Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the announcement that NASAA has finalized its model rule that, as states adopt the rule, will require state-registered investment advisers to create a written “succession” plan for their business.
From there, we have a number of practice management articles this week, including: strategies to effectively delegate tasks to staff; why it’s best to build out the staff infrastructure supporting your advisory firm by building roles around people, rather than trying to fit people into roles; a profile of several advisory firms that have been successful in creating a strong culture that supports the firm; a guide of what to do if you find out you’re being terminated by your broker-dealer; and a look at where advisors get their best ideas (from peers and conferences) and how they create the accountability to follow through on them (using coaches and study groups).
We also have a few marketing-related articles, from a look at how being less available to prospective clients can actually help to close them, to strategies to invoke an emotional connection with prospective clients to get them interested in doing business with you, and a discussion of how the world of wealth management is changing as the (younger) emerging affluent have different expectations of what they’d like to see in a “good” wealth management service in the first place.
We wrap up with three interesting articles: the first looks at some of the ways that investment advisers misreport investment performance (from skewed benchmarks that create an illusion of alpha to buying premium bonds that make yield appear higher than it will be over time); the second is a message from a Millennial working in financial services about how mismatched most of today’s providers are to the true needs and desires of younger investors; and the last looks at the CFP Board’s public awareness program after nearly five years, and the progress the CFP Board is really making in advancing awareness of the CFP marks.
Enjoy the reading!
Weekend reading for April 25th/26th:
Got a Succession Plan? State Regulators May Soon Require It (Kenneth Corbin, Financial Planning) – The North American Securities Administrators Association (NASAA) has just published a model rule that would require state-registered investment advisers to adopt a formal business-continuity and succession plan, addressing issues like backing up books and records, and putting in place an alternate communications plan to reach clients and employees in the event of a major disruption of the firm (from a natural disaster to the death of a principal) as well as a plan for which personnel would assume key responsibilities. Notably, the model rule is just that – a model rule – and not an actual law, so states will still have to formally adopt the rule themselves for it to actually impact RIAs in the state; nonetheless, given that many state securities examiners have already been observing these issues in the field (from advisors who pass away, to recent events like Hurricane Sandy), the expectation is that the rule will be adopted soon in many states.
Smarter, Easier Ways to Delegate (Kelli Cruz, Financial Planning) – Learning to delegate is crucial to running a successful business and maximizing the use and value of your own time, but unfortunately most of us are not trained in how to delegate effectively and struggle to do so. First and foremost, though, it’s important to determine what should be delegated in the first place; it may be because the task really isn’t all that critical (so you don’t really need to do it yourself), or alternatively that it’s important enough that it will provide a good learning opportunity for someone else to hone their skills, or simply that someone else really has better experience and skills to get it done. Next, it’s important to delegate effectively, which means defining what needs to be done, the associated requirements, and set realistic expectations for the outcome; it’s also important to explain to the employee why the task is being delegated, and where it fits in the overall firm, to help the employee take ownership of the responsibility. Ultimately, remember that the goal is for the task to get done, not necessarily to dictate exactly how it will be done (the essence of micro-managing), and in fact letting the employee craft their own method and process to getting it done can further help to boost their ownership of the task. Similarly, remember that initially someone else who is doing the task may take longer to do it or be less efficient, but that’s still a learning/growth opportunity for him/her, the efficiency will get better with time, and it may still make sense if it frees up your time for you to accomplish more of what you need to do for the business.
Stay In Your Lane Part 2: Creating Infrastructure (Angie Herbers, Investment Advisor) – As Herbers noted in her Investment Advisor column last month, a significant challenge for many advisory firms as they grow is getting employees to “stay in their own lane”, focusing on their job and responsibilities and not overlapping or conflicting with others, which can often occur when the firm and everyone’s role in it is not well focused. Continuing the theme, Herbers provides some additional tips and strategies on how to effectively build a staff infrastructure for an advisory firm, including: while it’s great to have job titles to define roles, be ready to adapt the job titles and description to the skillset of the person (and then build around him/her as necessary), rather than forcing the person into the job title can result in mismatches; similarly, beware an overly deep or complex organizational chart that just isn’t necessary in most advisory firms (given their size), as if you do a good job matching the right person with the right skillset into the right position he/she shouldn’t need all that much supervision and management anyway; as you move away from job titles and org charts, do focus on job descriptions, which are essential to ensure that each member of the team is doing what they really do best, identifying where roles can be swapped/switched with other team members, and that identifying any gaps between their job descriptions that can be and need to be filled in; and make the team itself part of defining the titles, roles, and job descriptions, as having them be a part of the process helps with the buy-in to achieve it, including asking them to step up to the less-than-ideal-but-sometimes-necessary compromises that arise.
The Secret Sauce of Successful Firms (Ellen Uzelac, Research Magazine) – As advisory firms grow, recognizing – and trying to manage – the culture of the firm is increasingly becoming an important part of success. And ultimately, the culture of a firm is defined by its leaders at the top, as the entire business becomes a reflection of their beliefs and preferences at least to some extent. Accordingly, the article profiles three large and successful firms, and the notably-Gen-X leaders in charge of them, who are creating cultures very different from the ‘traditional’ ones in financial services. For instance, Adam Birenbaum of Buckingham Asset Management wants everyone on the team to feel they are a critical part of it; as a result, their “Our Team” page puts everyone on an even playing field, where a receptionist is seen at the top of the list, Birenbaum’s CEO profile is mixed in the middle, and co-founder Bert Schweizer is simply listed as a “wealth advisor” near the bottom of the page. Ultimately, though, the point isn’t just that Buckingham’s “Team” page is a gimmick, but reflective of their culture, that also includes a program to recognize exceptional service within the firm, offers wealth management services for free to its own members, and allows everyone in the tech department one day per quarter to work on any project they wish. Another example is Cheryl Holland of Abacus Planning Group, which has a strong culture of active listening, reflected in everything from the work they do with clients, to the fact that every new hire gets a pair of giant Mickey Mouse ears to accentuate their listening culture. The last example is Ted Jenkin and Kile Lewis of oXYGen Financial, who wanted to create a small firm culture that focuses on Gen X and Y, which is now reflected in everything from a lobby that includes board games and a video game station, supporting technology that allows the firm’s advisors to meet with more than 2/3rds of the firm’s 2,300 clients virtually using Skype or GoToMeeting, and a casual atmosphere where “dressed up” means jeans and a sport coat. And notably, the other key thread that flows through all these firms: they are large, and growing rapidly, supported by a loyal and highly engaged staff who have bought into the culture they’re a part of.
An Advisor’s Guide To Surviving Termination (Mindy Diamond, Wealth Management) – With the ever-changing regulatory environment, broker-dealer firms are looking with increased scrutiny at their representatives in recent years, and even some high-profile $1B+ advisors and teams and found themselves suddenly terminated without notice and receiving a security escort out the door. So what should advisors consider if they face a termination? Diamond notes that the biggest issue is the Form U-5 that the broker-dealer files with FINRA, which is a public disclosure form that will contain the reason for the termination; as a result, if a termination event happens, it’s crucial to retain an attorney immediately who can help negotiate the specific language that will be used in the U-5 regarding termination (which has some flexibility regarding wording even while remaining truthful). Diamond notes that it is also highly preferable to work with a attorney specifically familiar with FINRA rules and regulations (and ideally with a relationship with the broker-dealer in question), to ensure a prompt and correct handling of the situation. And time is ticking, as the U-5 is generally filed within 30 days, and once filed is extremely difficult to alter after the fact, and a U-5 with a report of sales practice violations could block you from being hired by other broker-dealers in the future. Alternatively, Diamond also notes that some terminated brokers decide that it just doesn’t make sense to keep working in the broker-dealer environment at all, and use the event as an opportunity to transition to becoming an RIA instead.
Where Did Your Last Great Idea Come From, And What Did You Do About It? (Julie Littlechild) – Littlechild recently conducted a study looking at where advisors go to get their best ideas; the results revealed that the #1 source for most advisors is a conversation with other successful advisors, followed by attending (live) conferences, and media articles. However, the caveat is that just getting ideas alone isn’t enough; ultimately, the most successful advisors have a process to hold themselves accountable for actually following through on the idea, such as working with a business coach, or participating in a study/mastermind group. In fact, the best coaching and study group relationships have a structure around them (regular set meeting times, agenda/ground rules around the discussion, etc.) to ensure an environment of accountability. And notably, coaches and study groups often help by creating accountability around all areas of our lives; Littlechild found that those who use coaches do so for both professional and personal (and even ‘spiritual’) reasons. But again, the fundamental point is that success relies not just upon getting out there to meet with peers to get ideas, but also having a network of peers (or a coach) to create the accountability to follow through.
The Key to Attracting New Clients: Be Less Available (Dan Richards, Advisor Perspectives) – The research on persuasion has long observed a “law of scarcity”, where the demand for an item increases when it is (or is expected to soon be) in short supply. And while Richards doesn’t literally advocate a “Buy NOW While Supplies Last!” approach to clients, he does not that there are legitimate ways to limit your availability, that can help invoke the law of scarcity to support the sales process with a prospective client. For instance, you might limit yourself to only X new clients per quarter, and communicate that to a prospective client – e.g., “I only accept four new clients each quarter; if you’re not interested right now, that’s fine, so I’ll touch base again in 3 months.” Now, if the prospective client wants to work with you, the onus is on him/her to step up to work with you in the limit time window (or at worst, it’s a good excuse to contact the prospect again in 3 months!). Similarly, you might also (legitimately) communicate that you’re not the right fit for all potential clients and that you only work with certain types; only schedule prospective client meetings on a certain day at a certain time, and if the prospect has to schedule 3 weeks out to get onto your calendar, that’s ok because it’s communicating that you’re busy too and your time is scarce and valuable (and worth paying for!); and when conducting events with prospective (or current) clients, limit the size of the event (and communicate it as such) to convey the exclusivity that makes it more desirable to attend.
7 Hot Buttons Your Ideal Financial-Planning-Prospect Desperately Wants You to Push (Ronald Sier, See Beyond Numbers) – Ultimately, when we buy a product or service, we’re not really buying the ‘thing’ itself, but the feelings it creates; for instance, Kodak founder George Eastman famously noted that they were not in the business of selling cameras, but in creating recorded memories. Of course, while that conclusion sounds simple enough, recognizing it as a camera company was a significant challenge, and similarly Sier notes that many financial planners also get stuck in trying to figure out what’s really valuable to clients and what they really want – which is important, because in the end, most buying decisions are driven emotionally, and not logically (even when we think we’re making a logical decision). So how can you figure out what to focus on and deliver? Sier recommends the book “Hot Button Marketing“, which makes the point that by identifying a prospective client/customer’s “hot button” issues, you can create a solution that fits it directly (and will essentially ‘sell itself’). For instance, for many people their hot button is that they want to feel in control, so you can focus the messaging of your planning solutions around helping your clients feel in control; alternatively, we all like to feel special, so you might brand your business around its exclusivity and the uniqueness of its clients. Other hot buttons include helping people feel respected, feel smarter, feel like self-achievers, or feel nurtured. The ultimate point – by crafting not just your services, but the language you use in and around your business to appeal to these hot button issues, you can better connect with prospective clients on an emotional level and draw them in to doing business with you.
The Changing Face Of Wealth Management (Jamie Green, Investment Advisor) – Industry trend research suggests that independent advisors have been gaining market share of wealthy clients and offering “wealth management” services, compared to wirehouses, although the latter still provide the bulk of wealth management as measured by assets. Yet underlying these trends is that the definition of what is “wealth management” has been in flux as well, from shifting definitions of what “wealthy” means, to a wider range of services and solutions called “wealth management” (from the traditional mahogany-paneled advisor office, to working with clients virtually or offering partially-self-directed technology solutions). According to the data, there are now 200,000 “ultra-high-net-worth” households (more than $30M of assets), with about 1/3rd of those living in the U.S. Amongst those with $5M or more of net worth, almost 1/3rd consider themselves self-directed investors. Given these constraints, many wealth management firms have actually been lowering minimums and going “down market” looking for opportunities to expand the firm and capture the future wealthy, since there are only so many available today – a challenge, since the emerging affluent seem to be particularly inclined towards using technology to be self-directed. As a result, the pressure is on for wealth management firms to truly justify their value proposition over technology solutions, which is driving growth in programs like IMCA’s Certified Private Wealth Advisor (CPWA) program; notably, though, market studies suggest the emerging affluent do still want contact with a human, and that robo-advisors alone will not be their holistic solution.
4 Advisor Moves That Shouldn’t Be Legal (Allan Roth, Financial Planning) – When it comes to investment performance and results, Roth notes that unfortunately a lot of advisors are still using some ‘questionable’ tactics to convey their value. For instance, many investment advisors still benchmark themselves purely to the S&P 500, which excludes mid- and small-cap companies, and therefore gives a natural bias towards the advisor’s portfolio that captures a more diversified blend that includes the small cap premium, giving the appearance of alpha that wouldn’t be present if benchmarked to a more proper total stock market portfolio. Even worse, some advisors benchmark only to the price of the S&P 500, implicitly ignoring the dividend component and creating an easier benchmark than a more proper S&P 500 total return benchmark. Another problem is advisors showing investment performance gross of fees, rather than net of fees that clients have to pay in the real world. A more subtle problem occurs when advisors buy premium bonds that are callable, which provide a higher stated yield and appear to have a superior bond return… except that when the bond gets called at par, it will be marked down in value, and the ultimate yield-to-call is much lower than the ongoing yield implies (but is masked until the callable event occurs). The last problem area is with many of today’s income annuity products, that offer guaranteed “income for life” in the form of ongoing withdrawals (e.g., at 6%/year), even though the reality is that for the next 16 years, the client will simply be getting his/her own money back and producing a true income return of 0%!
Millennials To Financial Advisers: #DoingitWrong (Jessica Lynn Rabe, Investment News) – Written by a millennial who works in financial services, this article is essentially an “open letter” to financial advisors about the challenges they will face in working with Millennials, analogous to a situation where the industry is trying to sell a Pontiac to a generation that wants a Tesla (yes, Pontiacs aren’t made any more – that’s the point). For instance, key issues for Millennials include advice about student loans (the average person in the Class of 2014 owes $33,000, and 70% of last year’s bachelor’s degree students had some student loans), guidance about entrepreneurialism (the success of startups like Facebook has inspired Millennials to pursue a similar path and risks), a wariness about capital markets after watching their parents/family lose a lot of money in the 2008 financial crisis (and a preference to bet on sports over stocks!), and a world that is increasingly passive-centric where the value of any active/portfolio management is questioned more and more every day. Notwithstanding these challenges, though, Rabe also notes that Millennials may actually be more inclined to seek out education and support from advisors (in part because of their limited-and-scary experiences with markets), will be very interested in working on non-portfolio short-term and long-term financial goals, value transparency (and therefore may be more inclined towards transparent independent advisors), can appreciate the convenience of working with an advisor (as long as it actually is a convenient experience by leveraging technology, as opposed to just sitting in an office), and need the opportunity to work with an advisor on a standalone fee basis since AUM doesn’t work (as they just don’t have portfolios/assets to manage yet!).
Building Awareness, Building A Profession (Kevin Keller, Journal of Financial Planning) – The CFP Board’s public awareness campaign is now entering its 5th year, an idea that first came forth from CFP professionals themselves who complained that consumers were not often aware of the significance of the CFP marks. And thus far, the campaign is working; since 2011, unaided awareness of the CFP marks amongst the “mass affluent initiators” (the CFP Board’s primary audience target, those aged 35 to 64 with $100,000 to $1M of investible assets who are willing to seek out expert advice) has nearly doubled from 17% to 30%, and awareness amongst the entire mass affluent group from 20% to 28%. And notably, the CFP marks are the only to grow in awareness over the past several years; the CFA, CLU, ChFC, and PFS have either remained flat or declined. Given its success so far, the CFP Board anticipates the public awareness campaign will continue from here, with periodic reviews by the board of directors to affirm that progress is still being made.
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.