Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the announcement that both Schwab and Fidelity are further expanding their list of commission-free (i.e., No Transaction Fee or NTF) ETFs, further expanding their offerings from both BlackRock and State Street, along with a number of secondary ETF providers… but still with the notable absence of Vanguard’s ETFs, as the battle of RIA custodians requiring back-end shelf space payments for access to NTF platforms continues to heat up (and raising the question of whether Vanguard may someday launch its own RIA custody platform with open access to all ETFs on a no-transaction-fee basis, to match its recent retail NTF ETF offering). Also in the news this week was the announcement that UBS is looking to launch its own internal independent channel, ostensibly to further stem the tide of brokers still moving independent even after the firm left the Broker Protocol.
From there, we have several articles on practice management, including: how industry benchmarking data shows that advisory fees are not declining (despite robo-advisor competition), but profit margins are beginning to suffer as advisory firms reinvest into providing more value-added services to justify their current fees in the face of competition; why it’s important to focus on service to clients and not pursue industry recognition awards (and more generally, the danger of “vanity metrics” that can distract from an advisory firm’s core focus); and how to think about segmenting services to clients in order to serve smaller clients profitably.
There are also a number of marketing articles this week, from some tips from marketing directors at large RIAs about what smaller RIAs could be implementing as well, to ways to show clients you’re really “worth it” when trying to justify fees, why new clients toss the typical advisor’s Welcome Packet in the trash (and how to make it better), and an interesting tactic of learning more about your ideal clients and what they really care about by simply trying to figure out what their favorite magazine would be (because niche magazines themselves have often already spent extensively on researching what’s most important to their niche clientele).
We wrap up with three interesting articles, all around the theme of industry change and disruption: the first looks at Ken Fisher of Fisher Investments, which recently crossed the stunning threshold of $100B of assets under management, driven heavily by aggressive spending in marketing even as most advisory firms maintain there’s no value to spending on marketing for clients; the second examines the big buzz at the recent Inside ETFs conference, that even as ETFs continue to disrupt the mutual fund industry, the next disruptor – of ETFs themselves – may have already appeared, in the form of technology-driven “Direct Indexing” that replaces the need for funds altogether; and the last similarly looks at how, even as Vanguard grows in its dominance amongst asset managers, changing competitive dynamics raise the question of whether Vanguard itself will have to restructure under new CEO Tim Buckley to stay ahead over the next 10 to 20 years.
And be certain to read to the end, where we include a video from advisor tech guru Bill Winterberg, highlighting some of the notable advisor FinTech trends on display in the VEO Village at the recent TD Ameritrade National LINC conference!
Enjoy the “light” reading!
Schwab & Fidelity Expand Commission-Free ETF Trading (Jeff Benjamin, Investment News) – This week, in the midst of the big annual Inside ETFs conference in Florida, both Schwab and Fidelity announced that they are making significant expansions to their line-up of commission-free ETFs on their platforms (i.e., No-Transaction-Fee ETFs that skip the $4.95/trade fee that would otherwise apply). In total, the changes will expand the platforms’ NTF ETF lineups to 500+ ETFs, primarily by expanding the number of funds available from major companies already on the platform – especially Blackrock’s iShares, but also other major ETF players including State Street, Invesco, and WisdomTree, along with choices from PIMCO, JP Morgan, John Hancock, Direxion, Global X, ALPS Advisors, and Aberdeen. Notably absent for many advisory firms, though, is Vanguard, which controversially has been largely shut out of NTF ETF platforms – and was even removed in late 2017 from TD Ameritrade’s existing NTF ETF platform – because the company is notorious for not being willing to make the shelf-space payments that Blackrock, State Street, and others have ostensibly been more willing to pay the custodial platforms. In fact, last summer Vanguard announced the launch of its own NTF ETF platform, that would allow all major ETF providers (a whopping 1,800+ ETFs) to be traded commission-free – rather than limiting the options to a pay-to-play – in an apparent attempt to undermine the economics of pay-to-play RIA custodian competitors. Yet with Vanguard still shut out of RIA custodians’ NTF ETF platforms – despite clear advisor demand – the question arises: will Vanguard have to launch an entire RIA custody platform offering a full suite of unlimited NTF ETF funds to persuade the remaining RIA custodians to reconfigure their business models and stop limiting advisors’ access to funds based who is (or isn’t) willing to participate in pay-to-play back-end deals?
UBS Forming Business To Service Independent Advisors (Mason Braswell, AdvisorHub) – As the independent advisor channel continues to put more pressure on traditional wirehouses, two of the four major wirehouses – UBS and Morgan Stanley – have withdrawn from the Broker Protocol, and just last month Wells Fargo announced that it was introducing a new “RIA channel” option under the Wells Fargo umbrella to give its brokers a path to the RIA model (but allowing the wirehouse to avoid entirely losing the advisor and assets) to complement its existing FiNet offering. Now the news is out that UBS, too, will be offering a quasi-independent model – ostensibly akin to Wells Fargo’s FiNet – where its brokers can transition from the captive wirehouse model while still remaining with the platform (and ostensibly avoiding the need to fully repaper clients). Notably, UBS has not been losing as many advisors to the independent channel in the first place, ostensibly in part because the company left the Broker Protocol and made it more difficult to break away; nonetheless, the firm did have a net decline of 285 brokers last year (bringing their advisor count down to 6,300), and in theory an on-UBS-platform independent option should help the company to further stem the outflow. More broadly, though, the real question is whether UBS is launching its independent option purely as a way to play defense against breakaway broker outflows that are still occurring… or if a more strategic shift is underway, where the wirehouse sees its future in a more independent fee-based world?
As Advisors Cling To AUM Fees, Their Profits Suffer (Christopher Robbins, Financial Advisor) – Based on the latest study from TD Ameritrade’s FA Insights, the AUM fee has remained remarkably robust and immune to industry competition and pricing pressure, with little evidence of downward movement in AUM fees even after years of the robo-advisor movement, nearly 90% of RIA revenue is still generated by asset-based fees, and that asset-based pricing is actually increasing as a percentage of all fees collected by advisors. The virtue of the AUM fee – from a business model perspective – is that fees naturally rise in rising markets, though environments like late 2018 can, in turn, cause significant harm to RIA revenues when markets pull back. Yet perhaps even more concerning, FA Insight finds that even in 2017 – when the S&P returned upwards of 18%, and RIAs averaged nearly 20% AUM growth and almost 16% revenue growth – the average operating profit margin declined from 24.4% in 2016 to 19.7% in 2017. Because while advisory firms are not cutting their fees to compete on price with robo-advisors and their ilk, advisors do appear to be trying to value-add their way up to justify their fees, bundling together and giving away more services for the same underlying fee, and resulting in downward pressure on profit margins even in the midst of rising markets and revenue. In fact, FA Insight finds that more than 50% of RIAs offer at least 12 different services bundled under a single asset-based fee, and continue to add more… without changing (i.e., increasing) their pricing to adjust for the costs of delivering more services. Or alternatively, advisors may even begin to explore new pricing models altogether, from fee-for-service models that are based on a cost-plus estimate (i.e., estimate the cost to deliver the services, add a targeted profit margin, and price accordingly) or value-based pricing methods that tie more directly to how the clients value the service. And some advisors are even exploring combinations, such as a minimum/flat fee for smaller or younger clients, that morphs into an AUM fee if/when/as the client rises above a certain minimum threshold (but ensuring with the minimum fee that the client remains profitable to service throughout).
Focus On Service, Not Standings (Sandy Schussel, ThinkAdvisor) – One of the important “ancillary” benefits of giving great service to clients is that firms tend to be rewarded with more referrals and greater growth, which in the extreme can even land the advisor on one of the various “Top/Fastest-Growing Advisor” industry lists (either from media companies like Barron’s, or simply under the broker-dealer or platform’s own “Top Advisor” list). Yet as Schussel points out, while it may be nice to get such industry and company recognition… it’s important not to become so focused on the recognition that you lose sight on the original factor that led to success: providing good service to clients and making yourself referral. As Schussel illustrates with one advisor, she was frustrated to make the Top-10 list in her company one year, and then barely make the Top-30 the next, wondering why it was her performance had slipped so dramatically… only to realize that she originally made the list because she was focused on serving her clients, and in the subsequent year was “distracted” by worrying about whether she’d make the list again (instead of staying focused on the clients). The key point: while recognition for success is great, be certain you remain focused on what brought the success in the first place, and not the success itself, or you can lose focus on what really matters. Or more generally, be mindful that you’re really measuring the right things in your business, which should be all about your clients, and not “vanity metrics” like industry recognition, social media followers, etc.
How To Right-Size Service For Small Clients (Angie Herbers, ThinkAdvisor) – Advisory firms have long struggled with what to do with “smaller” clients, either because they’re “accommodation” clients (e.g., an existing client’s family member), next-generation clients (that the firm wants to work with for long-term growth), or simply because the firm doesn’t like to turn away prospective clients in need (even if they don’t meet the firm’s formal minimums)… as given the cost to run the advisory firm itself, taking on too many such clients can undermine the profitability or even the viability of the entire advisory firm. Herbers suggests that the starting point for handling such situations is simply to understand how profitable – or not – those smaller clients really are. Begin by creating a list of all your clients, sort them by household account size (or better yet, total client revenue), and draw a line at the midpoint threshold (i.e., the median dividing line between the top and bottom 50% of households in the practice); in most firms, 60%+ of the revenue comes from the accounts above the line, and 40% or less below the line. If the firm has multiple advisors, the same calculation can be done for each advisor, along with an overall estimate of how much revenue each advisor in the firm works with (which similarly will have a dividing line of above- and below-average advisors). And what should be done once the list is made and segmented? Consider that the groups above and below the line are so substantively different, that they probably shouldn’t be receiving the same uniform service in the first place. Instead, begin to segment what the firm does for the clients based on where they fall, simply recognizing that the firm can’t afford to service all the clients above the line exactly the same as those below the client, and instead might need to do less-intensive financial plans, fewer updates to projections, fewer client meetings, etc. Not because it’s about doing “less” for smaller clients, per se, but simply because it’s crucial as a business owner to recognize that clients need to serviced in a manner consistent with what they’re actually paying (or not) in the first place.
Large RIAs Share Marketing Advice For The Little Guys (Christopher Robbins, Financial Advisor) – The very essence of financial planning is to take a step back and look at big picture goals first, identify a strategy to achieve the goal, and only then determine and begin to implement the tactics to get from here to there. Yet unfortunately when it comes to marketing for financial advisors, few take the time to do the big picture planning first, with the end result – similar to clients who don’t plan – that most of their short-term efforts are just wasted. Of course, the biggest challenge for most advisory firms is that they’re not large enough to have a dedicated marketing team to focus on these issues in the first place. And so a recent panel of Chief Marketing Officers and Marketing Directors for other large advisory firms offer their advice in this article instead. Key suggestions include: Don’t underestimate the value of non-industry-specific marketing automation tools (e.g., don’t spend $2,500/month on industry marketing software when the free version of MailChimp and just a little bit of setup can accomplish the same outcome); recognize that marketing is a nurturing process, where prospects build trust and interest over time, so don’t assume that marketing will immediately turn strangers into clients, and instead expect that prospects will have to be engaged repeatedly (i.e., a marketing funnel) before being ready to sign up with the advisor; if you’re going to make a hire, the first hire should be someone who sets the strategy and manages the process, as the implementation pieces can be outsourced, but someone has to be in charge and focused on the big picture goals in the first place; and don’t forget that your existing client base is also a rich source of business opportunities and referrals, but since they already work with you, they don’t necessarily need more client events focused on “financial stuff,” and might be even more interested by a non-financial speaker or event instead!
4 Ways To Show Clients You’re ‘Worth It’ (Janet Levaux, ThinkAdvisor) – Historically, most financial planners have framed their value proposition as helping clients to be able to accumulate for and then live in retirement, without running out of money, but United Capital founder suggests the advisor’s core value proposition is really “how do we help clients live their lives more richly?” The caveat, of course, is that what constitutes “living their lives richly” varies by client… but that’s also the point. Or as Duran puts it: “Price is fact. Value is perception 100%. And it’s driven by how [that value is] delivered, how it’s explained, and how it’s experienced.” Or stated more simply, when clients ask themselves if their advisor is worth the fee, they make the decision by evaluating whether they feel the fee is worth it. So how do you get clients to feel the advisor’s fee it “worth it” in the first place? Duran suggests a number of key points: first, recognize that it’s almost impossible to win by competing in the same space that everyone else is, so the starting point is to find your “winning zone” (i.e., the ground that no one else has where you can excel and competitors would struggle to catch up); next, get deeper on what your clients really care about, which starts by asking question like “what wakes you up at 3 AM?” (Hint: their answer is probably not “because I really need a comprehensive financial plan” or “why do you feel the pressure to work in the first place?”; next, be ready to communicate more proactively with clients, by whatever means they want (i.e., it could be video chats, or mobile devices, or in-person meetings, and don’t just assume clients always want the latter); and once you find something that works, be brutally consistent about delivering it (from what you deliver in the practice, to how you communicate with/to clients).
Why Clients Toss Your Welcome Packet In The Garbage (Sara Grillo, Advisor Perspectives) – Having some kind of “welcome packet” is a standard for most advisory firms, a way to introduce new clients to the firm once they come on board, and forming a key first impression for the business itself and what it will mean to have become a client (as clients who just signed up begin to evaluate “did I make the right decision in saying ‘yes’ to this advisor?”). Yet Grillo notes that most advisory firms’ welcome packets “read more like a court summons than a warm friendly bear hug,” usually containing items like a generic form letter lauding the merits of the firm, a list of team bios (with everyone dressed up in fancy suits and perfect grooming!), printouts of press appearances or industry awards, some paperwork to be completed, and perhaps a “boring” blog post or two from the firm (e.g., yet another article on Roth vs Traditional IRAs). More generally, though, the key point is that by joining the firm as clients, they’ve already decided they like you, so the focus of the welcome packet should really be about them instead. So what would the alternative look like? Grillo suggests instead that a better welcome packet might include: a coupon to a local restaurant where you know the owner (and have the client let you know in advance when they’re going, so you can contact the owner and ask them to give the client special treatment); a handwritten note from the person who will be servicing the relationship at the firm; a questionnaire about their lives (not financial matters, but other key information like birthdays, favorite food, favorite sports team, etc.); a humorous or warm picture of the team doing something fun or charitable together (to humanize everyone and make them more relatable); an invitation to the firm’s private LinkedIn or Facebook group for clients only; a calendar of the firm’s events for the next year, along with a free pass to bring a friend to the next event; a blog about what to expect during the first month of working together; and some chocolate (it’s hard to go wrong with chocolate!). The key point, though, is simply that the new client doesn’t need more information about the firm after they’ve already joined; instead, make them feel more welcome, instead!
What Magazine Is Your Business (Stephen Wershing, Client Driven Practice) – For most advisors, it’s remarkably difficult to develop an ideal client profile, beyond the most basic of demographics and financial information (e.g., Baby Boomers with at least $1M of investable assets), even though understanding the client’s more nuanced needs and preferences is key to effectively differentiating the advisory firm. Notably, the challenge isn’t unique to financial advisors, though; Wershing highlights the story of Chip Conley, who founded the Joie de Vivre hotel chain (and authored two books “Rebel Rules” and the more recent “Peak“), and has created a chain of hotels that each targets its own hyper-specific niche. For instance, one hotel is a rock ‘n’ roll themed property in Phoenix (think loud, leopardskin chairs, and lots of subtle and not-to-subtle musical references), that aimed to attract both rock ‘n’ roll fans themselves, and also rock ‘n’ roll performers (either up-and-coming or on-the-decline-but-still-running acts). The point, though, is simply that “guests will find their own personalities echoed in the style and service at the properties… the words they would use to describe their favorite hotel are the same words they’d use to describe themselves.” But rather than do intensive consumer research to understand their target clientele… Conley instead focuses on finding a niche magazine that they would already read (in the case of the rock ‘n’ roll hotel, it was Rolling Stone), and simply reads through the magazine itself to better understand the target clientele and their tastes, preferences, etc. Which Wershing suggests is equally relevant for advisory firms as well. After all, publishers of niche magazines already pour extensive resources into understanding the specific tastes and preferences of their readers, and refine that targeting over time. So if you’re having trouble figuring out more about who your ideal client really is, just try to figure out what magazine they would read… and then read up yourself to figure out what kind of marketing and messaging would really appeal to them!
Ken Fisher Hits A Milestone Of $100B Of AUM And $1B Of Revenues (Oisin Breen, RIABiz) – It’s long been said in the industry that “marketing doesn’t work” when it comes to financial advisors getting clients, and that marketing alone simply won’t persuade an affluent client to turn over their life savings. The only caveat is that the advisory industry’s largest independent RIA, Fisher Investments, which just crossed the stunning $100B AUM milestone and built its success precisely by focusing on highly scaled marketing. In fact, arguably one of the greatest headwinds that Fisher Investments now faces is precisely that so many other RIAs are beginning to emulate his marketing strategies (from Creative Planning to Personal Capital), similarly conducting national marketing campaigns (e.g., Creative Planning’s new national television advertising campaign), even as Fisher’s own growth begins to slow (a perhaps “inevitable” challenge simply given the firm’s immense size and the sheer amount of assets it needs to sustain its growth rates). Still, though, as recently as 2017, the firm managed to grow from $72B to $96B of AUM, a massive 33% jump in AUM in the span of just a single year, and even its growth of “just” about 4% last year (from $96B to $100B) still amounts to 50% of the Carson Group or 10% of Creative Planning (and was achieved in the face of a year of difficult markets as well). In addition, the firm “still” charges fees that start at 1.5% on the first $475,000 in a world where 1% has become the proverbial benchmark fee. Yet arguably, that success still further emphasizes that, at least at a certain size and economies of scale, financial advisor marketing may be far more effective than most advisory firms give it credit to be.
The Next Big Thing That Will Disrupt ETFs (Janet Levaux, ThinkAdvisor) – The growth of ETFs has been nothing short of miraculous in recent years, with the industry now raking in nearly $1B per day in inflows, as overall in 2018 the ETF industry gained $315B of AUM (while mutual funds lost $45B in net outflows), and since 2009 ETFs are up $2.3 trillion (even as mutual funds have seen $92B of net outflows). Yet even as ETFs are on the rise, the buzz at the recent Inside ETFs is that the next major disruptor – of ETFs – may already be here: Direct Indexing (also known as Indexing 2.0), where technology makes it increasingly possible to re-create any ETF or index fund from its component parts (e.g., using technology to easily own each of the 500 stocks in the S&P 500, rather than owning the S&P 500 index fund). The reason why this matters is that, once the stocks in an index fund (or smart beta fund, or any other ETF) can be managed directly with technology, the ETF wrapper itself is no longer relevant or necessary, and consumers suddenly have the opportunity to invest into perfectly customized portfolios just for themselves (e.g., a “personal index fund” that adjusts the standard index fund or factor funds for personal preferences, from a greater overweight in small-cap or value, to a tilt away from fossil fuel or vice stocks if the investor so wishes). In addition, such Indexing 2.0 solutions also have superior tax loss harvesting benefits, due to the ability to loss-harvest each and any of the individual stocks, and not being constrained to only loss-harvesting if the ETF in the aggregate is down. In fact, Parametric – which has offered such an Indexing 2.0 solution with better tax efficiency for ultra-HNW investors for years – already has more than $100B of AUM in the strategy, which means if Parametric were an ETF issuer, it would already be the 6th largest and the 4th-fastest growing today. Ultimately, ETF pundits Matt Hougan and Dave Nadig suggest that ETFs aren’t likely to go away completely anytime soon, but even if Indexing 2.0 is “just” a $100B advisor opportunity, there’s likely to be an explosion of technology firms looking to offer solutions in just the next few years!
Can Vanguard Remain Alone? (John Rekenthaler, Morningstar) – For most of its history, Vanguard was in a league of its own in a world where the industry focused on how to deliver active management to beat the market, while Vanguard maintained that it was better to simply own the market and minimize costs instead. Even Dimensional Fund Advisors (DFA), while being less “active” than most competitors, still maintains that it has alpha market-beating potential with its factor investing approach. And Vanguard effectively doubled down on this approach with its unique fund-investors-owned corporate structure, which provides further incentive for the company to reduce costs (since any “profits” from its fund investors would just be returned to them as profits anyway). Yet Rekenthaler suggests that this era of Vanguard may be ending, both as leadership changes (with new CEO Tim Buckley taking over for Bill McNabb last year), and the industry itself increasingly converges on ETFs that are at least “Vanguard-like” (at least far more so than the active mutual fund business of old), such that Vanguard’s own ETFs are not substantively different than others, and while Vanguard has historically at least still been able to compete on cost (supported again by its unique structure), new competitors have arrived that have their own tactics to compete at low cost, from Blackrock and State Street that have shown a willingness to push volume sales at discount expense ratios from the beginning, to Fidelity launching a zero cost fund by leveraging the profits from the rest of its brokerage business to subsidize its ETFs just to get investors in the door (a model that Vanguard itself isn’t positioned to replicate) and Schwab offering a “free” robo-advisor as a service (that in turn profits from its ETF expense ratios). At the same time, even Vanguard itself recently removed its “at cost” and “no profit” statements from its recent filings, perhaps simply to avoid recent legal questions of whether it is inappropriately pricing its services for tax purposes, but raising the question of whether Vanguard may also be getting ready to restructure in a way that allows it to engage in its own cross-subsidies of running more profitable business segments to support new less-profitable initiatives… if only to stay competitive with other fund and brokerage companies now increasingly doing the same.
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, see the video below from Bill Winterberg for some notable FinTech highlights in the VEO Village at the recent TD Ameritrade National LINC conference!