Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with a number of big industry shake-ups, including the sudden news that TD Ameritrade CEO Tim Hockey is out (for what may have been a failure to pay enough attention to the company’s RIA channel), and a management restructuring at Schwab that elevates its Schwab Advisor Services RIA division to report directly to CEO Walt Bettinger at the top of the organization, as the RIA channel continues its rise (and even the attention and resources it commands at historically-retail-oriented brokerage firms).
From there, we have several practice management articles this week, from the latest Schwab RIA Benchmarking Study that shows RIA growth remains solid (but not huge), averaging a 5.4%/year growth rate in clients over the past 5 years, the dynamics of what happens when an advisory firm decides to close its doors to new clients after growing to be “big enough” to satisfy the owner’s needs, how equity-sharing is becoming increasingly common at large advisory firms as a way to attract, but especially retain talent, and a new Risk Alert from OCIE that advisory firms are not doing enough to run their own independent background and disciplinary checks on new hires (and thus failing to properly report disclosable events to prospects and clients).
We also have a few marketing articles, from why it may be better to help prospective clients conduct a “fee audit” of their current advisor (before trying to convince them of your own value for the fees you charge), how trademark law works when it comes to advisory firms and the names of their businesses, and how the targeted advertising capabilities of search engines and social media is making outbound paid advertising an increasingly lucrative channel for advisory firms to pursue for getting new clients.
We wrap up with three interesting articles, all around the theme of trying to make good decisions on the path to self-improvement: the first looks at the fascinating phenomenon that successful systems are often “complex to make [but] simple to break,” which means at some point in the process of success (from business to investing), the focus shifts from building the complex system to work, to simply trying to make sure it doesn’t die a simple death; the second looks at how to think about potentially complex decisions not as an all-or-none “it’s right” or “it’s not,” but on a “confidence meter” scale from 0% to 100%, with a threshold for when a bet is at least “sure enough” to be worth making (while also recognizing that the threshold cannot be 100% because virtually no decision is entirely assured); and the explores how we often try to improve by making something bigger or better, but in practice some of the best improvements can come simply by reducing the leaks and fixing the tiny errors and mistakes that take away from compounding growth along the way.
Enjoy the “light” reading!
TD Ameritrade’s Board Suddenly Pushes Out Tim Hockey After His Big Misread Of RIAs (Brooke Southall, RIABiz) – This week, the sudden news broke that the TD Ameritrade Board of Directors had asked current CEO Tim Hockey to leave (with some sources reporting that Hockey decided to resign, but either way. clearly due to CEO-Board differences), after just over 2 years on the job. And while by most accounts Hockey did a good job growing TD Ameritrade by completing and integrating their recent Scottrade acquisition, and that overall TDA net revenue grew by over 45% during his tenure (with net income up from $212M to $555M), rumors are that the Board was concerned that Hockey – whose roots were in the “retail” side of the business – was not giving due attention to its RIA channel. Thus, even though Hockey recently made high-profile and pro-RIA statements that TDA was committed to not compete with its advisors – a jab at competing RIA custodians like Charles Schwab that are increasingly viewed as competing with their advisors – there was significant concern that in a recent earnings call, Hockey still couldn’t report and didn’t even know what the crucial Net New Assets flows had been from new and existing RIAs (even though historically TD Ameritrade has indicated that RIAs generate 70% – 75%+ of all of its net new assets). At this point, it’s not clear who will take over at TD Ameritrade next, and whether it will be someone more “pro-RIA” or not, but rumors are already flowing that the popular Tom Bradley, who championed the TD Ameritrade Institutional channel and growth for years and was controversially passed over for the CEO position for Hockey two years ago, could be back under consideration again.
RIA Division Gets Leg Up At Schwab Amid Management Shift (Jessica Mathews, Financial Planning) – Earlier this week, RIABiz broke the news that Schwab CEO Walt Bettinger was terminating its now-former retail executives Terri Kallsen (in charge of Investor Services, including the recent launch of the new Schwab subscription pricing model) and Andy Gill (Chief Marketing Officer), in a major restructuring of the executives of the organization. Notably, Kallsen’s head-of-retail position, in particular, has been a high-turnover position for years, as Schwab continues to try to grow its retail presence, and has largely succeeded, but only in the midst of what continues to be a challenging recruiting and turnover environment for the firm’s own advisors. And RIABiz notes that rumors abound that the executive shifts may foretell additional layoffs coming at Schwab as the firm’s retail division continues to evolve. The most notable part of the announcement for advisors, though, is that as a part of the restructuring, Schwab Advisor Services head Bernie Clark will now report directly to CEO Walt Bettinger, in what is effectively a material lift for the significance of the RIA channel at the organization… though perhaps not surprising, given that Advisor Services was responsible for the majority (52%, or $19.3B) of the $37B of net new assets that Schwab took in during the quarter. Which suggests that, just as the retail-vs-RIA battle at TD Ameritrade may have led to CEO Tim Hockey parting ways with the organization, so too is the RIA star on the rise at Schwab as well.
RIAs On A 5-Year Growth Tear (Jeff Berman, ThinkAdvisor) – In the latest 2019 Schwab RIA Benchmarking Study, independent RIAs continue to see strong growth, with the average firm up an annualized 9.4%/year in revenue over the past five years (and up 5.4% in total clients). Perhaps not surprisingly, then, a whopping 71% of advisory firms said they hired additional staff in 2018, and 42% are now even recruiting from other RIAs as the talent shortage of next-generation advisors becomes increasingly acute. Other notable trends that emerged in this year’s Schwab study included: firms are increasingly leveraging an ever-widening range of options to support equity financing for both acquisitions and internal succession plans (from banks to outside investors to the more traditional internal seller-financing); as advisory firms grow in complexity, they increasingly draw in professional management to support, with “only” 48% of $1B+ firms stating that they’re still led primarily by the founder; cybersecurity is increasingly becoming a focus, with 48% of firms now incorporating cybersecurity training in client education, and 92% addressing it in employee training; firms are increasingly trying to find value-adds to offer clients to validate/justify their pricing, including tax planning, charitable planning, family education, and even support on annuity and insurance products; and overall advisory firm profit margins remain strong, with RIAs hovering in the 25% to 30% range of profit margins at all sizes up and down the spectrum.
Should You Close Your Planning Practice To New Clients? (Carolyn McClanahan, Financial Planning) – Nearly 15 years ago, McClanahan made a career switch from medicine to financial planning, with the goal of taking care of the finances of 20 fellow physicians and maintaining a lean lifestyle practice. Now, however, the firm serves 95 affluent families, with a team of four advisors and an office manager with a part-time administrative assistant… and despite growing to become larger than originally anticipated, McClanahan has now decided that this is “enough,” the firm is at capacity, and will close to new clients. The decision is arguably quite controversial in the midst of an industry that insists advisory firms must “grow or die”… yet as McClanahan points out, in reality even if your business does continue to grow, the business you know will die at some point anyway. For instance, in McClanahan’s own firm, she launched with an original vision of a lean solo lifestyle practice with 20 clients… only to decide after 4 years that she wanted to do more in educating other planners on the intersections of health and personal finance (as a doctor-turned-financial-planner), which necessitated the “death” of her original business model and the birth of a new one. But after joining a study group with firms that were mostly larger than her – in order to learn how to grow a larger enterprise – McClanahan realized that owners of larger advisory firms have to spend far more time actually running the business, managing people, and investing heavily back into the business… to the point that the take-home pay of larger advisory firms often isn’t much better than being the owner of a small practice anyway. Of course, it’s one thing to decide to stop growing at a certain threshold – in McClanahan’s case, a target of about 100 client families – but another to figure out how to effectively manage existing team members who may lose their income/earnings upside if the firm stops growing (especially since the firm’s business model is a complexity-based retainer and not the AUM model). Ultimately, as a 55-year-old planner, McClanahan has decided that her approach will be to transition more and more firm duties and client responsibilities to her other team members, allowing their compensation to dial up (and hers to start dialing down) in the process, effectively providing both a continuity transition for clients for her own eventual retirement, and an upside for her next-generation advisors who can grow and mature into the practice as she winds down over time.
How To Think About Equity When Recruiting At RIAs (Jessica Mathews, Financial Planning) – With the competition for next-generation talent continuing to heat up, and advisory firms increasingly recruiting experienced advisors away from other advisory firms, the use of equity as a means to incentivize experienced advisors to join the firm is becoming increasingly popular; in fact, in the recent 2019 Schwab RIA Benchmarking study, a whopping 73% of firms that took employee advisors from other RIAs share equity with non-founders. Notably, though, firms aren’t necessarily sharing equity with the experienced advisors they hire right away; however, they are increasingly presenting a well-articulated “ownership plan” that shows the path to equity, as a way to incentivize their recruiting efforts. In fact, the Schwab study finds that equity-sharing at RIAs is primarily down to retain key talent and/or support the firm’s succession strategy, with only 4% of firms doing so specifically to attract new managing partners or advisors (or as a broader mechanism for employee compensation). And in general, equity-sharing becomes even more common as firms grow (and there is literally a larger pie to split), with 83% of $1B+ RIAs sharing equity with non-founders. However, it’s important to note that for the most part, equity is still purchased by employees, with only 11% of firms simply giving equity as “earned” by the employee and 20% granting it as compensation, while the majority of firms “finance” the equity either directly with employees, through current shareholders, or through external financing with a bank.
RIAs Failing To Vet And Disclose [Problematic] Advisor History (Melanie Waddell, ThinkAdvisor) – In a new Risk Alert from its Office of Compliance Inspections and Examinations (OCIE), the SEC revealed the results of 50 recent exams it conducted for RIAs that previously or currently employed individuals with a history of disciplinary events… which found that a material number of RIAs were failing to provide proper disclosures of their employees’ disciplinary histories. In many cases, the SEC found that the primary issue was that the advisory firms were not conducting their own background checks or searches regarding prior disciplinary actions, and instead were relying solely on supervised employees to self-report their own problematic backgrounds (which in practice didn’t always happen, as new employees sometimes don’t reveal a problematic past in the hopes of getting the job in the first place). In other cases, disciplinary actions were at least disclosed, but may have included “incomplete, confusing, or misleading information,” or failed to include sufficient detail about the number of events, date of each event, allegations, and whether the individual was actually found to be at fault. Other SEC concerns included: advisory firms sometimes have undisclosed compensation arrangements (e.g., with outside solicitors being paid to bring in clients), failing to disclose the existence of forgivable loans made to advisors that can create conflicts of interest for the advisor, and inconsistent compliance practices when overseeing the firm’s compensation practices. The key takeaway at a minimum, though, is that advisory firms should recognize that it’s always necessary to run a separate background and disciplinary check on new employees (to ensure that all relevant disclosures are being made), and not to simply rely on employees to accurately self-report their own potentially problematic history.
Conduct A Fee Audit To Determine If Your Prospects Getting What They’re Paying For (Grant Hicks, Iris.xyz) – One of the fundamental challenges in prospecting for new clients is that these days, it is increasingly common that the prospect already has “an advisor they’re happy with,” which makes it difficult to get them to even consider your services and value as a potential advisor to switch to. Consequently, Hicks suggests that the starting point, instead of trying to communicate your value for the fees you charge, is to first offer to conduct a “fee audit” on the prospect’s own portfolio and financial plan, and try to help them see that what they may not currently be getting value commensurate with the fees they’re paying (and instead are relying too much on simply not being unhappy with their current advisor). For instance, the fee audit might start by helping clients total up all the costs they’re paying (and put it not just in percentages but hard dollar terms), and then show them what they’re receiving and how it compares to the marketplace; e.g., they may be receiving a “comprehensive” financial plan, but does it actually include the full range of topics (tax, estate, insurance, investments, debt, cash flow) that other comprehensive financial plans would cover? From there, you can begin to contrast with what your clients receive, both in tangible benefits (your sample financial plan), and intangible benefits of financial planning (peace of mind, comfort, simplicity, safety, security, time, etc.). The key point, though, is simply to recognize that clients who have only ever had one or a few financial advisors may not even know what the “market” rate of fees really is, what they’re really paying, and whether the services they’re receiving are really consistent with that fee… so rather than talking about what you do and the value you provide, start by offering to do a “fee audit” with prospective clients to help them understand the context of what they’re already getting and what they’re really paying for it now.
How To Protect Your Trademark And Your Business (Tom Giachetti, ThinkAdvisor) – An advisory firm’s brand is often tied up in its name… which means launching or operating with a name that the firm doesn’t actually control and have a trademark for risks having the firm lose its name if a competitor (or more importantly, the actual trademark owner) shows up and demands the firm stop using its current name. Notably, though, under trademark law, actual trademark protections aren’t just created when you take the step to formalize protection (e.g., by registering it with the Patent Office); instead, rights to the trademark arise upon its first use, which is important because it means the firm may actually be able to protect its name and trademark if a future competitor arises using the same name, even if trademark filings have never occurred in the past. To demonstrate that you’re using and protecting the trademark, though, it is necessary to periodically monitor the internet or other sources of information to determine if someone else is encroaching on your rights… or risk having it be deemed “generic” because it’s already moved into common use by others. If a firm does discover someone else infringing on their trademark, the options include sending a “cease and desist” letter asking them to stop (and potentially asking for damages), or outright filing a lawsuit. On the other hand, if you’re on the receiving end of a trademark infringement allegation, the starting point should be to check current insurance coverage (and see if it has “advertising injury” coverage), especially since defending infringement lawsuits can be very expensive. Or alternatively, hiring a trademark attorney upfront to get assistance (and check whether the name is available or already trademarked) and avoid problems in the first place!
Targeted Digital Ads Work For Consumer Brands, But Can They Work For Advisors? (Michael Thrasher, Wealth Management) – One of the challenges of selecting a more focused client niche is that, once selected, the firm has to figure out how exactly to reach that narrowly defined target client. The good news, though, is that in the digital age, it is increasingly feasible for advisory firms to target a very specific type of client, and then create “lead magnets” (e.g., a helpful white paper) to attract and establish a connection with the prospect. For instance, one advisory firm decided to focus more directly on corporate executives with large concentrated stock positions, created a free white paper on concentrated stock positions, and leveraged the internal resources at Dynasty Financial to spend $7,000 on a digital ad campaign to try to target the white paper at relevant prospects… with the end result of landing a whopping $100M in new AUM when the targeting proved successful. Of course, the irony is that, even as advisors, targeted digital advertising is all around us already, such as the “random” website an advisor visits, or product the advisor searches for… and then starts seeing ads for that company or product “everywhere” thanks to Google retargeting ads. But with digital ads becoming increasingly targeted, it’s more and more feasible to reach a very specifically targeted clientele (reducing the amount of advertising “waste” and lowering the cost in the process). In fact, one advisory firm wanted to target prospects who played golf at a specific course and did so by “geo-fencing” their ads to only show for prospects within a particular geographic location. And notably, Dynasty finds in its marketing efforts for advisors that it is feasible to target high-net-worth clientele as well; in other words, digital marketing isn’t just for “young” or less affluent clients, as the whole point of increasingly hyper-targeted advertising is to be able to target exactly who the firm wishes to target (even if it’s an older or more affluent clientele, given the sheer ubiquity of the internet in the modern era!).
Why Things Break: Easy Causes Of Business And Investing Failure (Morgan Housel, Collaborative Fund) – One of the fascinating effects of increasingly complex systems is just how much has to go “right” in order for them to work, even as it takes very little to go wrong. For instance, Housel notes that the average kitchen remodel takes 12 weeks, but after just 5 weeks a human embryo already has a brain, a beating heart, a pancreas, a liver, and a gallbladder, and just becomes exponentially more complex by birth with 100 billion neurons and 250 trillion synapses… while death remains remarkably simple, caused by some combination of blood or oxygen deficiencies that eventually shut the entire system down. And the “complex to make, simple to break” phenomenon isn’t unique to the human body (e.g., construction requires engineers but demolition only a sledgehammer!). In the context of business and investing, there are similarly complex systems in the path to success, for which “death” (or at least, failure) is still often caused by relatively “simple” breaking points. For instance, goals tend to motivate people to do great things, but once the goal is met, those things tend to stop (which feels “OK,” because the goal was met!). As a business owner, being paranoid early on can help create a drive to serve customers/clients well and succeed, but eventually can cause dysfunction in the business. And in general, the growth of a business, or a portfolio, tends to increase its complexity, and complexity itself tends to introduce new weaknesses… thus the rule in biology that species tend to get bigger over time because big bodies provide a competitive advantage, but those big bodies eventually increase the odds of extinction as the species becomes too large to adapt to a changing environment). More generally, being successful at something tends to make you very good at solving that problem, but blind-sided by the next when the future challenges don’t turn out to be the same as the ones that were successfully solved in the past. Ultimately, though, the key point is simply to recognize that success in navigating a complex system doesn’t necessarily mean you can continue to do so forever, and that often it’s the relatively simple things that can ruin it in the end (which, fortunately, are also the things that can be most easily monitored… once the challenge is recognized in the first place!).
The Confidence Meter (Demonetized Blog) – While some people believe that there is no one “truth” that can be known about anything (known as nihilists), for many skeptics the problem isn’t that truth is unknowable, but simply that it’s really difficult to know (or even be confident in the methods we’re using to figure it out)… thus constantly being forced to act and make decisions with limited information at best, while being on a constant never-ending treadmill of formulating hypotheses and trying to prove them (or failing to do so and adjusting them). And as human beings, it can be especially challenging to take on new and different views than everyone else, as human beings are ‘herd animals’ and have a long history of ostracizing from the tribe those who stuck out and did things differently. To navigate this – both with respect to the potential for being right or wrong, and the relative distaste of discovering you’re wrong – consider creating or visualizing a “confidence meter,” that runs from 0% (total ignorance of the topic) to 50% (a “toss-up” decision) to 75%+ confidence (i.e., “it’s a heavily-odds-on bet I’m willing to put money towards”). In this context, then, consider the decisions you make – whether in business or in investment portfolios – and how many of your beliefs really merit a >75% confidence level, versus what’s just a “meh” toss-up instead? Are your decisions (or investment portfolios) aligned accordingly? More generally, though, the key point is that making an investment or business decision doesn’t have to be viewed from an “I’m positive and all in” or “I’m out” framework, but instead can be scored along a spectrum (the confidence meter), recognizing that some decisions may be “more sure” and confident than others but still not reach the critical threshold for “yes”… and in the process, becoming a filter to ensure that only the truly-most-confident views or hypotheses are the ones really invested or acted upon.
To Make Big Gains, Avoid Tiny Losses (James Clear) – Traditionally, the path to improvement is about trying to get better and make big leaps forward, but in practice, some of the best compounding growth can come from avoiding the tiny losses and leaks instead. For instance, in the 1970s, Japanese firms began to outcompete American companies by taking an obsessive focus on “lean production” to remove waste, reduce errors, and increase efficiency, to the point that because of quality, service calls for American-made color televisions were 5X as common as for Japanese sets, and it took American workers 3X as long to build them. The key distinction, though, is that the Japanese didn’t outcompete by trying to hire better workers or materials to make a better product, but simply to build the same product with fewer mistakes and problems; in other words, the Japanese improved not by creating something that was bigger and better, but simply by subtracting the things that didn’t work. And Clear notes the same principle can be applied individually as well, including: instead of trying to become more intelligent, focus on how to avoid more stupid mistakes and mental errors; instead of just trying to earn money, focus on not losing it and managing your risk; instead of trying to make better marketing materials, remove the distractions around the ones you already have; instead of trying to make exercise workouts more intense, just miss fewer of them; and instead of trying to follow a new diet of even-healthier foods, just try to eat fewer unhealthy foods instead. Yet while the concept sounds simple, Clear notes how often businesses do not do so in practice, focusing more on finding peak performers or landing big clients than trying to eliminate mistakes and reduce errors in the business. The irony, though, is that in practice it’s often easier to fix the errors than achieve perfect mastery, as just writing down a detailed process usually begins to highlight gaps or problems that could be fixed to make an immediate improvement.
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.