Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the industry news that lawmakers are recommending the Federal Trade Commission investigate Envestnet’s Yodlee over its data-sharing practices, raising concerns that the anonymized data they sell might still potentially be pieced back together by data buyers and that Yodlee is not sufficiently disclosing the way it sells data and the risks involved… though notably, Yodlee maintains that it does sufficiently scrub its data before sharing, and the practice is common across more providers than just Yodlee anyway.
Also in the news this week is a profile in Financial Planning magazine of Schwab, and specifically how it pursues advisors in its retail division that want to switch over to form an RIA or join an existing one… raising concerns about whether Schwab is impeding the ability of Schwab’s retail advisors to work in the industry if they leave Schwab, or whether independent RIAs are being inappropriately aggressive in pursuing Schwab retail advisors to join their firms and bring their existing Schwab retail clients along (even though RIAs would lambast Schwab if its retail team ever tried to poach RIA clients and assets?).
From there, we have several articles on industry trends, including one analysis that suggests, despite robo-advisor competition, the market for financial planning advice is actually poised to explode to the upside in the 2020s (in large part because the rise of technology is making it so much more efficient to deliver financial advice that it will reduce the cost and expand the market of who advisors can serve), a look at the ongoing slow but steady decline of wirehouse advisor headcount (even as wirehouse advisor productivity hits record highs), and the continued rise of mergers and acquisitions of advisory firms (which hit a new record in 2019, up a whopping 31% from the prior year).
We also have several practice management articles, from a discussion of when it’s time to revisit your own fee structure with clients (or not), a discussion of the rising popularity of the subscription-fee model for financial advice and when it works best (or doesn’t), the appeal of offering tax-planning services to grow your advisory firm, and the rise of “cash-management” solutions where advisors can offer clients high-yield bank savings accounts to complement their investment/brokerage services.
We wrap up with three interesting articles, all around the theme of personal productivity: the first explores how effectively achieving your goals requires not just setting goals, but prioritizing them to be able to focus and avoid being overwhelmed; the second examines how the real key to productivity is to focus on the ‘fundamentals’ first (from sleep to nutrition to workspace environment) and your own psychology, rather than fretting about self-control or self-motivation; and the last looks at how the real key to being more productive is not about what else you can manage to do, but what you can stop doing (and especially identifying the things you can stop doing that relieve you of even more otherwise-unnecessary decisions down the road)!
Enjoy the ‘light’ reading!
Lawmakers Call For Investigation Of FinTech Firm Yodlee’s Data Selling (Ryan Tracy, The Wall Street Journal) – This week, the news broke that lawmakers had sent a letter to the Federal Trade Commission asking the FTC to investigate account aggregator Envestnet|Yodlee over the ways that it is selling personal financial data on up to 25 million consumers, and whether it is obtaining the proper consent before doing so. Notably, much of the data services that Yodlee sells is specifically at the request of consumers – for instance, when plugging into various account aggregation tools, including some used by financial advisors – but Yodlee also separately sells data about users’ credit and debit card transactions. And while Envestnet does state that all such ‘personal’ data sales first scrub personally identifying details and anonymize the data, recent studies have found that having just a handful of ‘anonymized’ points of credit card metadata can sometimes be enough to de-anonymize and identify the underlying individual. Which is concerning, as ultimately spending data on an individual basis can then be used to identify private information about someone’s health, sexuality, religion, political views, or other personal details. Accordingly, the concern is that while Yodlee’s Terms of Service do note the ways that it uses data, lawmakers suggest that Yodlee “should not put the burden on consumers to locate a notice buried in small print”, and that consumers may not be made aware enough of the personal privacy risks of Yodlee’s data-sharing policies. On the other hand, it’s not clear that Yodlee is even selling a level of transaction data or metadata that could be de-anonymized, and the sharing of anonymized data to third parties isn’t unique to only Yodlee’s account aggregation services, raising questions of whether lawmakers simply aren’t ‘up with the times’ on the ways data can (reasonably) be leveraged, and why Yodlee, in particular, was singled out for a broader industry practice?
Is Schwab Blocking Broker Breakaways? (Jessica Mathews, Financial Planning) – As Schwab increasingly grows its retail services to include wealth management and services independent RIAs providing similar solutions via its custodial platform, there has been a growing concern in the advisor community about whether or to what extent Schwab will begin to compete with its own advisors. But a related emerging concern is that when advisors who previously worked in Schwab’s own retail firm want to switch into the independent RIA channel themselves, Schwab may be preventing them from doing so, as highlighted by both a recent lawsuit over the lengths that Schwab has gone to prevent its departing advisors from joining an RIA that custodies with Schwab (or launching their own RIA on the Schwab platform), and reports that Schwab has recently removed at least two RIAs from its custodial platform after accusing them of aiding former Schwab advisors in soliciting away their former Schwab-retail clients. On the other hand, the reality is that in the context of the Schwab retail business, clients primarily come in from Schwab’s own marketing efforts, and local retail advisors are compensated to service “Schwab clients”… accordingly, Schwab simply argues that departing advisors shouldn’t be permitted to take “the firm’s” clients (an increasingly common position of independent RIAs themselves when their own advisors leave) and that just as Schwab’s retail team is instructed not to poach clients and assets from RIAs on the Schwab platform, the RIAs on Schwab’s platform shouldn’t try to poach clients and assets from Schwab retail (by hiring away Schwab’s retail advisors). And in reality, similar non-solicit obligations for branch advisors going to independent firms are common at other firms (e.g., Fidelity) as well. Still, though, concerns remain about whether Schwab is ‘too’ aggressive in pursuing departing retail advisors, and the RIAs on their platform who recruit those retail advisors, particularly with the looming “Schwabitrade” merger that will further reduce the available alternatives for departing Schwab retail advisors to join an RIA on a non-Schwab platform.
Could Financial Advisory Revenue Triple In The Next Decade? (Michael Fischer, ThinkAdvisor) – According to a recent white paper by Zoe Financial, revenue in the financial advisor sector is poised to ‘explode’ from $57B today to over $200B by the end of 2030, or an average annual compound growth rate of almost 12%/year (as contrasted with a recent IBISWorld study that estimated financial planning revenue would grow at ‘just’ a 7% annualized rate in the coming years). The key distinction between the two is that while both are bullish on the growth of financial advice and financial planning, in particular, the Zoe report suggests that the opportunity is not merely that consumers – most commonly, Baby Boomers – are willing and interested in paying for financial advice, but that the ongoing evolution of financial advisor business models, coupled with the productivity enhancements of more and more advisor technology that reduce the cost of financial advice, will make it feasible to serve an ever-widening range of consumers, effectively increasing the ‘pie’ of opportunity in delivering and getting paid for financial planning advice, and more rapidly growing the advisory industry overall. In other words, the key for accelerating growth of financial advice isn’t just about doing more for clients, but that the tech-enabled ability to do more and at a lower cost will make financial planning both more valuable and cheaper, and that the lower-cost and alternative-fee models will allow firms to attract far more clients than they do today. Time will tell!
What’s Behind The Wirehouse Headcount Drop (Janet Levaux, ThinkAdvisor) – Over the past year, the number of brokers at the four major wirehouses (Merrill Lynch, Morgan Stanley, Wells Fargo, and UBS) dropped by 2% to just under 53,000, even as total assets rose by 15% (albeit driven in large part by the 2019 bull market) to $8.3 trillion. Of course, relative to the sheer number of brokers and assets – with the four wirehouses alone having more assets than all independent RIAs put together! – the ongoing trend of ‘breakaway brokers’ is still a minuscule trickle relative to their sheer size and market share. And a non-trivial portion of the decline in wirehouses is attributed not to recruiting away to the RIA channel, but simply the retirement of existing advisors, though the net decline does suggest wirehouses are struggling to attract and retain new talent to replace those retiring advisors. More broadly, though, the headcount of brokers at wirehouses has been in steady decline every year for nearly a decade, which has already precipitated two wirehouses (Morgan Stanley and UBS) to leave the Broker Protocol altogether to make it harder for their brokers to leave, and continues to raise questions of whether wirehouses are positioning themselves to reinvent for the coming decade (even as their advisor productivity hits record highs of more than $1M of revenue/broker at most major firms), or simply trying to build bigger walls to prevent their existing brokers from leaving without investing enough into their talent pipelines for the future?
2019 M&A Transactions Amongst RIAs Reached Sixth Consecutive Record (Christopher Robbins, Financial Advisor) – The latest Nuveen/DeVoe & Company RIA Deal Book for 2019 shows another record year for mergers and acquisitions amongst RIAs, with a total of 132 deals inked, up 31% from 2018 (and accelerating from prior years when the growth rate in deals was ‘just’ 10% to 15%). Notably, the acceleration in deal pace appears to be not just a function of the aging of advisors (with more and more reaching retirement age), but also that advisory firm valuations have continued to rise (making a sale more compelling for the owner), and rising access to capital for buyers (i.e., with more banks willing to lend, and more private equity firms willing to invest) has infused more financial capacity for a subset of ‘mega-firms’ to become ongoing serial acquirers (e.g., Mercer Advisors, CAPTRUST, Wealth Partners Capital Group, and Focus Financial Partners firms like Buckingham Wealth). And overall, the most active buyers of RIAs continue to be other RIAs (45% of the total), followed by RIA consolidators (with 37% of the total), while banks appear to be increasingly sitting out (only 2% of deals in 2019). On the other hand, while the volume of deals was up, the total AUM transacted was ‘only’ $347B in 2019, down from $494B in 2018 and $409B in 2017, as the average size of firms being acquired dropped in 2019 (as more and more ‘mid-sized’ firms from $100M to $1B get put up for sale). Though at the same time, the rising interest of sellers in the face of rising valuations may actually be creating a marketplace where sellers have ‘too lofty’ expectations, as transactions in recent years have increased from an average of 5X EBITDA to valuations closer to 7X instead… but sellers increasingly are asking for 8X to 10X, making many buyers balk even in an otherwise-hot M&A market.
4 Reasons To Change Your Fee Structure (Jarrod Upton, ThinkAdvisor) – 20 years ago, consumers accessed the shows they wanted with a comprehensive cable television package, that bundled together hundreds of channels into a single package that consumers ‘had to’ buy, even if they only wanted to watch no more than a dozen of those channels. And while this pricing strategy was successful early on, and even provided some economies of scale, over the years the rising overhead caused cable companies to price higher and higher, eventually leading to consumers to ‘cut the cord’ and begin to unbundle over the past decade to just buy the particular channels or shows they want instead (e.g., Netflix, Hulu, Amazon Prime, etc.). Upton suggests that advisory firms today are facing a similar moment, where it’s time to reflect on the traditional (AUM-)bundled wealth management offering, and to take a hard look at whether it’s time to either unbundle it or at least ‘re-bundle’ it with a new set of features (and re-price accordingly). Key considerations include: does the firm need to better align cost with the perception of value (e.g., not charging AUM when the services are increasingly financial-planning-related and go beyond ‘just’ the client’s investment portfolio); smoothing out revenue volatility (so fees don’t just go up and down with markets that are out of the advisor’s control anyway); to more substantively reprice to adjust to rising staff costs (e.g., make the AUM-fee schedule higher); or to introduce new services (e.g., beginning to charge separately for additional financial planning services, while keeping AUM fees for the core investment management offering). Notably, though, Upton emphasizes that for firms struggling to explain their value proposition in the first place, repricing is not a good idea, as if you can’t explain the value (even under the current fee schedule), it may be even harder to justify the firm’s value when changing to a new fee schedule (and arguably when the value is clear, the cost and pricing are less of an issue anyway!). On the other hand, often doing a clear audit of a firm’s service and value offering to clients can actually help to highlight whether and how pricing might be changed to be better aligned or more appealing in the first place!
When Subscription Fees Work (Christopher Robbins, Financial Advisor) – The dominant trend in financial advisor business models for the past 20 years has been the rise of AUM, and the concomitant shift to offering advisory accounts as an RIA or fee-based accounts under a broker-dealer. The good news of the rise of the AUM model is that it created more robust and scalable business models (at least relative to the the commission-based model that preceded it) that have led to larger and larger advisory firms; the bad news is that the model only works for those who have assets to manage in the first place, excluding large swaths of the population (including most of Gen X and Gen Y) who may have the financial wherewithal to pay for advice but not the assets to hand over to be managed in order to engage the typical advisor. Which in recent years has led to the emergence of the subscription model as a way to reach those next-generation clients by simply charging an ongoing monthly fee for financial planning advice, pioneered by organizations like XY Planning Network and now going ‘mainstream’ as major firms like Charles Schwab roll out their own monthly subscription financial planning solutions and broker-dealers like Cetera adopt new technology tools to facilitate the process for their hybrid advisors. More broadly, a recent Kitces Research study found 28% of advisors are charging some kind of flat hourly, project, or subscription fee for financial planning advice (with another 27% using a blended model of fee-for-service and AUM), and the pace appears to be accelerating as technology solutions emerge to facilitate the ability to collect non-AUM advice fees. Notably, though, subscription models do entail ongoing payments by the client, which in turn necessitates that advisors demonstrate how they will provide ongoing value and services to their clients to support those ongoing fees, which means, on the one hand, the model supports ongoing client relationships (and not just ‘transactional advice’), but on the other hand, also means that advisors must be prepared to systematize that ongoing advice to be efficient and scalable over time.
How To Use Tax Planning To Grow Your Practice (Taylor Schulte, Advisor Perspectives) – Notwithstanding the fact that “taxes” are a major component of the CFP curriculum, remarkably few financial advisors incorporate tax planning into their practices (beyond perhaps the direct tax implications of making a particular investment change, or talking about the tax benefits of their particular product/solution/strategy). Yet the reality is that proactive tax planning can produce remarkably ‘tangible’ benefits for clients (a hard-dollar tax savings that the advisor can point to as value added) from charitable strategies with donor-advised funds to asset location in the portfolio itself, is something prospects often respond favorably to (who doesn’t want help with lowering their tax bill!?), and personalizing tax planning is something that low-cost online advisors (i.e., “robo-advisors”) don’t offer (nor typically do a lot of tax preparers beyond whatever is needed to actually prepare and finalize the current year’s tax return). For some advisory firms, the hesitation in offering tax planning appears to be driven by compliance fears from broker-dealers about not offering tax advice (prohibited at firms that, legally, are in the business of selling brokerage products and not providing advice), which is not necessarily problematic for those at an RIA (though the IRS’ Circular 230 does limit the scope of what ‘non-tax-professionals’ can offer in tax advice and especially tax preparation services). On the other hand, often the most straightforward solution is simply to work proactively with the client’s CPA, giving the advisor the opportunity to demonstrate value but delivered jointly to the client with (and under the aegis of) the CPA’s blessing. For many advisors, though, the caveat is simply that they don’t have the tax knowledge to give relevant advice, for which Schulte suggests content like Natalie Choate’s “Life and Death Planning for Retirement Benefits“, Bob Keebler’s content, and educational content from the Bradford Tax Institute.
Why Every RIA Should Heed The Client Cash Accounts At Buckingham (Michael Thrasher, RIAIntel) – This week, mega-RIA Buckingham Strategic Wealth announced a partnership with Flourish Cash, a new cash-account service for RIAs that allows them to offer FDIC-insurance savings accounts for clients with a (current) yield of 1.70%. The shift into cash management services for clients appears to be part of a broader trend of HNW consumers wanting a ‘one-stop-shop’ financial institution to serve all of their needs (which means not only investment management and financial planning, but also banking), driving the emergence of new solutions like Flourish that are building to integrate directly into the advisor tech stack (e.g., Flourish can open accounts directly from within Salesforce via a CRM integration, and feed account balances directly into Orion for reporting and tracking and even billing purposes for advisors who charge fees based on the entire amount of client assets under ‘advisement’). In turn, as cash-management-for-advisors solutions continue to grow, providers are looking to expand into related advisor-support services as well, with Flourish reportedly working on new ‘modules’ like Flourish Home (for mortgage lending against real estate) and Flourish Gift (to support charitable giving), while competitors like Galileo Money+ are rolling out white-labeled credit and debit card solutions for advisors’ clients, all built around expanding the scope of the financial advisor’s traditional services to include a wider range of banking solutions.
Don’t Bog Yourself Down With Too Many Goals (Dorie Clark, Harvard Business Review) – One of the key benefits of setting goals is that it becomes easier to visualize the path to take to achieve the goal and the positive outcome of pursuing it. However, the reality is that if we set goals for anything and everything we wish to pursue, it can quickly lead to an overwhelming number of goals that no longer feel achievable, causing us to give up altogether. As the saying goes, “the best way to eat an elephant is one bite at a time”. Which means it’s crucial not just to set goals, but also specifically to prioritize them, and ask the follow-up question “what is the most important goal we should be working on” right now or this year? And in the financial planning context, the key is not just what the advisor thinks is the most important goal, but specifically what the client wishes to prioritize (which makes them far more likely to actually follow-through and pursue it!). In turn, because in practice there are often a lot of goals to pursue, it may be appealing to create a “Goal Timeline”, that shows incrementally how successive goals (or successive steps of a single goal) will be pursued, which both helps to recognize that goals not being prioritized aren’t being lost (they’re simply being pushed out to come next/later), and facilitates identifying the “keystone” goals (the critical threshold goals that, once accomplished, make the rest possible or at least easier). In addition, establishing a Goal Timeline also makes it possible to set deadlines for each goal or step along the way… as there’s nothing like a deadline to bring focus to getting a goal completed (to move on to the next one!).
Productivity Advice For The Weird (Ramit Sethi, I Will Teach You To Be Rich) – The traditional view to being more productive is that it’s all about self-control and self-motivation (i.e., the ability to just “buckle down” or better find your “Why” to feel more motivated), but Sethi suggests that in truth the key to productivity is about understanding what you really want to and should be spending your time doing, and then building systems to make that work for you. Or viewed another way, Productivity is like a pyramid, where at the base are the Fundamentals (e.g., having a good workspace environment, being well-rested, etc.), in the middle is Psychology (e.g., setting boundaries for yourself, being able to handle setbacks, etc.), and the top includes the Details (e.g., figuring out the right ‘productivity app’ to use). Accordingly, Sethi suggests that the biggest key to being more productive is to be certain you get the Fundamentals right first, which means 8 hours of sleep every night, having a comfortable home and workspace (Sethi hires someone to clean his apartment so he feels at his best in his space), having a consistent meal plan you stick with to maintain good nutrition, and optimizing your calendar with a consistently structured work schedule (e.g., for client meetings, team meetings, etc.). Once those Fundamentals are set (how many do you still need to go back and work on!?), it’s time to focus on the Psychology, including the feelings of guilt when you occasionally miss your schedule (it’s OK, forgive yourself!) and overcoming “should-itis” (all the things you feel bad that you ‘should’ be doing but aren’t, but realistically couldn’t in the first place). Once all of that is set, you can dig into how to improve at the margin, for which Sethi is an advocate of tools (and a philosophy that anything repetitive should be automated, and anything that can be solved for <$100 should just be paid for and solved!).
Finding The One Decision That Removes 100 Decisions (Tim Ferriss) – Donald Knuth is a renowned award-winning mathematician, and an early user of email since 1975… who quit using it altogether in 1990, stating “Email is a wonderful thing for people whose role in life is to be on top of things. But not for me; my role is to be on the bottom of things. What I do takes long hours of studying and uninterruptible concentration.” From Ferriss’ perspective, the key here is that so much of the focus around productivity today is about how to be faster… while ultimately, having the greatest impact is often about slowing down and “finding targets that don’t require speed”. And once you look at productivity from this perspective, the question quickly becomes: what decisions can you remove from your life… particularly the ones that further lift the load by relieving hundreds or thousands of downstream decisions as well? Accordingly, Ferriss actually highlights that he’s decided not to read any new books, as someone who in the past was a voracious reader, but then had to figure out what to read, and suffer from the “FOMO” worry of not reading the best/right/thing (and as someone in a highly visible position, also get him out of being constantly asked to ‘blurb’ and endorse books as well). More broadly, though, the real questions to ask are simply: in what situations are we actually making decisions or saying “yes” out of guilt (and if you create a blanket policy of ‘no’, does that make all the decisions easier); in what areas do you make a lot of individual decisions, where one blanket policy in that area would simplify the process for everyone; and how can you make more ‘upstream’ decisions that reduce how many problems and decisions flow downstream to you in the first place?
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.