Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the news that President-Elect Trump has selected Wall Street attorney Jay Clayton to take over as Commissioner of the SEC for Mary Jo White… signaling a potential shift of the SEC’s focus away from rulemaking and enforcement, and putting into doubt whether the SEC is likely (or not) to move forward on its own fiduciary rule in the coming years.
Also in the news this week is progress from the Department of Labor to carve out a Financial Institution exemption for IMOs to qualify for the Best Interest Contract and oversee independent annuity agents selling indexed annuities, and a new study from Cerulli finding that despite their tech-savvy inclinations, younger consumers are actually the most likely to be willing to pay for financial advice (but still necessitating a different business and service model than the traditional AUM-centric comprehensive-wealth-management approach used for retirees).
From there, we have a number of articles on marketing and business development this week, including: how to make 2017 the year you generate a better “return on effort” by better focusing your marketing activities; the importance of managing your digital first impression to prospects who check you out online; the core information than any/every financial advisor website must convey to prospects (but most don’t); how a “Now” page on your website can help humanize you and make a better connection to prospects; a study that found the fastest-growing RIAs really are more likely to effectively check the boxes on digital marketing strategies; and a look at how many advisors may be self-sabotaging by separating “business and friendship” when in reality they should focus on conveying their passion and let friends and colleagues who want help come to them and work together.
We wrap up with three interesting articles: the first is a call from Don Trone of 3Ethos to the CFP Board to stop holding out as a fiduciary champion when the CFP Board’s practice standards still allow many CFP certificants to avoid a fiduciary duty, and the organization’s opaque governance and limitations on its own accountability make it look hypocritical in calling for higher standards for advisors; the second is a look at how the world of mutual funds also faces an odd double-standard, where 401(k) plan administrators can be sued for using high-cost mutual funds that they don’t even profit from, but the mutual fund companies themselves face no accountability for trying to sell those high-cost funds in the first place; and the last is a fascinating look from the Wall Street Journal at the evolution of the 401(k) plan, and how even its original creators are not happy with how the 401(k) plan has largely replaced the defined contribution pension plans it was originally supposed to just supplement.
And for those who may be interested, at the end you can check out what I’ve done to implement my own New Year’s Resolution to get healthier in 2017 – by supplementing my existing standing desk with a new under-desk treadmill. In fact, all the background articles for this week’s Weekend Reading were curated for you as I walked (in place) for several miles while reading and typing!
Enjoy the “light” reading, and I hope you had a safe and happy New Year!
Weekend reading for January 7th/8th:
After Ripping Wall Street, Trump Picks Insider Jay Clayton to Lead SEC (Benjamin Bain & Robert Schmidt, Bloomberg) – This week, President-Elect Trump’s transition team announced that it plans to nominate Wall Street attorney Jay Clayton to lead the Securities and Exchange Commission. Clayton is known primarily for his work representing Wall Street firms – including representing Goldman Sachs during the financial crisis when it receive $10B from the Federal government as part of TARP, as well as working on high-profile IPOs like Alibaba’s in 2014. He also has an indirect connection to the world of financial advisors in particular, as his wife is a wealth manager at Goldman Sachs. Thus far, pundits are uncertain what to make of Clayton’s nomination, as his ‘insider’ status with Wall Street suggests he may be more sympathetic to their concerns, while President Trump had tough talk for Wall Street while campaigning for the presidency, and there’s almost no public information regarding Clayton’s political leanings (as he’s made almost no political contributors, and his voter registration records list no party affiliation). Congresswoman Elizabeth Warren has challenged Clayton’s selection as being pro-Wall Street and anti-consumer, though he does at least have deep securities law knowledge to work on investor protections if he wishes to; others have suggested his nomination is primarily just a signal that the SEC will focus more on supporting markets and capital formation and less on rulemaking and enforcement (compared to predecessor chair Mary Jo White, who herself was a former prosecuting attorney). In the context of financial advisors in particular, it remains entirely unclear whether Clayton will have any interest in advancing an SEC-based fiduciary rule. Notably, though, it’s also unclear how much the SEC will be able to get done anyway, even with Clayton, until President Trump nominates two others to fill the other remaining open seats on the five-member commission.
Office of Management and Budget Reviewing Proposed Exemption Under DOL Fiduciary Rule For Some Indexed Annuity Distributors (Greg Iacurci, Investment News) – The indexed annuity industry has been one of the most vocal opponents of the DoL fiduciary rule, and the lead in several of the lawsuits filed against the Department of Labor, not just for the fiduciary accountability it applies to fiduciary sales, but because the DoL’s rule did not conform well to how indexed annuities are distributed through Independent Marketing Organizations (IMOs) that support independent annuity agents. The fundamental issue is that in order to meet the Best Interests Contract Exemption requirements, the client must sign a Best Interest Contract with a “Financial Institution”, and an IMO doesn’t qualify as one, yet insurance and annuity companies themselves have refused to act as the fiduciary financial institution when they don’t directly oversee those independent agents either. Thus far, IMOs have been applying for Financial Institution status, but the one-at-a-time approval process has yet to be completed and approved for any of them. Now, the DoL appears to be easing the challenge by proposing an “Exemption for Insurance Intermediaries” – now being initially reviewed by the Office of Management and Budget – that would grant a broad class exemption to allow IMOs to qualify as Financial Institutions that would sign the BIC (putting them on equal footing to broker-dealers, insurance companies, banks, and RIAs). Notably, there are likely to still be some stipulations, including the potential that IMOs may have to face capitalization requirements; further details are expected in the coming weeks, when the proposal will likely go out for public comment. The good news for IMOs is that ultimately this could relieve their biggest hurdle to the rule, and alleviate their need for lawsuits challenging the rule; the bad news is that it’s not clear how long the OMB initial review, public comment period, and final implementation process will take, and whether the adjustment can be made quickly enough to minimize disruption to IMOs as the initial DoL fiduciary requirements take effect in April, with the remainder rolling out at the end of this year.
Younger Investors MOST Willing To Pay For Financial Advice (Liz Skinner, Investment News) – A new consumer study by Cerulli Associates finds that investors have become even more willing and interested in paying for financial advice than they were back in 2008, up from 40% to 50%. Notably, there is an age-skew to who is most likely to hire a financial advisor, but not in the direction that most would expect – younger investors under age 40, often viewed as being the most tech-savvy and most likely to hire a robo-advisor, were actually the ones most keen to pay for financial help. In retrospect, considering the issues that consumers face at this stage of life – including buying their first home, getting married, and starting a family – it’s not entirely surprising that they’re most interested in financial advice, and given that these kinds of non-investment financial issues are driving their advice needs, there’s a good potential for human advisors over self-directed robo-investing tech platforms. In fact, Cerulli specifically noted that with the greatest advice demand amongst the youngest cohort (with 73% of those under age 30 saying they’d pay for advice), the challenge is that too many advisory firms are still focused on older clients (and the high minimums they can afford), and haven’t rolled out lower-minimum more scalable financial advice business and service models that can provide non-investment-centric on-demand advice (face-to-face or digitally?) from live human advisors.
Master Your Return On Effort (Kristin Harad, Journal of Financial Planning) – A fundamental challenge for many advisors is that it can feel like you’re working harder and harder in the business, yet getting less and less in results or growth. To help refine the focus, Harad suggests that rather than simply focusing on maximizing income, growth, or the return on your invested capital, that you personally focus on maximizing the return on your (personal) effort. Notably, that means you can increase your return on effort by either trying to get better results on the effort you’re putting in, or trying to simply maintain your results but do so by putting in less effort over time. To achieve the former – increasing the returns on your effort – Harad suggests focusing on the quality of your growth, which means trying to not just attract more leads and clients, but higher quality leads and clients (as even if there are fewer in number, that can still be a higher return on your time/effort to get them) by focusing your marketing efforts on a particular target clientele (rather than a scatter-shot approach to marketing). Similarly, you can specifically work on improving your conversion process to turn strangers into prospects, and your closing process to turn prospects into clients, or even consider revisiting your pricing and services altogether to make them more appealing to a particular target clientele (and then go get them!). Alternatively, you can try to improve your return on effort by decreasing the effort you put in to maintain your current business/income; that could mean eliminating/delegating what you should no longer be doing (i.e., make a “Stop Doing” list!), reinvesting into technology tools that can automate parts of your process, or outsourcing what can’t be stopped or automated away (given the growing number of industry outsourcing solutions). The bottom line: if you’ve hit the wall and can’t work any harder, take a moment to figure out if there are ways you can work smarter, instead.
Optimizing Your (Online) First Impression (Cam Marston, Investment Advisor) – Aside from our height and age, almost everything about the first impression we give to prospective clients is under our control, from how we dress and groom ourselves, to the way we decorate our office space and conference rooms. However, Marston points out that in many cases, the prospective client’s first impression isn’t when they meet you in person or see your office, but when they visit your website online. The issue is pertinent to any prospective client, but especially if you’re trying to reach a “HENRY” prospect – High Earner, Not Rich Yet – as Gen X (and Gen Y) clients may be willing to pay for advice, but are notorious for doing their (online) due diligence first. Which means even if a promising young prospective client is referred to you, the first impression will be the one he/she finds using a computer or smartphone, and if it’s not a good first online impression, there may never be an in-person prospect meeting for you to make your first in-person impression! As with meeting someone in-person, though, online first impressions are still all about making a personal connection; in an online context, where you can’t have a direct conversation, that means having a clearly visible, professional-looking, appropriately sized picture, and a bio that highlights not just professional accomplishments but personal tidbits that give the prospect a way to make that first personal connection. The goal is not to sell the prospect on why he/she must work with you on the spot, but it is crucial to make a good enough first impression that the prospect wants to follow through to an actual first meeting!
9 Things Clients Need to Know about You (Kirk Loury, Journal of Financial Planning) – In the past, marketing was all about the brief “elevator pitch” and “value proposition” summaries, but increasingly consumers are looking to make a deeper, more personal connection… which means an advisor’s marketing and messaging must communicate more. Accordingly, Loury suggests a core list of 9 key points that advisors need to communicate to prospective clients through their (online and in-person) marketing, including: Key benefits the client will receive (and remember to focus on not just the features like “an individualized, customized personal financial plan”, but the benefit it conveys, such as “When my clients see their needs and aspirations carefully marked as milestones in the wealth plan, a real sense of financial purpose takes over”); Pricing cost and structure (as people want to know what they’re paying for, and how they’re paying for it); Services you’ll provide (and the more specific with examples of what you’ll do throughout the year, the better!); Why you’re an advisor (as people don’t care about what you do, until they understand why you’re doing it); your community involvement (which helps to illustrate your character, and also potential points of connection to the prospect); your credentials; how you built your company (so they understand the history and context); and your overall business objective (so the prospect can understand if your vision is aligned with their long-term needs). And remember, these may all be points that you explain in-person with a prospect, but if they’re not also on your website, the prospect may choose another advisor who’s more clear on their website, never giving you the chance to tell your own story!
A Simple Way to Make Your Web Site Engaging (Dan Solin, Advisor Perspectives) – On the website of a financial advisor (or almost any business), the typical “about” and “contact” pages tend to provide relatively dry and static background information that may be relevant, but isn’t very dynamic or engaging. To round out the context, Solin suggests creating a “now” page, that describes more directly what you (and/or the firm) are focusing on right now; the idea comes from Derek Sivers, whose “What I’m Doing Now” page helps people immediately make a more personal connection to where his energy and focus is. In the context of a financial advisor, this can be very important for making a positive digital impression on a prospective client, as it helps to make a more personal and emotional connection, beyond the dry details of qualifications and credentials. In fact, Solin created his own “Now” page, and emphasizes that it has led to a wide range of new conversations with clients and prospects, focusing not on his coaching and investment services, but the personal content he shared on the website that let people better connect with him on a personal level. Remember, though, that the point of a “Now” page is not to proselytize for your pet projects and personal passions; instead, it’s simply to share and help people understand your perspective, and make a more meaningful connection.
RIAs’ Road To Fast AUM Growth Paved With Silicon (Christopher Robbins, Financial Advisor) – Historically, referrals have been the number one source of new clients for financial advisors, but a recent study by Freewheel Marketing finds that it’s the most tech-savvy firms that appear to be enjoying the best AUM growth now. To analyze the issue, Freewheel culled a list of 100+ of the “largest” RIAs with >$2B of AUM, scored them across a range of digital marketing technology categories (from marketing automation and blogging, to ad buying, retargeting campaigns, lead-conversion tools, and the use of website analytics), and then cross-referenced them against Financial Advisor magazine’s list of the 2016 fastest-growing RIAs. The result: the fastest growing firms really did have materially higher marketing technology adoption than the rest (for example, the study specifically noted mid-sized RIA Alexandria Capital, which has $630M of AUM and has grown almost 50% in the past two years), and the result held whether analyzing small fast-growing firms or larger ones, albeit with some differences – smaller firms were more likely to leverage social media and sharing tools, while larger firms were using lead conversion tools, and paying for digital ads and retargeting campaigns. Though notably, even the addition of “simple” tools like Google Analytics on a financial advisor’s website was correlated with faster growth. Regular blogging was also much more likely to be occurring amongst the fastest-growth firms. Though just having a fully up-to-date website, designed with the latest web design tools and technology, was ultimately one of the most consistent elements of the fastest-growing firms.
Why A Broken RIA Sales Strategy (Referral Marketing) Is More Of A Repairable Passion Problem (Amy Parvaneh, RIABiz) – It’s a common experience for almost anyone: to be at a social event, and have a friend or family member tell you about how they’re launching a new business or career, and realize it’s only a matter of time before you feel the social pressure to do business with them (or have them outright ask you). Yet Parvaneh points out that for many financial advisors, our friends and family likely feel the same trepidation when they find our we’re working as a financial advisor, which in turn leads many advisors to stray away from soliciting them for referrals and pledging to keep “business and friendship separate”… but potentially blocking their own growth in the process. After all, getting prospective clients to engage you for wealth management does often require a personal connection, and if you carve out most of your social relationships from your business, you carve out most of your business opportunities as well. So what’s the alternative? Parvaneh the key to breaking through the dilemma is to find your passion for giving financial advice (or whatever your passion may be), because the reality is that when you’re engaged in and sharing your passion, it doesn’t feel like (and usually doesn’t come across as) marketing at all when you share what you do, even to friends and family. It can also help to inspire your staff to also talk more excitedly about the firm. But the bottom line is to simply recognize that while it can feel awkward to pitch your services out to friends and colleagues, it’s much easier to talk about your passions, and let them ask to do business with you if/when they’re ready to do so.
CFP Board: Stop Calling Yourself A Fiduciary Champion (Don Trone, Financial Planning) – The Financial Planning Coalition, of which the CFP Board is a prominent member, has been actively involved in supporting the DoL fiduciary rule, from filing a favorable comment letter to support the proposed rule, to filing an amicus brief to support the Department of Labor in its defense of various lawsuits challenging the rule, emphasizing that “Since 2008, CFP professionals across all business and compensation models have been required to operate under a fiduciary standard similar to that required by the Department of Labor’s … rule.” However, Trone suggests that this statement is not accurate, as the CFP Board’s current fiduciary standard has substantial “loophole” exceptions that allow a material number of CFP professionals to not be bound by a fiduciary duty, and Trone notes that when he launched a fiduciary handbook in partnership with the FPA in 2010, the CFP Board shortly thereafter ended his approved status as a continuing education sponsor (which he contends was retaliation for working with the FPA to try to take the lead on fiduciary away from the CFP Board). Trone also notes that the CFP Board touts its growth in the ranks of CFP certificants as a substantiation of its fiduciary standard, but contends that it’s more likely driven by the growth of CFP training programs than because the CFP Board enacted a fiduciary standard. And in the meantime, Trone points out that the CFP Board has been acting to limit its own accountability, restricting its Terms and Conditions to force CFP certificants to agree to mandatory arbitration and waive their own right to sue in court, though ultimately he suggests that if the CFP Board’s Board of Directors fail to engage in sufficient oversight of the organization, they might still be sued directly by CFP certificants for their own fiduciary breach to put stakeholders first. The fundamental point: if the CFP Board wants to claim the moral high ground on fiduciary issues, it could stand to clean up its own fiduciary standard and governance processes, first.
The Legal Double Standard For Mutual Funds (John Rekenthaler, Morningstar) – In today’s legal environment, 401(k) plan sponsors that use mutual funds in their plans face substantial liability exposure. Recent class action lawsuits have challenged everything from plan sponsors failing to secure the lowest cost mutual fund share classes, failing to offer the “right” selection of funds (e.g., not offering a stable value fund for cash positions), and failing to sufficiently control plan administration and record-keeping fees and disclose revenue-sharing agreements. Yet at the same time, Rekenthaler notes that the mutual fund companies themselves, which create the share classes, set their costs, and market them in not-always-transparent (or sometimes highly misleading) ways, face little accountability. A mutual fund company can defend its costs by saying it’s within a ‘normal range’ (or even defend being the most expensive by noting that “someone” has to be), even as the 401(k) plan provider – that doesn’t even design the mutual fund, but merely picks it – is often legally accountable for finding anything but the lowest possible solutions in any particular category. So why the double standard? Ultimately, the reasoning is rather straightforward: mutual fund producers are governed by the disclosure-oriented Investment Act of 1940, while 401(k) providers have to adhere to stricter ERISA fiduciary rules. Yet the question remains: why is it that the corporate purchasers of mutual funds, who often make no profit on their actions, are fully accountable in court to the highest standards, while those who make their living by producing expensive mutual funds in the first place are let off the hook?
The Champions of the 401(k) Lament the Revolution They Started (Timothy Martin, Wall Street Journal) – When the 401(k) plan first launched about 35 years ago, it was envisioned as a private savings account that could supplement a company pension that guaranteed payouts for life; it was never expected that such defined contribution plans would replace pensions in the subsequent decades, as big employers looked for ways to cut (or at least better control) their costs. As a result, only 11% of workers actually have access to both a defined benefit and defined contribution plan, while 33% of workers are covered by only a 401(k) plan. Looking back, even the early backers of the 401(k) are now saying they have regrets about how their creation turned out, noting that early forecasts of adoption and participation were too rosy, and that the 401(k) plan has overexposed workers to big drops in the stock market and high fees from Wall Street money managers. The situation is complicated by the fact that most people don’t even fully understand how much they need to retire, much less how to invest it properly, and the uncertain and stress that causes just further reduces participation (or at least, leads to insufficient savings for many). Defenders of 401(k) plans still emphasize that pension plan participants are at risk of substantial losses if the employer defaults and goes out of business, while 401(k) plans are fully capable of producing more than enough for retirement if employers provide access and people start saving early enough… but the challenge remains how to help those who are not saving-inclined already. Some already-implemented fixes have helped the issue, such as easing rules for automatic enrollment, and allowing default investment options into more growth-oriented target date funds (at least compared to money market accounts), but expanded efforts including supporting states to set-up automatic enrollment IRAs are now causing debates about whether government-run solutions will crowd out private sector competition. Still, others say that reforms haven’t gone far enough yet, and that the final solution – similar to what’s been adopted successfully in other countries – should be a mandatory savings plan that would be government-run, and administrated by the Social Security Administration, with investments managed by third-party professionals (to prevent investors from harming themselves in market downturns).
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, here is a picture of my latest standing desk setup! As you may recall, I adopted a standing desk back in the middle of 2015, and have found it’s helped to relieve the back pain I often felt when sitting at the computer all day, in addition to helping me lose some weight.
Now, I’ve added an under-desk treadmill – the Lifespan TR1200-DT3, for those who are interested – and also a set of new 32″ computer monitors to ease the strain on my eyes (the Samsung 32″ LED model), though in retrospect I have to admit they may be a little too large, and most advisors would probably be better served using the 27″ version of the monitors, instead.