Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the announcement that United Capital is launching a white-label service for advisors called FinLife Partners, intended to offer a form of turnkey financial planning platform that includes United Capital’s proprietary financial planning tools, along with a bundled and integrated technology stack of CRM, financial planning software, and more (the solution that United Capital built internally for its own advisors over the past several years!). Also in the news this week was the big release of G4, the newest version of the MoneyGuidePro financial planning software, which has gone through a significant redesign to be able to better facilitate client conversations as an interactive planning tool.
From there, we have several practice management articles this week, including a look at how focusing on “best practices” often leads to just chasing fads and being stuck in the past rather than building towards the future, why it’s time for the traditional advisor “elevator pitch” to die (or at least, be substantially reinvented), how the ongoing evolution of advisory firms is making them structure and operate more like large accounting firms, and the emerging battle for the advisor desktop as advisor platforms increasingly position themselves as being first and foremost a technology platform.
We also have a few more technical articles this week, including: the latest research on Millennials, and how they may not actually be risk-averse investors after all (but they do appear to be real-estate and debt averse!); an in-depth look at the growing awareness that the typical risk tolerance questionnaire may be doing a remarkably poor job of actually measuring true client risk tolerance; and a great explainer and analysis on whole life insurance, how it really works, and when it’s appropriate (or not) to use.
We wrap up with three interesting articles, all around the theme of a growing focus on consumer spending behaviors: the first is a profile of Peter Adeney, also known as the blogger “Mr. Money Mustache”, who has built a tremendous blogging platform around the idea that thrifty living isn’t about self-denial but being a better global citizen; the second is a fascinating interview with four men, who have incomes varying from the poverty line to over $1,000,000/year, about their financial challenges and goals (and the fact that all of them, regardless of income, are hoping to double or triple their income to meet their goals in the next 10 years!); and the last is a fascinating “confessional” article from a writer who makes a good middle-class income, but is living from paycheck to paycheck, along with as many as 47% of other Americans who couldn’t afford a $400 emergency expense without going into debt, but due to taboos of talking about money and debt are so ashamed it’s difficult to even talk about the problem, much less get some help.
Enjoy the “light” reading!
United Capital Offers Tech, Processes For Independent Advisors (Christopher Robbins, Financial Advisor) – This week, United Capital launched a new platform called FinLife Partners, a version of United Capital’s own financial planning tools and processes that will now be available for other advisory firms to license on a private white label basis. Access will include United Capital’s MoneyMind analyzer tool (which categorizes client money behaviors as being primarily influenced by fear, happiness, or commitment), their Honest Conversations goal-setting exercise for clients, and the opportunity to use United Capital’s custom built version of Salesforce, and its related integrations (including account aggregation via Yodlee and ByAllAccounts, e-signature onboarding tools, and financial planning software). Notably, because United Capital’s tools are a combination of “standard” industry software (e.g., CRM and planning software) integrated together, and its own proprietary financial planning tools (e.g., MoneyMinid and Honest Conversations), advisors who utilize the platform will need to be prepared to fully implement the United Capital approach to financial planning – a form of Turnkey Financial Planning Platform (TFPP) approach that appears to be growing increasingly popular in the industry (though advisors must pick a platfrom that aligns with their own approach to financial planning). Pricing is not yet set, though United Capital indicates it may end out being a combination of a flat cost for software implementation, plus a share of the increased revenue that the advisor gains after adopting the platform (as notably, United Capital reports that the adoption of these tools on its own platform have helped to drive new United Capital advisors to see 30% top-line revenue growth and 10% new asset growth in the first 12 months after implementation).
MoneyGuidePro: A New Version Rockets Out Of The Gate (Joel Bruckenstein, Financial Planning) – This week, leading financial planning software provider MoneyGuidePro released its new “G4” release. The primary goal of the new version was to focus on adding human value to planning, and making it easier for the advisor to work interactively and collaboratively with clients through the financial planning process. As a result, the new version of MGP is designed around “conversations”, which is a guided path through a series of MGP screens as a form of financial planning workflow; the five pre-built conversations include a Quick Intro (for prospecting), a basic Retirement Zoomer plan, a full Retirement plan, a Retirement + Estate plan, and a College Zoomer (focused solely on college planning). Future conversations may be released in the future, and enterprises will be able to craft their own custom conversation flows. Also tying directly into the new G4 release is MoneyGuidePro’s new prospecting tool, called MyMoneyGuide, which allows the advisor to offer clients a guided online introductory planning lab (powered by MGP’s own staff), which then serves up the completed prospect back to the advisor (for a cost of $75/attendee). Alternatively, a digital data gathering conversation tool allows the advisor to gather most client information directly, and feed it straight into the appropriate client conversation. The MGP G4 release also has focused more heavily on the process of setting goals, allowing clients to more easily select from a wider range of goals (as notably, when advisors set client goals there are an average of 2.5 goals chosen, but when clients choose directly, they choose an average of 7.5 goals for themselves); alternatively, the goal-setting process can be further expedited with an “auto goals” button where the software suggests common goals for a client’s situation, which the client can then modify. Other popular features, including MoneyGuidePro’s SuperSolvr, PlayZone, and “What Are You Afraid Of” modules remain in place, and the software has also adopted a full “brute force” Monte Carlo simulation tool (in lieu of its prior “Beyond Monte Carlo” simplified methodology). Overall, Bruckenstein suggests that the new “conversations” workflows should greatly reduce the learning curve for adopting the MGP software, digital client data entry should expedite the onboarding process, and the new more robust goal-setting process should further help facilitate client conversations (particularly the auto-goal generator tool to kick-start the client discussion).
The Problem With Best Practices (Shane Snow, Fast Company) – The concept of “best practices” is one of the most common conventions of the business world, but Snow points out that what actually constitutes a “best practice” is often a combination of arbitrariness or habits that were built around conditions that no longer apply. Debbi Fields (founder of the Mrs. Fields chewy cookie stories) struggled to get a business loan to start her first cookie store, because “best practices” in cookies were to make them crispy, not chewy. British newspapers printed in “broadsheet” format because of a government tax in 1712 that charged based on the number of pages in the paper, yet printing on broadsheets lasted as a “best practice” more than a century after the tax was lifted in the 1800s. Of course, it’s arguably a good idea to at least be aware of what the competition is doing, but Snow notes that the tendency of companies to look at “best practices” of other companies is just as likely to drive fads that come and go, and generally contributes to a herd mentality, more than any actual recognition of what is truly best – especially since even if something is a best practice at one point, that doesn’t mean it’s still a best practice today. So what’s the alternative? The first option is for the business to simply focus more on its own actual metrics and data, and look to what is actually proven to be working for the business. Another is to try to strip away the assumptions, and focus on the essence of the problem at hand, trying to avoid being ‘stuck’ in ‘the way things have always been done’ (that may or may not still be relevant). Or instead, for those who want some kind of best practices benchmarking, consider looking to the best practices of other industries, which may provide creative ideas of what can be done well, but without the legacy issues inherent in the best practices of the existing industry. The fundamental point: almost by definition, “breakthroughs happens not when you follow conventions, but when you break them.”
Death Of The ‘Elevator Pitch’ (Julie Littlechild, Absolute Engagement) – Over 40% of advisors surveyed in a recent Financial Planning Association practice management study reported that they have crafted an “elevator pitch”, a simple and (hopefully) compelling statement about the advisor’s business that can be delivered quickly (e.g., in the time it takes to ride up the elevator) and prompt a stranger to ask for more information. Yet Littlechild questions whether the elevator pitch is still even relevant in today’s environment. Not that advisors don’t need to be able to effectively describe what they do (that does still matter), but the idea of having an always-at-the-ready elevator pitch implicitly assumes that every person you meet is a likely prospect… which isn’t the case for most advisors today (who instead have at least some parameters around who they work with). More generally, though, Littlechild notes that in the today’s advisor age, it’s more about making a connection with the advisor, not just the product/service being sold, and making a prospect-advisor connection is about the advisor as a human being, not the pitch. For instance, a neurosurgeon connects with a patient by relating as a human being, not by telling others that the neurosurgeon “helps people reach their individual potential by making full use of their brains!” So how should an advisor describe themselves in today’s environment? Littlechild suggests that the focus should simply be on what your role is, and what you do, and let a prospect who finds that relevant ask to delve further. Don’t try to be cute about it, just be clear, use normal words, and be authentic.
Why RIAs May Start Looking More Like Accounting Firms (Mark Hurley & Effie Guo, Financial Advisor) – In the coming decade, industry guru Mark Tibergien predicts that the advisory industry will increasingly look like the accounting profession, with a large volume of very small local firms, a few dozen regional firms, and a handful of dominant national firms (that look similar to a wirehouse structure with a professionally managed and structured branch office system with a common brand and client, but built on an advisory chassis). Notably, though, Tibergien envisions all of these firms as being much larger than the ones in practice today; a successful “local” firm might still have $15M+ of revenue, a regional firm may generate $300M to $500M of revenue, and national firms will likely be multi-billion-dollar businesses. In that environment, Tibergien also suggests that the largest firms will generate significantly more enterprise value, given their likely growth rates and the stability of their cash flows, while the valuation multiples of smaller local firms will fall. How should firms build for the future in this environment? Tibergien recommends a focus on establishing a clear marketing position, a structure to support it, a human capital strategy to help grow it, a proactive management structure to manage profitability (including not only growing revenue and managing cost, but also considering pricing strategy and productivity and client mix and service mix), and a systematic client feedback process to gather information on where/how to improve. Though given the shortage of young people coming into the industry today, Tibergien suggests that soon the hunt for advisor talent will dominate the hunt for clients as the primary challenge for growing firms.
The New War For The Advisor Desktop (Tim Welsh, Financial Planning) – Advisor technology is increasingly becoming the entire foundation on which the industry’s giants are looking to capture mind- and wallet-share of independent advisors. Yet this focus on building centralized platforms for bundled technology to serve advisors is leading to an “all-out battle” for CRM, portfolio management, financial planning software companies, and more, each trying to compete for their slice of “real estate” on the advisor’s technology dashboard (as predicted on this blog back in 2014!). Yet the outcomes of these efforts are not always positive, as was highlighted by the recent Schwab decision to eliminate its bundled Salesforce solution after signing up only 150 firms in 6 years. And at the same time, new companies are trying to work their way into the technology stack, as Welsh suggests that Salesforce’s own Financial Services Cloud offering may be an attempt of the software company to work its way more directly into the advisor technology stack (and custodian and broker-dealer revenue streams). And notably, the growing investments into advisor technology are not unique to Schwab; Fidelity last year acquired eMoney Advisor, and more recently announced a billion dollar initiative called “Total Advisor Platform”, the custodian’s own attempt to take control of the advisor desktop (and in the process, make third-party portfolio accounting software solutions like Black Diamond and Orion irrelevant). Similarly, Envestnet has been on a recent acquisition tear, gobbling up rebalancing and CRM platform Tamarac, planning software FinanceLogix, and data aggregator Yodlee, while Morningstar has acquired data aggregator ByAllAccounts, portfolio rebalancer TRX, and robo-advisor HelloWallet. So what should advisors do? Welsh suggests that given outcomes like the Schwab-Salesforce “debacle”, independent advisors are best served by remaining independent, which means avoiding bundled solutions and pushing for open architecture (e.g., TD Ameritrade Institutional and its Veo Open Access initiative) to avoid being at the whim of a massive institution that may or may not decide to keep the system. (Michael’s Note: Of course, the caveat is that an open architecture solution does put more of a burden on the independent advisor to find, due diligence, select, and maintain their own technology stack, which is arguably why many bundled advisor platforms continue to be as popular as they are!)
Putting Millennials’ Finances Into Focus (Michael Finke, Research) – Within a decade, three out of four workers will be members of the Millennial generation, born between 1980 and the late 1990s, and the first half of the 21st century is expected to be dominated by Millennials (just as the second half of the 20th century was driven by Baby Boomers). In the context of financial services, Millennials are already beginning to show up as employees of advisory firms, and soon will start to become clients as well. So what does the research tell us about Millennials and their financial attitudes? While one leading hypothesis has been that Millennials will have a more conservative risk tolerance, given the tumultuous market crashes of the 2000s they witnessed during their formative years, the early research suggests that there is no difference in their actual risk tolerance, and that Millennials may actually be less prone to freaking out during bear markets. Similarly, the data finds that Millennials are holding similar exposures to stocks and actually tend to have more in financial assets than Gen X did at a similar age (in large part due to automatic enrollment in 401(k) plans), but Millennials are far less likely to own a home (and have the associated mortgage debt) and also use credit cards less, suggesting that if there’s any overhang from the financial crisis on Millennials, it’s that they’re more wary about real estate investing and debt, not portfolio investing overall. Notably, though, Millennials do appear to have very different views about work/life balance, a preference for a flexible workplace, and a leaning towards spending on experiences versus “things” (which suggests that their retirements may look very different in the future, as well!). However, despite the prevailing view that Millennials lack job loyalty, the data reveals that Millennials are actually sticking with their jobs longer than Gen Xers do, though Millennials are more likely to express a desire that their jobs contribute to the social good, and not merely function as the source of a paycheck.
Emerging Concerns About Risk Tolerance And Suitability (Tyler Nunnally, American Bar Association) – A good measurement of risk tolerance is viewed as essential for most financial advisors, not only to help understand how a client may handle situations of market volatility, but also because effective documentation of the client’s risk tolerance can be essential in the event of a lawsuit where the advisor must defend his/her actions. Yet regulators are increasingly raising the question of whether today’s typical processes for measuring risk tolerance are actually an effective means of doing so. For instance, FINRA has added the processes used to collect and measure investor risk tolerance as part of its emerging regulatory issues review, and both British and Canadian regulators have begun to study risk tolerance assessment tools as well (and found that the vast majority were “not fit for purpose”). Yet ironically, part of the confusion about risk tolerance may be of the regulators’ own making; for instance, FINRA itself defines risk tolerance as “a customer’s ability and willingness to lose some or all of [the] original investment in exchange for greater potential returns” but fails to distinguish between the key terms of “willingness” and “ability”. In other words, FINRA is mixing together someone’s financial capacity to take risk, and their actual tolerance and willingness to do so, even though the fact that an investor can afford to take a risk doesn’t mean he/she wants to or has any personal psychological tolerance for it. Similarly, a recent UK study found that the majority of complaints filed against advisors over suitability stemming from the financial crisis were related to scenarios where the “risk tolerance” tools were failing to capture the customer’s actual attitudes about risk. Perhaps the biggest concern, though, is simply that the internal risk tolerance measures used in firms today have not gone through any kind of psychometric process to actually validate that they actually measure what they are purported to measure. Which raises the question of whether regulators (and even litigators) may soon begin to scrutinize the process that advisory firms are using to select or create their risk tolerance questionnaires in the first place, and whether proper due diligence and testing is being done to affirm they’re even valid in the first place.
Whole Life Insurance: The Essential Guide (Todd Tressider, Financial Mentor) – Despite the rising popularity of term insurance in the media, the latest data from the American Council of Life Insurers reveals that nearly 64% of all life insurance policies being sold in the U.S. are whole life and other forms of permanent insurance, not term insurance. The “pitch” for whole life is typically to frame it like an investment, where you can “contribute” as much premium as you wish, the policy has a cash value with a guaranteed return and tax-free access to funds via policy loans, and when you die the policy value will blossom into a death benefit. Yet the biggest caveat is that on average, whole life insurance will be a losing proposition; in fact, insurance has to be a losing proposition for the consumer on average, or the insurance company will go bankrupt! Of course, that’s simply with respect to the balance of cost of insurance charges and the promised death benefit; the underlying cash value of the life insurance policy can still earn its own rate of return. However, looking only at the (guarantee) rate of return on cash fails to acknowledge the other costs and expenses that come out of the cash value, from the insurance charges themselves, to the recovery of commissions paid to the insurance agent, and more; thus, you might find a policy that has a “guaranteed” 2.5% rate of return, yet after 5 years the policy’s gross cash value is STILL far less than its cumulative contributions. In addition, Tresidder notes that even with the cash value accumulations that occur, policyowners can’t actually access all of this cash value without tax consequences; while policies do allow a policy loan against the cash value, which has no tax consequences (because it’s technically just a personal loan!), the problem is that loan interest can chew up the value of future policy growth, and not all the policy cash value can be borrowed against in the first place (or the policy runs out of collateral and will lapse). And if any “hiccup” happens along the way – e.g., you can’t contribute premiums every year and have to take a policy loan out earlier for a year to cover the costs – the projected loan amounts can be drastically curtailed. So what’s the alternative? If pure death benefit coverage is needed, Tresidder suggests term insurance and invest the rest, or for those who have a true “lifetime” death benefit need (e.g., for estate tax purposes), purchase secondary guarantee universal life insurance instead. And of course, some people may be affluent enough to need permanent life insurance protection, and have already maxxed out all other available retirement sources, and can easily afford premiums, and are not as concerned about the low rate of return after costs, who might purchase whole life insurance… but to say the least, that’s probably a profile that should be fitting far fewer than 64% of all life insurance policies being sold today!
The Scold (Nick Paumgarten, The New Yorker) – This article profiles Peter Adeney, known by many consumers as “Mr. Money Mustache”, his popular personal finance blog that advocates thriftiness as a way to liberate one’s finances (rather than as self-deprivation). Adeney lives the philosophy himself, as someone who leveraged a thrifty lived to save up about $600,000 in his 20s as a software engineer (plus a $200,000 paid-off house), and then retired altogether at age 30 (as the money was sufficient to support his thrifty lifestyle going forward at a 4% initial withdrawal rate). Together with his wife and son, Adeney spends about $24,000/year to maintain his lifestyle (living in Colorado), and through his blog he shares a combination of his financial tips, stories from his own lifetime, and a general theology of conservation and attack on consumerism and waste. The point is not just about thrifty and frugal tips, but a pro-environmental bent that questions everything from our expensive cars (he bikes almost everywhere and goes through less than 3 tanks of gas per year with his car), to installing his own boiler and doing most other home repairs. Notably, Adeney has time to do this in part because the whole point of “retirement” is to have the freedom to do whatever he/anyone wants, including doing (home improvement or other) work that he enjoys doing. Though notably, his blog has grown so large, it actually fuels a significant income itself now; the Mr. Money Mustache site gets about 750,000 unique visitors every month, its forums have nearly a million posts, and he’s now earning almost $400,000/year from the site, primarily from affiliate offers on products and services he recommends, including Betterment, Lending Club, and Geico (though since he maintains the same lifestyle despite the additional income, he plans to give most of it away someday).
4 Men With Very Different Incomes Open Up About The Lives They Can Afford (David Walters, Esquire) – The poverty line for a family of three is about $20,000/year of income, while median household income is $53,657, politicians draw the line between “middle” and “upper” classes at $250,000 of income, and the ‘American Dream’ of real wealth still starts at $1,000,000. Accordingly, Esquire interviewed four men, each of whom earns one of these amounts, to share their perspective on how they make spending and financial decisions. For the millionaire, he keeps a meticulous budget, lives ‘moderately’ spending $1,200/month on groceries, has a million dollar home with no mortgage and almost no other debt, with all spending going through a single credit card for cash points that gets paid off every month. The man earning $250,000/month lives on about $7,000/month (including a $2,000/month rent and $800/month on groceries), has a lot of credit cards but carries only a moderate about of debt given his income ($7,700 on one card he plans to pay off soon), and is saving up not for retirement per se, but to invest into an apartment building to generate a passive stream of income for himself to be “financially free” by age 50. The man earning $53,000 has a family of 5, a monthly rent of $1,000/month, and keeps his monthly grocery bill at just $400-$500/month by buying in bulk from BJ’s Wholesale Club. His debt is moderate, with monthly payments under control, but he’s still paying down a student loan from almost 20 years ago. And the man living at the poverty line – a single father with two daughters aged 7 and 4 – spends 30% of his income on rent (supported through an antipoverty nonprofit), covers his groceries through a combination of cash and food stamps, and has no credit cards (or credit card debt) but struggles with other debts, including traffic tickets, hospital bills, and even old phone bills, which he struggles to pay off because by the time he has the money to pay, the fines have doubled. Notably, across the spectrum, all the men report that they’re reasonably happy, but they all report a desire to double or triple their incomes in the next 10 years, to buy more of the things they want.
The Secret Shame Of Middle-Class Americans (Neal Gabler, The Atlantic) – According to the latest Federal Reserve consumer survey, a whopping 47% of Americans would have to borrow or sell something just to come up with the money to cover a $400 emergency. Gabler, a writer who has published five books, hundreds of articles, and has been recognized with a number of awards and fellowships, is one of the 47%, and describes the dilemma in an environment where money problems are so taboo that many people are more likely to admit they’re on Viagra for sexual impotence than confess to having credit card problems. Yet despite the fact that debt problems are so rarely discussed, the Fed survey makes it clear that the problem is actually incredibly widespread, and notably reaches far beyond just those who are traditionally though of as “poor”. Fortunately, the problem is starting to gain more attention because economists are beginning to study it more directly; while there has long been data on consumer income, savings, and debt, measuring questions like whether the household could handle a $400 emergency expense only began in 2013, born from the aftermath of the Great Recession and a growing recognition that most consumers are not as good at smoothing their income (saving in good years to have available for lean times) as logic (and prior economic research) would suggested. Unfortunately, though, while there is clearly a problem for a wide swath of both poor and middle-income families, there is less clarity about what has caused it, and what the solution should be. Some lay the blame on credit card companies, which have expanded their reach dramatically since the 1980s (in part due to a 1978 Supreme Court decision that nationally chartered banks are not subject to state usury laws limiting credit card interest rates), and their newfound ability to target lower and middle income households may have led those borrowers to overextend themselves too easily. However, Gabler suggests that the problem is perhaps even more fundamental – a combination of wanting to “keep up with the Joneses”, investing money into children to help them keep up with the children of the Joneses, and a basic belief that more financial opportunity will come in the future only to discover that it doesn’t always turn out that way and that life’s speed bumps complicate the situation further. For many advisors, the recommended solution for consumers is to save 10%+ of their income to protect against such problems, but Gabler notes that “many can’t save for a rainy day because [they already] live in an ongoing storm.” And given the shame that many feel, in part because society lays the blame on them for their own failures, most may be afraid to even seek out financial advice in the first place.
I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!
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 as well.