillion - is just the cash. A similar article from the Wall Street Journal this week has also highlighted the phenomenon that corporations holding cash may be a sign of fear, more than greed.

Integrated Tail Risk Hedging: The Last Line of Defense in Investment Risk Management - This article by Jerry Miccolis and Marina Goodman in the Journal of Financial Planning takes a fresh look at how advisors can protect clients from so-called "tail risk" - the potential for low-probability but extremely bad investment outcomes. The authors provide three criteria to evaluate potential "hedges" or tail risk solutions: sudden appreciation in severe market downturns without a give-back during recoveries; very low cost, both direct and indirect; and minimum disruption to the portfolio. Notably, most typical solutions, from a cash position, using put options or collars, variable annuity guarantees, or investing in gold, fails to meet some or all these criteria. Instead, the authors suggest a more sophisticated strategy - capitalizing on investor fears by shorting weekly market volatility and buying daily volatility (in the form of swaps), which historically has generated a remarkably robust return because day-by-day volatility virtually never turns out to be as bad as investors fear on a weekly basis (and the effect is actually most pronounced in highly volatile markets). The article then provides a series of back-tests to show how well the strategy would have fared in the past, and explores how to invest the strategy (at this point, primarily through structured notes or ETNs).

A Twist On Guaranteed Income - This article discusses the RetireOne retirement income product from a company called Aria Retirement Solutions. What makes RetireOne unique is that it is essentially the lifetime income guarantee of a variable annuity, without the variable annuity part. Instead, this "stand-alone living benefit" (often abbreviated as SALB) is attached to an investment account, allowing an investment adviser to keep the client invested in the portfolio of choice and simply have the guarantee as a backstop without losing investment flexibility or favorable capital gains treatment. The cost would vary from 85bps to 1.75% (competitive with other variable annuity income guarantees), depending on the size of account and its equity exposure, for the pure SALB benefit, but with no other distribution (i.e., commission) costs or an underlying variable annuity expense. Thus far, development of SALB offerings has been slow, as it requires both extensive technology (so the insurance company can keep track of the investor portfolios) and state insurance regulator approvals (which can be slow for an innovative new product). At this point, Aria is the only company with an offering, backed by Transamerica, and initially available only on the AEGON/Transamerica platform. If it catches on, though, expect to see more companies offering the solution on more platforms.

My Investing Checklist - This blog post by Bob Seawright is simply a nice checklist of common errors that investors should avoid and good investment maxims to remember. Most of the rules will resonate with advisors having witnessed bad investment behaviors in clients (including #20 "when you have reached your goal, stop playing" and #11 "an otherwise great investment plan can readily become a disaster if it doesn't line up with our understanding, goals, objectives, and risk tolerances"), but a few are good reminders for advisors as well, from #2 "correlation is not causation" and #22 "data should always trump opinion or ideology" to #19 "when reading financial or investment papers, the best stuff is usually in the footnotes". I can envision some advisors taking the highlights of the list that are most meaningful for them and framing it for their office!

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.

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Out and About

Wednesday, October 7th, 2015

*CPWA Training on Retirement Planning @ IMCA

Wednesday, October 7th, 2015

*Cutting Edge Tax Planning Developments & Opportunities *Social Security Benefits Planning for Couples *Life & Death Tax Planning for Annuities @ Dupage County Estate Planning Council

Tuesday, October 13th, 2015

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