Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with a deep dive from Bob Veres into the Consultant’s Report recently released by FPA that was reportedly the driver of their recent OneFPA Network initiative to dissolve and consolidate all the FPA chapters… which, as it turns out, wasn’t actually a recommendation from the Consultant in the first place, and in fact the Consultant had cautioned FPA that chapters were concerned about how National was encroaching on chapters and that they valued their autonomy! And raising troubling questions about who is really driving the OneFPA Network initiative.
From there, we have a number of articles about advisory industry trends, including two interesting retrospectives on the major events in 2018 (e.g., fiduciary rulemaking and RIA consolidation) and the potential industry issues still looming in 2019 (will a new advocacy organization emerge for the growing RIA channel?), a discussion of whether recent market volatility will impair the valuation of advisory firms and potentially even bring an end to the current seller’s market (or whether revenue decreases from the market decline will just make buyers push even harder to acquire more to grow their revenue instead!), and how a cottage industry is forming around the FINRA expungement process to cleanse brokers’ BrokerCheck records (which helps to clean up frivolous customer complaints, but with a 93% expungement rate, may be proving too easy to remove bona fide regulatory black marks as well?).
There are also a number of cash-flow and budgeting oriented articles this week, from a look at how bankruptcy judges are starting to reconsider whether student loans should be adjusted in bankruptcy, how to do a credit freeze for a child (now that Congress has passed a law allowed any parents to do so, for free), tips for navigating the financial conversation in a (new) couple’s relationship, and some tips about how to determine what is “reasonable” spending for ultra-wealthy clients who really can afford almost anything.
We wrap up with three interesting articles, all around the theme of self-improvement and creating (good) new habits in the New Year: the first explores the research on how to cultivate better habits (drawing on James Clear’s recent “Atomic Habits” book); the second looks at how to minimize being “stupid” (i.e., overlooking or dismissing conspicuously crucial information, or avoiding avoidable mistakes and errors); and the last provides some further food for thought about how to better meet goals even as we all struggle from time to time with our own willpower to do so by creating habits that avoid any need to have or rely on willpower in the first place (and just let the automatic habit take hold instead!).
Enjoy the “light” reading, and Happy New Year!
The OneFPA Network Consultants Report (Bob Veres, Inside Information) – When the FPA announced its OneFPA Network initiative, it emphasized that the process began with chapter leaders in 2013 stating that they wanted better collaboration and integration with National, leading to a consultant being hired in 2014 to evaluate the entirety of the FPA who “uncover[ed] operational and cultural issues impeding FPA’s growth and success,” which in turn led to the Board initiating the OneFPA proposal as a solution. However, the FPA only just recently actually released the 2014 Consultant’s Report to the membership… and as it turns out, the report shows that chapters were not actually asking to be dissolved into a single centralized entity at all. In fact, Veres notes several criticisms and concerns that the Consultant’s report raised that are entirely opposite of what FPA National ultimately proposed with the OneFPA Network, including: Chapters acknowledged the benefit of Greater Coordination but valued their Autonomy, and it was National that was prioritizing more centralized coordination; Chapters were concerned that National was already encroaching on their sponsorships; Chapters were already concerned that they were being informed of National’s strategic direction but not involved in its development (as sadly reinforced by the entire OneFPA rollout itself); and the consultant’s report itself explicitly stated that “Whether FPA’s current chapter structure is the most effective structure to serve FPA’s organizational purpose is beyond the scope of this assessment.” Notably, the Consultant’s Report did highlight agreement from National and Chapters about the benefits of greater website coordination, and that Chapters wanted better more proactive support from National regarding membership database management… yet those are all areas that National could have (and didn’t) accomplish even under its existing structure. In fact, even in the 2014 Consultant’s Report, when asked, “With the best interest of FPA as a whole in mind, assess the ideal level of autonomy (independent decision making authority) of your chapter to national,” the overwhelming majority of the Chapters said that their current autonomy was appropriate, and that the primary things they wanted to change were simply more timely communications and more dues sharing with chapters, while it was the National Board and staff that stated to the consultant they thought chapter autonomy should be decreased. Which raises the fundamental question yet again: who is really driving the OneFPA Network initiative, the Chapters (as National claims), or the National leadership itself?
Biggest Events For [RIAs] Last Year (Joe Duran, Investment News) – While the consolidation of RIAs has been a trend underway for many years, arguably 2018 was the year that the rise of the “National RIA” really came to the forefront. From the merging of Edelman Financial with Financial Engines to create one of the widest-reaching National RIAs (with a newfound penetration into the employer retirement plan marketplace), to the IPO of Focus Financial as the first publicly traded “pure” RIA (or at least RIA aggregator) that validated the opportunity for RIA consolidators to expand their valuations with public market multiples, which in turn further accelerated (and even contributed to the frothiness of) the seller’s market for RIAs, and just the sheer number of RIAs that are quickly approaching or have already surpassed $25B of AUM, including Captrust, Creative Planning, Edelman Financial, Mariner, and of course Duran’s own United Capital… some of which may become $100B RIAs in just a few more years. In the meantime, 2018 created a lot of volatile rollercoasters as well, from the actual market volatility in the final quarter of the year, to the explosive volatility of Bitcoin and cryptocurrencies in general (with Bitcoin approach $20,000 at the beginning of 2018 and collapsing under $3,500 by the end of the year!), and also the regulatory volatility of both the death of the Department of Labor’s fiduciary rule and the emergence of the SEC’s own Regulation Best Interest proposal. We’ll see what 2019 holds?
Voids Were Exposed In The RIA Business In 2018; Who Or What Could Fill Them In 2019? (Brooke Southall, RIABiz) – The entire advisory industry is in flux today, from the ongoing proposals to add/impose/change a fiduciary rule on advisors, to the annihilation of many active managers and looming obsolescence of a large swap of asset managers, aging RIA custodians ripe for disruption, and even new threats to passive franchises (as it was Fidelity that was the first to launch zero-fee ETFs to undercut Vanguard and Blackrock). Though Southall suggests that one of the most confused trends of RIAs in 2018 is the rise of the “National RIA,” a motley category that now includes both big call centers (e.g., Vanguard’s Personal Advisor Services and Fisher Investments), big robo-advisors (e.g., Betterment and Wealthfront), big roll-ups (e.g., United Capital), and big ensembles (e.g., Creative Planning and Edelman Financial Engines), while more and more independent broker-dealers recast themselves as not just platforms for hybrids but bona fide national RIA platforms themselves (e.g., Commonwealth and Cambridge). At the same time, though, there is still a void amongst the RIA community for a clear centralized organization to lobby and advocate for them (focusing just on the client-facing advisory business, and not the asset-management side of the RIA business), even as the Broker Protocol breaks down and both broker-dealers and even wirehouses begin to enter into the RIA fray, not to mention rising competition from RIA custodians themselves with their own private wealth management divisions (e.g., Schwab and Fidelity). Still, though, the RIA community is spawning a wide range of start-ups to attempt to fill the voids as well, from technology needs to RIA support platforms, and Southall notes that even with encroaching threats, the natural independence of the RIA model promotes a level of both curiosity and decisiveness that tends to keep them one step ahead of the competition.
Sellers Market For RIAs May Be Ending (Charles Paikert, Financial Planning) – As markets pull back, advisory firms operating on the AUM model tend to see margin compression, as revenues decline while costs remain steady (as clients must still be served, and if anything, demand more time and service from their advisors in the form of handholding). The good news is that advisory firms that had healthy profit margins in the first place can generally weather the storm (i.e., it’s a profits recession, but not something that requires firing team members and scaling back). The bad news, though, is that if advisory firms have lower profit margins, they simply can’t command the same multiple-of-revenue purchase price that was available to them at the market’s peak. Which means, as advisory firms begin to pull back from peak valuations, that it may give more bargaining power back to RIA buyers in what has for years been a seller’s market. After all, when profit margins are high and valuations are at a peak, there’s little room for buyers to negotiate, as they all are pushed to offer the most any firm can reasonably afford. However, with profit margins down – albeit “temporarily,” until markets recover – buyers have more room to negotiate with sellers. In addition, inefficiencies in advisory firms – e.g., bloated payrolls and poor use of technology – that may have been masked in peak margins of rising margins suddenly become revealed in the financials of an advisory firm going through a bear market. Of course, the reality is still that there are an immense number of advisory firms that want to buy – perhaps even more in the face of declining bear markets that put even more pressure on consolidators to acquire to maintain top-line revenue growth – and the fact that buyers still dramatically outnumber sellers means sellers still have a lot of bargaining power. But at a minimum, the market pullback may begin to more clearly separate the valuations of well-run advisory firms from the rest.
Cleaning Up Tainted Broker Records Becomes A Cottage Industry For One Law Firm (Jeff Benjamin, Investment News) – As consumers increasingly check references online before hiring a financial advisor, the visibility of BrokerCheck – and any “black marks” of disciplinary action on a broker’s record there – are becoming increasingly important, especially since one of the greatest predictors of bad behavior from a broker is whether he/she has had problematic behavior in the past. On the other hand, the rising consequences of having even just one negative report on BrokerCheck also means that brokers are more concerned than ever about having “frivolous” or questionable complaints from customers where (no matter how unlikely or illogical) the complaint (and “implied” black mark) remains on the record even if it’s ultimately determined there was no actual wrongdoing. Fortunately, FINRA does have a Dispute Process for brokers to try to obtain expungement of their BrokerCheck records… but the need for expungement has become such high stakes that now a single law firm, aptly called “AdvisorLaw,” is making an entire business out of broker expungement requests, having single-handedly filed 252 of the 403 broker expungement requests last year alone, with a whopping 89% success rate. From AdvisorLaw’s perspective, they’re simply providing a key service for brokers who “incorrectly” had marks placed on their BrokerCheck record, does not even take cases where the broker was found guilty or admitted guilt, and focuses primarily on expungement scenarios where the claim is either false, impossible, or where the registered representative wasn’t actually involved in the alleged sales violation. On the other hand, some are raising concerns of whether expungements are going too far, and even FINRA itself recently announced proposed new guidelines for arbitrators to reduce the current 93% approval rate on expungement requests (as while false or inappropriate complaints may occur, it’s hard to believe that 93% of them were false!), especially since arbitration panels that decide on expungement often never hear from the original customer who made the complaint and may only be getting the broker’s one-sided story.
Judges Wouldn’t Consider Forgiving Crippling Student Loans… Until Now (Katy Stech Ferek, Wall Street Journal) – For decades, student loans were known as one of the few debts that bankruptcy judges would never consider reducing, as even the Department of Education would argue that student loans should only be canceled for a hardship that was expected to persist for at least 25 years (a typical repayment period), which is virtually impossible to prove. But now, as some students enter bankruptcy proceedings with crippling 6-figure debts, some judges are expressing a willingness to revisit the old guidelines about what constitutes “undue hardship” that could trigger a loan reduction… or if not outright cancelling the student loan debt, perhaps cancelling future related tax bills, try to make repayments more affordable, or encourage lawyers to represent the borrowers for nothing (in a world where the student loan bankruptcy lawsuits themselves can cost $3,000 to $10,000 and take years to resolve). The problem is coming to a head as across the country, nearly 45 million people carry student debt, and over the past decade alone the total amount has more than doubled to a whopping $1.4 trillion. And not only are judges themselves potentially becoming more amenable to some form of student loan relief, but the shift in legal views is also reportedly making lenders themselves more willing to compromise and reach settlement resolutions out of court. At the same time, though, several bills in Congress that would give even more flexibility to the courts to erase student loan debt in bankruptcy have stalled. Nonetheless, a movement appears to be growing amongst judges to at least consider cancellation, and the rising potential for student loan debt cancellation is in turn leading to more cases being filed to request it, which may mean it’s only a matter of time before the floodgates open.
You Should Freeze Your Child’s Credit. It’s Not Hard. Here’s How. (Ron Lieber, New York Times) – Thanks to a recent new Federal law, the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, anyone from an infant to your great-grandmother can freeze their credit report for free (a Congressional response to the Great Equifax Hack of 2017 and the aftermath of people who struggled with costly and delayed credit freezes). And now that “kiddie freezes” (children under age 15) are available, Lieber suggests it’s a good idea to do as soon as possible… since arguably there’s little possible reason your child would actually need to have their credit report pulled (and if they do, you can unfreeze it then), but doing so prevents them from facing a messy identity theft situation that they might not otherwise discover until they’re adults and try to use their credit and realize it’s long since been stolen and besmirched (especially problematic since most people don’t monitor the otherwise “idle” credit reports of their children in the first place). And fortunately, Lieber notes that the process actually isn’t very onerous, as there are specific Children Credit Freeze pages for each of the major credit bureaus Equifax, Experian, and TransUnion, with the required forms, and instructions on what information to send them (generally, proof that you are who you say you are and the child is who you say the child is, which means some combination of child’s birth certificate, Social Security cards, and driver’s licenses, though that information must be mailed or potentially faxed and cannot be electronically uploaded). Once the forms are processed, a response is mailed back to confirm the freeze in a few weeks. Though bear in mind that for children who are 16-and-older, they are still deemed “adults” for credit purposes, and must use the standard adult-credit-freeze process (though because the late-teenager likely won’t have a credit file yet, identity information similar to that for minors will still need to be mailed).
Navigating The Financial Side Of A Relationship (Maria Teresa Hart, New York Times) – While couples can fight about anything, money fights tend to be particularly toxic, with one recent study showing a direct relationship between the number of times a couple argues about their budget each month and their subsequent divorce rate. Which in turn leads many couples to avoid talking about money at all, even though that can ultimately just corner the couple into an untenable situation they have to discuss when it’s too late to come to an easy compromise. Hart suggests that the starting point to having such couples discussions about money, though, is to ask about and understand each other’s personal history with money – e.g., childhood memories about money and parents’ money behaviors (and the lessons they imparted). Unfortunately, though, society often teaches us that money is an intimate subject to be secretive about, which makes it hard to share and let someone else in the first place (not to mention that it can feel like you’re losing some individual financial autonomy to share your financial details with your current or future spouse). Still, though, not facing the hard money issues often just leads to more issues, and what one financial therapist calls “cycles of shame and spending” that can emerge. Yet at the same time, it’s important to remember that because couples have different money histories, the ultimate conclusion may not be a compromise around shared money values and philosophy, but simply an understanding that each member of the couple approaches money differently (as author Gretchen Rubin puts it in her recent book, “The Four Tendencies”), and that the couple must sometimes learn to agree to disagree and respect each others’ money differences.
Merrill Lynch’s Spending Advice For The Wealthy (Abby Schultz, Barron’s Penta) – One of the unique challenges that very affluent families face is figuring out how to set spending limits for the family when there’s so much wealth there really doesn’t have to be much of a limit in the first place. For instance, they really could afford that Ferrari anytime they wanted… which makes it difficult to decide whether to buy one or not. It may be difficult to figure out something as “simple” as “how much should we spend on our next family vacation” when the truth is that almost anything is “affordable” for an ultra-wealthy family. The Merrill Lynch Center for Family Wealth Dynamics and Governance suggests that the starting point should be taking the family back to their own Core Values and Principles, and then decide whether the potential expenditure fits those values and a desired outcome (e.g., to preserve wealth, grow it, or spend it down). Because without a conversation and due consideration, the decision framework that tends to emerge is the individual’s “money scripts” from their childhood about what is and is not “appropriate” spending behavior, which may or may not connect to the client’s current financial reality (leading them to be either too profligate, or to thrifty). Although in some cases, making a good spending decision simply comes down to working with an advisor to really think through all the implications and long-term impact (e.g., buying an additional home or a jet isn’t just a matter of the upfront cost, but the ongoing maintenance costs as well, weighed against the alternative of just leasing or renting instead).
How To Develop Better Habits In 2019 (Ryan Holiday, Medium) – Almost everyone wants to cultivate better habits, but most of us struggle to make them a reality, from the New Year’s resolution to go to the gym more often, the desire to eat healthier, or the plan to sit down for a new creative project we’ve been procrastinating on. But how do you go about actually developing better habits? According to James Clear’s recent new book “Atomic Habits” (which represents the “small habits that make an enormous [atomic] difference” in your life), the starting point is to recognize the long-term impact of making never-ending small incremental improvements, as even “just” getting 1% better every day compounds out to 3,678% improvement by the end of the year! Which means, for instance, that you shouldn’t promise yourself to “read more,” and instead just commit to reading a (very doable) one page per day. If you’re prone to “forgetting” your new habit commitments, consider creating a physical reminder as well; for instance, Holiday keeps a picture of Dr. Oliver Sacks on his desk with a sign in the background that says “NO” to remind him to say “No” more often himself (and better focus on what he’s saying “Yes” to), or to encourage yourself to Journal more, put your journal right on top of your desk each evening so that when you arrive in the morning you have to go out of your way to move them to not engage in the habit (or simply journal as you intended to!). Other notable tips include: piggyback new habits on top of old habits (e.g., if you already take a walk every morning, commit to picking up trash along the way as well, and now you’re also cultivating a habit of volunteering in the neighborhood!); be mindful of who you surround yourself with (as those with bad habits will tend to rub off on you, and those with good habits will, too); and try to make it more interest by making it more social (e.g., with the Spar! app); create a standard “ritual” for the habits you want to honor, as that means once you do just the first step of the ritual, the rest of the habit tends to be automatic; and recognize that even the best habits don’t necessarily have to occur every day (exceptions are OK, too, and no one is perfect!).
How Not To Be Stupid (Shane Parrish, Farnam Street) – Most people think of “stupidity” as the opposite of intelligence, but chess master Adam Robinson suggests that in reality, “stupidity is overlooking or dismissing conspicuously crucial information.” In other words, while some people might naturally be smarter than others, anyone can make (or avoid) stupid mistakes by failing to properly consider all the obvious information in front of them. Which means, in essence, avoiding real “stupidity” is about avoiding avoidable human errors. And in practice, such moments of “stupidity” happen in surprisingly predictable situations; the factors that increase the likelihood of making stupid mistakes include: being outside your normal environment or routine; being in the presence of a group; being in the presence of an expert (or when you believe you’re the expert); doing any task that requires intense focus; getting stuck in information overload; being physically or emotionally stressed or fatigued; and rushing or a sense of urgency. The more of the factors that are present, the greater the risk of a stupid mistake, and notably, these factors are surprisingly common, including in many high stakes situations; for instance, all of them are common factors present in hospitals, which is one reason why the current estimate is that anywhere from 210,000 to 440,000 people die every year from hospital errors (as contrasted with “just” 30,000 fatalities from automobile accidents). And unfortunately, even checklists don’t necessarily help, as ironically the factors that drive “stupidity” also cause people to misuse checklists as well! Which means the starting point for minimizing stupid mistakes is just to minimize the presence of the 7 factors in the first place. (And then, perhaps, checklists can help!)
How To Meet Your Goals Without Willpower (Ephrat Livni, Quartz) – For centuries, the conventional view is that we all have a certain (limited) amount of “willpower” that we can use (and potentially exhaust) trying to fight and resist our sinful impulses. But more recent research in psychology reveals that’s not really the way willpower works… or at least, that it’s much more nuanced than just being a simple finite resource that we deplete and restore. In fact, the whole nature of “habits” is that we have certain behaviors that essentially occur on autopilot without much rational or conscious thought. Which on the one hand, means you need a lot of “willpower” to break the habit. But also means that if you can reprogram yourself to focus on new habits, that you don’t necessarily need the “willpower” to get there, because the habit will carry you there automatically anyway! Of course, that still raises the question of how to better program “good” habits for ourselves. According to Charles Duhigg, who wrote “The Power Of Habit,” the key is to create cues that associate positive experiences with the kinds of activities we know we should do anyway. Thus, for instance, it’s better to treat yourself to chocolate after a workout than kale chips, as the craving for the chocolate can actually help to subconsciously remind you to work out in the first place (and associate the workout with a positive experience of chocolate at the end). Similarly, packing gym bags in advance, or even sleeping in workout gear, also reduces our need to think (and have willpower) and defaults us into the habit of what we’re trying to accomplish anyway. Thus, making to-do lists works… not only because they literally remind us of what to do, but also because we enjoy crossing the items off at the end, and why setting deadlines also works (because it feels good to meet them!). So in the end, if you’re finding yourself struggling with having the willpower to meet your goals, don’t try to figure out how to get more willpower… try to figure out how to create habits that make goal success a mindless (no-willpower-requiring) result 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.