As the public becomes more savvy about protecting themselves from fraud – in part due to the assistance of increasingly sophisticated anti-virus and anti-phishing software – thieves are becoming more and more creative about new ways to steal. A disturbing new trend is that some thieves are beginning to directly target financial advisors and their clients – as famous bank robber Willie Sutton noted, if you want to get rich by stealing, go to where the money is! Accordingly, financial advisors and investment custodians have seen a noticeable increase in attempts at fraudulent wire transfers by “spoofing” – where a request sent “from the client” is actually a spoof from a fake-but-similar email account (or sometimes is even the client’s actual account!), and asks the advisor to process a wire transfer to a third party bank account. By the time anyone realizes the request was fake, the money is already gone, the transfer cannot be unwound, and the wire fraud theft is complete. In response, it’s crucial for advisors to review – and potentially change and improve – their processes and procedures to ensure a wire transfer request is legitimate before acting upon it, especially in scenarios where the transfer is going to a third party. Fortunately, some best practices are emerging about how to avoid these kinds of client disasters!
As financial planning firms grow more efficient, especially with the use of technology, it becomes possible for planners to manage an increasingly large number of clients. The only limitation, it would seem, is the time it takes to service them. However, research in psychology and anthropology suggests that there may be another limit to the maximum number of clients – the physiological limit of our brain’s neocortex that constrains the number of social relationships that can be actively maintained. This threshold – called “Dunbar’s number” – is estimated to be about 150 people on average, and corresponds not just to the average size of many ancient tribes and villages, but also the military unit size of the Roman army, and even the average number of Facebook friends or engaged Twitter followers! The implication of the research is that even as firms continue to become more efficient, there’s still a physiological brain-based limit to how many clients we’ll ever be able to manage, which allowing for some personal relationships as well may never be much higher than 75-125 for any planner regardless of the new tools and technologies we create in the future!Read More…
For much of financial planning’s history, the only way to be a financial planner was to build your own financial planning business, either alone or with a partner or few. As the industry matures, though, it is increasingly common for financial planners to begin their careers not by starting a firm from scratch, but by joining an existing one, with the ultimate goal of “having your name on the door” as a partner. Yet it’s not clear if many newer planners really want the risks and responsibilities of being a partner, or are just trying to find a career track that leads to a professional income – after all, in firms where the only options are administrative staff or professional partner, it appears that partnership is the only path to a higher earning potential.
The model emerging at larger firms, though, is to more clearly delineate between compensation paid for working in the business, and the risks and benefits of ownership for working on the business as a partner. Ultimately, the reality may be that only a few newer planners really have the inclination to be a partner – for the rest, the real key is to craft a career track that will leave planners not as partners at all, but simply well compensated for a job well done!
In the financial planning world, most firms are small businesses that are struggling to get larger, trying to grow the practice by simultaneously competing for the same biggest clients and at the same time serving anyone who is able and willing to pay for financial planning services while slowly raising minimums to become more profitable. In response, many practice management consultants have suggested that financial planners establish a niche to build their businesses, focusing on a smaller market they can dominate rather than a larger market they struggle in. Notwithstanding this advice, few firms have adopted the niche approach, most commonly out of a fear that if they narrow the focus of the practice it will simply lead to fewer clients. Yet the reality is that in other industries, firms are growing like never before by focusing not on the biggest clients and opportunities, but by capitalizing on “the long tail” of smaller, niche segments that can add up to real dollars, and become accessible because of the how the internet facilitates business in the digital age. Is it time for financial planners to similarly adopt the long tail approach?Read More…
The assets-under-management model for financial planning firms has become increasingly popular in recent years. However, its rising popularity has also brought a great deal of criticism, especially regarding the volatility of revenues as markets cycle up and down. As a result, some firms have begun to shift to a retainer-style model in an attempt to smooth out fees, rather than pricing on a strictly AUM basis.
Unfortunately, though, an annual retainer model where clients have to write a check for services makes the fee significantly more “salient” and can actually force firms to either cut prices or work harder to generate the same income, and may result in worse client attrition during down markets as fee-sensitive clients choose not to renew during difficult times.
As a result, some firms that shift to annual retainers are even shifting away from retainers and back to AUM pricing after a few years of business pain! Of course, the reality is that the AUM model can’t serve all clients, and retainers may be necessary in some segments of the marketplace; nonetheless, in situations where there is a choice, the AUM model may have far more longevity than some expect.
As financial planning firms continue their search for scalability and efficiency, more and more firms are choosing to outsource various aspects of their business, retaining only the core areas where they provide the most value. As a result, Turnkey Asset Management Programs (TAMPs) have exploded in recent years, as more and more planning firms outsource their investment process to focus on their financial planning services.
However, a new option is beginning to emerge – the Turnkey Financial Planning Program (TFPP), designed to be a holistic one-stop shop for starting a financial planning practice. And as signaled by LPL’s recent announcement to acquire Veritat, one of the early TFPP platforms, building an effective TFPP can be a valuable business proposition itself, in addition to being an appealing offering for the growing financial planning firm.
In fact, arguably the TFPP is a glimpse at the broker-dealer of the future – a core offering for financial planning firms, once the other parts that are unnecessary for a financial planning practice are stripped out – and may also represent a way for RIAs to grow as well. So forget the TAMP – it’s time for the TFPP.
As financial planning slowly transitions into the digital age, and increasingly common discussion is whether to transition client information to the cloud, where it will be hosted on servers in a data center, instead of the planner’s office. Given the frequency of high profile data breaches announced in the media, is it really safe to move client information out of the office? Yet in most cases, the planner’s office, and the client’s home, are not nearly as secure as we make it out to be. Data centers have fences, guards, sophisticated security monitoring, and intrusion detection systems built to rebuff those trying to access data inappropriately, while the client’s best data defense is often little more than opening the door of the mailbox, and planning firms often lack the size and scale for truly effective security either. In point of fact, most firms don’t even have the systems to know if they’ve been “hacked” in the first place, and wouldn’t know until clients began to report identity theft problems! In addition, a persistent media bias that highlight major companies with data breaches but not small businesses that lose client files, may be misdirecting focus and causing us to misjudge the relative safety of the options. Which means ultimately the reality is that, notwithstanding the occasional high profile story, cloud security may actually still be far more effective at protecting client data than we realize!Read More…
As the steady drumbeat continues to beat about the value of planners creating niche practices, most discussion of niches focuses on having a more clearly defined value proposition for clients and being able to make yourself more relevant for a target client market. Yet a recent article points out another important benefit that emerges when lots of planners all begin to establish niche practices – the opportunity for cross-referrals between planners with different, non-overlapping niches! In a world where most planners are generalists who all do everything for everyone, there is little need to ever cross-refer; but when most planners specialize in niches, cross-referrals can become increasingly common. And if planners will well-defined niches are more effective in converting prospects into clients, then the reality is that a collaborative group of niche planners may generate more clients in total than all of them could achieve by each acting as an individual generalist, as the whole really can act more effectively than the sum of its parts!Read More…
When considering a purchase, we all evaluate the value that we will receive relative to the cost of the transaction. Yet research shows that some methods of payment make us more sensitive to the cost than others – which in turn can distort the cost-benefit analysis and change the decision, but also impacts the ability for sellers to raise prices without changing the buyer’s willingness to pay.
For instance, research on toll roads shows that consumers are less sensitive to toll increases when they pay electronically than in cash; similarly, we are more willing to spend money when we pay by credit card than when the cost it made salient by paying in cash. The upshot of highly salient pricing is that it helps to ensure businesses don’t raise prices unfairly and abuse their customers; the downside, however, is that it can make it more difficult for honest, fairly priced businesses to attract new clients and grow their revenues due to price sensitivity.
In the financial planning world, this helps to explain the popularity of both commission and AUM models, and the relative difficulties of hourly and retainer fee models – it’s not just about how much the firm charges, but also about how the firm charges!Read More…
As financial planners – especially those who provide comprehensive financial planning services – try to convey the overall value of the services they provide, it is increasingly popular to reduce how often portfolio performance is reported to clients. As the theory goes, if performance is reported less frequently, clients will fixated on it less often.
Yet perhaps the reality is not that performance reporting is making clients focus on investments, but instead that clients are simply being prudent stewards of their wealth who want to know how they’re progressing towards their goals?
If that’s the situation, then the reality is that restricting access to good portfolio information may not make clients think about it less, but instead may make them worry about it more! Which means, counter-intuitively, that the best way to make clients focus less on investments may be to make information available even more often!