Enjoy the current installment of “Weekend Reading For Financial Planners” – this week’s edition kicks off with the industry news that NASAA has approved a new Model Rule that would, for the first time, impose an annual Continuing Education requirement for advisors at RIAs (regardless of whether they have a professional designation)… or at least, at the state-based RIAs that are subject to the individual states that may adopt the NASAA Model Rule in the coming years?
Also in the news this week is the news that the CFP Board has hired a 20-year veteran of the SEC’s Enforcement leadership to become its new Managing Director of Enforcement as the organization signals a growing focus on actually enforcing its new fiduciary standards of conduct, and a new consumer research study finding that investors are more comfortable with human advisors over robo-advisors and are (slightly) more likely to follow their advice… but were also more likely to be dissatisfied in the recent pandemic market volatility earlier this year (in particular, for all those advisors who advised their clients to “do nothing” and simply stay the course!).
From there, we have several articles on practice management and growth, including tips on the next positions to hire for as an advisory firm grows (from Client Service to Operations, Investments to Compliance), the importance of visioning exercises as an advisory firm leader to truly envision the future growth of the firm (and the organizational chart it would take to get there), and a look at how advisory firms are increasingly rethinking their approach to compensation and benefits (in particular, the ongoing shift from revenue-based compensation to salary-plus-incentives instead).
We’ve also included some articles on employee performance reviews (as that time of year queues up!), including one strategic approach on how to run the annual employee review process, another highlighting the importance of benchmarking employees not against one another but their own past selves (to measure personal improvement over time, not competitiveness against others in the workplace), and a look at how the ’emotional culture’ of an organization can help drive employee success and retention.
We wrap up with three interesting articles, all around the theme of how financial advisors manage their own money: the first is a recap of the recent new book by Josh Brown and Brian Portnoy aptly titled “How I Invest My Money: Financial Experts Reveal How They Save, Spend, and Invest“; the second is the personal story of the Chief Investment Officer of a multi-billion-dollar RIA about how he invests his own money; and the last is an interesting look at how there’s often a gap between what financial advisors say their clients should do, and what they do themselves… and the debate about whether that is a sign of advisor hypocrisy, a recognition of how hard it is to follow advice (even our own, as we’re human beings too), or simply an acknowledgment of how varied our goals are and the paths that we take (which is why financial planning is so important in the first place)?
Enjoy the ‘light’ reading!
NASAA Proposes Model Rule To Require CE For RIAs… With A Number Of Shortcomings (Max Schatzow, Adviser Counsel) – This week, the North American Securities Administrators Association (NASAA) proposed a new Model Rule for states that wish to adopt a mandatory continuing education (CE) program for the Investment Adviser Representatives (IARs) in their state. At its core, the new CE rule would implement a new 12 hours/year CE requirement for advisors that work under an RIA, half of which would need to pertain to “Products and Practices”, with the other half covering Ethics and standards of professional responsibility for RIAs (e.g., education on the IAR’s fiduciary obligations). Notably, the requirement would only apply to advisors at RIAs (i.e., those registered as an IAR), not ‘all’ employees. And advisors who already have a designation that qualifies for a waiver from the Series 65 – e.g., those with the CFP marks, or their CFA, ChFC, or CPA/PFS – would be permitted to cross-apply their professional designation CE credits to qualify towards their new IAR CE obligation. In turn, education providers themselves will be able to become “Authorized Providers” and offer IAR CE courses (on top of the plethora of CE that has already become available in the pandemic). However, because a NASAA Model Rule is only that – a model rule, that states themselves still must adopt and implement – it’s not entirely clear whether or how quickly states will take up the new IAR CE requirement, in what is anticipated to likely be a ‘patchwork’ of IAR CE requirements in the coming years (as some states inevitably adopt before others, and because the Model Rule is only a model, states could adapt differently and have their own CE requirements with different hours or a different split between Ethics and Product/Practice). More significantly, though, Schatzow notes that it’s not clear whether the states that implement the NASAA Model Rule can even require CE credits from IARs that work from SEC-registered investment advisers, or only from state-registered investment advisers. As technically, Section 203A(b) of the Investment Advisers Act stipulates that states only have the power to “license, register, or otherwise qualify” an IAR doing business in their state… and it’s not clear if a CE requirement is technically a form of “qualification” as defined in the Act, or if states will be limited to only those advisors that state RIAs. Of course, the SEC might ultimately adopt its own CE rule as well… but in the meantime, it remains to be seen just how far the new NASAA Model Rule for CE for RIAs will really go.
Former SEC Investigator Tapped To Head CFP Board Enforcement (Raymond Fazzi, Financial Advisor) – Following on its issuance of new Standards of Conduct earlier this year, and recent scrutiny about whether the CFP Board is really ready to effectively enforce its new rules and weed out its own bad apples, the CFP Board announced the hire of a newly created position of “Managing Director of Enforcement”, and has hired Thomas Sporkin to fill the role. Notably, before his new role with the CFP Board (and a stint at a private law firm focused on investment-securities-related issues), Sporkin was in the SEC’s own Enforcement Division for 20 years, where he supervised a wide range of SEC enforcement programs, including the design and management of the SEC’s Office of Market Surveillance and its Whistleblower program (which focused on collecting reports of wrongdoing and data mining all of the data intelligence received by the SEC to spot potential enforcement issues). Sporkin is expected to lead a team of attorneys and legal staff to “modernize the detection, investigation, and prosecution activities” of the CFP Board, and will report directly to CEO Kevin Keller… a signal that the CFP Board (still) intends to be more proactive in the actual enforcement of its new fiduciary standards.
Study Finds Investors More Comfortable With Humans Over Robos, But Dissatisfied With Advisors Who Just Stay The Course? (Lee Barney, Plan Adviser) – A new report from Dalbar entitled “COVID-19 and Robo Advice” recently surveyed nearly 1,000 investors – half of whom worked with a human advisor, while the other half worked with a robo-advisor – and finds that investors are generally more likely to follow the recommendations of their human advisor than a robo-advisor, and were more likely to be contacted more than once by their adviser during the COVID-19 crisis. However, the study also found that, in general, robo-advisors were more likely to communicate than human advisors on a monthly basis, robo-using investors were slightly more likely to invest more during the pandemic crisis, and robo-investors were on average more satisfied with their robo-advisor than traditional investors were with their human advisor. The split appears to be driven in part by the fact that robo-using investors were more likely to report their account balance is now higher than it was before the pandemic (at 90%, versus ‘just’ 75% for traditional advisors), which admittedly may simply be because robo-advisors are more likely to work with younger clients who continued to save and invest and add to their accounts throughout the year (driving their account balances higher), as in general those aged 31 to 45 were more likely to be satisfied than those who were aged 46 to 75. Either way, both types of investors responded positively to proactive communication as a key driver of satisfaction, with traditional (human-using) investors most swayed overall by great customer service, while robo-using investors were more focused on doing good for the community, transparency around performance, and outperforming benchmarks. Overall, though, the biggest tension point was around recommendations in the midst of the crisis itself, with 2/3rds of robo-using investors wishing their robo-advisor had suggested better ways to protect their investments (far more than human-using investors), but traditional human advisors who recommended to “do nothing” and stay the course during the pandemic also receiving significantly lower satisfaction ratings than investors who were given any other recommendation… implying that, whatever the outcome, investors do appear to have a strong “do something” bias in expecting to see action from their (human or robo-)advisors in the midst of volatile markets.
3 Hires That Help RIA Firms Enter The Elite (Devin McGinley, Investment News) – As advisory firms hit and decide to grow past the capacity crossroads – when the advisory firm morphs from a single advisor/owner into hiring a growing team with increasingly specialized roles – one of the key questions becomes “who should I hire first/next”? In InvestmentNews’ recent industry benchmarking study, McGinley notes that amongst the largest and most successful “elite” advisory firms, the hiring of Operations Specialists (e.g., operations managers, who take on day-to-day tasks of managing the firm itself, to free up the advisors to focus on high-value clients) was the biggest distinguishing factor, with 69% of elite firms holding such roles as compared to only 41% of the rest. The second biggest gap was the hiring of investment specialists, with elite RIAs significantly more likely than other advisory firms to employ someone in a dedicated investment role (65% versus only 47%) to research and trade client portfolios. And the third biggest gap was the hiring of dedicated compliance, as the burdens of compliance do take up a non-trivial amount of time – even for relatively small advisory firms – but compliance is also a highly delegable task of an RIA founder to a dedicated compliance professional, with 44% of elite RIAs having dedicated compliance staff (compared to just 29% of other firms). Though notably, the most common role hired across all advisory firm types were Client Service Administrators to handle the client-level paperwork, scheduling, and other tasks that advisors can delegate.
Hiring To Achieve Strategic Growth (Scott Hanson, Investment News) – Advisory firms face what is arguably a never-ending series of walls to break through as they continue to grow, with each stage of growth clearing some hurdles only to find the next new challenge to overcome. And it’s a challenge to which, eventually, many advisors succumb and stop growing. Yet Hanson suggests that in the end, the real problem is not the inability of certain advisors to solve for the challenges of growth, but a failure to envision what it would look like to be much larger than they are today, in order to map the pathway from here to there. In the context of their own firm, Hanson notes how at the start of every year, the leadership team would ask “What people do we need in place to double the size of the firm in the next three years?” And then each year would then repeat the exercise on an ever-growing base of employees. Though ideally, charting the path to success is not just about visioning what the firm would look like at 2X the size… but to envision what it would look like at 10X(!) the size. For instance, even when Hanson started with his business partner – and there were just two of them – they envisioned after the first two years what the firm would look like at 10X its then-current size… which would require growing from 2 to 13 employees. Accordingly, they actually drafted an org chart for that future firm – replete with four departments and 13 job titles – and then listed their own names in all the boxes. But as the firm then grew, the process of hiring for growth became simpler – an exercise of deciding what was the next box on the chart to relinquish to a new dedicated hire. Today, the firm has grown to more than 200 employees, but the strategic approach remains the same – the starting point to the next stage of growth is to envision what it’s like after the growth has been achieved, the team that would be required to sustain an organization of that size, and then chart the path from here to there.
RIAs Rethink Compensation And Benefits Amid Pandemic (Kenneth Corbin, Financial Planning) – As the pandemic has forced advisory firms to work virtually and provide more support to work-from-home and remote employees, it is leading to a broader industry discussion about appropriate compensation and benefits in advisory firms… a trend that is only accelerating as advisory firms also increasingly hire employee advisors and adopt team-based approaches, for which the “traditional” approach of revenue-based compensation isn’t necessarily as good of a fit. Instead, advisory firms are increasingly adopting salary-based compensation for advisor roles (which Fidelity’s most recent compensation benchmarking study found was an average of 75% of advisor compensation), on top of which they may apply bonuses or incentives that are focused on firm- or team-specific goals and initiatives (not just the amount of revenue that the advisor is responsible for managing). Of course, that doesn’t mean that advisory firms are entirely eschewing incentive compensation for business development and bringing in new clients, but growing firms that have an established marketing system often simply need advisors to service and retain those clients (not necessarily to attract them), which changes the focus of the compensation incentives. On top of which includes not only ‘typical’ employee benefits like health insurance (offered by 77% of $100M+ advisory firms and 99% of $1B+ firms), but a widening range of other employee benefits and ‘perks’ (which Fidelity suggests summarizing with a “Compensation Statement” for employees that lists not only their base and bonus compensation, but the value of their benefits alongside it to understand the full package of compensation they’re receiving).
Developing An Annual Employee Review Process For Your Firm (Ashley Hunter, XY Planning Network) – As the end of the year approaches, it’s not only the season of winter holidays… it’s also the season of annual employee reviews. Notably, employee reviews themselves are a stressful function for many firms, full of awkward conversations in the process of dredging up the past 12 months’ worth of work history while trying to make compensation decisions. While for others, it’s a time to celebrate the successes of the year, positively reward the team, and re-orient them to the upcoming year’s objectives and opportunities. Hunter notes that in the context of her own firm, there is a two-pronged approach to employee reviews. The first is a “Snapshot”, which is meant to recap the year in review, where the team member can reflect on their personal and professional achievements and the challenges they overcame – in essence, a “brag sheet” – and is crafted by the team member so they can highlight and claim success for their own victories (and then meet with their manager to celebrate those victories). The second component is the “Career Action Plan”, which is more future-focused, and invites team members to share where they want to be and what they’d like to be doing in 5 years, so they can determine (with their manager) the right steps to take in the coming year to move in that direction (and consider both the natural strengths they already have and where they may still need to develop in order to get there) and set a milestone of where they should be in 2-3 years to be on track. Notably, the Snapshot (year in review) and Career Action Plan (years to come) aren’t meant to be the only feedback a team member gets all year and isn’t meant to be a substitute for real-time feedback throughout the year. Instead, it’s simply meant to be both a positive culmination of what’s been achieved for the year and an opportunity to re-set the goalposts for what to shoot for next (in order to determine the steps to take and goals to set to move in that direction in the year to come).
How Performance Reviews Can Kill Your Culture (Shane Parrish, Farnam Street) – It’s not uncommon in most companies to have a few ‘rising star’ A players, some on-the-verge-of-being-fired C players, and a bunch of B players (neither on the verge of promotion nor expulsion) in the middle. The problem, though, is that firms that conduct performance reviews on this basis can simply accentuate these differences, effectively putting team members in competition with one another for those select few “A” slots… or worse, convincing B players who fear others will out-compete them anyway to just sit back and resign themselves to mediocrity. The key distinction is that employee performance reviews should be a time to reflect on growth opportunities – and what it takes for anyone in the organization to grow – not a ‘forced ranking’ system that concentrates resources for growth in the hands of the few and starves the rest in the process (not to mention failing to consider how different people may simply develop and improve at different rates, even if they can all get there in the end by varying paths), and implies that the best way to get ahead isn’t actually to grow at all but simply to outshine others (and make them look bad) instead. So what’s the alternative? Simply put, instead of comparing employees to each other, compare them to where they were in the past, and whether they are on a path of learning and improvement (and if so, what can be done to increase that rate of progress)? In other words, employee reviews shouldn’t be about competing with and trying to better our co-workers, but simply our past selves that we want to improve upon… which is a game that every team member can win at the same time (to the betterment of the organization as a whole!).
Employee Emotions Aren’t Noise, They’re Data (Sigal Barsade, MIT Sloan Management Review) – The research on business management has long recognized the significance of corporate culture, but recent studies have found that embedded within corporate culture is an “emotional culture” that also helps to drive its approach to solving problems and achieving business goals. For instance, an otherwise-similar set of business objectives may be pursued very differently within a culture of caring, versus a culture of optimism, or one of anxiety, which in turn can have a significant impact on everything from teamwork to absenteeism to success in achieving those goals and objectives. In other words, rather than trying to push down or avoid the emotions of a business, instead, emotions should be viewed as “data” that provide important indications of how the team feels, is thinking, and will behave. And notably, just like most cultures, emotional culture is driven from the top, as emotions can be “contagious” and spread from one person to the next, which means whatever emotions the leadership conveys (i.e., “Are things going well? How is the organization doing?”) can easily propagate (favorably or not) to the rest of the team. Though this doesn’t necessarily mean it’s just about being “positive”, either; for instance, one study found that an emotional culture of optimism and pride was more effective than joy and love when it came to helping team members bounce back from poor performance, while another study found that in the long-term care industry, there was a positive association between stronger emotional cultures of companionate love and patients’ outcomes. The key point, though, is simply to recognize that emotions are human, and emotions are there… so rather than trying to ignore and suppress emotions in the workplace, consider the emotions being manifested, and the culture they embody… and whether that’s the culture the firm wants to have as it pursues its own efforts to help clients?
Josh Brown And Friends Tell You What They Own In New Investing Book (Bob Pisani, CNBC) – While financial advisors are often asked how they would advise clients to invest their money, remarkably few ever ask how financial advisors themselves manage their own money… leading advisor Josh Brown (and co-author Brian Portnoy of financial wellness platform Shaping Wealth) to publish a book “How I Invest My Money: Financial Experts Reveal How They Save, Spend, and Invest” to highlight how real financial advisors are actually investing for themselves. And while some themes were unsurprisingly consistent – keep debt low, spend frugally by avoiding expensive luxury goods, use tax-favored accounts like 529 plans and Roth IRAs, and start saving early – others were ‘surprising’ at least relative to what some might expect. For instance, busy advisors – even and including those who actively manage their clients’ portfolios – often don’t have the time or inclination to manage their own portfolios as well, and end out owning a lot of ETFs and index mutual funds (albeit with perhaps some ETF ’tilts’ towards certain market factors, sectors, or areas like emerging markets). Other notable themes that arose: advisors are generally quite proactive in tracking what they spend; there’s often more of a focus on the behavior of saving than what’s invested in when they save; they nearly all own their own home (and often with little or no mortgage); there’s often more of a focus on taxes than fees; and there’s a big emphasis on balancing having some fun now while also saving for the future, and investing in oneself as their first/biggest investment of all.
How I Invest My Money (Peter Lazaroff) – As the Chief Investment Officer for a multi-billion-dollar RIA, Lazaroff celebrates the recent release of the “How I Invest My Money” book about advisors to share how he manages his own household finances. As a starting point, Lazaroff uses his own spreadsheet to track his net worth, updated every six months to stay aware of his progress over time. The largest asset on Lazaroff’s spreadsheet, like many advisory firm partners/founders, are his shares of the advisory firm itself, which is both a sizable (and very illiquid) asset, and also has a debt associated with it (the business loan he took to purchase his shares for the partner buy-in); next is his home (which he views as a form of consumption and not an investment, but it is an asset and sits on his balance sheet). When it comes to his investment assets, Lazaroff has no investments in taxable accounts (he used all the available dollars to buy shares of his advisory firm as a new partner), and owns a single mutual fund (the DFA Global Equity Portfolio) in his Roth and traditional IRAs (similar to the systematic factor investing approach the firm uses for its clients), while holding the most aggressive model portfolio available in his 401(k), opting for simplicity and letting the markets work for him (after acknowledging that he “learned the hard way” how leveraged ETFs work by trying to outperform with market timing earlier in his life/career, but also noting that he has enough comfort with markets to hold 100% equity portfolios). Other notable elements include: Lazaroff keeps not just 3-6 months’ worth of expenses for emergencies but a 12-month cash reserve (which he’s used three times in his life, twice to invest into his business, and the third to buy more equities during the pandemic sell-off earlier this year); beyond maxing out retirement accounts and contributing to 529 plans for his kids, all excess cash flow goes to paying down his business loan (though he doesn’t plan to pay down his mortgage); and Lazaroff uses a “reverse budget” approach to managing household cash flow, that starts with how much he needs to save to meet his goals (which is automated), and then sleeps well knowing he can spend whatever remains (including the occasional lavish experience, per the research that we derive more happiness from spending on experiences than ‘stuff’!).
Rich As I Say, Not As I Do (Nick Maggiulli, Of Dollars And Data) – In many professions, the most successful people are those who first and foremost have exemplified what they preach, from the competitive bodybuilder who always works out to the world-class musician who always practices… but when it comes to financial advisors, the awkward reality is that what many financial advisors preach to clients is not necessarily what they have done to achieve their own wealth and financial success. In some cases, this is simply because they had their own unique path, from inheriting or family money, to having a uniquely successful business, or simply being lucky; in other cases, the reality is that the financial advisor themselves isn’t actually very financially successful, even as they try to advise their own clients to a (hopefully!) better path. More generally, the challenge is simply that a lot of financial advice has remarkably little evidence to support it; not that the advice is necessarily “bad”, but rarely is there a bona fide experiment of a group of people who receive the advice, and a second control group that doesn’t, to actually measure which recommendation was ‘best’. Not to mention that some financial experts simply take their own paths, from Harry Markowitz, who founded Modern Portfolio Theory but famously acknowledged he doesn’t really use it himself (and instead opts for a simpler portfolio of just splitting 50/50 between stocks and bonds), to yours-truly who has publicly acknowledged investing most of my money into my businesses (not my 401(k) plan). Of course, the reality, to some extent, is simply that we are each our own individual on our own path, and the whole point of financial planning is advice customized to the needs and goals of the individual which means one size doesn’t fit all, and what works for one person may not work for the other (even and especially if the one is the advisor and the other is the client). Still, though, Magguilli raises the good question of whether in the end, “rich as I say, not as I do” is a sign of advisor hypocrisy, a recognition of how hard it is to follow advice (even our own, as we’re human beings too), or simply an acknowledgment of how varied our goals are and the paths that we take (which is why financial planning is so important 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, and Craig Iskowitz’s “Wealth Management Today” blog as well.