Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the news that broker-dealers are stepping up their efforts to fight the CFP Board’s fiduciary rule taking effect in October, with a formal letter through the American Securities Association asking the CFP Board to accept Reg BI compliance as sufficient, and the CFP Board responding that it won’t back down from a full fiduciary requirement for CFP certificants and is willing to lose thousands of CFP certificants if necessary to maintain its differentiation (but may partially relent by delaying enforcement and allowing broker-dealers more time to adapt their compliance oversight).
Also in the news this week was an announcement that Morningstar is engaging in its first major overhaul of its Analyst Ratings since 2011 to focus even more on cost (as one of the few factors that is persistently predictive) and benchmark active managers on both a net-of-fees and risk-adjusted basis when comparing to benchmarks and peers, along with a new study by Spectrem Group about why clients leave advisors besides investment performance alone (hint: failure to respond promptly when clients call is still the #1 reason clients fire advisors outside of investment performance!).
From there, we have several marketing-related articles, including tips on how to take baby steps towards enacting a marketing plan for the first time, strategies to expand the visibility and footprint of your advisory firm’s brand, and why it’s better to memorize stories to communicate your value proposition and ‘pitch’ to prospective clients (rather than just trying to memorize the right words alone).
We also have a few practice management articles this week, from the reasons why advisory firms should focus on improving productivity and their systems before just hiring more employees, to what makes billion-dollar RIA standouts more successful than the rest (hint: their speed at which they do reinvest into both their systems and their people), and the concept of “Meta Roles” that employees can (and should be encourage to) take on to help everyone work better together as a team.
We wrap up with three interesting articles, all around the theme of how to take (effective and better) vacation as a financial advisor: the first provides a helpful series of Do’s and Don’ts reminders about how to prepare for a vacation (and what should and should not be communicated to clients in advance); the second gives tips on how to craft the right Out Of Office (OOO) message while you’re out, to ensure the right tone is set with clients and prospects while you’re gone; and the last looks at how the research in behavioral finance can be applied to taking vacations (e.g., focus on experiences over goods, build the anticipation, and always do a big activity at the end given that we most often remember what came last/most recently anyway).
Enjoy the “light” reading!
Financial Industry Group Asks CFP Board To Back Off If Reps Comply With Reg BI (Mark Schoeff, Investment News) – This week, the American Securities Association (a lobbying trade association for regional broker-dealers) submitted a letter to the CFP Board raising concerns that brokers who hold the CFP marks and comply with Regulation Best Interest may still fail to meet the CFP Board’s own fiduciary standard taking effect in October… and therefore requested a safe harbor protection that compliance with Reg BI will be sufficient to avoid any disciplinary action from the CFP Board. And notably, the ASA letter itself is a follow- on from a comment letter last year from a number of brokerage firms, including LPL, Edward Jones, Wells Fargo, and Ameriprise, that raised the possibility of a mass exodus of broker-dealers from the CFP marks if the CFP Board’s fiduciary standard went through. In response, though, the CFP Board merely affirmed that the ASA is correct – the CFP certification’s fiduciary standard is intended to be a higher standard than the minimum regulatory floor of Reg BI (which is what makes the CFP standards meaningful and valuable to the public), and the CFP Board is willing to lose thousands of its 84,000 CFP certificants if necessary to stick to its standards. However, the CFP Board did acknowledge that its Board of Directors may consider a delay in enforcement of the new standards, effectively providing a longer transition period as firms get up to speed on both the CFP Board’s new fiduciary standards and weaving them together with the recently-released Regulation Best Interest.
Morningstar Overhauls Influential Analyst Ratings System (Dawn Lim, Wall Street Journal) – Fort the first time since being rolled out back in 2011, Morningstar is making some significant overhauls to the way it generates its Gold, Silver, Bronze, Neutral, and Negative Analyst ratings for funds. In particular, Morningstar is directing its analysts to focus even more on the costs to investors when rating all types of funds, and to evaluate not just whether costs are competitive relative to peers, but whether the overall impact of costs are squeezing too much in returns for investors (e.g., in certain high-cost-across-the-board categories, where comparative cost alone doesn’t tell the whole story). In addition, Morningstar is making it harder for active managers to get gold, silver, and bronze ratings, and going forward will only provide such ratings for managers who beat their benchmark and peers after fees are deducted and results are adjusted for risk. The new changes are expected to take effect at the end of October, and Morningstar has noted that the changes are anticipated to lead to several downgrades of various investment products.
Why Investors Change Advisors (Catherine McBreen, Iris.xyz) – While some clients will simply leave due to life circumstances beyond the advisor’s control (e.g., death, divorce, relocating), and an extended period of poor performance will often grind on an advisory relationship, a recent research by Spectrem Group entitled “Communicating with Advisors and Providers” finds a number of other, more ‘practical’ reasons, why investors often change advisors. In particular, the #1 reason (42%) that clients state they would change advisors is the failure to return phone calls in a timely manner (and the response scored even higher amongst retired investors), followed by “not providing me with good ideas or advice” (not directly related to investment performance) at 40%, and simply “not being proactive in contacting me” at 34%. By contrast, only 22% of investors stated that “losses over the span of two years” as a reason to move, with 10% citing one year as the measuring period and 17% citing 5 years instead. The key point, though, is simply that often the biggest driver of losing clients isn’t actually investment performance itself, but simply the failure to frequently and proactively communicate and share ideas in the first place.
Taking Baby Steps Toward Your Marketing Plan (Steve Wershing, Client Driven Practice) – For many or even most advisory firms, the “marketing plan” has simply been a sales effort of trying to get in front of and close new clients, without necessarily even creating any of the traditional ‘marketing’ materials like a brochure or (modern) website. And for firms that have created at least some of those materials, it’s often done over time… which means they’re not always in sync, and often become outdated. Yet for firms that aren’t marketing oriented in the first place, doing an entire new “marketing plan” can itself seem overwhelming. Accordingly, Wershing provides some tips on how to take more incremental steps towards a new marketing plan over time. The starting point is to segment your clients, and then write out the relevant characteristics for your top tier of clients (e.g., age, family status, profession). Then create or improve your referral tracking system, so you know where your referrals are coming from in the first place (to get a baseline to measure improvement, and to understand what may be already working for you). From there, focus in on your top-tier clients who are your strongest referral sources, and pay special attention to them (as Wershing’s research has found that providing special treatment to people who refer you really does result in more referrals, as long as the special treatment focuses on the relationship itself and not just a specific transaction). Other tips include: review your planning process, to ensure that when you meet a prospect, you can actually explain to them what you actually do; show your process to Centers of Influence (e.g., take a COI out to lunch, and say “we have a few clients in common and we have referred a couple back-and-forth but I don’t think I have ever actually stepped you through the process we use with clients. Would you like to see it?”); update and memorize your “positioning statement” (i.e., do you have a compelling answer ot the statement “what do you do?”); and develop a new habit of mentioning referrals and how you are referrable (e.g., don’t just say “we have been working on a lot of college funding plans lately” but instead “our clients have introduced us to several people who needed college plans lately”). Notably, most of these individual steps can be completed in just a couple of hours, making it feasible to improve the firm’s marketing plan incrementally in small bites!
The Top 10 Branding Tools For An Advisory Firm (Lee Frederiksen, Iris.xyz) – Having a strong brand (which Frederiksen defines as the “product of your reputation and your visibility”) makes it possible for an advisory firm to generate more prospect leads, close more business, command higher rates, and even to recruit team members more effectively. The question, though, is what firms can do to improve their brand, and in particular its visibility. Frederiksen provides a number of actionable suggestions to work towards, including: write the definitive book on your signature topic (i.e., demonstrate that you really know your stuff for your target audience!); produce a high-quality video (but don’t skimp on the cost, because a high-quality brand needs a high-quality video to support!); develop a must-read industry blog sharing relevant news and commentary for your target market; publish a provocative industry newsletter that provides critical insights not readily available elsewhere; organize a specialized conference in your target market; conduct a ‘groundbreaking’ research project; initiate an awards program (as people love to be recognized, and when they receive an award, they love to publicize the fact!); start an industry index (e.g., tracking a key data point in your target market); cultivate more visible experts in your firm whose personal brands can amplify the firm’s brand; and create a high-profile interview series. Notably, advisory firms don’t necessarily have to do all of these at all, but working on even 1 or 2 well can materially improve the brand visibility of the firm! (And also force the firm to think more clearly about its target market, to figure out who, exactly, to produce such materials for!)
Awkward Memorization (Seth Godin) – The rising popularity of TED talks, along with traditional industry advice like “create an elevator speech”, is leading to more and more people trying to carefully craft a memorized talk or pitch that they will deliver. The problem, of course, is that rote memorization often doesn’t come across as authentic; even great performers who have memorized their lines deliver it without any evidence of memorization, as it still appears to be speaking from the heart, because they’re effectively sharing a story (not just delivering memorized lines). Accordingly, Godin suggests that the better approach is not to memorize a speech or pitch, per se, but to memorize your stories, recognizing that a series of stories weaved together makes a talk or a pitch. And then it’s not necessary to even remember all the lines; just have a few cue cards or prompts to remember each story’s name, and simply tell the stories themselves. Which are much easier to tell with heart, anyway.
Think Twice Before Hiring New Staff (Angie Herbers, ThinkAdvisor) – One of the fundamental challenges of growing an advisory firm is that it requires hiring for advisors to service the growing number of clients… which is difficult both because it’s expensive and time-consuming to find new talent, and even then it takes time for a new advisor to reach full capacity (and profitability for the firm). In addition, adding more advisors to the firm also increases the workload of support staff, which in turn necessitates even more hiring, and further burdens on management. Yet while that may be necessary in the long run, Herbers suggests that for most firms, the starting point should be focusing on how to double the workflow of the firm without hiring any more people… which most firm owners say can’t be done, but in practice have often never actually tried to accomplish, as advisory firms (like all businesses) have an organizational design challenge that what worked in the past won’t necessarily be efficient going forward (and therefore requires the business to be willing to work differently to get more efficient without hiring more people). A few potential paths include: choose to specialize, as when advisors (or whole advisory firms) get more focused and deeper with their expertise, they can produce the results more efficiently (think Henry Ford’s assembly line, where each worker developed a specialized part rather than working on the entire car down the line); shorten time spent with each client (as Herbers suggests that while it’s important to bond with clients, many advisors really spend more time than is necessary with each client); streamline contact with other professionals (e.g., instead of always doing calls with a client’s lawyers, accountants, or insurance agents, instead prepare and send over a standardized overview of instructions and “need to know” items); and encourage the firm’s advisors to be creative themselves about how they can work with more clients (as what contributes most to an individual advisor’s productivity may differ from one advisor to the next anyway).
Billion-Dollar RIAs Outperform By Reinvesting In Themselves (Jacqueline Sergeant, Financial Advisor) – According to the latest FA Insight 2019 Study Of Advisory Firms from TD Ameritrade, which studied what differentiates the largest, fastest-growing, and most profitable advisory firms from the rest, a key differentiator of the top firms is that they are reinvesting in themselves and adding human capital at a much higher rate than peers (increasing employees by 12% between 20166 and 2018). Yet those firms are not employee-heavy in the end; instead, large stand-out RIAs were actually generating a higher gross profit margin (75.5%, vs 63% at other firms), and are more likely to tie their employee compensation directly to helping the firm meet its strategic goals. Other notable differences from the FA Insight study included that standout firms: don’t underprice their services (collecting an average of 84 basis points on every dollar managed, compared to just 74 bps for other firms, and being more likely to collect at least a minimum fee from every client as well); scrutinize their technology spending and focus on generating high returns on their investment; and are more likely to be acquiring other firms (in a repeatable manner).
How Meta Roles Boost Your Career (John Graham, ThinkAdvisor) – Businesses have always struggled with communication and team coordination, especially in the world of financial advisors when firms were historically very silo’ed advisor by advisor… and the trend isn’t helped by today’s shift towards emails and remote work environments (which can further undermine team communications by eliminating opportunities for spontaneous conversation and collaboration). Graham suggests that one way to get employees focused more holistically on their team and the overall firm is to create “Meta Roles”, as a way of getting employees more engaged about tasks and roles beyond just the rote duties of the core job itself. Examples of potential Meta Roles include: the Diagnostician (who helps to take in employees concerns and complaints, and like a medical diagnostician, prescribe a treatment by coming up with a workable solution to the concern); the Dreamer (an employee who likes to dream about how to do things differently in the firm, coming up with new ideas and challenging old ones); the Dissenter (as while it’s important to dissent in a constructive manner, having Dissenters forces the business to think differently about what it does, and helps to avoid complacency and group-think); the Deliberator (whose role is to deep dive into ideas and help ensure decisions are only made after vetting with proper deliberation and research); and the Doer (who is good at just picking up and doing what needs to be done). In other words, Meta Roles aren’t just an abstract exercise; they’re really meant to be functional, encouraging an employee to own the Meta role to create a positive impact for the firm.
What Should Advisors Do Before Going On Vacation? (Bryce Sanders, ThinkAdvisor) – Taking a vacation from time to time is not only an opportunity for a pleasurable experience, but a necessary and healthy recharge for the mind and body. The caveat, however, is communicating it to clients appropriately, both as a courtesy (to let them know you’ll be unavailable), and ideally as a positive way to humanize yourself and make yourself more relatable to clients (but without necessarily highlighting that you’re doing so with the profits you’ve generated from them!). Accordingly, Sanders provides a series of suggested Do’s and Don’ts in how vacation is communicated to clients and what advisors do to prepare in advance, including: Do get in touch, and tell clients the dates you’ll be gone (so they know when you’ll be available or not), and what the coverage will be in your absence (who clients should call with needs, and what your availability will be, or not, in the event of emergency); Do ask if they have anything they need done before you leave, and let them know that you won’t be checking email regularly while you’re gone (but bring along a list of phone numbers and addresses as well, just in case); Don’t hype the luxury and expense of your trip (which risks connecting the dots too directly between the fees clients pay you, and the luxury of your own lifestyle); Don’t go for sympathy (yes, you work hard and long hours and need vacation; so do your clients in their jobs, too, and not all of them get a vacation!); but Do ask about their vacation plans, so you can build rapport over shared vacation experiences!
Crafting Your Out-Of-Office Message? OOOh, Be Careful! (Wendy Cook, Advisor Perspectives) – The ubiquitous availability of email on mobile devices makes it harder than ever to unplug… which not coincidentally, seems to have decreased the use of Out Of Office (OOO) auto-responder messages in recent years. Nonetheless, it’s arguably a positive to unplug from time to time, which means it IS important to set an Out Of Office message, to communicate expectations properly to those who are trying to reach you. The caveat, though, is that your OOO message can actually communicate more than intended, and accordingly Cook suggests spending some time really considering what the OOO should say (or not). For instance, it’s common to say “If this cannot wait, please contact…” but from the client’s perspective, what that really communicates is “I hope you’ll leave us alone until I’m good and ready to be back in touch”, which isn’t exactly a positive message of client communication. Instead, Cook suggests “For immediate assistance, please contact [name]. Otherwise, I look forward to promptly being back in touch with you when I return” which communicates the expectation, while still leaving the choice to the client. Similarly, while it’s important to set expectations about when you’ll be back and who to contact in your absence, the OOO message is also an opportunity to reinforce the client relationship (e.g., “I am attending a Dimensional Fund Advisors workshop, and I can’t wait to share with you the new insights I’ll gain while I’m away”). Of course, be certain to check the OOO for typos as well (as a lot of people may see it!), and it doesn’t hurt to bounce the message off a colleague first as well (both to help spot the typos, and to confirm the tone and message). And perhaps most important… don’t forget to deactivate the OOO message when you’re actually back (remind yourself by scheduling a calendar reminder before you leave!).
Hack Your Vacation, And Other Behavioral Tips (Barry Ritholtz, The Big Picture) – Research on happiness has shown that we derive more positive feelings when we spend on experiences than on material goods… which makes vacations an especially opportune time to leverage spending on experiences to create more happiness for ourselves. In addition to just the benefits of spending on vacation experiences alone, though, Ritholtz notes a number of other relevant aspects of the behavioral finance research that can be leveraged for a more positive vacation, including: anticipation adds to the pleasurable feelings of consumption, so thinking about your trip as you make plans, and talking about how fun it will be, is a great way to kickstart the trip even before it begins; start big, and have a great peak, as the primacy/recency effect and the peak-end rule means we’re more likely to remember what happened first and last (and in general, we remember the peak-intensity positive or negative moments most), so those are especially good areas to focus on scheduling high-impact activities; and socialize the experience, as part of the reason experiences create lasting memories is that they’re shared memories with family and friends… so make sure you engage in the vacation jointly with others, too!
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.