Enjoy the current installment of “weekend reading for financial planners” with a special focus on practice management and technology topics! This week’s reading kicks off, though, with news from the CFP Board’s ongoing saga in the Camarda lawsuit; the latest development is that the CFP Board declined to answer a large number of questions in a deposition with its staff counsel, in turn prompting the Camardas to ask a Federal judge to sanction the CFP Board for failure to comply with the deposition and the CFP Board maintaining that the questions from the Camarda attorneys are just a “fishing expedition” beyond the scope of their actual case.
From there, we also have an article on the recently announced SEC regulatory priorities for 2014, which includes a deeper look at “reverse churning” inactivity in fee-based AUM accounts, the activities of dual-registered advisors, how advisors handle IRA rollovers (dovetailing on the DOL’s anticipated new fiduciary rules), and a big push for more investment adviser examinations. There’s also a discussion of whether robo-advisors may finally start to become a threat to advisors – or not – as Wealthfront announced this week that it has crossed the $500M AUM mark, after being at little more than $100M a year ago.
We also have a number of additional practice management and technology articles this week, including: two interesting industry studies released this week, where the first shows that wealthy clientele are increasingly adopting a multi-advisor approach and not consolidating advice and assets with just one person, and the second study finding that while advisor client retention is consistently high, there is a noticeable dip in retention for advisors 2-4 years after a client relationship begins (suggesting a clear area for focus for advisors who want to boost retention); an article looking at how best to build relationships with centers of influence (based on a live panel where attorneys and accountants were asked to rate advisors’ “pitches” to them); some very practical tips about how to dramatically increase how many meetings you’re conducting and the amount of face time you’re getting with your clients; and two technology articles by Bill Winterberg, the first looking at some helpful productivity apps, and the second a review of how to use the free Google Forms service to conduct based survey and client data gathering activity.
We wrap up with three interesting articles: the first is a remarkably good list of all the conventional practice management wisdom that is often repeatedly but rarely implemented in full, presented as a series of potential “mistakes” that advisors should avoid; the second is an article about the latest research on persuasion and how to (ethically) influence clients to act; and the last is a fascinating interview with popular personal finance blogger “Mr. Money Mustache” who retired at the age of 30 and now writes about how to retire early with a modest lifestyle, built around a message not of Scrooge-like frugality but a simple focus on enjoying the things that matter the most in life and letting go of the rest of our spending excesses (and some light chastisement towards financial planners that perhaps we focus too much on saving for old-age affluence and not enough on managing spending). Enjoy the reading!
Weekend reading for January 18th/19th:
CFP Board Declines to Answer Deposition Questions in Planners’ Lawsuit – The depositions have begun in the lawsuit between Jeffrey and Kimberly Camarda and the CFP Board, and the fighting continues to get uglier. Last month, CFP Board staff counsel Adam Zajac refused to answer dozens of questions during his deposition – so many, that the Camardas’ lawyers argue it amounted to failing to attend the deposition, and that a Federal judge should sanction the CFP Board by requiring it to cover the costs that the Camardas incurred for the deposition itself. In response, the CFP Board claims that Zajac’s behavior was proper, and note that there is still a motion under consideration that would dismiss many of the discovery requests the Camardas have submitted, including most of their deposition requests; accordingly, the CFP Board claims that Zajac should not have been compelled to answer certain questions while it is still under dispute whether that information will be subject to the discovery process in the first place. Nonetheless, some other attorneys note that so many declines to answer questions in a deposition are unusual, and that usually witnesses answer questions unless there is an issue of attorney-client privilege (though the CFP Board is claiming that its disciplinary proceedings should be privileged as well). The CFP Board has confirmed that it will provide the court with a transcript of the proceedings before a three-member disciplinary panel that first heard the Camardas’ case, as well as the transcript of their appeal, and the compensation disclosure rules themselves, but that any remaining information amounts to little more than a “fishing expedition” by the Camardas and their lawyers.
SEC Takes Deep Dive On Conflicts Of Interest – Last week, the SEC released its list of examination priorities for 2014, and it includes a significantly increased focus on conflicts of interest and uncovering different ways that business models, practices, and products may provide incentive for advisors to act outside their clients’ best interests. Areas of particular focus include how fee-based wrap accounts are being used – on the one hand, such accounts reduce the incentive for churning, but the SEC is now increasingly concerned about “reverse churning” where buy-and-hold investors are placed into wrap accounts with high fees even though no trading is anticipated (such that a standard transactional account would have been much cheaper to construct the same portfolio). Another area of scrutiny are dual-registered advisors, and whether/how advisors are navigating their RIA fiduciary duties in deciding which clients will be brokerage versus RIA clients. The SEC also notes it will be focusing on retirement rollovers – dovetailing on the Department of Labor’s scrutiny in this area – and RIAs that have never been examined and should be will be a big push for the SEC in 2014 as well.
Robo-Adviser Wealthfront Grows, But Is It Mainstream Or Just A Niche? – This week, “robo-advisor” Wealthfront declared that it has crossed the $500M-of-AUM mark, up from little more than $100M a year ago at the beginning of 2013, and making it the largest (as currently reported) robo-advisor platform. Yet the Wealthfront announcement also highlights that Wealthfront’s clientele are disproportionately from Silicon Valley, and the top companies of its clientele are exclusively tech firms like Google, Facebook, LinkedIn, Microsoft, and Twitter, with a whopping 55% of its clients under the age of 35. With such a uniquely focused clientele, the question then arises whether Wealthfront is really going “mainstream” as a robo-advisor, or if the reality is simply that it has found a profitable niche as a technology-enabled investment solution for Silicon Valley techies (which doesn’t invalidate their model, but does suggest that Wealthfront’s growth may slow once it saturates its Silicon Valley techie target market). In addition, it’s notable that because Wealthfront charges only 0.25%, its $500M-of-AUM only produces the revenue of a $125M firm charging 1%, and likely isn’t even close to allowing the company to break even given its coterie of expensive engineering talent. Nonetheless, with continued growth, expect to see a lot more attention paid to robo-advisors in the coming year, as recently predicted on this blog.
Wealthiest Clients Have 4 Advisors, Study Finds – A recent Cerulli Associates study finds that while many advisors believe they are their clients’ only advisor, high-net-worth clients are actually maintaining an average of four “provider relationships” (including advisors and other financial services vendors). The trend towards maintaining more advisors actually accelerated during the recession and in its aftermath, such that Cerulli suggests interest in multiple advisors was likely a direct result of the market meltdown. In 2008, investors with more than $5M of assets averages 3.3 provider relationships, and 5 years later it’s now up to 4.4. Notably, though, most high-net-worth clients appear to be adding advisors, but not necessarily terminating existing relationships, and the study finds that nearly 1/4th of the high-net-worth households report their primary provider still controls at least 90% of their investable assets. The study also notes that notwithstanding the increase in advisors, high-net-worth clients have generally moved on from the financial crisis, and are actually among the most optimistic investors.
The Lesser-Known ‘4-Year Itch’ – According to a new study released on Monday by PriceMetrix, the average advisor retains 90% of his/her client relationships in any given year, but advisors who wish to hold on to their clients should boost their service efforts between the second and fourth year of the relationship, as that’s when clients appear most likely to bolt (based on an analysis of 40,000 advisors using PriceMetrix data). During the first year of work, clients are in the “honeymoon period” where advisors average a 95% retention rate, but between the 12 and 48 month mark, the average retention rate falls to 74%. Notably, advisors who have larger clients (based on AUM) also appear more successful at holding onto their clients (ostensibly because they can afford to give those clients more time and attention); households with $100k of AUM retain their advisors about 87% of the time in any given year, but those with $500k have a retention probability of 94%. The study also found that price impacts retention, but with some surprising nuances – the optimal charge appears to be in the range from 1% to 1.5% of AUM, and client retention was less favorable amongst advisors who price on the high side of this average, but retention was also diminished amongst advisors who price their services on the lower side as well.
What Professionals Want: Tips for Building Referral Networks – While industry research consistently shows that garnering referrals from “centers of influence” (high-powered lawyers, accountants, and insurance agents who are influential in the community and can refer big clients) is lucrative, few advisors do it well. This article provides an interesting summary from a panel discussion with a dozen accountants and estate planning attorneys, who listened live to the pitches from some advisors and gave feedback on the degree of positive or negative reaction they were having. The key is to recognize that we’re all emotional beings who react with our gut first and our head second, so how the conversation is framed and delivered really matters. Some key insights included: Be careful not to tell other professionals how to do their job (if you treat a referral partner like an order-taker to ‘make a C-corp’ or draft a Will a particular way, you’re not going to cultivate a team-based relationship that leads to referrals); don’t ‘oversell’ other professionals (compliments are nice, but trying to push the relationship too fast or deliver fake platitudes will ruin the opportunity); give detail about how you work with clients and other professionals, including how you will update them to keep them informed of the situation; referrals come from relationships, and relationships come from networking where centers of influence are active, so join the local chamber of commerce, metropolitan breakfast club, or wherever else you can appropriately meet them; and make sure you’re giving referrals too (not just for the reciprocity, but because giving a referrals is the clearest way to communicate that you really trust the other professional).
How to Triple Client Meetings in 2014 – This article from Advisor Perspectives takes an interesting look at how advisors who want to increase the amount of meetings and face time with clients can try to do so. The first step, not surprisingly, is simply to make a commitment to doing so, but it helps all the more when staff are involved with the process as well; for instance, one advisors sat down with his assistants, and engaged them in helping to figure out how he could free up more time for meetings, and then to help him systematically track it to hold him accountable. Another strategy was to block consistent meeting time on the calendar; unless the advisor was out of the firm at an event, there would always be four standard slots available on the calendar for meetings at 9AM, 11AM, 2PM, and 4PM on Tuesdays, Wednesdays, and Thursdays (with Mondays set aside to prepare for the week, and Fridays to discussing outstanding follow-up items to address). The assistants were then tasked to make sure that the available calendar slots were consistently filled with client meetings. Another key – to ensure that there are not only more meetings, but more productive ones – was to set a pair of goals for each meeting (one goal to advance the client’s agenda, like a planning issue, and one goal to advance the advisor’s, like completing an outstanding piece of paperwork or getting an introduction to the client’s accountant), and the goals would then be articulate on a meeting agenda, with an assistant in the meeting to take notes and capture follow-up items. Of course, just scheduling and committing to meetings doesn’t help if clients aren’t motivated to meet as well, so focus on how to make it easier for clients to come meet you (can you validate parking or arrange for convenient parking spaces? Can you time meetings to manage clients’ traffic/driving burdens?), other to take (top) clients out to lunch as well, and help clients set their own goals about what will be covered in the next meeting (which makes them want to show up and follow through on it). And if you’re still struggling to find time to meet, revisit what else can be delegated to staff to ensure that you do have the time to conduct more meetings and get more face time with clients!
Build Your Own Online Data Forms – On Morningstar Advisor, advisor tech guru Bill Winterberg looks at tools that advisors can use to gather, maintain, and update information collaboratively with clients using online data forms and tools, besides using email (which is not efficient nor sometimes secure) or via a client vault or online portals (which are better suited to sharing documents than processing and extracting updated data and information). So what are the alternatives? One option is to use Google Forms, a part of the free Google Drive service that also has documents, (spread)sheets, presentations, and drawing. Google provides 19 themes to change the look and feel of a form, and five basic types of response fields (line of text, paragraph, multiple-choice, checkboxes, and a drop-down list), in addition to some more advanced options (1-10 scale rating, grids, and more). Winterberg suggests that this service may be most effective for doing ad-hoc data collection for specific information from a large number of people, such as simple client surveys or feedback forms; the Google Form can also be embedded directly into the advisor’s website. However, there are some caveats; the tool doesn’t have a lot of standard predefined fields (e.g., address, city, state, zip code) so they must all be captured via text fields, and the data validation options (used to ensure someone has entered the right type of information/response) are fairly limited. And of course, because Google Forms is a generic standard and not industry specific, there’s no automated integration, though data generally could/should be able to be imported into other software manually. In terms of output, Google Forms does offer a summary view of results, and some pie charts and bar graphs of other response types, though the summary of text responses leaves something to be desired unless the advisor links the form responses directly to a Google spreadsheet for further analysis. Notably, Winterberg gives Google Forms good marks for security in general (data is encrypted for transfer and stored in Google data centers), but still cautions against using the service to collect sensitive financial information (in fact, he notes that doing so is against the program’s policies). For those looking for more robust Forms options, Winterberg also suggests Wufoo for more complex forms, and PreciseFP for gathering financial planning information in particular.
Little Apps, Big Time Savings – In this Journal of Financial Planning article, Bill Winterberg shares some tips on the “apps” he uses to help improve his daily productivity, noting that with there are mundane tasks you repeat over and over from day to day and week to week, even saving just a few minutes or seconds repeatedly can add up to significant time savings. The starting point, though, is to know how much time you spend on your various tasks in the first place, for which Winterberg recommends RescueTime; at a modest cost of $72/year, RescueTime logs your computer activities for you and gives you some reports on how much time you’re spending in various applications and documents. With RescueTime giving you a baseline for your productivity, you can then evaluate some other tools compared to this benchmark. For productivity enhancement itself, Winterberg suggests checking out Text Shortcut tools, which can convert small snippets into longer words, phrases, or even sentences and paragraphs; thus for instance, you might train it that anytime the snippet “madr” appears, it should substitute in your full mailing address, allowing you to effectively “type” the entire address in just four characters! Winterberg uses TextExpander on Mac OS X, and recommends PhraseExpress or AutoHotKey for Windows users. Other productivity tools include learning to better use the built-in search functionality of today’s operating systems (Mac OS X features Spotlight, and Windows 8 offers universal search capabilities in its search bar), and upgrading to the YouTube HTML5 player that allows you to play back YouTube videos faster for quicker consumption (you can do the same with podcasts in iTunes). While many of these changes may only save you seconds and minutes here and there, it adds up fast.
2014 Countdown: 14 Critical Mistakes Advisers Will Make Next Year – While there isn’t a lot that’s new here, this list is a remarkably good summary of the 14 key areas that various industry commentators and consultants most commonly cite as steps advisors should take or focus on to improve their businesses. The key “mistake” items that advisors should avoid include: Forgetting about the next generation (be cautious about focusing too much on baby boomers); Keeping an outdated template website (time for an update!); Not investing in better technology; Pretending social media is a fad (it’s not a silver bullet, but ignore a valuable communication tool that millions of people use daily at your own peril); not using video to market (the average user spends 88% more time on a website with video); not carving out a niche (don’t fall for the everything-for-everyone trap – investors prefer to work with advisers who specialize in helping people with situations similar to their own); not asking clients what they want (be sure to survey your clients at least once a year); failing to (try to) wow clients by going beyond “just” the financial issues; failing to host social events for clients; not having a minimum client account size (even just a $50k minimum can help communicate that your time and energy are worth something); underestimating the value of coaching; working in the business instead of on the business (make sure you take time on a regular basis to think about the big picture issues for the business); failing to delegate; and not developing a written plan. Again, this list isn’t rocket science, but I think it’s safe to say that advisors who avoid all of these mistakes are much better off than those who don’t, and I suspect very few advisors successfully navigate everything on this list so we all have at least a little room for improvement!
How to Become an Advisor of Influence – This feature article from Research magazine is not about becoming influential, per se, but how to apply the science of persuasion and influence in your own business and with your clients, as research in the past several decades has provided remarkable detail about exactly what works and what doesn’t. The point here isn’t necessarily about manipulation, but simply the ability to move people in your direction so they’re more likely to say ‘yes’, whether it’s a request, a (business) proposal, or a (financial planning) recommendation. Accordingly, leading researcher Robert Cialdini breaks ethical influence into six principles: Reciprocation, Scarcity, Authority, Consistency, Liking, and Consensus. For instance, doing something on behalf of someone else can create a sense of obligation, and a moment pops up immediately after a client thanks you where you can ask for something in return, such as a referral. More generally, the research notes that persuasion stems from trust, and in turn is why it’s so much more powerful to ask clients questions, get to understand them, and then make recommendations – the solutions being offered are then perceived as more trustworthy. Other tips include: focus on commitment rather than progress (“congratulations on your commitment toward your goal” is better at sustaining focus than “congratulations on making progress towards your goal” which gives a license to coast); don’t make your strongest arguments for your case without first establishing your credibility and trustworthiness, which can be quickly enhanced by pointing out weaknesses or drawbacks as well as features and benefits; emphasize similarities between you and the client to help build rapport, as we’re more likely to say yes to someone we like and feel connected with; have clients write down their goals to help them live up to them; and use social proof by showing clients what others in similar situations have done, which makes them feel more inclined to act in a similar manner. (Michael’s Note: If you like this kind of research, I highly recommend Cialdini’s “Influence: Science & Practice” book, which covers decades of research in this area; it’s one of the top books in my Recommended Reading list!)
How To Retire Early — 35 Years Early – This article from Marketwatch is a Q&A interview with a man named “Pete” (first name only to help protect his privacy), a 39-year-old who lives with his wife and 8-year-old song in Longmont, Colorado, and retired from being a software engineer when he was just 30 years old and now publishes the wildly popular “Mr. Money Mustache” personal finance blog. The secret to Pete’s retirement success is the fact that they live on very little: about $25,000/year for a family of three, which they fund entirely from their investment income (though they also still work when they want sometimes, albeit on their own terms). The focus, though, is not just about scrimping and frugality, but about enjoying life with less, and their motivation for “ultra”-early retirement was to be able to focus on raising a family without the pressure of a demanding tech-industry career. Notably, Pete actually follows a (slightly more flexible) version of the 4% rule, and accordingly aimed to accumulate 25 times his annual spending to retire (and the couple did so once their net worth hit that ~$600,000 goal). In general, Pete frames retirement around the concept of financial independence – when your living expenses are covered by nonwork income – and notes a “good-natured battle” with the financial planning industry, which he suggests focus too much on retiring at a very old age with many millions in savings (“just so you can continue to spend $100,00/year until you die), and not enough on getting control of materialism and spending so you can live on a fraction of that amount (and shave 20+ years off the time you have to keep commuting to the office). Pete also points out that he does not actually live on a monthly or annual budget; instead, he simply maintains a clear set of values to apply before any purchase, that emphasizes whether it is really the best possible use for the money, in the context of a goal of creating lifelong happiness for himself. Ultimately, Pete advocates that if you focus on cost-cutting as negative, it will become a self-fulling prophecy, but if you really focus on the fundamentals of happiness – close relationships with others, health, rewarding work, and a chance to be creative – that you may find much of the other materialism melts away. Similarly, Pete emphasizes that the key to retirement success is not merely about trying to save more, but also about spending less, which simultaneously makes it easier to save more, and reduces the bar for what’s needed for retirement in the first place… such that many people can go from zero to financial independence in as little as 10-15 years (especially today’s baby boomers who will receive Social Security as well).
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 new Bits & Bytes weekly video update on the latest tech news and developments, or read “FPPad Bits And Bytes” on his blog!
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!