Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the Department of Labor's announcement that it is working on a new delay proposal for the full implementation of the fiduciary rule, that could extend the current transition period by as much as 18 months to July of 2019... though it remains unclear what legal basis the DoL has for postponing full implementation so much further, and whether OMB will actually approve its proposal.
In the meantime, DALBAR's Lou Harvey has proposed a new "Seller's Exemption" that would make it easier for salespeople to avoid the fiduciary rule - on the condition that they do not provide any actual advice, nor hold out to the public as "advisors" - and given that the delay would still just delay full implementation (but not repeal the fiduciary rule itself), we also feature coverage on what procrastinating advisors should do to get caught up on their upcoming DoL fiduciary compliance obligations.
From there, we have several practice management and personal productivity articles, including: how to achieve a state of "Flow" and peak productivity; the ways that we as financial advisors sometimes sabotage our own growth as we try to change our businesses to better fit our own lives; what to focus on if you're a "reluctant manager" who just wanted to serve clients but now increasingly find yourself in a managerial role with your advisory team; common conversational traps that advisors fall into with clients; why it's crucial to understand your financial planning "weaknesses" and limitations on your technical knowledge (and don't say you're "comprehensive" when you're really not!); and a reminder that financial planning can take an emotional toll on us as advisors, which means it's especially important to have strategies to manage your own stress!
We wrap up with three interesting articles, all looking at emerging trends in the advisory landscape: the first looks at whether advisory firms need to stop focusing on increasingly commoditized investment (and even comprehensive financial planning) advice, and instead try to figure out how to expand their services to also include solutions their clients more proactively seek out; the second examines the aftermath of the "new" fiduciary rules (and outright commission bans) that rolled out in the UK and Australia in the past 5 years, which ultimately did not disrupt financial advisors (but did force them to shift their business models); and the last is an interesting look at whether the new term for advice-centric advisors to differentiate themselves is to not just be "fee-only" but to be an "advice-only" fee-for-service advisor, where by definition the only thing the client pays for is the advice itself (and nothing else)!
Enjoy the "light" reading!
Weekend reading for August 12th/13th:
DoL Seeks To Delay Fiduciary Rule Until July 2019 (Mark Schoeff, Investment News) - The Department of Labor has been embroiled in several lawsuits challenging its new fiduciary rule, and in a brief filled in its Minnesota lawsuit with Thrivent Financial this week, the DoL indicated that it is submitting to OMB a proposal to delay the remaining parts of the rule from the current January 1st, 2018 implementation date, out to July 1 of 2019, instead. Notably, the core of the DoL fiduciary rule has already taken effect, but compliance is currently in a "transition period", such that firms and advisors are required to adhere to the Impartial Conduct Standards (that they give best-interests advice, for reasonable compensation, and make no misleading statements), but don't have to comply with the full scope of disclosure and other requirements of the Best Interests Contract Exemption. The proposed delay would extend the current transition period, allowing firms another 18 months before being required to step up to full compliance (and, notably, also extending the time period during which DoL fiduciary opponents can continue in their attempts to derail the rule further), and would also extend the time period before the indexed annuity industry must complete its transition from the existing PTE 84-24 rules to the full BIC requirements. Yet the latest proposal of the DoL to delay the rule is just that - a proposal - which still has to be reviewed by OMB (for up to 90 days), and then the DoL would release it to a public comment period (with comments being submitted by both fiduciary advocates and adversaries), and then a final change rule would have to be re-submitted to OMB if the comments were supportive of further delay... and it's not clear yet whether the DoL actually has a substantive and legally justifiable reason to engage in a further delay (not to mention one as long as 18 months). Which means at this point, the latest proposed delay just adds another layer of uncertainty to the potential timing of the DoL fiduciary rule, and it won't likely be clear if the new delay is even going to be a delay until this fall.
DALBAR Puts A Sellers' Exemption To Fiduciary Rule On Labor's Desk (Nick Thornton, Benefits Pro) - In a recent comment letter submitted to the Department of Labor, DALBAR CEO Lou Harvey has proposed a "Seller's Exemption" from the fiduciary advice rules. At its core, the purpose of the Seller's Exemption is simply to distinguish one-time sales of investments by brokers and insurance agents, from ongoing fiduciary advice, by allowing salespeople to avoid the fiduciary obligation, as long as they don't call themselves fiduciary advisors to the public, either. In other words, the point of the proposal would be to limit the current environment of dual-registered advisors who provide fiduciary advice for a portion of the engagement, but then switch hats at will to become brokers selling a product... and more generally, to make it clearer to consumers that there's a separation and difference between "sales" and "advice" in the first place by better controlling the (often overlapping and ambiguous) titles that advisors and salespeople use (and expressly prohibiting salespeople from using the term "adviser"). The upside for much of the sales-based industry is that they wouldn't need to comply with the burdens of the full Best Interests Contract Exemption, and wouldn't be held to the full fiduciary standard... with the caveat that they'd have to be clear they're not in the advice business, either. Though ironically, a similar rule requiring the separation of brokerage services and investment advice already exists under the Investment Advisers Act of 1940, but it SEC hasn't been enforcing it.
A Procrastinator's Guide To The DoL Fiduciary Rule (Steve Niehoff, Journal of Financial Planning) - While questions remain about exactly what may be changed in the DoL fiduciary rule by the time it takes full effect, the rule itself was implemented - at least in partial form - on June 9th, and is now the law of the land when it comes to financial advice for retirement investors (albeit with exceptions still in place for those who are solely giving "education" to investors). The core obligation of the DoL fiduciary duty is two-fold - the first is that advisors owe a duty of loyalty to their clients (i.e., to act in their clients' best interests), and a duty of prudence (by engaging in an objective process that gives appropriate consideration to all the relevant facts and circumstances). In addition, the advisor must adhere to the Impartial Conduct Standards (to act in the client's best interests, receive no more than reasonable compensation, and make no misleading statements), and serving as a fiduciary under the DoL rule means that certain conflicts of interest are outright prohibited, including "self-dealing" (providing advice for the advisor's own benefit), receiving third-party payments, and engaging in "dual representation" scenarios (e.g., representing both the buyer and the seller on a trade in a retirement plan). In practice, Niehoff highlights several "common" conflicts that are likely to arise for advisory firms, including: charging differently for fixed income and equity investments (instead, you need to use a single blended rate for the whole portfolio); not charging on money market holdings when you have discretion over the client's allocation to cash (either make the cash non-managed altogether without discretion, or charge on the entire portfolio, including cash, over which you have discretion); soft dollar arrangements (which are not entirely forbidden, but must comply with DOL Technical Release 86-1 in how those dollars are used); and clearly substantiating the appropriateness of IRA rollover recommendations (where the advice must be clearly documented to substantiate why it was better to roll the assets over to the advisor, rather than just leaving them in the existing plan).
4 Ways Financial Advisors Can Benefit From Finding Their Flow State (Craig Iskowitz, Wealth Management Today) - Winning athletes are known for being able to "get in the zone", an extreme state of focus that researcher Mihaly Csikszentmihalyi dubbed a state of "flow" in his book by that name. But notably, achieving a state of flow is not unique to athletes; it's possible for anyone to reach a similar level of focus and performance in their given endeavor. Accordingly, Iskowitz highlights a recent TD Ameritrade LINC conference session by Steven Kotler and Jamie Wheal, who apply the principles of Flow research across a wide range of professions based on Kotler's recent book "The Rise Of Superman: Decoding The Science Of Ultimate Human Performance". However, not everyone reaches a state of flow in the same manner; Kotler and Wheal have found four different types of Flow profiles, including Hard Chargers (the classic adrenaline junkies), Deep Thinkers (the virtuoso that loses themselves in full concentration on their task at hand), Flow Goers (free spirits like yogis and artists who try to live their lives in an ongoing state of flow), and Crowd Pleasers (extroverted performers who find moments of flow in engaging the crowd). The reason why it's important to understand your "Flow Profile" is that it allows you to better oriented your time and energy towards the kinds of activities most likely to create a Flow state, and identify your Flow triggers - the psychological, environmental, social, and creative areas that can help people enter a state of Flow (and once you understand your own Flow triggers, you can try to re-create those trigger circumstances more often). Notably, though, even for the best, Flow states do not sustain. Even neurochemically, the process of flow is a four stage cycle of Struggling to reach flow (when cortisol and norepinephrine are released), Release (where you de-stress to prepare to enter a flow state), the Flow itself (which includes a global release of nitric oxide, which flushes out stress hormones and resets the nervous system), and Recovery (where the neurotransmitters must build up again). For those who are curious to better understand their own Flow profile, Kotler and Wheal have launched the Flow Genome Project, which provides a Flow self-assessment tool here.
5 Ways Successful Advisors Sabotage Their Own Growth (Julie Littlechild, Absolute Engagement) - In the early years of being an advisor, there's a lot of energy and enthusiasm for taking in new ideas and coming up with new ways to grow... but after a period of time, that growth and success may not feel the same, as the nature of the business changes, and our own needs and priorities change as well, leading to a kind of "fulfillment flatline". When advisors hit the fulfillment flatline, it's time to make a change, but Littlechild notes that often the greatest barriers to those changes are internal ones that we impose upon ourselves - from fear and doubt about whether the change will work, guilt about something we're going to stop doing or give up, or other emotional barriers. And in turn, many advisors internalize these fears and concerns, and end up self-sabotaging their own progress (or inhibiting it from even getting started). In particular, Littlechild highlights five core areas where advisors often inhibit their own growth, including: 1) Not recognizing where, exactly, we get "stuck" in our business (as it's one thing to realize you're feeling stuck, but another to really spend the time and focus to figure out where you're stuck, and what's causing the blockage); 2) Guilt that reshaping the business to better fit our needs and lives is "selfish", without recognizing that if the business isn't fulfilling for ourselves, we're going to burn out anyway; 3) Becoming overly invested in what we've already built (the infamous "endowment effect" in behavioral finance), and satisficing too quickly for what is "good enough" because it already works, and not doing the work it takes to improve the situation and try to make it great; 4) Letting doubt take hold, fearing that if we can't make the change perfectly we shouldn't try at all, even though the reality is that we growth means we have to spend time living in the "messy middle" between where we were, and where we want to be; and 5) Allowing fear of failure to convince us it's better to stay where we are, and not try to improve the situation at all... which can only be overcome by setting a clear vision of where you want to be going in the first place.
Are You A Reluctant Manager? (John Bowen, Financial Planning) - Most financial advisors become advisors to help make a difference in the lives of their clients... not to manage the employees in their own advisory firm. Yet with growth, there inevitably comes a growing team of people to manage, which for most advisors result in several blocking points, from struggling to empower team members to make decisions, to figuring out how to get team members to feel they are part of the big picture, knowing how to compensate the team appropriately, and getting everyone on the team to march together. Bowen suggests through core elements that must be resolved to build an effective team: 1) Create a clear mission and purpose, as while for many advisors creating vision and mission statements may sound like a bunch of fuzzy words, for employees it's literally the embodiment of the common purpose that's meant to pull them together as a team (and makes it easier as the advisor to figure out exactly who you need on the team, and what you need them to be doing); 2) Establish principles that encourage collaboration (just as you have certain principles for who you will and will not accept as a client, you need to establish clear standards for how the team will work together as well, such as "Consensus, not democracy - we all get our say, but not necessarily our way" or "Silence equals agreement (so speak up if you disagree!)", and beware having a "my way or the highway" attitude that disengages the team); and 3) recognize the importance of complementary skillsets, and that your ideal teammates are probably not just younger versions of yourself, but people with substantively different skillsets that help to do the things that aren't your own strength.
Three Traps For Unwary Advisors (Dan Solin, Advisor Perspectives) - Many financial advisors fall into "traps" that can limit their ability to engage and develop rapport with prospects and clients, without even realizing it. Solin highlights three core "traps" that many advisors fall into without realizing it: 1) Lack of Interactivity, and failing to recognize that to be really engaging with clients, they must be engaged interactively, and not just talked to (which is why television is increasingly trying to become interactive, and why children's shows in particular often try to increase their interactivity, such as Mister Rogers breaking the 'fourth wall' to talk directly to the children's audience to interact with them); 2) Fear of a pause, as most of us find it awkward to have an "uncomfortable" gap in conversation of more than a second or two, yet allowing a gap of 5+ seconds can actually help to better engage prospects and clients, who may themselves feel compelled to "fill the silence"... by volunteering even more useful information and deepening the conversation; and 3) Not asking enough questions, as the reality is that prospects and clients tend to feel better engaged and understood when they are talking, which means the more the advisor asks questions and stops talking themselves, the more the prospects and clients tend to like the advisor! Or stated more simply: the more you're talking, the more likely you're losing the prospect or client!
What Is Your Financial Planning Weakness (David Cordell & Thomas Langdon, Journal of Financial Planning) - Most CFP professionals identify themselves as "comprehensive" financial planners who offer holistic financial plans, but in practice most advisors tend to focus more on some areas than others, whether due to their underlying business model as an advisor, natural inclinations towards certain topics, or the outright development of a particular niche or specialization. Which is important, because a number of financial advisors may be saying that they give comprehensive advice, when in reality they have weaknesses and gaps that they may not even realize. For instance, imagine that a 55-year-old client couples informs you that they are going to be moving to another state for a new job with a new employer, and as a result need to handle the move, selling their old home to buy a new one, and figuring out what to do with their kids (one of whom is in college, while the other two are in high school). For the typical advisor, the first topic of conversation might be the opportunity to roll over the client's old 401(k) plan, confirm that the couple has adequate savings for their last two children to go to college, and perhaps ask the couple if they've updated their life insurance needs with one child almost done with school. But Cordell and Langdon note that there are a number of additional issues, such as highlighting that the couple will likely need new Wills (since they're going to be residents in a new state), figuring out the rules for in-state tuition in the new state (and how soon the middle child will qualify), and perhaps optimizing the tax treatment of their moving expenses. Yet to truly be a comprehensive financial planner, it's also necessary to consider a substantial number of additional insurance issues - including property and casualty insurance issues, such as whether the old house and belongings will still be covered under the current policy if they're not living there, whether their household items being transported in their rental truck are fully insured, how long their current automobile policies will be valid in the new state, whether they need renter's insurance in the new location until they buy a new home, and more. Of course, P&C insurance questions are covered on the CFP exam itself, so most advisors should at least have some familiarity with the issues. But the point remains: if you're going to give "comprehensive" financial planning advice, are you really advising on "everything" covered under the CFP curriculum... and if not, do you have a relationship with an external (P&C) expert who can help ensure that your clients don't have any critical gaps?
A Heavy Emotional Price (Carl Richards, Morningstar Advisor) - An often undiscussed challenge of being a financial advisor is the emotional toll it takes on us, as a financial advisor. After all, in practice one of the primary roles of the financial advisor is to be a release valve for clients' anxieties, along with taking on the burden of trying to ensure they achieve their financial goals. Yet the burdens that clients face – and try to transfer to us – are often beyond our control, from health events in the client's life that disrupt their financial plans, to a bear market that derails their retirement plan. In fact, a 2012 study in the Journal of Financial Therapy by Brad Klontz and Sonya Britt found that after the financial crisis, a whopping 93% of financial advisors reported medium to high levels of posttraumatic stress symptoms (including sleep difficulty, feeling numb, and intrusive thoughts and images), with 39% reporting severe symptoms. Yet Richards notes that these stressors go largely undiscussed in the world of financial planning – with the caveat that if we don't discuss the problem, we can't effectively deal with it. Which is concerning, because it's only a matter of time before the bear market emerges, which will spawn client fears, and bring new anxieties for financial advisors as we once again try to walk clients back off the financial ledge. So it's time to start figuring out: what are the best practices for how we as financial advisors should be taking care of ourselves, and deal with the stress and anxiety that's part and parcel to what we do with and for our clients?
Should Advisers Be Selling Coffee Instead Of Client Service? (Tony Vidler) - In a highly commoditized market like gasoline stations, it's difficult to compete on price alone, and, as a result, gas stations for many years competed on service instead, providing gas station attendants who would pump the gas for you (and inflate your tires and wash your windows). As competition rose, many gas stations moved away from competing on service and focused on price instead, especially the largest companies that could leverage their size and scale to compete... leaving the small local provider even more reliant on service to differentiate themselves. And Vidler suggests that a similar path is playing out in financial services, as large national players increasingly use their size and scale to compete on price, and force advisors to try to differentiate on client service instead. Yet technology makes it increasingly feasible for consumers to "serve themselves", which means just trying to do things for your clients as a form of "great service" doesn't necessarily work (e.g., it's not great service to help clients with their paperwork if you can use digital tools to just e-sign everything in a fraction of the time anyway). So what's the path forward? In the case of gas stations, it was to expand into cross-selling, providing food outlets and selling great coffee, that gave customers a reason to show up beyond "just" a reasonably priced commodity alone. In the case of financial advisors, the key isn't literally to start packaging coffee with financial advice, but more generally to recognize that it's time to create higher perceived levels of service – which notably, can increasingly be done in a cost-effective manner through outsourcing (from virtual assistants and paraplanners, to third-party research, solution-providers, and more). In other words, if consumers aren't beating down your door to receive comprehensive financial planning advice, is it time to figure out what advisors can deliver that's valuable and compelling to clients, and provide the comprehensive financial planning along with it as well?
The Future Of Financial Advice: Lessons From London (John de Zwart, LinkedIn) - While here in the US we've been focusing on the prospective changes of the DoL fiduciary rule, the reality is that fiduciary change is a global phenomenon for advisors, and the DoL fiduciary rule isn't even the most stringent, as in Australia their Future Of Financial Advice (FOFA) reforms banned commissions entirely (albeit with a grandfathering transition for existing trails), and in the UK their Retail Distribution Review (RDR) legislation banned investment commissions even more abruptly. With the Australia and UK changes having occurred in 2012 and 2013, though, there's now an opportunity to "look back" and see what the outcomes of more stringent fiduciary rules really are. In the UK, the severity of the shift did lead to a significant decrease in the number of financial advisors (mostly from large financial services firms that decided to stop offering advice when they couldn't generate commissions anymore); the remaining financial advisors, though, have increasingly focused on financial planning (including cashflow management, estate planning, risk profiling, tax advice, and strategic investing), and concomitantly engaged in a significant increase in investment outsourcing (e.g., the UK equivalent of TAMPs), which is actually bringing investment costs down as advisors consolidate investments into larger platforms with more economies of scale. Notably, though, advisors in the UK are still using an AUM advice fee (typically 1%) with some minimum fee, and Australia similarly is still continuing to use AUM fees even as advisors shift increasingly towards broader-than-investments advice. In the meantime, UK regulators have observed an "advice gap" – portions of the marketplace that aren't being served by the current advice market – and consequently are exploring ways to encourage the use of "robo" tools, corporatized models, and streamlined advice solutions (akin to platforms already being launched here in the US). The bottom line: a fiduciary rule and the elimination of commissions didn't end the world of financial advisors, but it has increasingly shifted the advisor value proposition away from only investments, which in turn is accentuating the challenges that advisors still have in just trying to get new clients in a cost-effective manner in the first place.
Advice-Only: The Best Model For Financial Advice People Need And Want (Harry Sit, The Finance Buff) - For most of its history, financial planning advice has been bundled somehow, either to the commission-based products that were sold during the implementation phase of the plan, or more recently to investment management in the form of a singular AUM fee that covers both the portfolio and the non-portfolio advice. Yet Sit points out that as products increasingly become accessible online, and technology simplifies the process of investment management, consumers are increasingly paying a large portion of their fee for what are largely lower-priced administrative chores, and not necessarily paying for the advice itself. Notably, this doesn't mean that advice itself isn't highly valuable; it's simply a recognition that in many cases, it's hard to separate those who actually give advice, from those who charge an AUM fee for a portfolio that isn't much different than what a robo-advisor could have administratively run for you at a fraction of the price. And while labels like "commission-based" and "fee-only" do help to differentiate the advisors who get paid for implementation from the ones who have no incentive to sell, "fee-only" on its own still doesn't effectively separate advisors who actually give financial planning advice, from those who are primarily in the business of managing an investment portfolio for a fee. Accordingly, Sit suggests that the new differentiating label should be "advice-only", to connote the subset of fee-for-service financial advisors who really, truly, just provide advice and get paid for it, without the conflict of also needing or wanting to get paid to manage a portfolio. Especially since the reality is that the marketplace for investment management fees is actually only a small subset of the population, while the range of people who want and need (non-portfolio) advice is much larger... but they must work with a non-AUM advice-only advisor to access it. And with more and more online solutions, advice-only advisors can easily and quickly help clients implement for themselves, which ultimately brings down the cost for the consumer as well. Though unfortunately, in today's environment, it's still difficult to actually find true advice-only advisors, which are currently concentrated amongst platforms like the Garrett Planning Network and XY Planning Network (as even a large volume of NAPFA advisors are fee-only but not necessarily advice-only)... although Sit has recently created his own search-and-screening service for consumers who want help in finding an advice-only advisor.
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.