Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with two big news announcements, including a new $60M round of venture capital for robo-advisor Betterment that will be used in part to build out its robo-advisor-for-advisors solution Betterment Institutional (with a reported 90 RIAs already using the platform), and a detailed review of Form ADV for the new Schwab Intelligent Portfolios “robo” solution as well that reveals the platform will only be “free” because its 30bps management fee will be covered by the profits Schwab makes on its underlying ETF and bank offerings (including a 7%-30% cash allocation in all portfolios!).
From there, we have several practice management articles this week, including a look at how doing financial planning for Millennials means retooling the advisor’s services (and business model?) away from AUM-centric retirement accumulations and towards building “financial independence” instead, an interview with “Reformed Broker” and financial advisor Josh Brown as he approaches 100,000 Twitter follows about how his blog and social media presence helped to build a $170M AUM practice, a look at the importance of effective branding and communications for advisors, and some tips on how to publish an “e-book” to establish your credibility.
We also have a few technology-related articles, from a look at how to better “personalize” and humanize the ways you use technology with your clients, to software reviews for the latest Tamarac iPad app and the newest release of eMoney Advisor’s financial planning software (dubbed “EMX”).
We wrap up with three interesting articles: the first is a letter from CFP Board chair Richard Rojeck as the organization celebrates its 30-year anniversary, looking back at what has been accomplished and where the CFP Board still sees opportunity from here; the second is a review of the recent new book “The Incredible Shrinking Alpha” by Larry Swedroe looking at how the competition for alpha is fiercer than ever (which makes less and less of it available to capture); and the last is a great reminder that helping clients through the stressful times can be stressful for the advisor as well, so now – while markets are relatively calm – might be a good time to take a “reboot”, and make sure you’re fresh for when the next inevitable bear market finally comes.
And be certain to check out Bill Winterberg’s “Bits & Bytes” video on the latest in advisor tech news at the end, including highlights of the Technology Tools for Today (T3) conference, a review of the news that Betterment has raised another $60M of venture capital (in part to support its new service for advisors, but also to expand its capabilities to answer basic financial planning questions), and more!
Weekend reading for February 21st/22nd:
On Strength Of $1.4B AUM And 90 RIA Clients, Betterment Raises $60M Of VC Funding Looking To Disrupt RIA Custody (Brooke Southall, RIABiz) – While Betterment has added almost $1B of AUM in the past year, the launch of Betterment Institutional and its partnership with Fidelity is opening a new path to growth for the robo-advisor: becoming a custodial platform (and TAMP) for advisors, with a reported 90 RIAs already using the solution. Their “full stack” solution is able to facilitate account opening so quickly and trading so inexpensively, because it actually operates an underlying broker-dealer to keep costs down. Thus far, the interest has come primarily from newer advisory firms looking to use Betterment as their whole solution, but Betterment Institutional aims to attract large existing RIAs as well. And while the offering technically may conflict with Fidelity’s own custodial business, thus far the firm is approaching the collaboration openly, as a change to better learn what kind of support advisors need in a digital world, The new VC funds will be used by Betterment to build out support for the RIA solution, in addition to investing more towards building tools that can help their direct consumers answer basic financial planning questions, and a total of 90-120 employees are expected to be hired.
Schwab Tells The SEC Its Robo-Advisor Has A 30 Basis-Point Fee And Big-Time Cash Allocations Held By Schwab Bank (Lisa Shidler, RIABiz) – As the Schwab Intelligent Portfolios “robo” solution comes closer to fruition, Schwab has filed the Form ADV with the SEC disclosing the details of the standalone RIA solution, bringing to light a number of new details about the offering. Most notable is that, while Schwab has announced that the solution will be “free”, their ADV actually states that Schwab Intelligent Portfolios will charge a 30bps fee, but clients will not have to pay the fee because Schwab affiliates will reimburse the client behind the scenes – primarily through the use of Schwab ETFs, ETFs in the Schwab OneSource program, and the fact that Schwab may steer anywhere from 7% to as much as 30% of client portfolios into cash positions held by Schwab Bank, on which it can earn an interest rate spread. The fact that Schwab may hold significant cash positions has garnered some criticism (and that the cash will be held in Schwab Bank, rather than in money market funds), although Schwab defends that the potential 30% allocation would only be for those with short-term goals, and that the lower end of the cash range is consistent with other RIAs that “hold between 8%-10% of client assets in cash on average”; Schwab also indicated that the cash position will not be optional, and that clients cannot be “fully invested” even if they want to (unlike most other “robo” solutions).
Want To Lure Millennials? Forget “Retirement Planning” (Gil Weinrech, ThinkAdvisor) – Ultimately, it might be said that financial planning is about “helping clients live great lives”, but what constitutes a “great life” is looking increasingly different for traditional Baby Boomers, versus the younger Millennial generation, and that the younger generation is not nearly as “retirement”-centric as the older. To some extent, this is simply because for Millennials, retirement is so far away (30+ years?), that it just doesn’t resonate. Beyond the time horizon issue, though, there simply seems to be a difference in generational attitudes; for Baby Boomers, it was normal to work at one (or just a few) job for most of a career, save up, and then stop working; for Millennials, by contrast, there is a much greater interest in leading a balanced life over time, not just by focusing entirely on work in the early years and leisure in the later years. In turn, this can lead to very different approaches to advice about working (where a Millennial’s “human capital” is their greatest asset), and the reality that a large cash position may actually be quite healthy for Millennials (rather than invest in retirement accounts), because it helps to facilitate the flexibility they need as they build towards “financial independence” where their ongoing (passive) income can cover their ongoing lifestyle needs. Notably, though, this type of planning approach for Millennials also creates challenges to the “traditional” AUM-centric business model of advisory firms, as if Millennials will be more focused on ongoing income and not necessarily accumulating large retirement accounts an ongoing monthly retainer approach may become more popular.
Tweeting Maven Josh Brown Approaches 100K Followers, Explains The Business Upshot (Liz Skinner, Investment News) – Financial advisor “Downtown” Josh Brown may be the first advisor to cross 100,000 Twitter followers, and while that number pales in comparison to national celebrities, Brown notes that his activity on Twitter and in the world of blogging and social media has had a material impact on his practice. Notably, Brown points out that it’s still almost impossible to directly calculate the ROI of his blogging and social media activity… except to recognize that the nearly $170M of AUM came almost entirely from his blog and that of his partner Barry Ritholtz, and that Brown even found most of his staff because they first came to him through his blog as well. Brown finds the time to use social media by just squeezing it in opportunistically (though he is prolific), even if it’s just to tweet out a thought while riding up in an elevator. Though notably, Brown also emphasizes that the process of writing and blogging plays a very material role as well, and that many of the people he admires most are prolific writers themselves. Brown does point out that with Twitter, not everything you tweet/say may be appealing to every follower, but that’s not necessarily a problem; the goal is simply to find those who you do resonate with. But he also acknowledges that the world of blogging and social media does lend itself to a “certain personality type” that is willing to be authentic and that enjoys the engagement.
Efficient Branding And Communications (David Lawrence, Financial Advisor) – In a world where most advisors are generalists, and many use the same templated websites and the same messaging about what they do, how can a forward-looking advisor stand out? In this interview with Kirk Lowe of TactiBrand, Lowe makes the case that ideally, a firm will have some kind of new/unique product or service to offer clients. Lowe cites “robo-advisor” Wealthfront as one example (which is really “just” a platform offering low-cost ETF portfolios using modern portfolio theory), and WBI Investments as another (they launched a new actively-managed ETF that brought in a whopping $1.3B in its first day). However, even if your product and service is similar to others, you can still find a way to communicate it differently and uniquely; for instance, can you use your website to tell your story in a way that draws visitors through to actually contact you (and are you using Google Analytics to measure the outcomes so you know what’s working and what isn’t?). The starting point, though, is to recognize that a cookie-cutter website template probably won’t get it done; at a minimum, be certain you’re working with a firm that can customize a template to tell your story, or find a firm that has the capability to build it outright from scratch.
How To Write An E-Book (John Bowen, Financial Planning) – “Credibility marketing” is an approach where you create and distribute content that showcases your expertise with your target clientele; the goal is that by establishing an expert presence, prospective clients are “pulled” in to you, so you don’t have to push yourself onto them. Historically, authoring a book has also been an effective means of establishing credibility, but Bowen points out that in today’s world, it’s cheaper and easier than ever to launch your own book, and even simpler to create an electronic “e-book”. Of course, the actual process of writing a book is still a significant effort, but Bowen points out that once you identify what content you want to write (or who the target market/niche is that you’re trying to reach), you can actually hire a professional writer to help (or at least a professional editor to put some polish what you write yourself) through sites like the Editorial Freelance Association, the American Society of Journalists and Authors, or online marketplaces like Guru, Elance, oDesk, or freelancer.com. And the e-book doesn’t need to be terribly long; something that is 30-35 pages that can be read in an hour is sufficient. You will still want to be certain the book has all the proper components of a book, though, including a table of contents, the copyright information, an About The Author section, and appropriate footnotes/endnotes for anyone you cite. Once you have a draft, send it to at least five people you trust for honest feedback, and be certain to send it out to a professional proofreader at a minimum before publishing the final version. And when it’s done, remember that you still need to leverage the book in your marketing, from noting it in your marketing collateral, to offering a webinar that talks about the key concepts for those who are interested.
Personalize Your Technology (Bill Winterberg, Journal of Financial Planning) – While technology provides powerful tools to help serve clients better, Winterberg notes that it’s still crucial to humanize and personalize how your clients interact with the technology of the firm. For instance, what do clients (and prospects) see first when they visit your website; do you showcase stale generic images like lighthouses and walks on the beach, or do you highlight the humans at the firm to make the interaction feel more personal (especially if you’re looking to differentiate yourself from “robo-advisors” like Betterment and Wealthfront, which really do focus on their technology)? Ideally, though, Winterberg suggests you should not just use photos, but actual video, so visitors to your site can really see who you are and how you communicate (and if you’re not comfortable on camera, you can get a coach, or simply practice until you get a recording you like!). Once the videos are created, you can upload them to YouTube so anyone who is interested in you can look you up. Winterberg also notes that it’s important to personalize outbound communication as well; no more “Dear Valued Client” messages, when any number of technology tools can facilitate a mail merge to include the person’s first name in the salutation of the message.
Tamarac’s New iPad App (Joel Bruckenstein, Financial Planning) – There is a shift underway in advisor technology, a confluence of factors including better tools for developers to build software and lower cloud computing costs, and also a plethora of consumer-facing finance tools from Mint.com to robo-advisors that are changing consumer expectations and demands. Bruckenstein suggests that Tamarac is a good example of this shift; their Advisor Xi solution, which combines Advisor View (portfolio accounting/reporting), Advisor Rebalancing (trading and rebalancing tool), and Advisor CRM, recently rolled out a series of new iPad apps for both advisors and a (privately branded version for) their clients, with flexible layouts that can be customized for personal use and the ability to group (or “household”) accounts for consolidated performance reporting. Specific types of reports can be made available (or not available) for particular clients. A document vault solution is also included, and if clients have a question they can click on the help feature within the app to have an email inquiry sent directly to the advisor. The iPhone and Android versions of the app are expected later this year.
eMoney’s Next Generation [of Financial Planning software] (Joel Bruckenstein, Financial Planning) – Earlier this year, eMoney Advisor launched the latest version of its platform, called EMX, including both its popular aggregation and client portal tools, and its full suite of advanced financial planning tools (available in an EMXPro version). The EMX updates were intended to be a major overhaul and update to the software, with both technology updates behind the scenes and a visual facelift to an even-more-modern design. For advisors, the EMX solution includes a dashboard interface for advisors, with alerts tied to the planning software to notify about situations like when clients move off their asset allocation or when a stock (e.g., client’s employer’s stock) hits a certain price, as well as helpful summary statistics (though not very customizable) about the clients and their financial situation (as well as updated when they log into the portal, link their accounts, etc.). The planning software itself includes three modules: Goal Planner for goals-based planning; DecisionCenter for deeper cash-flow-based planning; and DistributionCenter for interactive estate planning. The investment planning section includes capabilities to create investment proposals, and the software includes tools for doing “what if” scenarios as well. Reports also received an update. Overall, though, Bruckenstein notes that the highlight may be the client portal, which is effective enough that clients can actually use it as their primary financial center, and there have been many improvements to the eMoney integrations as well.
CFP Board: How Far We’ve Come, Where We’re Headed (Rich Rojeck, Journal of Financial Planning) – This year marks the 30-year anniversary of the CFP Board, which was created in 1985 to house the CFP marks when there were roughly 10,000 CFP professionals. Three decades later, the number of CFP certificants is up to 71,000, up 54% in just the last decade alone. Rojeck notes that ultimately, the CFP Board’s mission is “to benefit the public by granting the CFP certificant and upholding it as the recognized standard of excellence for competent and ethical personal financial planning.” And while the CFP marks have seen a great deal of growth and success, Rojeck notes that there is still work to be done, from further establishing clear career paths for young financial advisors, to improving the diversity of planners (there are more over the age 70 of than under 30, and only 23% of CFP certificants are female), to the ongoing work with the CFP Board’s public awareness campaign, consumer advocate and ambassador programs, the financial planning coalition, the Women’s Initiative, and more. Overall, the CFP Board’s current strategic plan is focused on four objectives, dubbed “AGRA” for Awareness (of the certification), Growth (in the number of CFP professionals), Recognition/Regulation (of financial planners), and Authority (with the CFP Board as the recognized authority on financial planning), and in the coming year Rojeck notes a particular focus on getting the CFP Board’s new “Center for Financial Planning” along with its Career Center to support ongoing growth of CFP certificants and financial planning.
Why Active Management Fell Off a Cliff – Perhaps Permanently (Josh Brown, Reformed Broker Blog) – 2014 was the worst year for actively managed mutual funds in three decades, with fewer than 20% of stock-picking managers beating their benchmark, and in his new book “The Incredible Shrinking Alpha” Larry Swedroe makes the case that this is not merely a temporary or cyclical phenomenon, and that the challenge of generating alpha will only be worse and worse going forward. And while the failures of active managers have helped to drive a dramatic increase in indexing, Swedroe makes the case that even this won’t lead to a resurgence in active management, and that instead there are still enough professional managers to keep markets efficient, but now they’re only competing against each other (and not less sophisticated retail investors). And this may just make the situation worse for active managers, especially as the average skill level rises which means paradoxically there’s less relative skill difference for one manager to outperform another! On the other hand, a paper from GMO entitled “Is Skill Dead?” finds that active managers generally only do well when they have an “opportunity” due to either the largest mega-cap stocks underperforming, where cash is not a major drag on returns, or where international stocks outperform US stocks; in 2014, none of these conditions were true, and sure enough active managers got clobbered, but the odds are that at least some of these conditions return in the future from year to year. In the meantime, though, the poor performance for active managers may actually be exacerbating the problem, as the ongoing outflows from actively managed funds in the aggregate is driving selling pressure on the stocks most popular with active managers… leading the 10 stocks most favored by active managers to actually get crushed by the 10 least favored stocks (by a whopping 32%!) last year (and the trend is continuing so far in 2015!).
Time to Reboot (Carl Richards, Morningstar Advisor) – When markets become turbulent like in 2008, as advisors we become the ballast to help keep clients stable and avoid making rash decisions. Yet as Richards points out, bearing the brunt of all that client worry and anxiety takes a toll on us, too. Despite the stress we face, though, Richards laments the fact that it is rarely discussed amongst advisors, and suggests that we’re doing ourselves (and our clients) no favors by pretending that what we do doesn’t have an emotional cost on us, too. Fortunately, in today’s environment, things are “relatively” good and stable… and as a result, Richards suggests that now is the time for most advisors to take a “reboot” for themselves, stepping back for a little mental housekeeping. It could be getting more exercise, simply taking more walks, or more substantive professional help. But the bottom line: if we don’t take care of ourselves now, we may not be very effective to help our clients when the next difficult time comes.
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!
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!