Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the latest of DoL fiduciary news, including the revelation that the Justice Department does not intend to defend the "class action lawsuit" provision of the fiduciary rule in the current Appeals lawsuit that fiduciary opponents have filed, a memo from LPL that indicates it expects the DoL fiduciary rule to stick and will be limiting the ability of its brokers (but not those on its RIA platform) to solicit 401(k) rollovers (suggesting that LPL may be pivoting its entire business to be more RIA-centric), and an announcement from Raymond James that it will be converting the payout grid for its independent channel to be entirely "product-neutral" with just a straight revenue-based payout (starting at 81% and rising as high as 90% for top producers).
From there, we have a few practice management articles this week, including a look at when to think about using debt proactively as a business management tool in advisory firms (especially since private equity investors often demand more in dividend payments than lenders demand in interest payments!), when you consider soliciting input from clients when making a potentially significant business decision, and how to create a "Client Retreat" event to deepen the relationship (and the breadth of solutions) for your clients.
We also feature several articles specifically focused on finding work-life balance, whether as an advisory firm owner or an advisor employee, including how to approach the work-life balance question as an employer (it's all about setting clear expectations of what it takes to succeed in the firm), how to change your situation if you're an employee unhappy with your balance (it's all about starting the conversation with your firm/supervisor about what you want to change, and discussing ways to make it work for both parties), and how financially successful "lifestyle practices" can actually be (the idea that a lifestyle practice with good work/life balance can't also be profitable is a myth... at least when done right!).
We wrap up with three interesting articles, all from people who have experienced early retirement or extended sabbaticals, talking about what they learned that surprised them about retirement (or a "faux retirement" sabbatical) in their first year. Key points included that more time at home makes it far easier to eat healthy and exercise more, but that the "best" days are still the ones where there's something to "do" when you wake up, that you may find even more opportunities coming to you once you're retired (which means you need to be careful to figure out what filters you will use to decide whether to say "yes" or "no" when they come along!), and that while you'll have more time to deepen spousal and other family relationships, don't underestimate how much you may miss the social environment and camaraderie of your "work family" as well!
Enjoy the "light" reading!
Weekend reading for July 8th/9th:
Justice Department: DOL Fiduciary Rule Should Be Upheld—Just Not the Class-Action Part (Diana Britton, Wealth Management) - Last summer, the U.S. Chamber of Commerce and SIFMA filed a lawsuit to block the Department of Labor's fiduciary rule. Texas Chief Judge Barbara Lynn ultimately ruled in favor of the Department of Labor (and not to stay the rule), the case was appealed, and now the U.S. Justice Department has filed its 135-page court brief to defend itself in the Appeals Court. In its brief, the Federal government continues to stand behind the fiduciary rule, but explicitly stated that it would not defend the provision of the rule that requires Financial Institutions to allow consumers the right to file a class action lawsuit when advice is provided to rollover IRAs. The shift is consistent with President Trump's recent positioning in a separate case, NLRB v. Murphy Oil USA (which is currently pending before the Supreme Court)... although if the Trump Administration loses, it could become even more difficult for fiduciaries (and even FINRA) to require mandatory arbitration at all. For the time being, though, and in the context of the DoL fiduciary rule, the unwillingness of the government to defend that section raises the possibility (though it does not ensure) that the court could agree with the plaintiffs and ultimately strike down the class action requirement of the BIC exemption (and allow Financial Institutions to once again force consumers into mandatory arbitration, even in cases of alleged fiduciary breach). Given the string of legal losses that fiduciary opponents have faced thus far, the fact that the Department of Justice has pledged to continue to defend the fiduciary rule makes it likely that it will remain. However, the potential that the class action provision even could be struck down in court raises serious concerns about the overall enforceability of the DoL fiduciary rule with respect to IRAs, given that the Department of Labor has the right to set fiduciary rules for IRAs but not enforce them, and without the risk of a class action suit looming, Financial Institutions may simply decide that occasionally losing one-off mandatory arbitration cases against individual brokers is an acceptable "cost of doing business" while pushing the line on the fiduciary rule. And of course, in the meantime, the Department of Labor has already separately begun the process of potential further changes to the fiduciary rule with its recent Request for Information, suggesting that while the rule may "stick", there is still substantial uncertainty about exactly what will remain in the final version next year.
LPL's DoL-Rule Memo To Reps Implies Become RIA Or Stand Down On Rollover Advice (Lisa Shidler, RIABiz) - As the largest independent broker-dealer, what LPL Financial does holds a lot of sway in the broker-dealer community as a prospective sign of "things to come". And so there has been a great deal of focus on a recent LPL memo to its brokers, that effectively stated that its brokers should only provide education with respect to 401(k) rollovers, and accept investor-directed rollovers, but not directly solicit and recommend 401(k)-to-IRA rollovers themselves (to stay compliant with the DoL fiduciary rule). But the limiting directive on rollovers was only a requirement for LPL's brokers, and not whose who use its RIA platform (who would ostensibly be eligible for the streamlined Level Fee Fiduciary exemption on rollovers). And for those who are hybrid RIA/B-D registered, the RIA can still do the rollover but must submit an attestation to LPL to substantiate that the RIA has its own policies and procedures in place to meet the DoL rule. Defenders of the policy point out that given LPL's size, it is a large and potentially appealing legal target once the final DoL fiduciary rule is fully implemented, which means the company may feel it has little choice but to assert a bright-line separation between its brokers and level-fee-fiduciary-eligible RIAs. And to the extent that its advisors use their own RIAs (and simply custody on LPL's RIA platform), LPL may be able to avoid legal liability exposure to its advisors' actions. But at the same time, when the largest IBD begins to effectively steer all its advisors who want to continue to participate in the lucrative 401(k)-to-IRA rollover business from its broker-dealer over to the RIA side of the platform... it suggests that LPL itself may see its long-term future not as an IBD at all, and instead is pivoting to compete as one of the country's largest RIA platforms in the future!
RayJay To Implement "Product Neutral" Grid For Indie Brokers (AdvisorHub) - Also in the DoL fiduciary news this week was the announcement that Raymond James is revamping its grid payout formulas for its independent broker channel, and will be adopting a "product-neutral" grid that simply pays all of its brokers a straight percentage of its aggregate fees and commissions regardless of product sold. The payout rate will start at 81% for those with up to $500,000 of revenue in the previous 12 months, and top out at 90% for firms with more than $10M of revenue. Notably, Raymond James actually eliminated its product-based grid for its employee advisor channel back in 2013; this change is specifically for its independent channel, and appears to be a direct result of the DoL fiduciary requirement that firms implement policies and procedures to minimize broker incentives to sell certain products over others. Accordingly, Raymond James also announced that it will be adopting a flat $25 ticket charge on all transactions (previously, charges ranged from $22 to $26 based on the product). Notably, in practice the prior range of product-based grid payouts was narrow enough that most independent reps on the RayJay platform will not likely see a major change in net compensation; nonetheless, the shift to a product-neutral grid is significant, and given Raymond James' size and success, will likely set a precedent for other (independent) broker-dealers to follow as well.
When [Business] Debt Is Good (Mark Tibergien, Investment Advisor) - In the aftermath of the financial crisis, "debt" is often a bad word, something that advisors coach against, politicians are looking to reduce, and college graduates are increasingly burdened by. But Tibergien notes that in the business context, "debt" is often referred to as "leverage", which has more positive connotations (at least for some) and recognizes the kind of positive potential that can be achieved. After all, while it's dangerous to fund a depreciation asset with debt (e.g., an automobile), funding an appreciating asset with debt can just amplify its returns... whether it's real estate (financed with mortgage debt), or a business (funded with business loans). And as advisory firms continue to grow into increasingly large businesses, Tibergien suggests that it's time for more advisory firm business owners to start considering when and how debt might be used to (appropriately) leverage the company's balance sheet. The starting point is to recognize how the prudent use of short-term debt can help to smooth out an advisory firm's cash flows; given that most advisory firms bill quarterly, but pay staff monthly, the business must either accrue an increasingly large block of cash as working capital to cover the ongoing monthly costs between billing periods... or use debt, typically in the form of a line of credit, to help finance cash flows (and reduce the need to rely on a sizeable cash position). For firms that are growing (and want to accelerate growth), debt financing is also an appealing means to finance that growth, whether it's borrowing to finance the cost of an acquisition, or to hire and invest in marketing and sales. And notably, while many advisory firms don't like to have debt payments looming, the reality is that getting capital by sharing equity (e.g., selling a piece of the firm to a private equity investor) will typically entail a 'required' payout of an ongoing dividend anyway (as the outside investor still wants a return on capital, too!), which means debt-financed growth may actually present less of a long-term cash flow constraint than simply borrowing (given both that interest rates on debt are often lower than private equity preferred dividend rate requirements, and that at least a debt can eventually be paid off, while private equity dividends must continue in perpetuity!).
When Do You Involve Your Clients In A [Business] Decision? (Steve Wershing, Client Driven Practice) - Many advisors try to leverage client feedback to get input on a potential new initiative or service offering, but a common challenge is figuring out when and how to solicit that feedback. For instance, if the firm is working on a new website re-design, should you create some working drafts and then show it to select clients, or is it better to just bring the current website to your client advisory board for feedback up front and see what they suggest are needed improvements in the first place? Wershing suggests that it's far better to involve clients in the process earlier rather than later. Not only may it get them excited to help potentially spread the word when they get an early "sneak peek" at what you're working on, but feedback about the current site, and what it may be missing or not doing well, is an opportunity to better understand what your clients are really looking for in the first place (as the reasons our clients decide to do business with us aren't always the reasons we think!). And in some cases, early feedback can simply save the firm a lot of wasted effort on a failed initiative; for instance, one advisor planned to launch a new service to help clients with teenagers to select, apply to, and prepare for the right college for their children... only to discover in the early feedback phase that although clients loved the idea and had lots of suggestions on how to do it, it was also revealed that what they would be willing to pay was nowhere near the likely cost to the advisory firm to offer it! The bottom line - don't discount the value of getting feedback from your (top) clients about what you're doing in the business before you do it, as it can both help to shape whether or how to offer new services to them, in addition to making them feel more engaged (which can improve retention and referrals), too!
How To Create A Client Retreat (Bill Harris, Journal of Financial Planning) - For most advisors, growing and scaling an advisory firm is simply about how to more effectively deliver a growing volume of 1-to-1 client meetings. But Harris decided that, to better delve into his niche (empowering recent widows) and reach even more people, he would organize a Client Retreat. Notably, this was intended to be more than just a group seminar, but an actual multi-day escape to help clients step away from the current routine of their lives, and re-focus themselves to set new personal goals and a path forward (a common challenge for recent widows to figure out!). To create the desired feel, the venue was a semi-luxurious boutique inn and spa (only 40 overnight rooms and beautiful grounds), and attendees would pay a cost of $399 to attend (plus the cost of the hotel rooms, which were organized with the hotel as a room block). Of course, creating such a Retreat is not simply an "if you build it, they will come" approach, so the firm also had to market the initiative, which they did through a combination of an event page on the firm's website, emails out to its 1,200 person e-newsletter list (first "Save the Date" teasers, then the registration information itself), social media distribution (including paid boosts and posts in various Facebook groups), discount codes to Centers of Influence, and even distributing physical flyers at appropriate niche-targeted locations (e.g., bereavement groups). Notably, the subject matter of the Retreat itself was beyond "just" financial issues, to anything/everything relevant to the target audience - the event was dubbed "Rise Up: A Reinvention Retreat for Widows", and speakers included others who had made the successful transition through widowhood, a life coach, a nutritionist, and a yoga teacher. Overall, Harris was happy with the results, but did provide a few key tips: one-day events are much simpler than multi-day events; marketing can still be a challenge; charging a premium price helps to attract quality attendees; give careful consideration to the exact event date for potential conflicts; and have a cancellation policy (especially since many arrangements may already have been paid in advance).
How To Balance A Life (Philip Palaveev, Financial Advisor) - One of the most common challenges for advisory firm owners is that they put in more work and effort to the business than their employees, creating a tension between the founder's desire to grow the business, and the desire of employees for "work-life balance". Yet Palaveev notes that the whole concept of "work-life balance" means different things to different people; for firm owners, it's often a negative connotation of employees who leave early for kids' soccer games, but for some employees it mean simply mean "taking an afternoon break with the kids, and then finishing work later in the evening"... and that the same amount of work will still get done. Accordingly, Palaveev suggests that firm owners should be wary of trying to demand more rigorous and fixed work hours to get more from employees, and instead simply try to be clearer in defining what is expected of them as professionals, and the consequences of not meeting those expectations. In turn, though, such a discussion can raise additional issues to be prepared for - for instance, is the firm creating an environment where the only people who can succeed are those with no kids or family commitments, and is that really what the firm wants/expects? More generally, though, the reality is that the work culture of a firm is usually still set by its leader at the top, and employees often recognize (even if only intuitively) that long-working bosses often expect long hours from employees to get ahead (and conversely that if you're someone who is ambitious and ready to put in the hours, it probably won't be recognized and rewarded by a lifestyle-oriented founder). Nonetheless, Palaveev suggests that by trying to get more explicit about the expectations of the firm and its leadership, there is more likelihood of a clear alignment between employees and leadership (or at least, that those who won't be a fit will recognize it early and transition themselves!). On the other hand, advisors themselves should recognize that the early "growth" stage of a career is often the one with the worst work-life balance... but that it is also a temporary phase, which means sometimes even if it's not ideal, it's a good idea to "tough it out" and do what it takes (and sacrifice some work-life balance) early on, to be able to achieve a better balance later.
4 Ways Young CFPs Can Balance Passion And Practice (Rianka Dorsainvil, Investment Advisor) - Amongst Millennials in general, there is a common goal of trying to succeed in the workplace and also figuring out a way to spend time on things that fuel their passions (rather than simply doing one now, and the other later). Dorsainvil points out that when it comes to financial planning, there is at least more opportunity to pursue such a path than in many other careers, given the sheer flexibility of being a financial advisor (especially as an independent). However, even amongst Millennial advisors, the work-life balance is often less than ideal, and even jobs that initially are a good fit can drift over time. Accordingly, Dorsainvil suggests that for Millennial advisors who find themselves in such a funk, the first key step is to start a dialogue with your boss/supervisor about the concern, and explore how the situation might be improved - recognizing that with a shortage of young financial planners and the costs of turnover, many employers may be more willing to acquiesce than the Millennial advisor realizes. Of course, there's still always a possibility that the firm or supervisor will say "no" and reject the request, but even then it may help to ask for further clarification about why - is it a budgetary issue, the timing of the request, or possibly just a misunderstanding about what you actually wanted? And if there's really no effective path forward, remember that you can look to new job opportunities as well; it may take time, but in the end you'll be glad when you find a firm that really does feel right for you (but be sure to ask more questions in the financial planning job interview, to ensure that the next firm really does have the culture you want!).
How Lifestyle Advisers Can Succeed (Sean Allocca, Financial Planning) - In today's advisory world, "lifestyle practice" often has a negative connotation, implying that the advisor is unambitious, unable to grow profitably, and/or won't be able to keep pace with the changing demands of the marketplace. Yet a recent new white paper from SEI, dubbed "The Purposeful Advisory Firm", finds that in reality many lifestyle firms include stronger cash flows for owners than larger enterprises (with 53% of lifestyle firms having a margin of more than 31%, and 55% having gross revenue of more than $1M dollars!), in addition to having a higher quality of standards and a more loyal clientele! For those who want to formulate a successful lifestyle practice, SEI suggests the four key components to consider are: people (you need a small core staff who are well-trained and well-compensated, as key employee turnover can be very problematic); value proposition (having a clearly differentiated niche is essential to compete against larger firms that would otherwise have more resources to deliver to clients); investment philosophy (a model-based approach is crucial to maximizing efficiency and profit); and technology (which is also crucial to efficiency, in addition to being able to bolster the client experience of the small firm). And notably, even as advisory firms continue to grow larger, the SEI survey finds a growing majority (64%) of advisors see themselves as advisors first and business owners second, as modern platforms and technology make it more feasible than ever to be a successful lifestyle practice!
Early Age-52 Retirees With $3M Shares 10 Things That Surprised Him About Early Retirement (ESI Money, Business Insider) - For many prospective retirees, there's a certain vision and expectation of what retirement will be like... a time of leisure, when there are no longer any work obligations. However, retirement in practice doesn't always feel quite as expected. Early-retiree (and personal finance blogger) "ESI" shares his perspective on what he learned from experience after his first year in retirement (at age 52), and what surprised him, including: Mondays are the worst day of the week for most workers (the end of the weekend and the start of the work-week), but the best day as a retiree (as everything from the gym to stores and restaurants are "crowded" on weekends, but sparse on weekdays when everyone else is working!); you turn into a morning person when you don't fear waking up for work anymore; old colleagues have trouble accepting you're "retired", and you may even find you get more job opportunities when you don't need them(!); not having "work" to do doesn't mean you aren't busy (it simply shifts from things you have to do, to things you want to do that you schedule for yourself); you have time to get physically fit again (with both more time to exercise, and a home routine where you can better control what you eat); family relationships improve when you have time to spend on them (including the relationship with spouse, and adult children); there's more time to experience personal growth, such that early retirement can actually be a renaissance of learning; and you won't even realize how much stress you used to struggle with in your working days, until it's gone (but it can take months into retirement to complete the de-stressing transition!).
Lessons Learned After Retiring At Age 40 (Reddit AMA) - While retirement itself is a major transition for anyone, it can be especially challenging to navigate for those who retire "extremely" early. In this Reddit AMA, an ultra-early age-40 retiree shares his perspective on the first year of retirement (having retired with a nest egg of $1.8M). Key points include: home life is vastly improved as stress levels decrease; there is more time to exercise (but it is especially critical to do so to stay healthy given the age and stage of life!); as a very-early retiree, kids are often still in the home (having not gone to college yet), which provides more time for bonding family time (but also led to a shift to seeking out more "unstructured" family time to connect); household duties can shift dramatically (as the early-retiree husband who didn't cook in the past now does the bulk of the household cooking); the freedom to say "no" allows you to be very frank and picky about what you commit to, but opportunities may come that are appealing to take on as a way to keep the brain active and engaged (and may even pay a little, too!); transitioning into retirement may make you feel like you need to have a budget, even if you didn't before, to make sure that you spend within what your nest egg can support; don't forget to take into account the need to maintain access to insurance (health, dental, etc.); you may check the markets and investment performance more frequently leading up to retirement (trying to hit your "number"), but there is less of a desire/need to do so once you're already retired; and be prepared for significant changes in the dynamics with your friends, including the fact that many times your closest friends are "work" friends that you now need to separately schedule time to see! (For further perspective, be certain to scroll down through the Reddit AMA and read the subsequent questions and responses as well!)
What I Learned From My 'Faux-tirement' (Christine Benz, Morningstar) - As with any major life transition, it's hard to know what retirement will be like until you experience it... to the point that some retirement experts even suggest that prospective retirees go on a "trial run" of their retirement plan before fully committing (e.g., rent an RV to drive around for a month or two, before you sell your house to tour in one, or rent for a year in your desired retirement location before you commit to a permanent residence there). Benz recently had a miniature version of the same experience, in taking a six-week sabbatical from work, and gained some perspective on what it was like to not wake up for work every weekday (even if she knew she had to go back after six weeks!). Key insights included: juggling both work and family obligations takes more of a multitasking toll than you may realize, and even over just a six-week "faux retirement", Benz found a marked improvement in her powers of concentration; you may think that you've got a big "to-do" list of things you want to get done when you're not working, but when you're really not working, you'll be surprised how quickly you get through them (even in a six-week faux retirement, not to mention a permanent retirement!); it still helps to have a purpose and something to do and accomplish, such that "balanced days" (of leisure but also something to get done) felt the best; with more time, you realize just how much constant rehashing there is on cable TV news, but there's also more time to read consume other types of media as well; it's easier to maintain a healthier lifestyle when you can prepare your food at home and have time to exercise; your daily activities change in retirement (thanks to more leisure time), but not all of them drive up your spending (as there's also time for walking, reading, and gardening!); and don't underestimate the connection you have with your "work family", and the social absence you may feel when you suddenly are no longer seeing them every day!
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.