Enjoy the current installment of “weekend reading for financial planners” – this week’s reading kicks off with some turmoil between NAPFA and the CFP Board, which have split on the definition of “fee only” and created the awkward scenario where some “fee only” planners under NAPFA actually don’t qualify as “fee only” CFP certificants.
From there, we have several practice management articles this week, including some ideas from Bob Veres about how to fix the industry’s regulatory woes, some tasks to target for outsourcing in your firm, and a discussion of whether we need to reframe “succession planning” as “continuity planning” instead (to recognize that many advisors want a more continuous and ongoing role in the transition). We also have a few articles related to technology topics, including a look at how to make sure your client data is safe when you’re using your laptop and mobile devices on (public) WiFi networks, and a nice summary of Susan Weiner’s “Virtual Book Tour” with a long list of great articles on blogging for financial advisors (great tips whether you’re thinking about getting started, or trying to get better).
There are also a few technical articles this week, including on from Ed Slott about the latest proposals for changes to retirement accounts under President Obama’s budget (some beneficial for clients, some not so much), and another article about the rising specialty of helping clients through health care and health insurance issues in retirement.
We wrap up with three interesting final articles: the first is from the Research Puzzler blog, suggesting a fresh way to look at the active vs passive debate is to distinguish between “maximzers” and “satisficers” instead; the second about the concept of “negative selling” and reverse psychology, where sometimes clients are more engaged by telling them what they can’t have than what they can; and an intriguing discussion by financial planning blogger Ronald Sier about the fact that in the end, most clients don’t have financial goals, they have real world goals that have financial ramifications, and we as advisors need to adjust our conversations accordingly. Enjoy the reading!
(Editor’s Note: Want to see what I’m reading through the week that didn’t make the cut? Due to popular request, I’ve started a Tumblr page to highlight a longer list of articles that I scan each week that might be of interest. You can follow the Tumblr page here.)
Weekend reading for August 24th/25th:
CFP Board & NAPFA Split On ‘Fee-Only’ Definition – In the past several weeks, the CFP Board has conducted a webinar and sent out notices to CFP certificants “clarifying” some misunderstandings regarding the CFP Board’s definition of “fee only” as a method of compensation, after the issue was highlighted in the recent public admonition of Alan Goldfarb. As highlighted previously on this blog, though, the real problem with the Goldfarb ruling was that the CFP Board’s definition of “fee only” was actually even more restrictive than NAPFA’s, and as a result it is estimated that approximately 5% of NAPFA’s own members would be prohibited from calling themselves “fee only” CFP certificants. The key issue is whether a planner may call themselves “fee only” if they are affiliated with any other organization that receives non-fee (i.e., commission) income; under the CFP Board’s rules, any related party, including the certificant’s employer, or any institution in which the CFP certificant has a financial interest, would run afoul of the rule, while NAPFA members are permitted to hold ownership stakes of less than 2% in broker-dealers, banks, or other financial institutions. For now, the leadership at the CFP Board and NAPFA are “in discussions” about whether/how to resolve the issue, as all parties involved seem to agree that it would be even more confusing to consumers if advisors were listed as “fee only” on one organization’s site but “commission and fee” on another, due to the differences in definitions, and the CFP Board has indicated it “may be willing” to explore how the Financial Planning Coalition could agree on a single fee-only definition.
How To Fix Advisors’ Regulatory Woes – In Financial Planning magazine, industry commentator Bob Veres looks at the current regulatory environment for advisors, suggesting that we are now in an environment of “regulatory capture” where the regulatory bodies have been taken over by those they’re supposed to regulate, as Veres notes that many SEC regulators move on to lucrative private sector jobs with the firms they’re supposed to oversee, FINRA’s board includes executives of the firms that the organization is supposed to currently oversee, and Congress is often beholden to the organizations with entrenched interests and “representatives [who] arrive holding bags of money.” So what’s the alternative, given that almost any regulatory structure is at risk for regulatory capture at some point in the future? Veres suggests that perhaps a better route would simply be to relax the regulatory structure altogether, and let market forces sort it out (i.e., let the good advisors succeed and the bad ones languish) – especially given the reality is that the regulators do so little to control who holds out as a financial advisor already, that perhaps the public wouldn’t miss the regulators much anyway but advisors could at least operate without such onerous regulatory and compliance hassles. Not that Veres is suggesting no regulatory oversight at all; instead, regulators would simply focus on more tangible issues, like verifying that money is where it’s supposed to be (to protect against outright fraud and embezzlement of client funds), ensuring the protection of private client information, and let consumer complaints be settled in a court of law based on whatever standard advisors choose to subject themselves to. Wall Street wouldn’t get a free pass either, as Veres suggests that if a judge finds a firm creates products not in the interests of consumers, the firm would be required to buy the investment back at cost (think toxic mortgage securities). While Veres notes there would certainly be a lot of problems with this free market kind of system, he argues that it may not be much more broken than the current system is anyway, but at least it would cost a whole lot less to administer.
Think Big, Stay Small: How Outsourcing Can Grow Your Firm – From Investment Advisor magazine, practice management consultant Angie Herbers looks at how advisors are leveraging outsourcing to keep their practices profitable. Notably, though, outsourcing isn’t just about managing cost; in fact, Herbers notes that for many firms, the outsource providers – experts in their narrow area of focus – often do the job better than an advisory firm’s unspecialized staff, even while getting the job done at a fraction of the cost of a full-time employee (at least until the firm grows large enough that it truly makes sense to bring the work in-house). Herbers doesn’t recommend outsourcing everything at once when going down this road, though; instead, she suggests that firms adopt outsourcing incrementally as the business needs grow and evolve, which allows the firm to get some experience in working with outsourcing partners and figure out what can and cannot be effectively outsourced. So what kinds of tasks are typically outsourced? Herbers suggests that for small firms, the recruiting and hiring process is a good starting point for outsourcing, along with website design, regulatory compliance, and a personal assistant (virtual or even someone local available in-person). As the firm grows, outsourcing may include HR and business administration functions and legal compliance. Larger firms may wish to explore outsourcing support for marketing and branding, and may target additional outsourcing providers for specific projects. Herbers’ article also provides some suggestions for potential providers in all of these categories.
The Reframing Of Succession Strategies – In the Journal of Financial Planning, veteran financial planner Lew Walker raises the question of whether it’s time to reframe the idea of “succession planning” to instead think of it as “continuity planning” instead. The issue is that in the context of advisory firms, where so many advisors find their own meaning and purpose, the idea of “exiting” and “letting go” of their firm is akin to talking about his/her funeral or planning a root canal! With the aging of the profession, though, this is increasingly becoming an issue; the first CFP certification was in 1973, which means early pioneers who obtained their marks in their 20s are now in their 60s, and overall Cerulli estimates that 22% of advisors are in their 60s. Yet the demographics issues mean not only are there a large number of baby boomers getting ready to retire, but relatively few successors available to buy their practices; the problem is exacerbated by the fact that the most entrepreneurial of successors are more likely to start their own firms anyway, and even when there’s a buyer/seller match today’s independent advisor often wants a slower transition than just riding off into the sunset as soon as the sale is signed. Walker suggests that the solution to this challenge is a team-based approach, not from the perspective of just servicing clients with teams, but that it provides an easier way to facilitate a transition itself. Which means perhaps the real way to improve the difficulties in today’s succession planning environment is for us all to get better at team building?
How Secure Is Your Wireless Connection? – From Investor Advisor magazine, Dan Skiles cautions advisors about the use of open WiFi networks, whether at a conference or out on the road visiting clients. While connecting a tablet to a local WiFi network may be a nice way to take notes, quickly go online to check email, or access websites, the reality is that many wireless networks have no security protections whatsoever, which may leave advisor and client data at risk. Skiles notes that connecting to a hosted WiFi network of a major telecommunication carrier (e.g., Verizon, AT&T, or Sprint) is generally secure, as it leverages the companies’ computer security infrastructure; if one isn’t available, the next option is to carry a small wireless modem so the advisor can host their own secure networking hotspot. If you have to connect using someone else’s network, Skiles suggests that at least a network that requires a password (e.g., the hotel or conference WiFi in many situations) is somewhat more secure, as it means not just anyone can access the information flow. If any secure financial or client information is involved, be certain to connect using HTTPS or SSL secure connections. If you have to connect to an open network, be cautious about not going to important sites where you might enter your secure password, and be certain not to auto-connect to the network so you don’t unwittingly connect to it in the future without realizing it. If you regularly have to use unsecure open WiFi networks, Skiles suggests setting up a VPN (virtual private network) so that any information you transmit after connecting on the WiFi will be transmitted securely (and there are several third-party applications that can automatically establish a VPN connection for a reasonable cost). If you have employees, make sure your firm’s policies are clear about employees accessing client information on their own WiFi-enabled devices, to be certain they don’t compromise client privacy by mistake.
Financial Blogging Virtual Book Tour – Over the past month, Susan Weiner of the Investment Writing blog went on a “virtual book tour” for her new book “Financial Blogging: How To Write Powerful Posts That Attract Clients” for financial advisors, and this article provides a nice summary of all the guest posts that she wrote. The topics are all part of the general theme of blogging as a financial advisor, including generating ideas for blog posts, finding time to blog, technology tips to help your writing process, getting support editing your writing, hiring a virtual assistant to support the blogging process, how to respond to negative comments, and more. If you’ve been thinking about launching a blog for your advisor website, or are looking for some tips and ideas of how to do it better, you may want to check out the list of Susan’s articles for some inspiration (and I recommend her book, too!).
Obama’s 6 Retirement Proposals – On the Financial Planning magazine blogs, Ed Slott provides a good overview of the various retirement-related proposals that were put forth by President Obama’s budget earlier this year, including who the winners and losers would be. Although ultimately the fact that they were included in the President’s budget not make them law, it provides a good indication of the bargaining chips the White House might put on the table when it comes time for tax compromises. The possibilities include: a requirement for businesses with more than 10 workers in business for 2 years would be required to set up and provide automatic enrollment in IRAs for their employees (contributions would be solely by employees, but they would be defaulted into a 3% contribution from their salary unless they specifically opt out); stretching inherited IRAs may be restricted (as discussed previously on the blog, the proposed rules would instead require the 5-year rule for most beneficiaries, though spouses could still roll over to their own accounts, and disabled and minor children would have some relief provisions); a cap that would limit new contributions to IRAs and 401(k)s once the account reached several million dollars (also discussed previously on this blog); a limit on the maximum tax benefit of any deduction to a 28% tax rate, which would indirectly limit the tax benefit of deductions for retirement account contributions for high income individuals; relief from RMDs for those with less than $75,000 in their retirement accounts; and relief to allow non-spouse beneficiaries to do 60-day rollovers of inherited IRAs to cut down on the number of accounts that are accidentally distributed by mistake.
Connecting Health To Wealth – This article in Financial Advisor magazine notes how as baby boomers approach retirement, their questions increasingly begin to encompass health care issues, from how to handle the health insurance gap between retirement from the workforce and the onset of Medicare, to whether they should enroll in Medicare if they’re still working at 65, to making decisions about Medigap and Part D plans. Which means advisors either need to ramp up their knowledge in a new area of expertise, or look for an external provider who can help, like Katy Votava of Goodcare, who consults with advisors and their clients on these specific senior health care issues. And the opportunities with expertise are significant; for instance, better shopping and coordination of the various layers of plans (Medicare Part B, Part D, Medigap, Advantage plans, etc., and coordinating with the client’s actual health care needs and drugs being taken) can produce thousands of dollars in savings, and sometimes Votava finds errors in billing and insurance claims when reviewing significant client health care expenses. The article also discusses advisors working with geriatric care managers, who help clients make decisions about where and how to get care (e.g., in their home or a nursing home), especially when a long-term care event occurs. The bottom line, though, is that for advisors specializing in retirees, if they aren’t providing guidance on health care issues, it’s time to get some assistance.
The Paradox Of Choice – From the blog of “Investment Committee Doctor” Tom Brakke, this article looks at “The Paradox Of Choice” by Barry Schwartz, a popular book from a few years ago that look ed at how having more choices isn’t always better. While at face value it may seem appealing to have more options to find greater satisfaction, the “paradox” is that in reality, we often find more choices to be overwhelming, tiring, and stressful, and are more prone to being dissatisfied with a final decision. The book notes that when tackling this issue, some people are “maximizers” – putting in significant additional effort to determine the ideal or optimal path – while others are “satisficers” who are happy when things are “good enough” without spending significant time on the decision. Brakke suggests that the maximizer vs satisficer issue is a good analogy for investment approaches as well, as the active investor seeks to maximize every investment decision, while the passive investor is a satisficer who decides that the “index and relax” approach is good enough. Notably, the investment industry in general is fueled by maximizers – those always on the hunt for the next great manager or investment – while the research suggests that a lot of clients would probably be happier to simply be satisficers. Not that all advisors and their clients should be satisficers, but Brakke suggests that it can still be a baseline against which other strategies are measured, in terms of not only performance and results but also time and effort.
Don’t Even Think About Reading This Post – From author Adam Grant on the LinkedIn blog, this article takes an interesting look at how we often refuse to do what we’re told, and insist on doing what we’re not to supposed to, whether it’s the boss who won’t look at that report you keep asking him/her to review, or the child that can’t help but reach out to a hot stove after being told not to touch. These concepts of “reverse psychology” ultimately boil down to three key points: Reactance (the more we’re discouraged from something, the more we feel our freedom is threatened, the more we want to regain choice and control by doing the opposite of what we’re told); Rebound (when we’re told not to do something, we often can’t stop thinking about it, which just makes it worse); and Curiosity (being told we shouldn’t have/do/eat something just makes us more curious to try it out and see what all the fuss is about). The complication, of course, is that while these effects happen unintentionally throughout our interactions with the world, we can also plan to use such techniques (or have them used upon us). So at the least, be cognizant if these effects are happening to you; on the other hand, be aware that you can also use them to your advantage… but do it ethically, please!
Why 97% Of Your Clients Don’t Have Financial Goals And What To Do About It – From the blog of Ronald Sier, this article makes the interesting point that while there is some data to suggest that having goals helps people to reach them, most people don’t really have financial goals. After all, when was the last time you ever really heard a prospective client say “You’ve got to help me with my financial goals” – in fact, often if we ask clients what their financial goals are, they need help just to articulate them in the first place. Instead of financial goals, Sier suggests instead that the real focus should be on real goals – a certain vacation, or a specific retirement lifestyle, or a particular experience the client wants to have – and the job of the planner is then to help them take the steps necessary to achieve that goal. By focusing on real world goals and not just financial goals, clients can get better buy-in to those goals (increasing the odds they really follow through to achieve them), and avoids the risk of the moving-target goal (as happens too often when clients just aim for “a number” and then when they get to that number, they want a bigger number). Of course, delving into real goals – not just the financial ones – can be a difficult conversation itself, so Sier suggests starting with telling stories to illustrate successful goals and focus your questions on delving into what really matters.
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. You can see below his new Bits & Bytes weekly video update on the latest tech news and developments, or read “FPPad Bits And Bytes” on his blog!
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!