Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the news that state legislators are taking action yet again to fill the fiduciary void left by vacating the DoL fiduciary rule and the SEC’s non-fiduciary Best Interest Regulation… this time, from Maryland, which has proposed a new fiduciary rule that would uniformly apply to RIAs, brokers, and insurance agents, and setting off the usual objections from industry product manufacturers that a state patchwork of fiduciary rules will create an unnecessarily high burden of regulatory complexity (albeit while the industry also continues to fight against fiduciary regulation at the Federal level, too!).
Also in the news this week is coverage of the recent TD Ameritrade LINC National conference where CEO Tim Hockey vowed not to compete with the RIAs on its platform (as the issue of RIA custodians with retail divisions competing against their own RIAs becomes an increasingly sensitive issue), a new diversity push at Edward Jones to steer retiring advisors’ books of clients to advisors who are women and people of color that some are claiming goes “too far” by paying advisors more to hand off clients to minorities (and less to transition their clients to another white male), the news that within 2 weeks of Bogle’s death Vanguard removed its claims of being an “at-cost” and “no-profit” provider (though it’s unclear if the firm is really changing its strategy, or simply backing off claims that were causing it legal troubles about whether its pricing was an inappropriate tax dodge), and a look at Fidelity’s expansion of its model portfolios as advisors increasingly outsource investment model design and implementation (which asset managers like Fidelity are using as an opportunity to increase their own assets by offering pre-built models that “happen” to predominantly use their own proprietary funds).
From there, we have several articles on advisor technology, from a discussion of whether presentations on advisor technology should be eligible for CFP CE credit, highlights from the T3 advisor technology conference, how the rise of Artificial Intelligence (AI) will likely play out with advisors in the coming years (think less “robots replace advisors” and more “software that combs through data to identify planning opportunities for advisors to discuss with their clients”), and a review of the ongoing technology initiatives at all the major RIA custodians as a veritable “technology arms race” gets underway as platforms compete for advisors’ attention.
We wrap up with three interesting articles, all around the theme of the changing landscape of the financial services industry itself: the first looks at the recent Royal Commission report in Australia, a highly critical review of their conflicted financial advisor landscape, and the rather drastic changes that the regulators may now implement to ensure advisors are truly acting in the best interests of their clients and not merely as salespeople for their company’s products; the second is a fascinating exploration of the evolution of the financial services industry over the past 130 years, which finds that, despite exponential growth in technology efficiencies, the financial services industry all-in takes the same 1.5% to 2% of assets to facilitate investment now as they did more than a century ago (albeit while providing more value-adds for the same aggregate fee); and the last which looks at research on the true value that clients get from planning for their future finances, and how financial advisors, in particular, appear to provide the most value and best outcomes for at least those planning-oriented clients.
Enjoy the “light” reading!
Maryland Bill Would Impose Fiduciary Duty On Brokers And Insurance Reps (Mark Schoeff, Investment News) – This week, Maryland state Senators introduced the Financial Consumer Protection Act of 2019, which would require brokers and insurance agents to be fiduciaries that act in the best interests of their customers (along with RIAs, though they already have such an obligation). And companion bill is expected to be introduced in the Maryland House soon as well. In response, lobbyists from the insurance product industry immediately objected on the grounds that imposing a fiduciary duty on insurance agents would limit the ability of consumers to access insurance products, while the brokerage industry’s lobbying organization (SIFMA) expressed concern that state-level fiduciary regulations like Maryland’s could lead to a challenging patchwork of varying state obligations on financial advisors and that a Federal solution would be preferable. Yet with the SEC’s proposed Regulation Best Interest taking a substantially lower non-fiduciary standard for brokers – and not raising the standard on insurance agents at all – states from Nevada to Maryland continue to propose state-level fiduciary regulations… raising interesting questions about whether the SEC will eventually be “compelled” to lift the Reg BI standard, if only to preempt the states from doing so themselves (as the more the product distribution industry fights back Department of Labor and now SEC best interest standards, the more states continue to step up and fill the fiduciary regulation void).
TD Ameritrade CEO Hockey Vows Not To Compete With RIAs (Melanie Waddell, ThinkAdvisor) – As more and more RIA custodians begin to compete in their retail division with the RIAs they serve in their institutional division, TD Ameritrade CEO Tim Hockey stated at this week’s LINC National conference that TDA is “not going to try and compete in the same space as RIAs.” As TDA puts it, their focus in the retail sector has been to “enable self-directed investors through technology,” and that they intend to go even deeper in pursuing the same technology-platform approach with RIAs as well. In fact, Hockey went so far as to state, “If someone walks into one of our branches and is looking for the holistic services and relationships that you provide, we’ll refer that client to an RIA — full stop.” In other words, TD effectively sees their technology platform as supporting the full range of investors, by serving the do-it-yourselfers directly and serving the advisor-directed delegators indirectly (by operating as the technology platform that their RIA advisors use). The positioning is a notable distinction from RIA custodial competitors Schwab and Fidelity, that have been increasingly deepening their own private client/wealth management divisions, and even came up in questions directly to Schwab CEO Walt Bettinger at the latest Schwab IMPACT conference last November (albeit with a more nuanced response that Schwab focuses on mass affluent clients and may increasingly compete there, relegating to its RIAs “just” its higher net worth $1M+ clientele instead). Accordingly, TDA announced a number of new initiatives to focus further on its technology-platform-centric positioning, including joining Members Exchange to bring down trading costs, and a new internal innovation incubator called “Discotech” (short for Disruptive Companies and Technology).
New Diversity Push At Edward Jones Stirs Up Controversy (Mark Schoeff, Investment News) – In an effort to support greater diversity, Edward Jones recently launched a program that grants retiring advisors (or those simply streamlining their books of business) a financial incentive (an additional 10%) if they sell/turn over those clients to fellow advisors who are women or minorities, in an effort to help women and minority advisors jumpstart their careers. For advocates of diversity, the program has been lauded as a means of better supporting diversity, especially since other brokerage firms from Merrill Lynch to Edward Jones itself in the past have faced allegations that such leads and client opportunities were handed out in a discriminatory manner against minorities. In fact, a former Edward Jones broker sued the firm for employing “company-wide policies and practices regarding training, compensation, partnerships, and the assignment of territories, business opportunities and sales support that unlawfully segregate its workforce and deny African Americans the income and advancement opportunities because of their race”… which perhaps not coincidentally, occurred in May of 2018 just a week before the new policy to improve the company’s racial diversity was implemented in June of 2018. However, some are raising the question of whether the program goes too far, and that effectively paying a retiring advisor 100% to sell their clients to a white male but 110% to sell their clients to a female or person of color amounts to discriminating against the white male brokers at the firm, and that a better path would have been focusing on diversity in hiring and other business areas, rather than “penalizing” retiring advisors for giving assets to a(nother) white male advisor. Nonetheless, as a focus on how advisors – including and especially under-represented female and people of color – get access to the opportunities of acquiring clients from retiring advisors, access to house or orphaned accounts, or participation in RIA custodial referral programs, except to see more discussion as the industry tries to assess the best way to expand opportunities for women and minorities and address its diversity woes.
Vanguard SEC Filings Drop ‘At-Cost’ And ‘No Profit’ Claims That Were Dear To Late Founder John Bogle (Joseph DiStefano, Philly Inquirer) – While Jack Bogle is known for inventing the index fund (and his company Vanguard as the leading purveyor thereof), arguably Bogle’s greater innovation was not merely creating low-cost index funds, but the unique way that Vanguard itself was structured to ensure their funds would be low cost (and continue to price lower over time): the “mutual mutual fund company” where Vanguard’s management of funds is effectively owned by their fund shareholders, reducing any incentive to extract excess profits from their investors (since the profits would just accrue back to those investors as shareholders anyway). Accordingly, Vanguard long positioned itself and its unique structure as making it feasible to offer funds on an “at-cost” basis with no profit component (since profits would only return to the investors anyway), to further keep the funds’ expenses low. Yet on January 16th of 2019, investing legend and Vanguard founder Jack Bogle passed away… and in a batch of annual filing updates for Vanguard less than 2 weeks later, the company updated its language to remove the “at-cost” and “no-profit” components of its positioning and no longer state that it is a “mutual mutual fund.” On the one hand, advocates suggest that the changes are simply done to reflect more precision about Vanguard’s reality, given that there’s no such thing (in terms of legal status) as a “mutual mutual fund” and that Vanguard does operate as a for-profit company to generate reasonable profit margins. In fact, Vanguard was recently subjected to a whistleblower lawsuit from attorney David Danon, who alleges that the company’s “at-cost” pricing could actually be a violation of Federal tax law (an issue that is ameliorated by the removal of the “at-cost” and “no-profit” language). Still, though, the shift does raise questions about whether Vanguard may begin to shift in a different direction after Bogle’s death, especially given its otherwise opaque governance structure with fund managers who report to a self-renewing board and a lack of any disclosures regarding executive compensation.
Fidelity Launches First Model Portfolios With ETFs (Bernice Napach, ThinkAdvisor) – As financial advisors increasingly outsource their investment functions to third-party asset managers, Fidelity recently announced the launch of its own Fidelity fixed-income Model portfolios for its advisors – a Fidelity Bond Income Model Portfolio, and a Fidelity Multi-Asset Income Model Portfolio – to complement the five equity-based Model Portfolio strategies Fidelity also launched last year. The new fixed income Model portfolios will include a combination of other ETFs and active and passive funds, using institutional share classes and with expense ratios ranging from 0.52% to 0.63%, and while the Models don’t have a separate management fee, they are notably comprised almost entirely of Fidelity’s own funds in the first place (plus one iShares U.S. Preferred Stock ETF). In other words, for Fidelity, the templated Model portfolios are effectively just a distribution channel for its own funds, complementing the rise of other Model Marketplaces in recent years, and will be available both on its own platform and through third-party Model marketplace and TAMP platforms (e.g., Envestnet). For advisors who are increasingly financial-planning-focused in the first place, the availability of Model portfolios directly from Fidelity may be appealing, and Fidelity reports that nearly 100 advisory firms already have access to the models through various TAMPs. On the other hand, critics of such Model portfolios and Model marketplaces from asset managers raise the concern of whether Fidelity (or any other Model marketplace asset manager) will ever “fire” one of their own funds from the lineup if it is underperforming, and whether advisors will ultimately still retain more liability and responsibility than they may want to have to watch over their Model portfolio provider in the first place (especially when the Models are created by the asset manager whose funds are used in those models).
Should CFP Board Require Technology Training? Advisors Seem To Think So. (Ryan Neal, Investment News) – In the latest 2019 T3 Advisor Tech Survey, a whopping 85% of the more-than-5,000-advisors surveyed believe that the CFP Board should grant continuing education credits for technology-related session, given the CFP Board’s long-standing position that “practice management” sessions are not eligible for CFP CE credit. However, the CFP Board notes that some types of technology sessions actually will be eligible for CE credits when its new Code of Ethics and Standards of Conduct take effect in October, around topics from cybersecurity (which falls under the CFP Board regulation to understand industry regulations that apply to CFP professionals) to technology that improves client interactions (which is part of the Client Communication segment of the CFP Board’s Topic List). Still, though, the CFP Board does not approve technology-courses that are firm-specific, or solely related to practice management. But T3 founder and advisor technology guru Joel Bruckenstein suggests that in the modern era, advisors can’t serve their clients effectively if they don’t understand how technology works, and argues that not only should technology content be eligible for CE credit, but that more should be included in the core curriculum to earn the CFP designation in the first place. In fact, a recent Investment News report found that students who get first-hand experience with advisor FinTech often have an advantage when getting hired. On the other hand, that outcome suggests that learning about technology, like most practice management topics, is already its own reward that is recognized in the marketplace, regardless of whether it receives CE credit or not.
19 Ideas From The T3 Advisor Conference Your Boss Needs To Know (Craig Iskowitz, WM Today) – Last week was the annual T3 Advisor Technology conference, the largest event of the year dedicated to Advisor FinTech, which runs for nearly 3.5 days and included a record-breaking 775 attendees. As an advisor technology consultant who attended, Iskowitz highlights a number of notable trends and ideas that emerged from this year’s conference, including: the ongoing rise of APIs continuing to make advisor software integration better and better; a rise of solutions specifically focusing on the client experience and supporting the advisor’s emotional intelligence; and the emergence of artificial intelligence tools themselves. For instance, nViso launched a facial recognition software tool that can “read” a client’s emotions on their face to better understand what they’re thinking and how they’re reacting (e.g., measure a client’s risk tolerance but showing them risky market scenarios and using software to track their visceral reactions!?). Other notable announcements and trends included: Edmond Walters (founder of eMoney Advisor) returned to launch a new ultra-high-net-worth financial planning software platform called MoneyLogixPro (as it’s being developed with MoneyGuidePro and FinanceLogix alongside Walters’ own new firm dubbed Apprise Labs); MoneyGuidePro launched “Blocks”, a series of small planning apps intended to deliver bite-sized financial planning and financial education chunks to clients (via a Netflix-style interface to select which Block to watch next); a new Compliance solution from Orion to handle common compliance oversight tasks (e.g., monitoring employee trading, catching front-running, etc.); Riskalyze launched a new “Multiple Opinions” module to give risk tolerance questionnaires separately to husbands and wives (and help them talk about the results), along with a new RetirementMap and Timeline module to support “lite” financial planning projections alongside the risk tolerance assessment; a wide range of announcements from advisor platforms, including Pershing, Fidelity, E*Trade, and Envestnet; and the emergence of Invent.us, a new company from FinanceLogix founder Oleg Tishkevich to help broker-dealers (finally) transition their legacy technology to the cloud.
How To Prepare For AI In Financial Planning (Blake Wood, Journal of Financial Planning) – Artificial intelligence has been a big buzzword in technology (including advisor technology) for several years now, but thus far, remarkably little has actually rolled out and been implemented in the advisor community. Yet as clients continue to demand more and consumer expectations rise, arguably it is inevitable that AI will eventually make its way into at least parts of the financial advisor ecosystem. Wood suggests that this will likely evolve much more incrementally over time, though, following multiple phases: 1) rules-based tools that help clients make better decisions (or advisors to deliver better advice) by taking in client data (e.g., via account aggregation) and using rules-based triggers to notify advisors or clients when there’s an opportunity to take an action or make a change; 2) machine learning and deep learning, which takes the volume of account aggregation data and tries to identify patterns to make intelligence projections of what may be coming (e.g., using Natural Language Generation [NLG] tools to translate anything from a lengthy financial plan to a complex investment statement or even “simple” administrative requests into a digital conversation with clients via Chatbots and other NLG tools); and then 3) adaptive learning, that gathers information from an ever-widening realm of client issues to help identify and propose solutions (e.g., spotting opportunities to switch credit cards, find a better leasing option, or comparing long-term care insurance policies). Notably, a key point is that even as technology expands access to products and solutions, it can also create overwhelming levels of choice, which means the AI of the future won’t only help to analyze and identify more planning opportunities, but also to more effectively narrow them down to a more effective range of limited choices that advisors can then discuss with their clients.
Tech Wars Roil Custodian Landscape (Karen Demasters, Financial Advisor) – In a world where technology is increasingly essential for advisors to efficiently manage investment assets and deliver a more holistic value proposition to clients, technology amongst RIA custodians is becoming the key differentiator for one platform to attract advisors away from another; in other words, RIA custodians are in a veritable “technology arms race” to compete for relevance to their advisors in the future. Accordingly, Demasters highlights a number of the major advisor technology trends amongst custodians over the past year, including: Schwab is working on PortfolioConnect, a next-generation version of its current PortfolioCenter that will eliminate the need for daily data downloads and reconciliation, along with a new Digital Account Opening tool to let any advisory firm have a “robo-advisor-like” digital account opening experience, while also expanding its suite of third-party technology partners through Schwab’s OpenView Gateway platform; TD Ameritrade continues to build on its VEO One platform, and also recently rolled out new more automated account opening tools (including an API layer that allows other tech vendors or advisory firms to create their own digital account opening process), along with their new Model Market Center that builds on top of TDA’s iRebal rebalancing software solution; Fidelity is expanding its Wealthscape platform by deepening integrations with its 2015 eMoney Advisor acquisition and going deeper with data analytics tools; TCA by E-Trade has built its own model marketplace (Money Manager X-Change) to more easily implement (and trade and rebalancing) third-party asset managers, along with its own new account aggregation tool dubbed CompleteView; Pershing continues to reinvest into its NetX360 platform by deepening its own API layers to work with other third-party advisor tech providers; and LPL (which, in addition to being the largest independent broker-dealer, is also a major RIA custodian for its hybrid RIAs) has been working on its asset gathering support by acquiring and integrating the AdvisoryWorld investment proposal generation tools, along with rolling out a wider range of centralized investment options and model portfolios (e.g., Strategic Wealth Management and Guided Wealth Portfolios platforms).
Highlights Of The Final Royal Commission Report On Australian Advisor Reform (Graham Hand, Cuffelinks) – The financial services industry in Australia has been in the midst of substantial turmoil in recent years, starting with their Future Of Financial Advice (FOFA) reforms in 2012 that imposed a fiduciary duty on advisors, and more recently a Royal Commission investigation that found, despite the imposition of a fiduciary duty, the vertically integrated financial services firms that both manufactured and distributed their own products (through their advisors) were still too product-centric, stating “Providing a service to customers was relegated to second place. Sales became all important. Those who dealt with customers became sellers. And the confusion of roles extended well beyond front line service staff. Advisers became sellers and sellers became advisers.” Accordingly, the newly issued Final Report of the Royal Commission has made a series of 76 recommendations (virtually all of which are anticipated to be implemented), that will dramatically alter the landscape of financial advice in Australia (and potentially become a template for reform in the US and elsewhere, too). Key changes include: ongoing advice fees (including AUM fees) must be renewed annually by the client, and advisors must record in writing each year the services that the client will be entitled to receive and the total fees to be charged; advisors who are not “independent, impartial, and unbiased” must provide clear and concise disclosures explaining why they are not; commissions, including previously grandfathered commissions, will be repealed “as soon as practicable” and fully transition to fees; fees from most types of superannuation funds (Australia’s equivalent of self-directed IRAs) will be prohibited (or at least must fully comply with the preceding requirements); and a 5-year study that will evaluate whether the vertically integrated model of financial product manufacturing and advisor distribution should be broken up altogether.
The Finance Industry’s Incredible Ability To Keep The Money Rolling In (Paul Davies, Wall Street Journal) – The financial services industry has been under immense pressure for the past decade, with the ongoing shift to index funds and ETFs (and lower-cost funds in general), coupled with an increased demand for transparency that is raising further scrutiny of Wall Street’s revenue model and compensation structures. Yet a fascinating new study by economist Thomas Philippon finds that the all-in cost of the financial services industry to turn a dollar of savings into a dollar of investment has been remarkably stable, hovering in a narrow range between 1.5% and 2% going all the way back for nearly 130 years. Of course, the nature of exactly what the financial services industry does, and the technology it leverages to execute, has changed dramatically over more than a century. Nonetheless, the report highlights that even as some segments of the financial services industry become simpler and lower cost with technology, other new areas (that are higher cost and generate more revenue) continue to crop up (e.g., the rise of low-cost index funds for the past 20 years paired with the rise of higher-cost hedge funds that also grew over the same time period). In part, this is because growing technology and other efficiencies in financial services tend to be used to simply expand its reach in the first place (e.g., as lending markets became hyper-efficient, the financial services industry expanded into riskier borrowers and new markets, from subprime to microlending), or to reconstitute its value proposition (e.g., financial advisors being paid less via product commissions for implementation and more via fees for holistic advice, albeit with an all-in cost that is still remarkably similar to what it’s always been). Or stated more simply, the financial services industry appears to be somewhat unique in its ability to leverage technology and efficiencies in ways that don’t decrease its all-in cost for consumers, but instead simply morph into new solutions that do more for the same aggregate fee (with the unfortunate caveat that from subprime lending to the explosive growth of hedge funds, not all aspects of “more” from the financial services industry are necessary improvements in the end!).
Groundbreaking Research On The Value Of Planning (Erik Conley, Advisor Perspectives) – A little over a decade ago, researchers Annamaria Lusardi and Olivia Mitchell published a research study on how consumers who plan for their financial future end up with 2X to 3X more money at retirement than those who do not. Notably, at the time, even most of those who did plan for their future did it themselves, with 34% using online retirement calculators and another 24% using retirement expense worksheets and only 19% relying on advisor tools. Yet when evaluating those who did take more of a planning approach and where they got their information, it turned out that those who used financial planners tended to have the highest wealth in the end (followed by those educating themselves with magazines and newspapers, and then those who called around to others for help). Similarly, the study also found that those who were the most planning oriented and leveraged outside counsel and multiple independent information sources did substantially better than those who “just” gave some thought to their future financial needs in retirement but didn’t engage outside advice. Of course, there is a caveat to such research that correlation isn’t necessarily causation; for instance, it’s not clear whether the consumers with advisors did a better job avoiding emotionally self-destructive investment decisions, simply bought more diversified portfolios and experienced fewer losses, were better motivated to save and invest because of the advice of their advisor… or were simply so planning-oriented that they were likely to achieve those outcomes anyway, and also decided to engage a financial advisor simply because it was part of the planning process they already wanted to pursue. Nonetheless, the strength of the relationship between those who plan deeply with advisors versus those who plan less solely on their own suggests that there really is a data-supported value proposition for financial advisors to help at least planning-oriented consumers craft more effective plans for the future they want to focus on.
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 as well.