Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with an interesting new advisor survey showing that the number of face-to-face client meetings being held is already starting to decline, with some meetings being replaced with communication alternatives from larger social events to email and newsletter distributions to regular contact via social media; the end result is client communication that is more frequent and more timely but also more targeted for relevance and allowing the advisor to be more efficient.
From there, we have several practice management articles this week, including a review by Bob Veres of the recent FPA NexGen conference and the major themes emerging from young advisors, a look at what motivates young Millenial employees from the perspective of a “robo-advisor” who hires them to build the company’s technology platform, tips from practice management consultant Angie Herbers about how advisors must learn to recognize that what was effective to get them to where they are may not work to get to the next level, a guide from the Journal of Financial Planning about how to actually build a strategic business plan for your existing advisory firm step-by-step, and a great cover story from Financial Planning magazine about the rising trend of wire fraud targeting advisors and what to do about it.
We also have a few investment-related articles, including a discussion of how much advisors and their clients may be giving up (and may have lost already in the past several years) by investing in short-term bonds waiting for interest rates to rise, a study by Wade Pfau about whether it’s reasonable to haircut long-term returns when doing straight-line financial planning projections to account for sequence-of-return risk, and some ideas about how to implement a covered call strategy for clients who want to protect against risk or generate more “income” cash flows for retirement.
We wrap up with three interesting articles: the first looks at a recent survey of 700 advisors about how they define success and what it takes to get there (key points include that having the right mindset is essential, but success is most commonly defined by levels of personal engagement, client engagement, and team engagement in the firm); the second is a reminder that while there are clearly many things that computers and robots can do better than humans, there is still a lot that humans do better; and the last is a fascinating look at whether we perhaps don’t give enough credence to rules of thumbs and instead rely far too much on impossibly complex analyses that don’t actually improve (and may even worsen) the outcome.
And be certain to check out Bill Winterberg’s “Bits & Bytes” video on the latest in advisor tech news at the end! Enjoy the reading!
Weekend reading for July 5th/6th:
The Fall Of The Face-To-Face Client Meeting – A survey conducted by Peak Advisor Alliance and Cerulli Associates finds that advisors are meeting less often in one-on-one face-to-face meetings with clients, typically no more than once or twice per year. In lieu of these individual client meetings, advisors are hosting more frequent client and social events, getting proactive about email and newsletter distributions, and making regular contact via social media. The broad theme is that communication is moving towards contact that is more frequent, more timely, but more targeted, which allows the advisor to be more efficient. But it’s not just about advisor efficiency; advisors are also reporting that their clients themselves are more willing for virtual meetings (though not surprisingly older less tech savvy clients are adopting in smaller numbers).
What an Elite Group of Younger Advisors Has to Say – This article by industry commentator Bob Veres covers the recent FPA NexGen conference for young financial planners, which is oriented primarily around facilitated group discussions (rather than the usual lecture format) that are chosen by the attendees at the start of the conference, which included both (young) staff advisors trying to grow and advance within an existing firm, and entrepreneurial young advisors who are building their own practices (primarily trying to work directly with their peers in new business and service models). Key themes to this year’s conference included: the importance of work/life balance (and how to communicate about and negotiate for a more ‘balanced’ job responsibilities with the firm owner) and firm culture (companies with good culture will attract employees, and companies with a reputation for bad culture may struggle as the word gets out); firm cultural challenge points (from firms that are inflexible to change and adapt to a rigid adherence to client minimums that limits young advisors’ ability to obtain their own clients); solving these work/life balance issues by going independent and establishing a self-run practice designed around the young-planner-firm-owner (a “lifestyle” practice not at the end of the advisory firm’s existence but from the start!); a growing range of business models (not just AUM, but working in an employee benefits department, or an hourly model, or a “subscription” monthly fee model, and more – though notably, commission + fee was not discussed); new service models that de-emphasize portfolio management (and often outsource it altogether) and focus more on other financial planning issues and needs; and building firms that are niche-focused and “location-independent” (i.e., client meetings are all virtual, so the location of the advisor/business is independent of where the clients are located). The article wraps up with a list of “NexGen” technology tools, resources, and apps that were discussed at the meeting.
The Millennial Definition of Success – From the blog of Adam Nash (CEO of “robo-advisor” Wealthfront), this article looks at how the Millenial generation (who are doing much of the work in building the Wealthfront platform) define success in their own careers. As Nash notes, the old adage for success in business is that it’s all about “what you know” and “who you know” but Millenials are actually embedding this into their career decisions; they want jobs where they can control who they work with and what they’re working on, and look for opportunities where they are able to learn from the people they work with and feel drawn to the values and mission of the people and company they’re working with and for. In other words, it’s no longer a question of whether you live to work or work to live, but whether the work you’re doing is part of a life mission that accomplishes both at the same time (though in practice, that means Millenials may be willing to take far less pay to focus on an organization from which they draw purpose). In fact, Nash notes that in this context, the very definition of “success” for Millenials is focusing on having increasing control over who you work with and what you work on, using financial success to take increasing control of their careers to steer them towards the opportunity to do work that is meaningful and fulfilling for them. The bottom line – whether building a “robo” advisor that needs a team to construct it, or a human advisory firm working directly with clients – is that when trying to attract, retain, and maximize the value of Millenials, recognize that financial reward alone is not enough (instead, they’re attracted to “is this the problem I want to work on?” and “are these the people I want to work with?”), and that in this increasingly networked economy Millenials want to be working on teams that can continue to grow and expand their own networks.
Want To Continue To Succeed Owner-Advisors? Give Up These 3 Sacred Cows – This article from practice management consultant Angie Herbers makes the point that as advisory firms grow, what it takes to get to the next level of success is often different than what it took to get to the current level of success; as a result, firms must continually evolve and owners must change the way they run their firms, or risk hitting a wall. In fact, Herbers notes that firm owners unable to let go of the way they did things in the past is one of the most significant blocking points for them to move forward. For instance, as firms grow, it becomes crucial to build processes and procedures, yet when firms grow large enough that focus must evolve to focus more on getting the right people on board and into the right jobs, and training them accordingly. In turn, Herbers suggests that there are three cherished beliefs” that advisory firm owners must give up to build an effective training program for their staff members: 1) move from a “procedure” orientation to a “resource-based” focus (it’s no longer about being the owner that has all the answers and the processes to implement, but about being able to problem-solve whatever arises using the resources that are available; 2) do for employees what you’ve already done for yourself and reduce the number of hats (just as firm owners hire employees and shed some of the many hats they wear, eventually the same must be done for their employees as roles continue to specialize and employees wish to grow and advance); and 3) transition from a static mentality to a growth mentality (when firms are static, an employee who leaves is replaced by a new employee who is trained to do the same thing; when firms are growing and staff is expanding, each new employee starts a job that is different than any job that currently exists, and must be trained accordingly). Ultimately, the goal is not just to solve problems as the firm grows, but to structure the firm in a manner that allows it to be more dynamic to deal with the future problems that may lie ahead.
Putting Strategy into Action to Accelerate Growth – This article from the Journal of Financial Planning looks at how to actually formulate a business plan, for the approximately 50% of financial advisors who still don’t have a written one (according to the FPA’s Research and Practice Institute study last year). While business plans are often discussed as something to focus a new business, this article actually focuses more on how to execute a business plan in the context of an existing advisory firm, where the purpose is primarily to establish an annual plan that fits within a long-term growth strategy but gets granular enough to set short-term responsibilities for each staff member in the coming quarter and year. As the author suggests, crafting an annual business plan is a four-step process: 1) set a broader vision about where the company is going over the next 3-5 years, containing no more than about 4 key goals; 2) establish specific objectives over the next 3 years that will advance towards the vision (the objectives should fit within the vision, but be bigger than items that would just be completed in a single year); 3) formulate what the deliverables will be to achieve those objectives (this might include several deliverables for each objective) that are specific enough to be assigned to staff members who will be accountable for them; and 4) determine the roles and responsibilities of who will make sure the deliverables get done, including a clearly assigned leader for each, and supporting team members as necessary. Going forward, management of the business should track progress towards the objectives, implementation of the deliverables, and quarterly performance reviews for staff should track their progress against their assigned deliverables. Ultimately, the goal is to have a clearer focus for the business about what exactly is trying to be accomplished (to truly be strategic about execution), communicate the goals more effectively to get everyone on board, have better benchmarks to evaluate job performance, and identify where capacity might have to shift to avoid bottlenecks (e.g., where one staff member clearly is becoming responsible for too many deliverables).
Fraud Alert: How to Fight New Cyberscams – The cover story of this month’s Financial Planning magazine is about the growing trend of wire fraud, and features a somewhat “frightening” wire fraud attempt where a hacker broke into the email account of a client who was already in the midst of shopping for a house, and sent an email request to the advisor requesting a wire transfer to facilitate closing on the house the next day; it was only upon a follow-up phone call to the client that it became clear the client was still shopping for a house, not ready to close on it, and the attempted fraud was revealed. And the frequency is on the rise as well; a survey from Financial Planning magazine revealed that almost 25% of advisors have experienced a fraudulent transfer request in just the past 12 months, with 8% reporting multiple attempts. And the challenge is that attempts are wire fraud have now gone far beyond just getting poorly worded fake emails from a fake account written in broken English; hackers now may compromise the client’s actual email address, and will read through the client’s email history to understand more about the client’s situation and send a more ‘convincing’ fake email impersonating the client to request a (fraudulent) transfer (in addition to scouring prior emails for attachments that might include account numbers or signatures). The request might also give some excuse about why the transfer is urgent, and the client is not available (e.g., “I’ll be at my aunt’s funeral, and my daughter needs the money right away for an emergency.”); sometimes thieves will even call the advisor’s firm directly to try to accelerate the process with a staff member who doesn’t/wouldn’t know them. Advisors registered with the SEC are required to have an anti-fraud/identify theft program under Regulation S-ID (also known as the “red flags rule”), though it’s a good idea for any/all advisors to have processes and procedures in place to verify client wire transfers – the most straightforward is to always require a phone call to verify a transfer (only call out to them at an existing established phone number; don’t accept an inbound call that could also be fake), though other techniques include notarized paperwork, or even a secret access code. And it’s important to explain these processes to clients in advance, both to communicate that you’re trying to protect them, and also to set expectations in case they really do have a legitimate wire transfer to complete. Notably, if the custodian makes the mistake in allowing the fraudulent transfer, they are generally liable to make the client whole, though if the advisor as an intermediary authorizes the transfer without reasonable procedures, the advisor and their firm could be liable, and E&O insurance might not cover it (especially if there was no reasonable process in place to protect against the risk).
The Risk Of Short-Term Bond Funds – For the past several years, the primary risk most advisors and investors have been concerned about is the danger of rising interest rates and the associated impact on bond prices; however, as advisor Rick Ferri points out in this blog, moving into a short-term bond fund to defend against this risk has a danger of its own: lost return by sitting in a lower return bond fund waiting for a rate increase that hasn’t happened. In fact, as Ferri notes, the opportunity cost for advisors and investors who have been sitting in short-term bond funds since the Fed began its program in 2009 (and began to stoke fears of rising rates) has actually cost more than a rate increase itself would have at this point! For instance, the 5-year return on the Vanguard Total Bond Market fund (SEC yield of 2.13%, duration of 5.6) has been an annualized 4.75%, while the Vanguard Short-Term Bond fund (SEC yield of 0.87% and a duration of 2.7) has returned only an annualized 2.53%. In dollars, $10,000 invested in the intermediate bond fund would be up to $12,614 while the short-term bond fund would be up to only $11,330, which means even if interest rates jumped by 3% this year the intermediate-term bond investors would still be ahead given the 11.3% difference in cumulative return! Ferri does acknowledge that investors who really have short-term liabilities should match them with short-term bonds, but for everyone else – with a long-term time horizon – be cautious about letting the fear of rising rates stop you from investing in a diversified “proper” portfolio.
New Research On How To Choose Portfolio Return Assumptions – This article by Wade Pfau on Advisor Perspectives looks at the impact of varying portfolio return assumptions on financial planning projections, in both the pre- and post-retirement phases. The starting point, though, is to simply calculate returns properly in the first place; for instance, the long-term arithmetic average return (using Morningstar/Ibbotson data back to 1926) is 11.8% for the S&P 500 and 5.5% for intermediate-term government bonds, but the geometric return (i.e., return generated by compounding actual dollars with volatility) is 9.8% and 5.4%, respectively. The compounded real return (after inflation) is 6.6% and 2.3% for stocks and bonds, and is 5.0% for an annual rebalanced 50/50 portfolio. Of course, the additional complication is that for clients who have cash flows (going in or out of the portfolio), there is a sequence-of-returns risk inherent in the volatility as well. Given these parameters (and a 50/50 portfolio), Pfau tests whether haircutting returns during the accumulation and decumulation years (e.g., reducing projected returns by 2.5%/year) is an effective means of modeling the impact of sequence-of-returns risk, using three different scenarios (a lump-sum investment once and holding for 30 years, saving a fixed percentage of inflation-adjusted salary for 30 years, and withdrawing a constant inflation-adjusted amount from a portfolio over 30 years). The results suggest that advisors may indeed wish to haircut returns (if they’re using straight-line fixed projections) to account for the range of Monte Carlo outcomes and the sequence-of-return risks it models, and furthermore that because sequence-or-return risk is greater for retirees, the downward adjustment to return assumptions would be greater for retirees than accumulators. (Of course, the alternative would simply be to do retirement projections using Monte Carlo in the first place, which models these sequence-of-return risks, and simply choose a conservative probability of success.)
How to Use Covered Calls – This Financial Planning magazine article looks at the growing number of advisors who are using covered call options strategies, where clients write call options to generate cash flows while holding the underlying stock/ETF positions for potential profit (and to protect against any losses on the call options if the stock rises significantly). In some cases, advisors execute the strategy specifically to supplement dividends in creating cash flows for retirement – especially for clients who need income of 5%-6% per year in today’s low-yield environment – while others are simply using the strategy to supplement client total returns or even to partially protect against downside (by using the call option premium to help fill in any decline in the value of the stock over just holding the stock on its own). The approach might pair together buying a new stock position and writing the call option along with it (also called a “buy-write” strategy), or could simply be writing call options against existing positions (though clients should be warned of the limited upside and potential the investment holding could be called away if the market rises). For advisors who don’t want to be responsible for executing the covered-call-writing process themselves, and managing the call option transactions and timing, there are a number of mutual funds that execute the strategy; Morningstar analysts suggest finding a fund that has a track record of navigating a full market cycle with reasonable results, to give some assurance they have experience implementing the call writing strategy in both bull and bear markets.
700 Advisors Talk About Success – From the blog of practice management consultant Julie Littlechild, this article discusses the results of an advisor survey that looked at how advisors characterize “success” for themselves and their businesses, and what factors are most important to achieve success. Rated across seven categories – mindset, physical health, planning/goal setting, client engagement, team engagement, business efficiency, and personal efficiency – Littlechild found that the most crucial factors critical to success are advisor mindset, client engagement, and physical health. Notably, though, the mindset and client engagement categories also showed the biggest “gaps” between how critical advisors thought the areas were, and how well they were personally executing on it; other gaps included personal efficiency and planning/goal setting. Overall, Littlechild found that having a strong mindset and work ethic was a critical deal-breaker for success (i.e., if you’re missing those, the success won’t happen no matter what), but ultimately the key differentiators in which advisors were most upbeat around their own success seemed to be a combination of personal engagement (having a vision for both their own lives and how their businesses fit into it), client engagement, and team engagement.
The Kind Of Work Humans Still Do Better Than Robots – This article from the Harvard Business Review looks at the ways that people and computers are starting to come together in business, with a recognition that while some things are better done by computers, others are better done by humans, and the best solutions are often combinations of each. Sometimes it’s clear who is suited best for which role, though arguably it’s getting less and less clear which roles humans are better suited for, or where the human-computer combinations will excel, given how technology just continues to advance. Some tasks remain so complex that computers just can’t seem to brute force calculate them – whether it’s playing the Asian board game “Go” or predicting how proteins will fold – and the human brain is still best, though scientists actually still aren’t certain why the human brain solves these problems more effectively. Nonetheless, the implication is that there are domains of tasks and work that require taste, creativity, or some kind of aesthetic or emotional response, where the computers still lag behind. Is it possible that computers could someday catch up in even those areas? Perhaps, but this certainly reveals the areas where humans are likely to continue to bring value to the table, at least for a while longer!
How To Win By Doing Less – This article from The Motley Fool makes the interesting point that in baseball, an outfielder catching a routine fly ball does something truly remarkable: the player performs an unimaginably large number of complex calculations in the span of a few seconds to catch a fly ball that sailed hundreds of feet through the air after coming off a bat at close to 90 miles an hour, accounting for the ball’s initial velocity, spin, angle, wind direction, and more. Of course, in truth baseball players really do not perform such calculus in their heads; instead, they use a simple rule of thumb, where they align the fly ball with the center of their gaze, start running, and adjust their own speed and direction so the angle of the ball stays at the same spot in their gaze – and the end result is that the player finishes where the ball will land. The fundamental point – often, complicated problems really can be tamed with simple rules of thumb, and in the case of especially complex scenarios (like the trajectory of a fly ball) it can be impossibly complex to do the math in a timely manner even while the rule of thumb easily succeeds. Accordingly, a lot of the same approaches can be effective for investing, too: “calculating” the timing of the market is complex, but dollar cost averaging is a simple rule of thumb that works; detailed evaluations of every possible stock is complex, but just focusing on a few that are especially cheap and avoiding those that are extremely expensive is a simple rule of thumb that works; calculating forward expected returns of markets is complex, but recognizing that the past 10 years often predict the opposite trend in the next 10 years is a simple rule of thumb that works. The bottom line: sometimes rules of thumb aren’t nearly as bad as we make them out to be, going for more complex calculations doesn’t always lead to better results, and in fact the best performers – whether baseball players or successful investors – often do far more of the former and less of the latter than you might expect.
I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd’s Eye View – including Weekend Reading – directly to your email!
In the meantime, if you’re interested in more news and information regarding advisor technology I’d highly recommend checking out Bill Winterberg’s “FPPad” blog on technology for advisors. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read “FPPad Bits And Bytes” on his blog!