Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the launch of a new "outsourcing" partnership between Fidelity and FirstPoint Financial (a subsidiary of Mariner Holdings), where advisors can refer clients below their asset minimums to be invested and receive financial planning advice... for which the advisor can be paid a referral/solicitor fee of 35bps.
From there, we have a few interesting investment articles this week, including: an in-depth look at the various ways to invest in an S&P 500 index fund and how not all mutual funds and ETFs are the same; a look at whether legendary value-investor Benjamin Graham would have been a supporter of index funds (hint: yes!); a discussion of how, after several years of poor performance, this may be a breakout year for actively managed US equity funds because the necessary three preconditions for them to excel are present (at least after the first quarter); and an overview of the rapid rise of "liquid alternatives" as the hot new asset class, even though the reality is that most are actually not a new asset class at all but merely an active manager trading existing asset classes!
We also have several practice management articles, from a look at using client advisory boards to gather better feedback from clients to improve your practice, to the idea of using a "positioning statement" to explain why your business is unique/different instead of an elevator speech, to ways to find and leverage interns in your practice, and a wide-ranging interview in the Journal of Financial Planning with Caleb Brown of New Planner Recruiting about the current state of hiring, career tracks, and new financial planners entering the industry.
We wrap up with three interesting articles: the first explores how over the past 15 years, the number of jobs doing routine work has been in steady decline as technology and automation take over, but job growth continues to be robust for non-routine jobs that can't be easily automated (a bullish sign for financial planners working directly with individual clients!); the second looks at how technology is not only changing the world of financial advice, but also the advice we give to clients, as in the coming years we may no longer need to own cars (thanks to self-driving cars) or spend much on college (thanks to disruption from MOOCs) and estate planning could become a 5-generation-affair if longevity increases continue; and the last looks at a study of some of the common characteristics of the most successful advisors, including their focus on not only business goals but also the development of the team that supports them.
Enjoy the reading!
Weekend reading for April 11th/12th:
$12B Firm to RIAs: Sell Us Your Second Best (Charles Paikert, Financial Planning) - FirstPoint Financial, a subsidiary of mega-RIA Mariner Holdings, launched a new program this week that will pay other RIAs 35bps for referrals of their "mass affluent" clients under $250,000 (with no stated minimum investment required). The idea of the program is that RIAs targeting higher net worth clientele who don't have a client segmentation approach to serve the mass affluent will have a place they can refer those who don't meet the firm's minimums and be paid for the business, and FirstPoint will be responsible for servicing the client and delivering the client experience going forward. A related RIABiz article on the announcement notes that the assets would be managed at Fidelity, which simply hopes to generate revenue on the assets from its existing custody services. In a manner similar to Vanguard Personal Advisor Services, FirstPoint will provide some financial planning advice to the clients as well, delivered by a dedicated advisor who will work virtually with the client.
The Only S&P 500 Index Funds You Will Ever Need (Michael Rawson, Morningstar) - While selecting an S&P 500 index fund may seem quite straightforward, the reality is that there are now 49 different S&P 500 index funds with 145 different share classes, and not all are created/operated equally, with just 5 holding 85% of the assets at an average expense ratio of about 6bps and tracking error under 0.03% while the other 44 have a whopping average expense ratio of 0.58% and tracking error of 0.09%! To assess the "right" S&P 500 index fund, Morningstar suggests first and foremost it's important to recognize that with index funds, size is actually beneficial; while active managers may find it harder to be nimble as their fund grows larger, with index funds it's just a larger asset base over which fixed costs can be spread (and also makes it easier to efficiently track the index). In addition, Morningstar notes that firms committed to indexing tend to do a better job executing those index funds, and accordingly it's no surprise that Vanguard's S&P 500 index funds feature prominently on the list, including both the Vanguard Institutional Index (VINIX) and the Vanguard 500 Index Admiral Shares (VFIAX); for those who cannot meet the $10,000 minimum for the admiral shares, there is also an Investor share class, or Vanguard's S&P 500 ETF (VOO). Another alternative is the Fidelity Spartan 500 Index Advantage (FUSVX), though Morningstar notes that because Fidelity is more aggressive about its securities-lending practices, and also keeps a higher percentage of its assets in cash or index futures, the Fidelity fund is slightly less tax-efficient (as dividends derived from index funds or securities on loan are not eligible for qualified dividend treatment). For those who plan to trade more actively, Morningstar suggests the SPRD S&P 500 ETF (SPY), as with an average of $20B in shares trading every day, the SPY has the most liquid options market and the tightest bid-ask spreads; however, because SPY is structured as a Unit Investment Trust, it cannot internally reinvest dividends, and with a potential one-month lag between a stock's ex-dividend date and the monthly payment of dividends for the investor to reinvest themselves, SPY has tended to lag its index by (slightly) more than just its expense ratio, especially in bull markets. Another strong alternative is the iShares Core S&P 500, which Morningstar notes is catching up to the liquidity efficiency of SPY as the ETF marketplace grows overall, but as a stand-alone ETF has more potential tax-efficiency due to the creation/redemption process.
Would Benjamin Graham Have Hated Index Funds? (Jason Zweig, Wall Street Journal) - Benjamin Graham is known as the father of modern security analysis and was a legendary value investor, raising the question of whether he would/could have possibly endorsed index funds given his belief in the value of analyzing stocks to find cheap ones. Yet as it turns out, even though Graham died in 1976 - just one year after Bogle and Vanguard launched the first index fund - he wrote about the concept himself. In the 1951 edition of his "Security Analysis" textbook with David Dodd, Graham discussed what he called the "cross-section approach" where an investor would simply permanently own a broad selection of stocks, noted that if we assume that the price of stocks already reflects expectable developments of the next year or two, then a random selection should work out just as well as those selected by an analyst based on their near-term outlook. In 1974, just two years before his death, Graham noted in a speech to pension executives that as more and more institutions don't have the advantage/capabilities to achieve better-than-average results, they should consider simply accepting the results of the S&P 500 by just using those stocks as actual portfolios and avoiding the standard fees paid to financial institutions. Graham was also noted for having recognized that in the aggregate, the average manager cannot obtain better results than the index itself (since the market as a whole cannot best itself), and that institutions should require active managers to beat such index results over a moving five-year average period to justify their fees at all. Of course, some investors will still want to be "enterprising" (in Graham's words) and seek out investment opportunities, but for those who are more "defensive" and not so inclined, it seems that Graham believed indexing would be a quite reasonable approach for them after all.
All 3 Preconditions For Active Outperformance Are Present (Josh Brown, Reformed Broker) - A recent research paper from GMO entitled "Is Skill Dead" found that for US domestic equity funds to outperform, they generally need at least one (and preferably two) of three preconditions to be met: 1) cash is not a drag; 2) international stocks are doing well; 3) small caps are competitive with large caps. The reason is simply that to the extent a domestic equity manager has anything in cash, small/mid-cap US stocks, or internationals, the manager may already be so far in the hole simply due to those weightings and the relative underperformance of those categories to the S&P 500, that it will be almost impossible to dig out. Accordingly, in 2014 - a year when the S&P 500 and large cap trounced small caps, internationals, and cash - US equity funds tended to outperform. Yet Brown notes that at this point in 2015, the situation looks quite different; US large cap stocks are basically flat (so cash has not been a drag), small caps are up 4.5% (with small cap growth up 7%), and the MSCI EAFE is up 6.25%. Notably, dispersion amongst stocks is also up this year (the degree of return differences from one stock to the next), which also introduces more potential for active managers to differentiate themselves. Of course, it's only April at this point, so it remains to be seen whether these conditions will hold through to the end of the year... but if they do, there is a strong potential that active managers could have a "comeback" year, after taking it on the chin from indexing for the past several years.
Just How Hot Are Liquid Alts? (Michael Finke, Research Magazine) - Mutual funds that invest in alternative strategies, also known as "liquid alts" because they can be sold at their net asset value (as a mutual fund), have been the hottest fund category for the past several years, trampling flows to traditional equity funds and yesterday's hot commodity funds. Yet despite their growth, and the popular description as a "new and unique type of asset class", Finke notes that most liquid alts are not an alternative asset class; whether it's an alt fund following hedge fund strategies like long/short or a managed futures fund, in the end you're buying the "brain" of a fund manager and his/her ability to execute and outperform while trading amongst various the existing asset classes (i.e., the fact that an alts manager trades stocks and bonds doesn't make it a new asset class, it just means he/she is trading the stock and bond asset classes!). And notably, to the extent that some at least make the case that hedge funds should have an expected performance premium attributable to their illiquidity and lock-up provisions, liquid alts don't even have that going for them, since they are liquid (though notably, since mutual funds can't charge performance fees, their cost in a bull market may be less than the "typical" 2-plus-20 hedge fund structure). Despite the cost savings, though, and their popularity, Finke notes that liquid alt funds have been lagging badly; recent three-year returns for the liquid alt category have been about 2.9%, compared to 10.8% for fixed income and 32.8% for equities. Although because "liquid alt" means so many different things, there is also an extremely wide dispersion of outcomes, both good and bad. Which means at the least, it's especially crucial to effectively evaluate the exact type of liquid alt fund and its manager, far more so than with any other type of "asset class", and it's really not safe to expect a certain type of diversification or performance results just because "it's an alternative strategy".
Get Better Feedback From Clients (John Bowen, Financial Planning) - Getting good feedback from clients is crucial to making improvements to your own business and the services you provide them, and Bowen makes the case that the best way to do this is by conducting "board meetings" with a group of your top clients - who are likely to want to participate because improvements in your services ultimately benefits them as the clients, too! The key, however, is in the execution of the meetings, which must be run properly to set the right tone and get the right feedback. The first step is to set a formal agenda for the meeting, so both you and the participating clients know where to focus the time and conversation; it might start with a review of the "state of the practice", followed by some key topics/issues to discuss (anything from the firm's marketing and business development to the client experience and services you're providing), and have a clear wrap-up that sets planned action items that you will implement (and be accountable to the group to have done by the next meeting). Be certain to solicit feedback about the meeting structure itself, too, which is important for giving clients a continued feeling of buy-in so they continue to participate. To keep the meetings more formal - as the goal really is structured feedback, not just a casual conversation about the business over lunch or dinner - hold the gathering in a boardroom setting, or perhaps the event room in an upscale restaurant. And some advisors will even use third-party facilitators to help keep the conversation flowing and on track, especially since some topics/conversation items can be awkward if the feedback includes some (constructive) criticism of the advisor who's also running the meeting.
No More Elevator Pitches - Start Using A Positioning Statement (Steve Wershing, The Client Driven Practice) - If you've been struggling as an advisor to develop and get comfortable saying your "elevator pitch" - that concise way to describe your unique value to a prospective client that could be delivered in the time it takes to ride the elevator - you're not alone. Wershing notes that many advisors struggle with their elevator pitch, as it often feels too "fake" or "salesy" and then never gets used. Nonetheless, the reality is that advisors still do need a way to concisely describe what they do and how they are different from others; Wershing suggests that the best way to do this is not with an elevator speech, but with a "Positioning Statement" instead. The idea of "Positioning" - a marketing concept first popularized in a book of the same name by Al Ries and Jack Trout - is that rather than just describing something you do, the real goal is to occupy a certain position in people's mind, and to become (uniquely) associated with that concept. For instance, IBM occupies the position of big computers, Kleenex occupies the position of tissues, and Lego occupies the position of plastic interlocking building blocks. In other words, given the reality that our brains do try to pigeonhole everything to categorize it (as you may have noticed, many clients tend to pigeonhole you based on whatever you did for them first, and have trouble recognizing the breadth of other services you provide as well!); thus, your goal with a positioning statement is to control how you are categorized and to end out in your own distinct (and therefore more easily recallable) category that accurately captures (all of) what you do. Ultimately, the goal is not for the positioning statement to be a sales pitch unto itself; it's simply about trying to ensure that people "file you" properly in their mental records, which makes it easier for them to recall you when there's an opportunity to work with you - or refer you - in the future.
5 Ways To Tap The Power Of Interns (Katherine Vessenes, Research Magazine) - While many advisors seem to assume that hiring an intern is a low-stakes proposition and can be a casual process, since the firm isn't committed to long-term employment anyway, Vessenes makes the case for having a good intern-hiring process to really get the best candidates that can impact your business. As a starting point, Vessenes suggests that it's worthwhile to pursue students from top-tier schools; in her experience, candidates coming from a top-rated business school were materially better than hiring students with (only) a liberal arts degree, who struggle to get up to speed with the high-level math and finance we deal with in practice (at least a business school graduate will be familiar with some of the jargon and concepts). Vessenes also does significant background and 'due diligence' work on candidates, including requesting a certified copy of their transcript (alas, there is a lot of grade fraud out there!), checking to see if their resume has typos (a sign that their other work could be sloppy, too), giving them a Kolbe exam to understand their work style, requesting a writing sample, and even giving them a small project (for a nominal payment like $50) as an initial test for their ability to do work and solve problems. Vessenes also strongly encourages paying interns (so they'll treat it like a real job). And finally, recognize that the top interns are going to have a lot of opportunities thrown at them, so it's important to market how you'll engage the intern in meaningful work and why your firm is worth working at over all the other offers they'll get.
Caleb Brown on Career Paths, Hiring Mistakes, and Advice for New Grads (Carly Schulaka, Journal of Financial Planning) - In today's financial planning landscape, the dearth of young talent means there are lots of vacant job opportunities, but unfortunately newer young planners who just search for "a job" end out in a bad fit that causes them to leave the job, and sometimes the profession altogether. Caleb Brown founded New Planner Recruiting to resolve this challenge, and improve the process of matching new planners to financial planning firms, and after an estimated 10,000(!) conversations with potential job seekers, shares some of his tips and perspective on the current landscape for financial planning jobs and hiring. Key insights include: the primary problem that firm owners make when hiring has been and continues to be a poor job of setting reasonable expectations, and instead either expecting too much too fast from a new hire, or not giving enough expectations and guidance and having the candidate get off track; many planners get in trouble by hiring a "mini-me" - a candidate who reminds them of a younger version of themselves, and sometimes becoming so enamored with the candidate they ignore other red flags in the hiring process; graduating students today won't have trouble finding a job, but need to really focus on finding the right fit, and then demonstrating how they go above and beyond the minimum to get hired by that firm; career changers are often materially different types of candidates than college students, as both may be "new to the profession" but the former often have more life and work experience, while the latter tend to have a deeper financial planning education (4+ years of college for financial planning, versus 9 months in an adult education certificate program); larger RIAs are making progress on developing a clearer career track, starting with entry-level salaried positions for new planners, but there's still a lot of inconsistency in job titles. For further depth on the interview, you can listen to a full podcast recording here.
Is Your Job ‘Routine’? If So, It’s Probably Disappearing (Josh Zumbrun, Wall Street Journal) - While much of the American labor market and the middle class were built on routine job workers showing up at factories and offices, doing the same task over and over again all day long, and then going home, a recent new study entitled "Jobless Recoveries" by Henry Siu and Nir Jaimovich finds that in reality all the job growth of the past 15 years has come from non-routine work and that routine jobs have been in an ongoing decline. In particular, the research goes a long way to explaining the "jobless recoveries" of the past two recessions; for instance, since the 2008 employment highs, employment in routine jobs is still down more than 5%, even though historically these were simply cyclical jobs that would experience strong hiring after recessionary layoffs. While to some extent the job losses may be explained by outsourcing (including overseas), it appears that the bulk of job losses are simply due to improving technology that just automates those routine jobs out of existence altogether. On the other hand, this doesn't mean all jobs are going to vanish due to technology and automation; the researchers also find that nonroutine jobs - either manual-labor-related like janitors and home-health aids, or cognitive-based like public relations and computer programming - are actually up over 20% each in the past 15 years. On the one hand, part of the implications of this research is that it's more crucial than ever for people - and the country in the aggregate - to invest into human capital to train and educate the workforce beyond the jobs that can be automated away. On the other hand, it also parallels much of the dynamics underway for financial planning, too, where tasks that can be automated are being shifted to technology (or "robo-advisors"), but the nonroutine cognitive work that still must be done with individual clients remains valuable and on a growth trajectory.
The Future Of The IA World (Ric Edelman, Financial Advisor) - Technology is rapidly changing the world, both within financial services with the rise of the robo-advisor, but also beyond, and in this article Edelman paints a fascinating picture of some dramatic ways in which the planning we do with/for clients will change as technology progresses. For instance, consider the coming rise of the self-driving automobile; not only may many of today's children never learn to drive, but with self-driving cars, we won't need taxis (they'll just drive themselves to us on demand), we won't need truck drivers (the trucks will transport the goods themselves), jobs from parking-meter reader to tollbooth operator to valet will be gone, and the chiropractor profession may be nearly wiped out as the dramatic decline in human-caused automobile accidents means far fewer back injuries. Extending the concept even further, the change also means less demand on hospital emergency rooms (without traumatic car accidents), fewer transplantable organs (since car-crash victims are a major harvesting source), no more automobile insurance industry (1.5% of GDP!), a dramatic rise in productivity as the decline in accidents and traffic congestion improves commute times, a shift in city estate as the 31% of cities used for parking will be less necessary, and potential defaults for municipal bonds as many countries rely heavily on the revenue from traffic citations for speeding that won't be happening any more! In other words, the disruption of self-driving automobiles extends far beyond the simple impact of not needing to spend time focused on driving. Similarly, Edelman notes a number of other potentially massive disruptions, including: MOOCs (massively open online courses) threatening to alter the entire structure of colleges and dramatically cut the cost of education; increasing life spans with continued advances in medical technology; and the shift away from cash to credit and electronic banking and from traditional banking to virtual currencies like bitcoin. From the advisor's perspective, these issues are critical not only for our changing world in general, but because it can dramatically impact financial planning recommendations, from the need to have big 529 plans for young children (less of an issue if MOOCs crash the cost of college?), the estate planning implications of marriages that could last 100 years and families that could span five (living) generations, and the appropriate amount to budget for buying cars in a future where you might just pull out a smartphone to summon transportation on demand without ever needing to own a car at all.
6 Characteristics Of Uncommonly Successful Advisors (Julie Littlechild) - To explore and try to better understand the common traits of the most successful advisors, Littlechild did a survey study on 250 advisors who each personally manage more than $250M in client assets. The results revealed six dimensions around which the top advisors seem to be different than the rest, including: they have great clarity around their business and personal goals, though their success leads to challenges of time management, and they're much more focused on developing and managing their team and growth than in just trying to find new clients; they have "grit" and perseverance and create an expectation for themselves that they will achieve their goals; they invest heavily in personal development (much more likely to spend $2,500-$5,000 or more on personal/professional development and continuing education each year); they are heavily focused on engagement clients and engaging team members, as team development becomes critical for support; great advisors use tools to assess and measure themselves and their teams for success (including being much more likely to use some form of personal strengths assessment like Kolbe or StrengthsFinder); and the most successful advisors create support systems for themselves (often in personal and professional contexts), from hiring coaches to being a part of a study or "mastermind" group as the most common source of inspiration for top advisors is actually their advisor peers (from a mentor to study group mates). For further detail on Littlechild's study, you can see a fuller summary of the research results here.
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!
In the meantime, if you're interested in more news and information regarding advisor technology I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors.