Enjoy the current installment of "weekend reading for financial planners" – this week’s issue starts off with a great article by Texas Tech professor Michael Finke, who tackles the challenging question of whether financial planning is more art or science, concluding that while it may not be all science, financial planners should probably be incorporating a lot more science than is typically done today.
Beyond that, there are a number of articles about technology for advisors this week, including a review by Bill Winterberg of using live chat systems on your website for communication with prospects and clients, reviews by Joel Bruckenstein of portfolio tool Chaikin Analytics for iPad and separately the cloud-based virtual desktop solution External IT being rolled out by Fidelity Institutional Wealth Services. There’s also a review of some of the interesting tech companies that were seen earlier this Spring at the Finovate conference for financial services tech innovation, and a look at some of the recent data from the InvestmentNews 2013 Advisor Technology Study revealing that "innovator" firms that aggressively adopt technology are showing gains in everything from revenue and profits to valuations and easier succession planning.
From there, we have several articles specifically looking at some of the challenges that insurance companies are facing these days, from a new warning that some insurers many be less secure than they appear due to a "shadow insurance" loophole where they are reinsuring themselves with their own subsidies, to a subset of long-term care insurance companies that have been creating a lot of claims hassles with fine print and red tape, to the recent announcement by The Hartford that it will force a large swath of existing variable-annuity-with-income-rider policyowners to effectively renew what was supposed to be a lifetime guarantee or it will be cancelled.
We wrap up with three final articles: the first is from Angie Herbers and suggests that perhaps the "slow to hire and quick to fire" management practice is not really the best approach; the second is a good reminder that even as the world goes more digital, it is important not to forget the human beings at the other end of your business; and the last provides an important reminder that while the facts about why clients should work with us are important that it’s ultimately the emotional connections we make that lead to real trust. Enjoy the reading!
(Editor’s Note: Want to see what I’m reading through the week that didn’t make the cut? Due to popular request, I’ve started a Tumblr page to highlight a longer list of articles that I scan each week that might be of interest. You can follow the Tumblr page here.)
Weekend reading for June 15th/16th:
Financial Planning: Art Or Science? – In Research Magazine, Texas Tech professor Michael Finke takes a deep dive into the challenging question of whether financial planning is primarily an art, or a science. As Finke defines it, art implies subjectivity, whereas science is built on research and theories tested with data. Notably, the fact that financial planning works with human beings – who have a range of issues that require significant interpersonal skills and intuition to address – is not necessarily a distinguishing factor of art versus science; after all, doctors vary in their ability to communicate effectively with patients, but the advice they give tends to be consistent, based on sound theory supported by evidence. And from that perspective, there’s little that we recommend as financial planners that couldn’t be framed as a theory, tested, and either confirmed or rejected in lieu of a better alternative solution. In fact, Finke suggests that a lot of planners improve as they add clients not because they’re learning an art, but because they’re learning how to be better planners by testing and finding out what works and what doesn’t, albeit using the limited sample size of their own growing clientele. Ideally, though, these theories should be tested at a wider level, and much of the framework already exists, such as economists analyzing financial decisions using utility theory and seeing how our behaviors change as circumstances change. At the same time, there is still friction between academics/scientists and many planners, in part because the reality is that clients are not utility-maximizing robots and don’t always fit what the scientific models predict. Nonetheless, that doesn’t mean planning can’t be improved with the influence of science; as Finke notes with an interesting analogy: in Leonardo da Vinci’s "Treatise on Painting" he argues passionately that painting could be improved through a deeper awareness of scientific principles, such that even something as deeply rooted in art as painting can still be improved with the better application of science.
Live Chat For New Clients – In Morningstar Advisor, technology guru Bill Winterberg looks at a new growing trend in business websites: the use of online interactive chat tools, and whether they could soon be relevant for financial advisors. Think of live chat as similar to text messaging, but instead of doing it with friends, it’s with the employees of a business you’re working with or considering, and for many clients/customers, can be a faster, more appealing alternative to calling, being put on hold, navigating phone trees, etc. Live chat features can be used for lots of purposes, from prospect inquiries to customer service to complaint handling, but Winterberg warns that in an advisory firm context, it’s important to deal with the compliance issues first: most notably, that there should be a system to ensure all communications are captured and archived, as well as having a policy about who is responsible for responding to live chats, how those messages are periodically reviewed, and what issues are and are not permissible to be addressed in a live chat medium. As Wnterberg notes, though, perhaps the biggest risk to the approach is actually a productivity issue; while it’s a positive for engaging clients and prospects to have a live chat option available, it can also be a distraction for an advisor to have new chat messages popping up intermittently, though users of the tools suggest the benefits of more real-time interactivity and reducing friction of first connections with prospects are worth the cost (especially since the actual software pricing is fairly inexpensive).
Getting Professional-Grade Analytics – In Financial Planning magazine, technology consultant Joel Bruckenstein reviews Chaikin Analytics for iPad, which is billed as "the most powerful mobile analytics workstation for money managers." The driving force behind the software is veteran investor Marc Chaikin, and is an extensive of what was originally a free app released a few years ago for younger investors, but which ultimately got adopted by higher-net-worth individuals and a number of advisors. The core of the app itself is the "Chaikin Power Gauge Rating" which rates the appeal of a stock at any given time based on a wide range of factors across financial metrics, earnings performance, price/volume activity, and expert opinions; about 5,000 equities are tracked with data updated every weeknight. In addition to just analyzing stocks directly, the app comes with a number of preloaded lists of stocks, or you can build your own lists of what you want to track, or use it to identify whole sectors or industries that might be appealing to buy or risky and to be avoided. The application also tracks a few broad indices (e.g., Dow Jones Indistrual Average, S&P 500, Nasdaq 100) and can give some analytics on the overall breadth of the market’s movements. Of course, the caveat to all of this is that Chaikin Analytics will likely only be of interest for those who adopt a more active approach to investing (and find individual stock analysis relevant), and you have to buy into the Chaikin methodology, though for those who do the tool packs a lot of punch. On the other hand, Bruckenstein notes that it could also be useful as a way to provide quick but in-depth analytics on a particular stock that a client happens to call about, or already holds as an existing position. The app is available by subscription for $1,950 per year, or $195/month, and notably is only available on the iPad platform.
Anywhere, Anytime – In Financial Advisor magazine, technology consultant Joel Bruckenstein reviews the new comprehensive, cloud-based virtual desktop solution from Fidelity Institutional Wealth Services, which is rolling out in partnership with a cloud outsourcing company called External IT. Bruckenstein suggests that the new offering is a significant step forward in integration; while in the past decade, the major custodians have been increasingly at the forefront of helping advisors integrate key industry-specific applications, including CRM, portfolio management software, planning software, document management software, and more, the new offering will help support the cloud-based integration of general business applications as well, such as Microsoft Office tools and Quickbooks. In point of fact, a few such solutions have existed already, but advisor adoption has been slow, and advisors often don’t have the tools and knowledge to vet providers properly, so the goal of the Fidelity offering is to roll out a vetted solution on their behalf. Notably, advisors could still engage External IT directly, but the Fidelity version includes some custom design elements and commitments specifically for advisors, including an uptime guarantee that if there’s an outage, e-mail and MS office documents will be back online within an hour. The whole integrated offering is available at a cost of $150 per month per user, and includes software licenses for Microsoft Office, file storage, mobile device support, antivirus monitoring and other security features, and more. Beyond just potential cost efficiencies, Bruckenstein notes that the real advantage is the availability of a robust, secure, redundant virtual desktop that’s available anywhere there’s internet access, with no startup or transition costs. On the other hand, there are some concerns to be aware of, most significantly that advisors should ensure they have plenty of internet bandwidth before going down this road, especially for larger firms with a significant number of staff who would be using the platform at once.
New Adviser Tech Coming Our Way – This article is a review of the recent Finovate (Financial Innovation in Technology) conference by Ian McKenna of the Finance and Technology Research Centre, and highlights some of the innovations that may be impact advisors. McKenna suggests that the biggest theme was that companies want to deliver a more empowering experience for customers, which may significantly impact the process of advising for traditional advisors. For instance, a firm called Narrative Science has a new offering in big data analysis that may lead to new tools for advisors trying to select investments and other products for clients, and they’re already testing integrations with tech-enabled RIA startup Personal Capital. Continuing the investment theme, Quantopian is building an algorithmic trading platform where the users create and trade the algorithms – think of it as a platform where you can not only create your own rules-based trading approach to take the emotion out of investing, but the software also allows you to backtest the results to understand how it would have navigated various economic and market events of the past; for the more passive investor, JemStep will analyze a current portfolio and recommend asset allocation changes, while being sensitive to tax efficiencies, costs, and other factors. Beyond the investment end, there’s Moven, which offers a "Money Pulse" service that helps people track their spending and how it compares to prior spending patterns, and Money Desktop won "Best In Show" for their personal financial management software. Overall, McKenna thinks that the industry may be at an inflection point where the depth of available technology will soon become impossible to ignore, and those who adopt first may see significant impact.
Technology And Work Flow: Keystones In Valuing A Firm – The recent results from the InvestmentNews 2013 Adviser Technology Study revealed an interesting observation when examining a group of advisory firm "innovators" (based on the number of software categories they employ, how much of their software integrated, and their adoption of cloud-based and mobile applications) – while there’s little research to support the notion that any particular category of technology will make your practice more valuable than another (e.g., it’s not clear that good rebalancing software enhances valuation materially more than good CRM), the results do indicate that firms taking a more technology-driven approach tend to have an easier go at succession, both in terms of valuation itself and the ease of the transition. In addition, the innovator firms generated more revenue, handled more clients and accounts, and generated higher levels of income and earnings. But the key seems to be less the particular technology that’s used, and more the implementation of systems and processes built around it, which ultimately makes the firm less reliant on key employees and more stable and more capable of being transitioned to future ownership. At this point, the average firm still spends only 5% of its total annual operating revenue on technology, but this number has actually been ramping up significantly from an even lower base in recent years.
Insurers Inflating Books, New York Regulator Says – As the difficult investment environment continues, a disturbing new report from the New York State Department of Financial Services suggests that life insurance companies have been using a questionable loophole to burnish their balance sheets, making the firms appear to be much stronger than they actually are – to the tune of what could be as much as $48 billion for just insurers based in New York alone. The basic idea is that insurance companies (legitimately) use reinsurance to manage their risks, but some companies are setting up shell companies they own, doing reinsurance business between the parent company and the subsidiary, and because insurance is regulated by states and not all states regulate the same, the firms set up the shell reinsurance companies in states with looser regulations and less stringent asset/collateral requirements and then rely on the states’ privacy laws to avoid scrutiny from tougher state regulators like those in New York. The ultimate concern is that this obfuscation of using captive reinsurance companies can mask the company’s true underlying assets, and can distort risk-based capital ratios and lead companies to keep less in real reserves and surplus than strict regulators require to ensure the insurers have the solvency to pay claims. While that’s not necessarily a problem as long as everything is going well, smaller surpluses and reserves mean companies may have less of a buffer to manage against unexpected events in the future; and with no FDIC backing for insurance companies, a major event could ultimately overwhelm the relatively limited state guaranty funds and other backing and necessitate a taxpayer bailout and/or inflict significant harm on policyholders. A separate report suggests that the biggest users of the strategy appear to be the publicly traded insurance companies that face Wall Street pressures on earnings growth and returns on capital, while the mutual insurance companies (e.g., New York Life, Mass Mutual, Northwestern Mutual) appear not to be engaging significantly (if at all) in the practice. A full copy of the regulator’s report on this "Shadow Insurance" trend can be found here.
Fine Print And Red Tape In Long-Term Care Policies – In the New York Times, reporter Tara Siegel Bernard looks at the unfortunate challenge of long-term care insurance… not purchasing it, but filing claims for it. Unfortunately, some consumers are reporting that it takes a significant amount of paperwork and repeated phone calls to get claims processed properly. To be fair, some of the examples not that the real problem was not with the insurer, per se, but in ensuring that those who were providing the care were filing out the proper paperwork necessary to substantiate the care and costs so that the insurer would pay; nonetheless, it still represents a significant burden, and some families have had to fight to overturn claims denials or even file suit against some insurers. Key points of dispute tend to be: the deductible/elimination periods (some policies have very particular rules of what’s necessary to satisfy the requirements); eligibility for claims (especially since many people don’t want to admit their vulnerability and try to do as much as they can for themselves, but then get declined for claims as a result); selecting caregivers (generally required to use licensed caregivers, not family or neighbors); type of care covered (older policies often cover nursing care only, while some are making claims for lower-cost assisted living facilities instead, though more recent policies cover both types); alternative plans of care (for those who want a claim outside the ‘standard’ rules); and documentation (some insurers have been very picky about denying claims unless documentation is perfect). Notably, the top-rated insurers that are still active in the business reportedly have few claims problems; the issue seems to be worst for insurers that have stopped selling or exited long-term care insurance entirely, where the claims process is turned over to third-party administrators that are often less liberal in adjudicating claims, and there is little downside for the company to have unhappy customers since they’re no longer in the business anyway.
Hartford’s VA Redo Could Kill Off Living Benefits For Some Clients – The big news in the variable annuity space this week was the announcement by The Hartford – which previously offered one of the most popular variable annuities with a guaranteed lifetime withdrawal benefit, with over $65B in assets, until it decided to exit the marketplace – that it is making several investment changes in its prospectus, with a surprise twist: those who don’t proactively comply with the changes and adjust their investment allocations by October 4th may have their existing lifetime guarantee riders cancelled. If the rider lapses, clients will have one additional opportunity to reinstate it by reallocating their contract value within 15 days of termination, but will lose the reinstatement right if there is a premium payment, partial surrender, or over change, and the reinstatement will still step the payment base down to current market value if the rider was already "in the money" on its guarantee. In addition, the company is requiring existing account balances in many versions of its contracts to have a minimum 40% allocation to fixed income (or to use a risk-based asset allocation model that will do the same), is cancelling its dollar-cost-averaging-plus program, will require annuity owners to annuitize at age 90, and more. The filing with the SEC was not bashful in making the point that the purpose of these changes is to reduce the insurance company’s exposure to potential claims under its guarantees if there is a market decline, and that they are "determined" to reduce the size and volatility of their legacy annuities. While many of the investment and other changes were within the guidelines stated in the prospectus originally, critics have expressed concern regarding the potential rider cancellation in particular, as it essentially imposes a harsh "renewal" requirement on what was supposed to be a lifetime guarantee, and introduces liability for the advisor if the client cannot be reached to make the change in a timely manner.
How to Lead With Your Heart – This blog post by Angie Herbers on Advisor One suggests that the popular "slow to hire and quick to fire" is a misguided management practice. The problem is that it presumes that you can always pick the ideal employee by just trying again with better screening; yet in practice, Herbers finds that even with a rigorous screening process, retaining employees for the long term is 50/50 at best. Which means, simply put, that most firms are probably way better off trying to fix their existing relationships than starting all over again with someone new. Herbers suggests instead a leadership style of "leading with love" – in other words, treat employees the way you would treat family and friends, which means mistakes are an opportunity to teach rather than scold, encourage instead of criticize, and an environment where you give second and third chances while trying to avoid enabling destructive behavior. This doesn’t mean you never let go of employees; sometimes it’s still necessary. But Herbers suggests that the starting point is to see whether the owner/manager/leader really invested into the relationship and gave the sometimes necessary tough love first, and realize that if you’re frustrated with an employee who lacks certain skills, even something like good attention to detail, that it’s still something that employees can learn to do with some good loving support.
Being Digital Demands You Be More Human – From the Harvard Business Review blog, John Winson makes the important point that even as businesses tilt increasingly towards the digital medium, it’s crucial to remember that in the end, customers and clients are still human beings. For instance, recently a Nutella fan decided to start a "World Nutella Day" to celebrate her love of the hazelnut spread, ultimately culminating in a Facebook event page with 40,000 fans; yet the lawyers for chocolatier Ferrero Rocher, maker of Nutella, sent the creator a cease-and-desist letter for her improper use of its brand and trademark. A similar incident occurred when the author of the blog post had his 8-year-old son sent to Boeing a drawing of a plane he’d thought up; the corporate response from Boeing to the 8-year-old was to stop using the Boeing trademark in his drawings! Ultimately, the company made good on the mistake, inviting the family to Seattle to see planes being built, albeit after an embarrassing media storm when the initial response was made public, and the author notes that it’s never too late to turn a digital mess into something more positive. But underlying all this is a fundamental tension in balancing the need to control a product, brand, company experience, and intellectual property, with the desire to connect with customers and clients. Nonetheless, Winsor emphasizes that the key to success in this emerging digital world is to still reach out, in a human way, to those who engage with your products or services.
How To Influence Your Client’s Decision And Ignite Almost Always A Great Start Of The Relationship – From the blog of financial planner Ronald Sier, this article makes the key point that many planners appeal too much (or exclusively) to the left, "logical and rational" side of the brain, in trying to establish that they are trustworthy, and fail to engage the right side of the brain that is ultimately responsible for emotions, visualizing relationships, and making trusted connections. The problem is that while the right side of the brain is in charge of making many decisions, it looks at body language over credentials, reading between the lines versus taking what’s stated at face value, and comes to a conclusion that clients experience as a gut feeling about whether you’re someone who can be trusted, or not. And often this happens subconsciously; while we like to think that we came to a logical and rational decision, in truth we often make our decision based on the gut feeling, and then align the necessary logic behind that feeling to justify it! So how do you make sure clients get the right feeling about you? Focus on the body language and nonverbal your prospective client is giving off, so you can understand the impression you’re giving others, and what might have to change. And when you’re communicating with clients, recognize the importance of connecting based on emotions and not just facts; the facts are part of the story, but they’re not the story. So the bottom line: focus on how you make your (prospective) clients feel first, and fill in with the necessary facts around it. The facts are a necessary part of the process, but they make for a dull story that clients will not connect with if they’re the sole focus.
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!