Enjoy the current installment of “weekend reading for financial planners” – this week’s edition starts off with a few big industry news items, including NAPFA’s decision to restrict membership to only CFP certificants, the CFP Board’s decision to NOT implement the proposed CE changes put forth earlier in the year, and a look at the SEC’s announcements of what it intends to focus on next year – which still includes a uniform fiduciary standard for advisers and brokers. From there, we look at a number of additional articles about industry developments, including a review of the coming financial services reforms in the UK that will take effect in 2013 (and how it may become a template for future reform here in the US), an advisor who was ordered to pay $1.8M and may become barred from the industry BECAUSE he bought and held certain ETFs for his clients, an update from Investment Advisor magazine about whether the CFP Board’s public awareness campaign is having any results, and a continuing discussion from Bob Veres about the industry’s attempts to define who is a “real” financial planner. We wrap up with a few more offbeat articles, including a striking marketing discussion from Stephen Wershing that points out how a good brand should actually repel more prospects than it attracts, a review of election statistics guru Nate Silver’s book and how it may be relevant for advisors, a look at how conflicts of interest are creating problems in dentistry despite the fact they generally are “fee-only” providers of services to their patients, and a discussion from financial planner Carl Richards about why financial planners should themselves be hiring financial planners. Enjoy the reading!
Weekend reading for December 8th/9th:
NAPFA’s CFP-Only Move Puts CFP Board In Hot Seat – The big news of the profession this week was an announcement by NAPFA that going forward, members MUST have the CFP certification to become full members of the organization. The announcement is notable both in NAPFA’s full support of the CFP certification, but also because notwithstanding its new CFP-only focus, NAPFA leaders are still calling on the CFP Board to continue raising its standards, particularly regarding the recent discussions about the scope of its fiduciary obligation – suggesting that NAPFA doesn’t believe CFP is the final or perfect standard, but simply the best available right now. Ultimately, NAPFA suggests – as I have previously written in this blog as well – that having a clear single designation as a minimum standard ultimately improves consumer clarity. Perhaps most notable about the announcement though – although not recognized in the article – is that NAPFA has dropped its support of the AICPA’s PFS designation.
CFP Board’s Board Of Directors Seeks Further Consideration Of Proposed Changes To CE Requirements (Press release no longer available) – This press release announcement from the CFP Board declares that, after having considered a proposal to increase the CFP CE requirement, none of the proposed changes, from an increase in required hours to 40 every two years (from the current 30), to the inclusion of practice management for CE credit, will be implemented. During the public comment period, the CFP Board received a record-breaking 1,100 comments, and more than 85% opposed the increase in hours, for reasons ranging from the time required to the cost of getting CE. Although the proposed changes were not implemented, the Board of Directors did pass a resolution calling on the Council on Education and CFP Board staff to further study the issue… perhaps implying that notwithstanding the overwhelming negative response, the CFP Board isn’t giving up on the possibility of trying again to raise the CE requirements in the coming years.
SEC Will Pursue Fiduciary Rule in 2013 – This article from AdvisorOne recaps some announcements from the SEC about where it will focus efforts next year – including moving forward with a uniform fiduciary standard rule for advisers and brokers when providing personalized investment advice and “continuing to assess” ways to better harmonize adviser and BD rules when they are providing similar services. The exact standard that will ultimately be put forth, however, remains unclear, as incoming SEC Commissioner Elisse Walter has previously advocated for a uniform fiduciary standard, but is a prior executive with FINRA and may not necessarily support a standard that forces brokers to meet the obligations of the Investment Advisers Act. The next step will likely be a request for information from the public, so the SEC can create a detailed cost-benefit analysis on the fiduciary rule. However, it’s not clear whether the SEC will really be able to move forward soon, as it would require a majority vote of SEC Commissioners, are with one current seat empty, the SEC is potentially gridlocked with 2 Democrats (that have supported a uniform fiduciary standard) and 2 Republicans (who have opposed).
Great Expectations? Think British. New Rules to Apply there in 2013 – This article by Deena Katz in Financial Planning magazine discusses the big shakeup coming to the UK in 2013 – under their so-called “Retail Distribution Review” (RDR), advisors in the UK will no longer be allowed to accept any commissions from investment products (although they can still receive insurance commissions), and must disclose compensation and charge clients separately for advice. Advisors must also disclose whether their services are independent, restricted, or simplified, and will be subject to a requirement of 35 hours of CE annually (compared to 30 every two years here in the US!). Notably, Britain’s Financial Services Authority (FSA) has predicted that up to 25% of financial advisors will choose to leave the business, rather than reinvent themselves under the new requirements, but is ultimately pushing forward anyway for the long-term benefit of consumers. Granted, these changes are happening in the UK, and not here in the US, but Katz notes that these kinds of regulatory moves, which are also occurring in Australia and around the world, may become a template for future reform here in the US as well, and in fact suggests that the US is now falling behind from its prior global leadership position for financial planning.
Adviser Must Pay $1.8M For Holding Risky Leveraged And Inverse ETFs For Months – This article from Reuters discusses a recent arbitration settlement where an investment adviser must pay $1.8 million in damages to clients, for the “simple” crime of buying and holding. The adviser, Nicholas Rowe (and his firm Focus Capital Wealth management) were found liable for negligence, civil fraud, and other misdeed, because he purchased a number of leveraged and inverse ETFs and held them for months. The ultimate issue was not merely that the ETFs were viewed as risky – although that seems to have been a factor – but the fact that because of how the returns compound on leveraged ETFs in particular, holding for extended periods of time is virtually guaranteed to generate losses regardless of the market direction. In fact, the director of ETF research at Morningstar suggests that if the funds are being held longer than a single day, they “are not going to do what you think.”
High Ticket Item – Bob Clark of Investment Advisor takes a look at the CFP Board’s $40 million (over several years) public awareness campaign, which was built in part on a whopping 80% increase in CFP certification fees. Clark notes that the CFP Board did build into its process important monitoring steps, including a benchmarking study after one year and a formal review after two. And thus far, the results are actually encouraging, as the percentage of people who think about CFPs first when asked about a designation for financial planning has increased by several points in just the first year. On the other hand, these are research-driven results, and there doesn’t seem to be much evidence yet that CFP certificants are actually seeing an increase in clients as a result of the campaign, and Clark questions whether the kinds of messages the CFP Board is putting forth would be likely to drive an actual engagement process with a planner.
Defining ‘Real’ Planning: Who Are The Real Financial Planners? – This article by Bob Veres looks at how to distinguish between those doing “real” financial planning, versus those who perhaps say they’re planners but aren’t really doing it. Veres suggests that the fundamental benchmark should be that real planners follow a process that evaluates a client’s goals and objectives and create (and oversee implementation of) a plan to get there. The distinction is the client-centricity of the process, as distinguished from a commissioned salesperson who does just enough planning work to justify the sale of a product he/she already intended to recommend anyway, and the comprehensive nature of the process, as distinguished from those who focus solely on the portfolio. Notably, Veres points out that it’s not necessarily about how you’re compensated – he suggests there’s nothing wrong with managing assets and being paid for it, but if you do investments only and step away from the planning, call yourself something besides a planner. Veres has actually put forth this discussion in the past, but this article provides an interesting update to the discussion as Veres has received feedback (and pushback), and has evolved the conversation further.
A Good Brand Will Repel More Than It Attracts – This article by marketing consultant Stephen Wershing makes an interesting point – as the title notes, a good brand (and marketing message) should actually repel more people than it attracts. Why? Because it makes the people who are targeted by the message truly feel that you must be a specialized expert in their needs and their problems. By contrast, most advisors have trouble narrowing their message, and instead try to keep it broad to avoid the risk that they say something that may turn some people away. Yet the fact remains that by being so broad, it takes away any emphasis about what is unique and special about you. As Wershing notes, “branding is not about attracting the most clients, it is about attracting the right clients.” Or as I’ve written in the past, “Doing everything for everyone doesn’t make you interesting [or referrable] to anyone!”
Nate Silver’s Message For Financial Advisors – Nate Silver is the now-famous election analyst who correctly predicted the election results for all 50 states, and all but two Senate races as well, despite the controversy he frequently invoked in the weeks leading up to the election as pundits with their own views disputed his purely-data-driven approach. Now vindicated, the lessons of Silver’s focus on data-over-pundits (and his book “The Signal and the Noise“) is being applied to other industries, and this Advisor Perspectives article discusses some of the key takeaways of the book that may be relevant for advisors. Silver puts forth four key concepts of relevance for advisors: don’t predict based on data that is unsupported by theory or real-world insights; don’t believe predictors who are overconfident; don’t neglect possible scenarios that are out-of-sample or difficult to categorize; and admitting biases and correcting them through observation is better than just a rigid posture of objectivity.
Conflicts Of Interest In Dentistry – This article by behavioral finance professor Dan Ariely notes some recent research that as many as 48% of dentists have seen profits plummet since the recession. Not surprisingly, the dentists have adjusted to this challenge with a number of tactics, from discounted rates to introductory freebies, but others are managing their income a less desirable way: by upselling and overtreating patients. In the context of many of the debates within the financial planning profession, this is notable, as dentists would generally be considered “fee only” professionals, paid directly by their clients for services rendered. Nonetheless, even the dentists are succumbing to the fundamental conflict of interest in any business, regardless of model: to get paid more by trying to sell more of their services, even if the patient might not actually need it. As Ariely notes, conflicts of interest are nothing new, in the context of dentists or others, but it is an important reminder that the most fundamental conflict of interest is simply the desire to keep working with patients/clients and remain in business – and that’s a conflict every professional faces, regardless of profession, method of compensation, or business model.
What Stands Between Me And Stupid – This article by financial planner Carl Richards in Morningstar Advisor makes the fundamental point that because financial planners held stand between people and the sometimes-emotionally-driven “stupid” mistakes they make, that everyone needs a financial planner… including financial planners! Richards puts forth three reasons about why he as a planner has chosen to hire one: 1) help clarifying ongoing goals, where having someone help facilitate the discussion (especially given a spouse involved) can really help; 2) having a third party to provide accountability to the goals that were set; and 3) having someone to help prevent anything stupid from happening, since as Richards points out, “being an advisor with the CFP designation, years of experience, and the biggest calculator in the land, doesn’t make you immune to classic behavioral mistakes with investing.” Even as an advisor that can handle a lot of the other financial stuff, Richards emphasizes that virtually anyone (including planners themselves!) can use some help setting goals, staying accountable to them, and avoiding emotional decisions that lead to doing something stupid.
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!