Enjoy the current installment of "weekend reading for financial planners" – this week’s edition starts off with a negative review of President Obama’s decision to appoint Elisse Walter as a replacement for SEC Chair Mary Schapiro. From there, we look at a number of practice management and career related articles, including a discussion of how the ranks of dually registered advisors are growing ever faster than pure RIAs, some tips from Sallie Krawcheck for new advisors, a review of the rising trend of ETF asset managers, a look at some of the little things you can do to help build trust with a new client, how Google AuthorRank is changing the face of Search Engine Optimization, and a discussion of survey results from Bob Veres about the greatest fears of financial advisors in today’s environment. From there, we have two more technical articles, including a discussion of the tax rules for Master Limited Partnerships (MLPs), and a response from Laurence Siegel to the rather economically forboding article last week by Jeremy Grantham. We wrap up with two more offbeat articles: one suggesting that the primary reason clients have trouble saving for retirement is that their brains physiologically think of their retired selves like a stranger; and the other that there’s an important difference between persuading and convincing, with the implication that we as planners may focus too much on the latter. Enjoy the reading!
Weekend reading for December 1st/2nd:
Obama Makes ‘Really Unfortunate’ Appointment Of Elisse Walter As New SEC Chairman – RIABiz discusses the big announcement this week – that President Obama has named Elisse Walter to take over the SEC as Mary Schapiro departs in mid-December. The news is significant, because Walter will be in a position to drive two major issues for advisors – the potential implementation of a uniform fiduciary standard, and the determination of whether oversight of registered investment advisers should remain with the SEC, shift to FINRA, or go to a new SRO. Notably, Walter is a former executive with FINRA, and consequently some have suggested that this does not bode well for a higher fiduciary standard for brokers and increases the risk that FINRA will gain oversight of investment advisers, as Walter has previously been outspoken in supporting an SRO for oversee fee-based advisors (that would likely be FINRA); on the other hand, it’s notable that Schapiro herself was also a former FINRA leader, and in her parting words still insists that a uniform fiduciary standard is on the table and will get done. Notably, though, as this Reuters article points out as well, the Walter appointment is technically only temporary as it has not been confirmed by Congress, so it’s not clear whether her appointment is intended to be permanent or just as a stand-in; nonetheless, even if Walter does not remain beyond 2013, she may still implement many actions in the coming year.
Dually Registered Advisers Getting Extra Mileage From Hybrid Model – This InvestmentNews article notes a recent Cerulli report that indicates hybrid advisers – those who are both a registered rep with a broker-dealer under FINRA and also an investment adviser under the SEC – are the fastest growing segment of advisors. While the pure RIA channel grew by 3% in 2011 (with 13% asset growth), the hybrid channel grew by 6.9% with assets up 19.1% (albeit with still only 2/3rds the assets of pure RIAs). The key value proposition for the hybrid model is the ability to still deliver products that clients need that may only be available on a brokerage platform, and notably many advisors who initially adopt the hybrid model as a transition from broker to investment adviser are choosing to remain as hybrids to retain access to the full range of products their clients may need. However, the trend tends to be true for "smaller" advisors, as those with a larger asset base – more than $100 million under management – are still tending to make a full transition to a standalone independent RIA.
Sallie Krawcheck Clues In Green Advisors About Choosing That All-Important First Gig – This article from RIABiz discusses a candid presentation that former Merrill Lynch broker chief Sallie Krawcheck delivered as a part of InvestmentNews’ virtual job fair, with tips to new advisors. Krawcheck emphasized the importance of making a good decision about a first job, working hard, and the shift of the entire advisory industry towards delivering real advice and not just product sales. Her primary tips: be trustworthy; be quiet and detail oriented; be contrary (i.e., be willing to broach subjects and issues clients don’t want to talk about); stay focused on the long term (including the fact that a client who says "no" today may still say "yes" in the future); avoid short cuts and focus on your personal brand; be choosy (don’t do business with people you don’t want just because it’s a job); and think long and hard about the first job. Although I recently wrote that I think sometimes new planners put off the initial job too long trying to find the perfect one right out of the gate, overall Krawcheck’s tips are a fantastic reminder for anyone starting in the advisory business.
Rise Of The ETF Asset Managers – This brief article from Investment Advisor magazine looks at the rising trend of third party ETF managers – active managers who trade not individual stocks and bonds, but from the ever-increasing universe of Exchange-Traded Funds. The trend has been rather explosive – ETF manager strategies grew 30% in the first half of 2012 according to Morningstar, and are up 48% since September 2011. The trend appears to be dominated by tactical managers who prefer to focus on making macro(economic) calls rather than do individual security analysis, and who use ETFs as a very cost efficient way to gain exposure to a particular asset class, sector, country, etc., and be able to trade it quickly and easily when desired due to high liquidity. Advisors in turn seem to be supporting the demand by increasingly turning to ETF managers, to outsource the investment function so that the advisor can more effectively focus on serving clients.
Solutions for the Top 6 Financial Advisor Social Media Risk Factors – This article by Financial Social Media discusses how to handle some common problems and challenges that arise with social media. For instance, how should you handle negative comments on your blog or Twitter? Don’t lash out or delete them; take the high road, respond with poise and maturity, acknowledge the negative feedback, and offer a resolution, and remember that because social media is public, others will see whether you did (or didn’t) handle criticism well. If there’s an inappropriate comment that is just profane, rude, or offensive, though, delete the comment – but still reach out to the person politely, and explain why the post was removed. It’s also good to delete spam messages, but try to make sure you’re only deleting spam. Also, stay in compliance with all your requirements, manage your privacy settings (where possible) if you’re concerned competition is spying on you, and acknowledge and fix any errors (but don’t just hide them, especially if someone has already commented on it).
The "Little Things" That Build Trust – This article on Wealth Management provides a great list of little tips for how to enhance trust building, especially early in a relationship with a prospective or new client. The key point of the article is that trust, and your underlying credibility and integrity, are built (or damaged) incrementally by each and every action you take – so by focusing on your actions, including the little ones, you can enhance (or at least avoid undermining) the trust-building process. Some good tips include: arrive early (especially for the first meeting); make sure you know how to pronounce the person’s name correctly and do so confidently; promptly return messages; never say "trust me" – instead, just say what you’ll do, and then do it; admit when you don’t know the answer to something (and then get the answer!). Although there’s probably not much here your parents didn’t already teach you (or at least try!), it’s a great reminder list, especially since while most of us mayintend to do all of these things, few of us actually do so consistently.
SEO In 2013: The Rising Influence Of AuthorRank – This article provides a nice summary of the new wave to hit SEO in 2013: Google’s shift from PageRank to AuthorRank. What is AuthorRank? It’s where the quality of content is based not just on the page or website it’s found, but also the reputation and authority of the person who wrote it, which is measured by linking articles when they’re creating to a specific author and his/her Google Plus profile. Why does this matter for financial planners? It will be important to tie any blog that you create on your website to a Google Plus profile and to AuthorRank going forward, if you want clients and prospects to find your content online. (For a more in-depth discussion of AuthorRank, see this article from SEOMoz, or go to Google’s Authorship page to start the process for your site.)
The Top 10 Deepest Fears — And Highest Hopes — Of RIA Practitioners – This article by Bob Veres on RIABiz discusses some of the biggest concerns of financial advisors, based on a broad survey of his own newsletter readers. While some of the fears are not surprising – the potential consequences of rising US debt, a potential bond bubble, another financial meltdown driven by derivatives, and the fear (for RIAs) that FINRA will expand its regulatory reach – it’s notable that the top concern was simply that the ongoing problems with the stock market will undermine the perceived fairness of the investment system and erode investor confidence and willingness to invest (raising a question I also posed last year: has the financial planning profession bet its future on the stock market?). While focusing on some of these concerns is not necessarily the happiest and most uplifting of exercises, Veres does provide some important food for thought about issues that we all should be considering in our businesses.
Making Sense of Master Limited Partnership Tax Rules – From the AAII Journal, this article discusses the tax treatment of Master Limited Partnerships (MLPs), which have been increasingly popular as an investment lately due to their relatively high yields in the current marketplace. Although most investments that generate a yield have tax consequences, MLPs are complicated by the fact that they are in fact partnerships (albeit publicly traded), which means at the end of the year the owner does not receive a Form 1099-B, but instead receives a partnership Form K-1 for the pass-through share of the partnership’s income and expenses. In addition, it’s important to note that distributions (which come from distributable cash flow) are not the same as taxable income when a partnership is involved; as a result, there’s not necessarily any relationship between distributions that are received from an MLP, and the owner’s share of MLP taxable income on the K-1. In addition, losses from publicly traded partnerships receive special treatment, and can only be used against gains from the same partnership (otherwise the losses are carried forward); as a result, the partnership K-1 income itself must be reported separately from other partnerships the client may own, and similarly it’s necessary to keep track of the partnership’s adjusted basis. It’s also important to note that MLPs trigger not only state taxation in the state where the client resides, but also the states where the MLP does business; the good news is that in most cases that income will be below the filing thresholds for the states, but it’s notable that some states require a return to be filed even if there will be no liability (fortunately the MLP typically provides information about the relevant states). And be cautious about MLPs in IRAs, as they can trigger UBIT.
A Critique Of Grantham And Gordon: The Prospects For Long-Term Growth – This article by Laurence Siegel, director of research at the Research Foundation of CFA Institute, is a rebuttal to recent articles by GMO’s Jeremy Grantham (covered in last week’s Weekend Reading) and Northwestern University’s Robert Gordon regarding dramatically slower US growth in the coming decades. Siegel notes that while much of historical US growth has come from three distinct Industrial Revolutions (as defined by Gordon), the growth of productivity does not always coincide with the revolutions, as sometimes the technology is not adopted until much, much later (as Siegel notes, the telephone has been around for 136 years, but it’s still estimated that half the world’s population has never used one!); accordingly, ample growth could still be on the table in the coming decades simply as we continue to implement the productivity benefits of the infotech revolution of the past few decades. Siegel goes on to dispute points made by Gordon and Grantham – some more convincingly than others – and wraps up with a bullish case for growth based upon innovation and the ability for us to find substitutes, alternatives, and ways around the challenges that we face, just as we have for hundreds (and thousands) of years.
Stay Alive: Imagine Yourself Decades From Now – This interview with behavioral finance researcher Cass Sunstein discusses some recent research that found one of the common reasons we fail to prepare for long-run issues (like retirement) is because our brains literally think of our future selves as someone else – like a stranger – and therefore are even less inclined to plan for that "other person" down the road. So what’s the solution? When researchers showed people a digital picture of themselves aged to look how they would a few decades in the future, they connected more directly with their future selves – and dramatically increase retirement savings. Unfortunately, most financial planners will not likely have digital aging software in their offices, but the research nonetheless makes an important fundamental point – helping clients to a better job of envisioning their future selves may help them to relate to future-oriented behaviors like retirement savings.
Persuade Vs Convince – This brief article from marketing guru Seth Godin makes an interesting point about the subtle difference between the words "persuade" and "convince" in marketing. As Godin explains it, engineers convince – using facts, a spreadsheet, or some other rational device – while marketing persuade, appealing to emotions and fear and the imagination. The distinction: one is emotional, and the other is rational. And why does it matter? Because Godin notes that while it’s easier to persuade someone to action if they’re already convinced, no one is going to change their mind just because you convinced them of your point – you must also persuade them to action. Although some might argue against Godin’s use of the terms this way, it nonetheless has an interesting parallel in financial planning: do you try to convince your clients to action, or persuade them?
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!