Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with a scathing letter submitted by Senator Warren to the Department of Labor, pointing out that while insurance and annuity companies have insisted that a DoL fiduciary rule would be disastrous, when legally obligated to disclose the rule’s true impact to shareholders on earnings calls the major insurance companies have confessed that the rule will have “no significant impact” on their companies and that they’re ready to adapt as necessary (which Warren uses as leverage to encourage OMB to quickly approve the DoL rule).
From there, we have a number of practice management articles this week, including: a consumer study finding that consumers might not actually be as resistant to higher advisor fees as most advisors fear (at least, for those providing real value as advisors!); best practices tips for retaining new associate advisors in a growing firm; more best practices advice about setting compensation for advisory firm employees (and dispelling some compensation myths, such as why it’s not necessary to automatically give an annual cost-of-living adjustment); how advisory firm owners may be too quick to “embrace failure” rather than taking the time to make prudent business decisions; and how elite advisory firms are echewing traditional wholesaler arrangements with asset managers and instead are looking for more sophisticated support for their businesses and clients.
We also have a couple of technical articles this week, from a look at the recent Bipartisan Policy Center proposal to “fix” the country’s long-term care issues with a combination of shorter-term LTC insurance plus a Federal backstop program for large claims, the reasons why clients should consider a revocable living trust besides just probate avoidance, and how Socially Responsible Investing (SRI) actually does appear to provide long-term outperformance (though it may just be because such funds tend to overweight the “quality” factor).
We wrap up with three interesting articles: the first is a discussion of how a subset of robo-advisor investors are actually high net worth individuals (and not Millennials), raising the concern for traditional brokerage firms that they must soon launch competing robo-advisor solutions or risk a rising tide of client outflows; the second is a dive into the research on not just the behavioral finance biases that cause clients to make poor decisions, but also some tips on what to do about it; and the last is some guidance about how advisors who feel “out of control” in their lives and businesses may need to take a hard look at their client capacity and whether they are simply trying to service more clients than they possibly can.
And be certain to check out Bill Winterberg’s “Bits & Bytes” video on the latest in advisor tech news at the end, which this week includes a playlist of all the video highlights from his live coverage of the Technology Tools For Today (T3) Advisor FinTech conference!
Enjoy the “light” reading!
Weekend reading for February 13th/14th:
Sen. Warren Accuses Annuity Providers of Double Talk on DOL Fiduciary Rule (Melanie Waddell, ThinkAdvisor) – This week, Senator Elizabeth Warren (D-Mass.) and Representative Elijah Cummings (D-Md.) issued a joint letter to OMB Director Shaun Donovan and Labor Secretary Thomas Perez about the Department of Labor fiduciary proposal, highlights that while major annuity carriers like Prudential, Lincoln National, Jackson National, and Transamerica have been highly critical of the DoL’s proposed rule, they are telling investors the rule “will have no significant impact on their companies.” For instance, Jackson National CEO James Sopha has publicly called the proposal “bad for investors and for America” but in a shareholder call said “the company would build whatever product is appropriate… and adapt faster and more effectively than competitors.” Warren suggests that the stark difference between the statements is that these publicly traded companies are rarely held accountable for their lobbying assertions in Washington, while SEC rules require them by law to communicate full and accurate information about anything that could materially impact their business model and valuations. In other words, when the lobbying predictions are dire and bad, but the statement on earnings calls says it’s not actually a big deal, the latter characterization that is required by law to be accurate is likely the more truthful statement. Accordingly, Warren and Cummings suggest that OMB should promptly approve the DoL fiduciary rule, given that insurance and annuity carriers are acknowledging to shareholders the rule is not actually as problematic as their anti-fiduciary lobbying has claimed, and that the industry should in fact be able to reasonably adapt to the new rules.
Higher Fees Won’t Spook Most Advisory Clients (Emily Zulz, ThinkAdvisor) – While the industry buzz is that the rise of the robo-advisor may cause fee compression, a new study on advisor fees from the SEI Advisor Network finds that affluent and high net worth clients may still be quite tolerant of a fee increase, given the value that their advisors are providing, and that relatively few would actually leave. Similarly, SEI also notes that historically, advisors were also highly fearful of making a change to the AUM model in the past, yet in practice the typical advisor ends out retaining 90% of clients during the transition. In other words, the fear of whether advisors are really threatened by robo-advisors and the risk of fee compression may be more an issue in the advisor’s mind than the client’s. Notwithstanding this, SEI does find that a significant minority of consumers (38%) still don’t fully understand how their advisors are compensated, and that the adoption of online technology tools to manage finances is on the rise (particularly amongst younger consumers), suggesting at a minimum that advisors will have to continue to add more value to maintain and validate their fee structure.
Talent Wars: Lessons From Leading Firms (Caleb Brown, Investment Advisor) – In conducting post-hire interviews with associate advisors his company recruited into financial advisory firms, Brown notes the commonalities that make new advisors happy (and more likely to retain) in their new jobs. The biggest factor cited in a “great” position is an opportunity to have interaction with clients early on in the role – not necessarily to lead client meetings, but at least to sit in on them. Other positive factors that support job retention include: allowing new hires to assist in annual client events; providing flexibility to new hires to pursue whatever advanced financial planning subject matter expertise is of interest to them; and recognizing and rewarding good deeds of new employees early on (even if it’s with something as simple as a thank-you note). Supporting employee well-being also helps, and leading firms often provide reimbursement to employees for gym memberships, offer employees the opportunity to get a standing desk, and even provide meetings with a psychologist to ensure ongoing well-being (and job focus!). Pairing new employees with a mentor can also help improve retention. Of course, compensation matters too, though Brown notes that the best candidates will still turn down the top dollar offer for a position with better training and simple perks, such as regular catered lunches, a charitable giving matching program, a fully stocked kitchen, and movie and sporting event tickets.
6 Advisory Firm Compensation Myths (Kelli Cruz, Financial Planning) – For most advisory firms, the single biggest expense line item is compensation to staff, so getting it right is very important. Accordingly, Cruz highlights a number of common compensation concerns and issues in advisory firms, including: many firms fear they’re underpaying key employees, but in reality those advisory firms are often overpaying for key talent (use industry benchmarking data to determine if your compensation levels are really appropriate); variable compensation and bonuses can be an incentive for all employees, not just salespeople (so your compensation should include some combination of salary plus bonus for any/every employee); you really don’t need to pay a cost-of-living adjustment to employee salaries every year, and instead should adjust compensation based on market prices (again from benchmarking studies) or actual employee advancement); it may feel “easier” to just make administrative and support staff bonuses discretionary, but avoid the temptation and tie them to real incentive metrics (which could be team-based or individual-based); recognize that how incentive compensation should be structured to incentivize may vary depending on the employee; and remember that even a “good” compensation is bad if it fails to align to your firm’s culture as well (e.g., if your firm is team-oriented, be certain to tie bonuses to team success and failure!).
Failure Sucks: To Succeed, Embrace Success (Angie Herbers, Investment Advisor) – In his 2007 book “Failing Forward: Turning Mistakes Into Stepping Stones For Success“, John Maxwell made the case for what is now a widespread business strategy of embracing failure (because if you’re not creating opportunities for failure, you’ve probably stopped trying to move forward). However, Herbers suggests that being too encouraging of failure is still a poor approach, given that it can have both a hard dollar cost, a time cost, and an opportunity cost (not to mention potentially demotivating for the owner who can lose both confidence in themselves and credibility in the eyes of staff and partners after a few failures). Of course, this doesn’t mean that advisory firms should therefore stop launching new initiatives that might fail. Instead, the point is that the “embrace failure” philosophy may be encouraging failure by acting as an excuse for not doing due diligence on a business idea in the first place. Accordingly, Herbers suggests instead that most firms need to slow down and take a deeper look at their new initiatives (before just charging forward and “embracing failure”), and instead just use a notebook to write down new ideas, have regular management meetings to discuss them, do further vetting of the now-clearly-articulated idea with employees, and formulate a detailed plan of how it will be executed. At this point, there’s still a risk of failure, but the risk is reduced by the thoroughness of the process (and provides a better opportunity to evaluate if the risk is really worth the potential payoff). The bottom line: it’s OK to fail, but don’t be so cavalier about it that you’re actually causing the failures to happen by charging in too quickly!
Why Only 10% Of Elite RIAs Are Receptive To Fund Wholesalers Yet Depend On A Handful Of Good Ones (Brooke Southall, RIABiz) – According to a recent Ignites research study, only 10% of elite RIAs (and 20% of mid-sized RIAs) consider themselves to be receptive to mutual fund and ETF wholesalers, which is not surprising as large RIAs can get hundreds of inbound wholesaler inquiries. However, Southall notes that in practice, RIAs do appear to interact more with asset management firms that this study implies; the difference is that as roles become increasingly segregated within advisory firms, wholesaler inquiries may be fielded by an investment team (not the financial advisors), and the interaction may not be with a “wholesaler” per se but a consultant or analyst with more advanced knowledge. In fact, arguably advisory firms may be violating their fiduciary duties by not having some line of communication to the asset managers they’re using, to ensure they are getting detailed updates about the funds they’re using, and accordingly the biggest firms actually tend to meet more often with a small “inner circle” of wholesalers from asset managers that actually provide them value. The companies that are viewed as being most understanding of the needs of advisors include DFA, Blackrock, Vanguard, Fidelity, JPMorgan, PIMCO, American Funds, Goldman Sachs, Deutsche Bank, and Putnam.
How To Fix U.S. Long-Term Care Over The Long Haul (Mark Miller, Reuters) – Despite the looming risk of expensive long-term care (with 27% of 65-year-olds expected to spend at least $100,000 in their lifetime, and 15% facing costs of more than $250,000), the U.S. in the aggregate still struggles with the lack of a comprehensive national policy to the issue. Very affluent households can pay out of pocket, and the poorest may rely on Medicaid, but for the large middle group long-term care insurance was supposed to fill the void and has largely failed to do so (with “just” 7.4 million people covered by LTC insurance). Democrats suggest this is because the government should be more involved (and advocate expanding Medicare), while Republicans suggest the need for more private-market solutions. Miller notes that despite the partisan divide, a hybrid solution is beginning to emerge, embodied in a recent release by the nonprofit Bipartisan Policy Center. The first change would be the creation of a new class of “retirement LTC” coverage, offering 2-4 years of limited benefits after a cash deductible is met, and purchased using dollars from 401(k) plans through Federal or state health insurance changes. Notably, the new retirement LTC would have only 3 standardized options, as the research finds that the sheer number of choices in LTC coverage has become a significant barrier to purchase. Backstopping this new limited LTC coverage would be a form of “catastrophic” or ultra-high-deductible LTC plan, run by the Federal government; the plan could potentially be an extension of Medicare (and potentially a partial replacement for Medicaid spenddown scenarios), though it would likely still need an additional revenue source (e.g., an increase in payroll taxes, or a new “general funding” source through income or even consumption taxes).
How To Avoid Complicated Trust Issues (Martin Shenkman, Financial Planning) – Historically, the most popular reason to use a revocable living trust was to minimize probate (or avoid it altogether), but Shenkman notes that probate avoidance is not the only reason for a revocable trust. Other scenarios, which may be more complicated but may still be appropriate, include: gift (or bequeath) assets to a child in a revocable living trust in their name, to help clarify the separation of assets in the event of a future divorce; bequeath assets to a revocable trust instead of a testamentary trust (if it’s not a problem for the beneficiaries to have access to trust assets), so it’s easier to change the situs of the trust if the beneficiaries move in the future; use a revocable living trust with its own tax ID number to reduce exposure to identity theft (as it’s harder for trust assets to be stolen with the owner’s Social Security number if the trust isn’t using that number!); have parents of a special-needs child set up a revocable living trust for themselves to make it easier for a successor trustee to step in to use funds for both the parent and the disabled child; and use a revocable living trust for aging clients simply to ensure the continuity of management and oversight of their own assets in their later years (as successor trustees can often handle the assets of a trust more easily as a successor trustee than via a durable power of attorney).
Sustainable And Responsible Investing: Is There A Price To Pay? (Larry Swedroe, Advisor Perspectives) – While there has been an increasing interest in various forms of “socially responsible investing” (where investors deliberately do not allocate funds to companies that engage in undesirable business practices or markets), there continues to be debate about whether such investors are giving up potential returns by choosing to exclude certain segments of the market. To evaluate this, Swedroe examined all SRI equity funds with at least a 15-year track record and $500M+ of AUM, and compared them to a Vanguard index fund as a benchmark (based on the Vanguard fund that best matched the fund based on its Morningstar-assigned category). Swedroe’s results show that the SRI funds in the U.S. large-cap blend category are slightly beating their benchmark, but due to higher expenses are nearly tied (a mere 0.06% outperformance) with their comparable Vanguard index fund after expenses are accounted for; SRI funds in the large-cap growth category fared a bit better, with average outperformance of 1.77%/year for the past 15 years (even after an average expense ratio that was 0.68% higher than the benchmark). When screening the funds based on underlying factors (such as value, small-cap, etc.), the results still show favorable results for the SRI funds, with average annual alpha near 1%, although many of the funds lost their outperformance edge as more factors were considered, and the “quality” factor in particular eliminated the alpha for most SRI funds (as most SRI stocks tend to be “quality” stocks). Ultimately, though, the results do still show that SRI funds are successfully overcoming their higher expense ratios to provide better performance, so investors don’t appear to be “penalized” for their desire to select SRI investments; nonetheless, it remains unclear whether the SRI results are providing any unique value (from an investment perspective) beyond simply having a significant “quality” factor tilt. And of course, it remains to be seen whether SRI funds eventually become so popular that their available alpha actually does shrink away!
The Rich Are Already Using Robo-Advisers, And That Scares Banks (Hugh Son & Margaret Collins, Bloomberg) – While robo-advisors have been framed primarily as a service for young Millennials, about 15% of the investors in Schwab Intelligent Portfolios (which brought in $5.3B in its first 9 months) have at least $1M at the company. In light of this dynamic, an Accenture consultant suggests it’s the recognition that even wealthy clients are beginning to use robo-advisors that is spurring established firms to accelerate the rollout of their own solutions. In other words, the concern is that as more and more affluent clients experiment with robo-advisors, significant dollars could begin to flow into the platforms, so even traditional wirehouse brokerage firms are concerned they may lose assets if they don’t offer their own solution. Notably, though, the firms are finding that consumers don’t just want the technology to the exclusion of human advisors; instead, the major firms are looking at how technology can complement the opportunity to interact with a human advisor as well.
Why Clients Don’t Take Your Advice (Stephen Wendel, Investment Advisor) – In order to convince clients to actually take your advice as a financial advisor, they need to both believe what you’re saying, choose what to do in response, and then actually follow through and do it. In turn, these areas each have barriers that may lead to clients not following advice, which we’re learning more and more about as the research evolves in the field of behavioral finance. For instance, even if what you’re saying is accurate and true advice, clients may not believe it; in some cases, it may simply because the client doesn’t trust the advisor or the data, but the situation may be exacerbated by the client’s own biases (for instance, they may allow themselves to be overly swayed by anecdotal data, or excessively focus only on information that supports their pre-existing beliefs). So how can these biases be overcome? Notably, the solution is not to simply tell clients they’re being irrational; instead, one study found that sharing examples of how other investors can fall prey to these biases is more likely to change client behavior, and another study found that by asking clients to take a moment to imagine and argue the other side of the case they may force themselves to reconsider their own position. Even once convinced, though, it’s not enough to drive action – clients may feel overwhelmed by the decisions before them, so helping them make the information easier to process is important, along with giving them information in stages (e.g., broad overview up front, let them dig into details if they wish) can help follow-through. At that point, though, there’s still a risk of the “intention-action gap”, where clients plan and intend to follow through, but don’t; to minimize this, it’s crucial to make it as easy as possible for clients to follow through, as seemingly trivial tasks can slow their action (for instance, pre-filling forms or even pre-checking boxes with default choices). The bottom line, though, is simply to recognize which “type” of problem the client is having that is limiting them from taking the advice in the first place: is it a problem of belief, decision, or action, as each demands its own approach to solve.
Have You Ever Felt Out Of Control? (Julie Littlechild) – In today’s world, being busy is almost a badge of honor, but many suggest that doing so is not only potentially unhealthy, but is outright unproductive as well. Yet for many advisors, even if they want to dial back, it’s not possible, because they’ve created a “structural busy-ness” that just puts more demands on time than is possible to fulfill, and creates a feeling of being out of control of themselves and their business. Littlechild suggests the fundamental problem is one of capacity – and that many advisors misjudge their capacity, and end out taking on more than they can handle, which they don’t recognize until growth begins to stall (as client work for existing clients eliminates any time to go get new ones). To understand how bad the mismatch may be, Littlechild suggests the starting point is to look at the available 52 weeks in the year, subtract away time for vacation, conferences, and holidays, and then multiple by how many hours a week you work, to understand what your capacity really is. From there, figure out how many hours (per week) it takes to do non-client activities, so you know how much client-facing time you even have. Finally, consider how many hours per year you spend on a top priority client, and divide that into your remaining hours to figure out how many top clinets you can really serve. Thus for instance, if there are 52 weeks in a year but you lose 10 to vacation/travel/conferences/holidays (down to 42 weeks per year), you work 40 horus per week, and you want to invest 40% of your time on growth and business management (non-client time), you only have about 1,000 hours left in the year to serve clients. If it takes you 25 hours of time invested into a top client, you really only have capacity for 40 top clients (and no others)… so if you’re looking at 150 clients, you can now see why you feel so out of control! The bottom line: if you really want to understand your own capacity, do the math yourself, and get real about what it adds up to and what you may need to change to make that work.
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!
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 latest Bits & Bytes weekly video update on the latest tech news and developments, or read “FPPad Bits And Bytes” on his blog!