Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with a reminder that while most regulatory attention has been focused on the Department of Labor’s fiduciary rule, the Treasury’s FinCEN group is actively working on a new set of anti-money-launching (AML) rules that could impose new compliance burdens on RIAs (akin to what broker-dealers and banks already have to deal with for AML compliance). And in the DoL fiduciary news itself, the buzz this week is that with a potential 60-day delay on the table, asset managers have been slowing their development efforts on the new T-share class, at least until the dust clears.
From there, we have a number of articles this week about marketing and business development for financial advisors, including: how to think differently about crafting a (more unique) value proposition for clients; a structured process for trying to create and articulate your value proposition; some new research on why clients leave advisors (and how to start conducting exit interviews to understand for yourself why your ex-clients left, and what you might need to change); and an interesting article about whether in the world of digital marketing, it’s better to stop thinking of potential new clients as “prospects” to sell at all, and instead think of them as an “audience” to engage instead.
We also have several articles specifically on how to create better engagement with clients and prospects, from how to create a “client persona” in your marketing to further refine your messaging and improve engagement with prospects, to the latest research about how people have different engagement styles, and the importance of adapting your own communication to match the client’s style, and why it’s so crucial to not just answer a prospect’s questions but ask them questions and get them talking in a prospect meeting (as it better engages them and leads to deeper rapport).
We wrap up with three interesting articles that challenge conventional thinking in the industry: the first is an analysis by Wade Pfau, building on a prior article from this blog, about how the DALBAR behavior gap study is actually fundamentally flawed in the way it compares investor to market returns over 20-year time periods (as DALBAR compares investors to the returns of the market invested with a lump-sum all at once, even though most people didn’t have all their wealth to invest 20 years ago); the second raises the question of whether the whole “passive revolution” is overstated, and whether the phenomenon is simply that investors (and advisors) are no longer stock-pickers and instead are “asset pickers” (for which index funds and ETFs are simply convenient active building blocks); and the last raises the question of whether, as robo-advisors continue to evolve, if eventually financial planning will be given away for free by robo-advisors… or whether the ongoing lead generation, engagement, and self-onboarding tools of financial planning software means eventually it will automate itself to the point that it doesn’t need a financial advisor anyway (or at least, that the advisor has to provide a value proposition above and beyond just the software analysis itself!).
Enjoy the “light” reading!
Weekend reading for March 11th/12th:
Anti-Money Laundering (AML) Rule Looms For Advisers (Kenneth Corbin, Financial Planning) – While most regulatory focus over the past year has been on the Department of Labor’s fiduciary rule, back in mid-2015 the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) proposed that anti-money-laundering (AML) provisions be extended to cover independent RIAs, which would include a requirement for RIAs to establish policies and procedures to identify “suspicious activity” and designate a compliance officer to oversee the program… along with conducting employee training, and even obtaining an independent audit to affirm the process is being executed appropriately. And while much of President’s Trump focus so far has been on rolling back regulations, the administration’s regulatory freeze memo had an exception for areas implicating national security or financial matters, which would leave the way clear for FinCEN to proceed with a new rule (given that money laundering can otherwise potentially be used to finance terrorism). At this point, the public comment period on the AML proposals has already closed, and FinCEN is ostensibly working on a proposed rule that might be issued in the year or two (there is no concrete timeline yet). As a result, it remains to be seen how the AML procedures might actually apply to RIAs, and whether there may be exceptions for smaller RIAs and/or those relying primarily on third-party custodians. Nonetheless, given that broker-dealers and banks have long been subject to AML regulations, it seems increasingly likely that something will ultimately apply to RIAs as well, and become part of what the SEC reviews when examiners visit an RIA firm in the future.
New Class of Mutual Fund Shares in Limbo as ‘Fiduciary’ Rule Is Delayed (Michael Wursthorn & Sarah Krouse, Wall Street Journal) – With the pressure of the DoL fiduciary rule to minimize “variable compensation” across a particular product category (e.g., mutual funds), the industry has been racing to develop and roll out “T shares”, a new share class that would have perfectly uniform compensation across any/all fund families that offer them (likely with a 2.5% upfront commission, and a 0.25% 12b-1 fee). However, with the prospective delay of the DoL fiduciary rule now on the table, at least some asset managers are reportedly hitting the pause button on their efforts to finalize the release of T shares; those that have already filed for regulatory approvals of T shares aren’t likely to withdraw the requests, but the firms aren’t necessarily speeding to actually roll out the share class itself. Which means if the fiduciary rule actually does go through now, there may be significant disparities between which fund families do and don’t have T shares available. On the other hand, if the DoL fiduciary rule simply goes through later – after the 60-day delay – the asset managers may simply renew their efforts to complete the T-share rollout on a longer timeline, as in the long run the pressure of the DoL fiduciary rule is still to simplify down to a smaller number of mutual fund share classes (e.g., “T shares” and “clean shares” with no commissions or 12b-1 fees at all).
Doing A Better Job Articulating Adviser Value (Stephanie Bogan, Investment News) – If you search around online for “wealth management firms”, the reality is that most sound the same, highlighting key differentiators like “customized objective advice” or “comprehensive advice”, “upholding a fiduciary standard”, and “providing unbiased advice and excellent service”. Except as Bogan notes, when nearly every website uses those same catchwords – like personal, customized, objective, holistic, and client-first/client-centric – they’re not actually differentiating anymore. Nor are they even effective ways to communicate an actual value proposition itself, as the labels are really attributes of a value proposition, not the actual value proposition itself! So why aren’t advisors more effective at communicating value propositions? Bogan suggests that the core problem is that most of us still aren’t actually that confident and clear about our own businesses and what we actually deliver, which is turn is driven by our lack of focus on who we are really trying to serve. In essence, the key to effectively articulating a real value proposition is about getting clarity of who you really want to serve, and having confidence and conviction that you can truly serve them well – and then focus directly on exactly what it is you will do for those clients. For many advisors, the fear is that by trying to get more specific, they’ll miss out on a lot of other prospects along the way. But as Bogan points out, a broad-based generalized marketing message is like putting watered-down gas in a race car; you may still move forward, but the engine is going to sputter rather than roar.
Developing A Framework To Craft A Value Proposition (Mike Lecours, Journal of Financial Planning) – Clearly defining your value proposition is the most basic building block for all marketing activities, yet relatively few advisors can effectively articulate their value proposition, much less in a manner that is unique and differentiated from the competition (instead using common terms like “holistic” and “comprehensive” and “helping clients to reach their financial goals”). Drawing on the work of Osterwalder’s “Value Proposition Design” at Strategyzer, Lecours suggests the starting point to getting better focus is to complete this simple ad-lib: “Our services help ______ (customer segment) who want ______ (jobs to be done) by ________ (value created).” The Customer Segment is the type of (ideal) clientele you want to serve; you may already have a vision, or you might conduct client interviews and surveys/focus groups amongst your clientele to try to identify common themes that represent the kinds of clients you like to and want to work with. The Jobs-To-Be-Done portion speaks to what services the advisor will provide, but it’s important to frame it in a manner that is relevant to the aforementioned customer segment; thus, it’s not just “providing comprehensive financial planning” but “to make sure you can retire when you want” or “to run financial planning ideas past an expert from time to time”. Delivering the intended services to the targeted customer segment leads to the third part: the value created. Notably, a recent article on the Elements of Value in Harvard Business Review reveals that value can be broken down into more than 30 different value types, across four broad domains (Functional, Emotional, Life-Changing, and Social Impact); realistically, an advisor should aim to deliver “just” a few, and then focus on dealing them especially well. Ultimately, it’s important to recognize that creating a differentiated value proposition doesn’t necessarily require being incredibly creative and different across all three domains; as long as just one of the blanks is clearly differentiated (who you serve, what you do, or how you create value), it’s a unique value proposition as a whole, even if the other two blanks aren’t actually defined uniquely at all.
Create A Client Persona To Better Connect With Prospects And Referrals (Steve Wershing, Client Driven Practice) – At the most basic level, turning prospects into clients requires building rapport with them quickly. And building rapport starts with a feeling that “you understand me.” Yet Wershing notes that the way most financial advisor websites and marketing materials are written, they’re so bland and generic that they don’t create much rapport with anyone! To gain better focus, Wershing suggests creating a “client persona” – a hypothetical description of your ideal client that you want to attract. The Client Persona description should go beyond just the age and profession and net worth of the client, and instead should really focus more on their personal context and the issues they may be facing. Relevant domains might include: Family life (Are they single or married? Kids at home to drive around, or send off to college?); Work life (How much time do they spend at work, and are they more likely to be thinking about the next promotion, the next layoff, or the number of days until retirement?); Values (What do they believe in? Religious or spiritual beliefs?); Goals (Not ‘simple’ goals like retiring, but more nuanced ones like a desire to spend more time with family, or achieve a different level of success?); Experiences they desire (Are they more interested in meeting in person, or by video chat? Do they demand detail, or just want the big picture?); and Experiences they have had (What are their relevant personal money stories? What are their prior experiences with financial advisors?). If you’re really not sure how to answer these questions, start by interviewing some of your current top/ideal clients, and note the commonalities that can help fill out the details. Ultimately, Wershing suggests going so far as to give your Client Persona a name, and even a (stock photo) picture, so you can really visualize exactly who it is you’re trying to reach. And then really focus your marketing efforts on reaching them!
3 Client Engagement Styles Advisors Need to Understand (Bob Clark, Investment Advisor) – In the future, wealth management will increasingly be about the combination of technical planning expertise, and the ability to empathize and emotionally connect with clients. Yet ironically, while there is extensive training for financial advisors on technical skills, there is remarkably little research and training on how to apply psychological and behavioral principles to client relationships. A new book by financial advisor (and student of psychology) Chris White, entitled “Working with the Emotional Investor: Financial Psychology for Wealth Managers” aims to fill the void, building on existing research by psychologist David Kantor but applied in the financial advisory context. The key insight from Kantor’s work is that much of how we act and think today is determined by what happened to us in our early years, and is nearly impossible to change; as a result, effectively working with clients is about better understanding the way clients are, and why, to appropriately adapt recommendations, and the way recommendations are delivered, to be most likely to engage clients. The starting point is simply recognizing that clients typically engage in one of three different ways in the first place: 1) an Open engagement style puts a high value on back-and-forth interaction and discussion, where ideas are vetted in conversation; 2) a Closed engagement style, where people are less focused on the process and inputs, and more focused on the efficiency, planning, and bottom-line results (which means the clients tend to be very transactional and black-and-white in their way of approaching and selecting amongst options); and 3) the Random engagement style, where individuals like to explore questions more creatively, which helps to explore decisions in depth but can potentially lead to trouble making a final decision. From the advisor’s perspective, the goal is to understand from early client interactions which type they are, and then adapt communication and how recommendations are presented, in order to fit these engagement styles, which increases the likelihood the clients will actually follow through on the recommendations!
How To Instantly Engage A Prospect (Dan Solin, Advisor Perspectives) – In the typical approach talk with a prospective client, the advisor spends time describing what he/she does for clients, in an effort to demonstrate value and win the client’s business. But as Solin points out, the real key to winning a prospective client is not merely about the strength of your value proposition, but your ability to engage with them and build rapport. And the essential first step of building rapport is to get the prospect talking (rather than the advisor), by asking them questions. The virtue of asking people questions is that when they respond, their brains are fully engaged. No one can multi-task while talking. Which means as long as the prospect is answering questions and talking, the prospect will be engaged and present in the meeting. In fact, one recent study (with more than 40,000 participants!) found that a simple question like asking someone “Are you going to purchase a new car within the next 6 months?” actually increased their purchase rates by a whopping 35%! Notably, because the point is not just to ask questions for information, but to engage, the best sorts of questions are open-ended ones that really get the prospect talking at length, not just closed-ones with finite answers.
Why Do Clients Change Advisors? (Julie Littlechild, Absolute Engagement) – While most advisors have a strong client retention rate, the reality is that clients do leave from time to time, for reasons beyond just having passed away. Littlechild’s consumer research indicates that approximately 14% of clients say they have changed advisors in the past 5 years – implying an annual turnover rate of 2% to 3% – and that of the group who made changes, 24% switched because another advisor approached with something more/better to offer, 35% were dissatisfied with the current relationship and proactively sought out a new advisor, and 40% left for some other reason (from moving out of the area, to the advisor themselves leaving the business). In the context of any particular advisory firm, obviously the reasons may vary, but Littlechild suggests that just makes it even more important to know – or find out – why your ex-clients decided to leave, and accordingly advocates doing a client exit interview. Akin to an employee exit interview conducted with an employee who is leaving the firm, a client exit interview is done with a client who has recently left the advisory firm, to better understand why the client left. Notably, the point of the exit interview is not to try to win the client back or get them to see the “error of their ways”, but simply to identify issues that can be improved upon for the future. The exit interview itself can be done with a survey, or as a telephone call, though Littlechild suggests first sending a letter (about 2 weeks after the client has left) to let them know you’ll be calling for about 10 minutes to ask for some final feedback. To conduct the exit interview effectively, Littlechild provides five tips: 1) don’t interview everyone, just the (ex-)clients whose feedback you think would be valuable (i.e., if a client is leaving who you’re happy to see leave, you don’t need to exit-interview them!); 2) know your objective (it’s gathering information for the future, not trying to win the client back); 3) keep it conversational and try to delve deep (for instance, don’t settle for a response like “I felt I needed a change” and instead try to push harder to find out what was really wrong); 4) make it worthwhile for the ex-client (e.g., consider making a charitable donation or sending a gift card as a thank-you, since this person is now an EX-client and has no need/obligation to support your business); and 5) recognize the role of human nature (and that not everyone likes confrontation, and therefore may not give great feedback).
Why You Should Think Of Prospects As An “Audience” (Tony Vidler) – In the world of marketing today, it’s typical to think about the people who might do business with you as “prospects”, but Vidler suggests instead that it’s better to think of them as an “audience” instead, especially in the context of digital marketing. The reason is that with traditional marketing, usually the only “prospects” you talked to were already far along the marketing process, and by the time you met with them it was the beginning of an outright sales process. However, with digital marketing in particular, it’s more feasible to have a wider reach to a much larger range of people, many of whom will still be in the early stages of potentially engaging with you. The distinction is about who controls the process itself; in a sales process with a prospect, it’s the advisor who drives the next steps of the process, but with an audience, it’s the client/customer/audience that chooses when and whether to engage. As a result, that means if you really want to bring in new business, you need to make your audience choose to engage with you. Which means you need to deliver value and a positive experience even during the marketing process. In fact, the reality that it’s so easy for those on the receiving end of marketing to disengage helps to explain why so many advisors have long mailing lists of prospects, most of whom don’t open the emails or respond anymore. So if you want to really turn your prospects into clients, think of it less as a pure sales process, and more like one of “audience engagement”, because that’s a crucial first step to win enough of the prospect’s mental mind share of attention to even have a chance to convince them to do business with you!
A Warning To The Advisory Profession: DALBAR’s Math Is Wrong (Wade Pfau, Advisor Perspectives) – The annual “Quantitative Analysis Of Investor Behavior” (QAIB) study published annually by DALBAR since 1994 is one of the most widely cited statistics about how investors engage in bad market timing that results in poor performance, resulting in a so-called “behavior gap” between the returns of the market, and the returns that investors actually earn. Yet as discussed previously on this blog, there are serious methodological issues with how the study is conducted. The fundamental problem is that while the whole point of identifying how investors deviate from markets is to compare investor-dollar-weighted returns to timing-neutral time-weighted returns, in a world where investors make ongoing contributions over time (simply because they’re saving and accumulating over time), investor-dollar-weighted returns will always look lower, not because investors were bad at timing markets, but simply because they didn’t have all the money to invest in the early years when the markets tended to be much lower and cheaper! In the context of the DALBAR study in particular, this becomes a problem of benchmark comparison. The commonly-cited statistic where investor returns lag over 20-year periods is typically compared to what an investor would have earned if he/she made a lump sum investment at the beginning of the period, even though the average investor didn’t have all their money at the beginning! In fact, if investor you simply assume that investors make systematic ongoing contributions, dollar-cost-averaging into markets over time, those returns also lag the time-weighted return of the markets (again, because on average markets go up over time, and if you dollar cost average in, even if it’s because you didn’t have all the money at the beginning, your returns will ‘lag’). Even more notably, if you compare investor returns to a dollar-cost-averaged benchmark instead, where contributions are made over time, the DALBAR research would actually show that investors have been beating dollar-cost-averaged portfolios over rolling 20 year periods since the 1990s! Of course, this doesn’t necessarily ‘prove’ that investors are great at market timing either, as not every investor has money available to systematically dollar cost average their savings precisely every year either. Nonetheless, the fundamental point remains: much of what DALBAR attributes to the investor behavior gap is actually just the effect of accumulators who make ongoing savings over time, “lagging” the returns available with lump-sum investing because they simply didn’t have the money to initially invest in a lump sum to begin with.
The Myth Of The “Passive Indexing” Revolution (Lance Roberts, Advisor Perspectives) – Over the past several years, the growth of index funds has been explosive, as investors added more than a trillion dollars to index ETFs and index mutual funds, while pulling more than a quarter of a trillion dollars from actively managed mutual funds, and raising the question of whether we’re witnessing the “death of active” management. However, there are still many questions as to the cause of this passive revolution, and whether it’s just about the differences in expenses, the impact of Central Bank interventions that have rocketed markets upwards (such that any active manager who engaged in any level of “risk management” has likely underperformed for years), to the shift of technology that’s making it easier to analyze investments, swap in lower cost ones, and spot which mutual funds are underperforming (which, per the prior point, has been a lot of them lately). However, Roberts points out that in reality, the shift to index funds may not actually be a “passive” revolution at all, but simply a shift in how individuals and advisors choose to implement their (active) investment ideas. For instance, in recent years there have been a growing number of “ETF managers” – investment managers, often in the form of RIAs, that engage in active management strategies, but use ETFs as their “building blocks” for implementation; as a result, the portfolio looks like a passive one built with index funds, but in reality it’s a series of passive investment vehicles that are being actively managed. In other words, we’re no longer active stock pickers; now we’re active asset pickers instead, as evidenced by the fact that whenever major market events happen, ETF flows experience massive spikes (as active traders begin to trade them more). But recognizing that investors may not really be rotating to passive strategies, and instead are just using passive vehicles to implement active strategies, is important, as it implies that the active trading dynamics that occur in times of market volatility are likely to still reappear in the next bear market, and that the typical “passive” investor isn’t necessarily going to stay passive through the full market cycle.
What If Robo-Advisors Gave Away Financial Planning? (Craig Iskowitz, WM Today) – At the recent T3 Advisor Technology conference, MoneyGuidePro president Kevin Knull raised the question: what if robo-advisors gave away finanical planning? The idea may sound far-fetched to the typical financial advisor, but the reality is that Betterment and Wealthfront have already been rolling out at least limited-scope financial planning or retirement planning software tools directly to their investors. And given the ongoing march of technological progress, it seems only a matter of time until the robo-advisors’ tools become even more sophisticated, and start to rival the financial planning software tools used by financial advisors themselves. Although at the same time, financial planning software solutions for advisors are themselves growing in the other direction, with a growing array of integrations to try to make financial planning software the central hub of the financial advisor’s platform, and an ever-growing list of available features going deeper into both financial planning and non-planning solutions. For instance, at the recent T3 conference, both eMoney Advisor and MoneyGuidePro highlighted new tools that will allow advisors to use their financial planning software as a lead-generation and engagement tool for prospects in their own digital marketing process. And for both of these tools, a key aspect is that clients will increasingly be able to self-onboard and automate the initial steps of their own financial planning process – which means even financial advisor software is becoming more “robo-automated” as well. Which, again, raises the question: at what point might robo-advisors fully integrate and give away financial planning software? Or alternatively, if advisors’ own financial planning software becomes more and more automated and self-directed with consumers, what exactly will advisors still be doing to ensure they’re adding value on top of what the software can already provide?
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.