Enjoy the current installment of "weekend reading for financial planners" – this week’s issue starts off with a recent survey from the Financial Planning Coalition that advocates for greater [fiduciary] regulation of advisers to protect consumers, and a review of the Senate confirmation hearing for prospective SEC chairwoman Mary Jo White, who pledged to act quickly on the proposed uniform fiduicary standard and increased oversight of investment advisers.
From there, we have a few practice management articles, including a look at how mega-RIA RegentAtlantic built a $2.4 billion AUM practice by creating a series of niche specialist planners under a single umbrella, an evaluation of all the ways advisors add value to clients in portfolios beyond just investment selection (e.g., helping clients stay the course, asset location, systematic rebalancing, etc.), an overview of the biggest tech trends coming out of the recent Technology Tools for Today conference, how to craft a good content marketing strategy, and a good list of ways in which advisors end out "wasting" their time on social media due to poor execution of the marketing strategy.
In additon, there are a couple of technical articles this week, including a look at how even index funds aren’t really truly passive but that the essence of being passive can still be captured if the goal is to simply be the market and not beat the market, and an overview of some of the problems that arise when clients misunderstand what cash value life insurance is and how the cash value really works.
We wrap up with three articles: the first is by Bob Veres and looks at how financial planning may change in the coming decade; the second is a series of tips from Bill Bachrach about how to improve work habits in your practice to be more successful, and the last is an intriguing overview of some of the recent research about the link between money and happiness, which is much more nuanced than the traditional saying "money can’t buy happiness" would imply. 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 March 16th/17th:
Survey: American Investors Want More Protection – This week, the Financial Planning Coalition launched their first response to the recent announcement that the SEC had opened its cost-benefit analysis comment period for considering a uniform fiduciary duty for brokers and investment advisers. The Coalition’s comments were built around a national survey they just implemented, which found amongst other things that 80% of investors do not believe the Federal government is doing enough to protect consumers from being taken advantage of by [unscrupulous] financial advisers, and 84% of investors agree that financial advisers should be regulated by the Federal government to protect investors and build confidence in financial services. Accordingly, the Coalition continues to advocate for a uniform fiduciary standard for all those who give personalized investment advice, noting from the survey that 93% of respondents agreed that financial advisers providing advice should put the client’s interest first and disclose up front any[/all] conflicts of interest that could potentially influence the advice. In addition to a uniform fiduciary standard, the Coalition’s announcement also called for increased oversight from the SEC of investment advisers, with more frequent examinations that would be funded by user fees paid by the RIAs that are being overseen (which is estimated to be a less expensive way to improve oversight than having FINRA or a new SRO conduct the oversight instead).
SEC Nominee White Pledges Action on Advisor Rules – Earlier this week, SEC chairwoman nominee Mary Jo White went through her Senate confirmation hearing, in which she highlighted plans to move quickly on the outstanding uniform fiduciary standard proposal for advisors and also on the need to beef up oversight of investment advisers. However, while White emphasized stepping up enforcement from the SEC – "it must be fair, but it must also be bold and unrelenting" – there was little clarity on exactly how she anticipated moving forward on these advisor-specific rules in particular. Nonetheless, White’s statements certainly suggest that these rules will not simply fall by the wayside and remain unaddressed during her terms; one way or another, change may be coming soon.
In $2.4 Billion Practice, A Team Of Specialists – This article from Financial Planning magazine highlights mega-independent-RIA RegentAtlantic in New Jersey, which has grown to become one of the top 50 RIAs with more than $2.4 billion of AUM and 1,000 clients. What’s notable about RegentAtlantic is that its growth is built not only on a team of high quality advisors, but that each advisor develops expertise in a particular niche; in other words, the firm has essentially become a series of niche practices, each of which thrives and all of which benefit from working under the company’s overall umbrella. Niches include working with attorneys, business owners, pharmaceutical executives, physicians, women in transition, and even female Wall Street executives. Notably, the firm’s leader David Bugen finds that focusing on a niche not only helps business development and growth, but keeps the advisors motivated by helping them to find a niche that has personal meaning to them. Advisors at the firm are responsible for developing new clients and retaining the ones they’ve got, in addition to providing financial advice, and advisors are compensated by a combination of salary, incentives, and profit distributions from the firm (the goal at RegentAtlantic is for many employees to each have a small ownership stake). On the investment side, the portfolios are built on models, which are extensively diversified (far more so even than the typical advisor), although ostensibly all wealth advisors have clients in the same model portfolios (to help with efficiency and scale). Because of the firm’s intensive services, fees are 1% on assets all the way up to the first $5 million, and then step down as low as 25bps for assets above $10 million.
Comparing Advisors to Jim Cramer: Measuring your Professional Alpha – On Advisor Perspectives, industry commentator Bob Veres provides a nice overview of the various ways that advisors can add value for investment portfolios, beyond just the pure creation of investment alpha from outperformance. For instance, when looking at how advisors can help keep clients from inflicting harm upon themselves by emotionally driven decisions, perhaps the greatest value is simply the "professional alpha" of the advisor in helping clients stay the course in the first place! Properly executing a systematic rebalancing process also helps, adding an estimated 30+ basis points per year in annualized value over time, as does ensuring clients are truly well diversified. Implementing portfolios in a tax-aware manner also brings significant value, including effective loss harvesting strategies (although sadly no mention of harvesting capital gains!), and proper asset location. When you add them all up, Veres estimates that the true value of advisors could be a whopping 4% or more in annualized returns (or even 8%+, depending on just how poorly investors might have performed on their own). And of course, that’s before the potential that clients will further help themselves by saving more in the first place, when they realize the benefits of doing so by working with a good advisor!
3 Biggest Advisor Tech Trends – This Joel Bruckenstein article provides some highlights of the top technology trends seen at the recent Technology Tools for Today (T3) conference. Not surprisingly, one of the big themes was a focus on computer and cloud security, including better strategies for passwords, and managing threats to your computers, which can be as varied as a rogue employee, an employee who unwittingly visits a rogue website, a phishing email faked on behalf of a client, or even a USB drive conveniently "dropped" in a parking lot that starts a network attack as soon as you plug it in to your computer to see what’s on it. Another theme of the conference was how major custodians are supporting technology, from the TD Ameritrade announcement that the cloud version of the iRebal rebalancing software will become free for their advisors, to ScottTrade similarly announcing free access for its advisors to the MyVest modeling and rebalancing platform (along with a discount on a packaged RedTail CRM and imaging solution), to custodian TradePMR with a mobile-touchscreen-optimized advisor workstation application. The third theme was the just-rolled-out Windows 8 – including the Microsoft Surface tablet that had just released before the conference got underway. Overall, the views were fairly positive on Windows 8 as well – from better security to faster boot times to desktop/laptop/tablet integration, Bruckenstein expects that Windows 8 really will become the dominant operating system for advisors in the future, but it may take time as many advisors are slower to change.
Content Marketing Strategies To Educate And Entertain – In the Journal of Financial Planning, marketing consultant Kristin Harad looks at content marketing, a strategy where you share valuable information with your target audience to attract them to you as a no-selling give-and-you-shall-receive approach. Harad notes that there are a few different types of content you can share: you can educate, provide editorial (e.g., present your perspective on a current/timely issue), or simply entertain. Although some fear that content marketing – where you may educate and "give away" some of your expertise – may undermine their value, in practice the approach serves to reinforce your expertise and value. In fact, the more often you share, the more often the prospective client sees what you have to offer (and it helps to reinforce with current clients who might refer you, too!). Harad offers several tips to make the content valuable, including keeping a useful conversational tone, taking a clear stance on something (it’s much more interesting than boring, balanced views!), be creative and willing to go out on a limb sometimes, elevate the conversation by tying it back to the mission of why you do what you do while also keeping it practical and relevant, and make it personal by sharing your own story. And remember, you don’t have to create everything on your own; you can hire out for assistance, or partner up with others. Once the content is created, make sure it really gets shared, too – from groups and message boards, to other blogs, to sending samples to newsletters, neighborhood papers, or niche magazines that are almost always looking for content.
5 Reasons Advisors Are Wasting Their Time on Social Media – On AdvisorOne, Todd Greider highlights 5 reasons advisors are wasting their time on social media – or more accurately, 5 ways that advisors are mis-using social media and therefore wasting their time trying. For instance, many advisors are just using social media as a broadcasting medium to blast out their content, without interacting with their audiences or engaging with anyone, or worse the messages that do interact are just about selling and not educating (and if you do have to sell, sell yourself and your knowledge and experience, not the products you have to offer!). In addition, many advisors just have no particular social media plan at all – as a result, their use of the platforms is too haphazard to possibly yield useful results, or they’re using platforms that are not the best match for the target audience they’re trying to engage. In other situations, there’s a plan, but it’s not executed consistently, because the advisor doesn’t have a content calendar to help them schedule when content will be created to keep a regular flow for sharing.
Passive Investing Doesn’t Exist, But So What? – This article by Rick Ferri makes the interesting point that even passive, index-based investing involves more "active management" than we often acknowledge. Index construction itself is not static; the securities in the index change, and are impacted by real human beings who have to decide what does and doesn’t make the cut (or what criteria will be used to make that determination). In addition, index fund managers face challenges as well, timing the execution of trades as cash flows go in and out, whether to use derivatives or leverage to handle cash flow obligations or to maintain exposures, etc. The matter is even more complicated in the process of managing individual clients, where new deposits have a timing element in when they are executed, and even rebalancing entails decisions about when or how often to pull the trigger. Nonetheless, Ferri emphasizes that there is such thing as a passive approach, but it’s based the goal of the strategy. If your goal is to simply track the markets (for better or worse), you’re passive; on the other hand, if the goal of these changes and transactions is not just to manage a client’s exposure TO an index, but to BEAT that index, the approach is active. The bottom line – technically, there may not be such thing as "true" passive management, but if your goal is to BE the market (not BEAT the market), you’re still capturing the passive essence.
A Practical Understanding of Cash Value – In the Journal of Financial Planning, life insurance consultant Peter Katt highlights some of the points of confusion that often arises for clients around cash value life insurance. For instance, some clients are upset they have to borrow money against their life insurance in the form of loans, when it’s "already their money" – yet as Katt notes, this really is the proper structure, as extracting the equity out of life insurance without liquidating it is kind of like extracting equity out of real estate without liquidating it… but taking a loan instead, with interest due, and the underlying property (real estate or life insurance) as collateral. Clients also fail to realize that with some types of policies – e.g., whole life – you can’t just stop paying the premiums; the costs aren’t just extracted from the cash value instead, but are funded as loans against the policy, which in turn creates loan interest that can compound to the point it lapses the policy (and with a taxable income bill to boot!). Notably, though, sometimes the best way to fix the situation is still to pay the loan off, especially in today’s environment where the internal rate of return on the policy until death may still be better than available bond alternatives! Other problem situations include managing around surrender charges on UL policies – realize there’s a difference between the gross account value, and the available net cash surrender value! – and that even though with many/most UL policies you get only the death benefit at death (not the death benefit PLUS the cash value), be careful in extracting cash value out to try to maximize this, as there’s again a risk of lapsing the policy.
Fearless Forecast For Advisors – In Financial Planning magazine, industry commentator Bob Veres shares his forecast about how financial planning will change in the coming decade, broken down into 5-year increments. Over the next 5 years (2013 through 2018), Veres predicts the consolidation trend will continue, as solo practices merge to become ensemble firms, in search of scale (in part to deal with rising regulatory/compliance costs) and a wider range of potential successors, as well as better operational and leadership support. Notably, though, this support may actually extend the careers of many advisors, slowing the need and urge for succession planning. Over the subsequent 5 years (2018 through 2023), Veres predicts another scandalous brokerage-firm-created crisis, likely tied to derivatives bets that go bad when inflation and Treasury rates finally start to rise. In the meantime, video technology will be making distance irrelevant in finding and working with financial planning clients, and this in turn will allow planners to specialize more than ever, and to extend planning to a wider range of consumers in the middle market. Looking beyond the 10-year time horizon (2023 and thereafter), Veres predicts that brokerage firms will all be owned by banks, most captive agents will work for RIAs, crowd-funding will be a recognized alternative investment as stocks and bonds become old fashioned.
Working Well – In Financial Advisor magazine, Bill Bachrach provides suggestions for how advisors can improve their personal work habits to be more successful, not only in terms of value to the client, financial success of the advisor, and quality of life, but also because it simply enhances client trust (as Bachrach notes, "How can one person who doesn’t have their ‘stuff’ together expect people to pay him/her to get their stuff together?"). Key habits are broken into four categories, and include: client service work habits (spend time with profitable clients, be truly comprehensive, serve a finite number of clients who pay predictable recurring revenue, systematize your processes, and learn to really help clients manage expectations); client acquisition work habits (build your business with referrals and introductions, learn to maximize your phone skills, and practice active listening); leadership work habits (recognize that everything is about leadership, be ready to lead and really give advice, don’t just be the expert with solutions but the team leader that gets answers); and time management work habits (keep your time focused on the prior 3 categories of client service, client acquisition, and leadership, learn to be a good delegator, and learn to outsource where appropriate). There may not be any great revelations in reading through this last, but many good reminders and nudges.
Does More Money Make You Happier? – From Psychology Today, this article takes an interesting look at some of the recent global research on the links between money and happiness, which finds the old saw "money can’t buy happiness" isn’t quite as clear as it once appeared. The research origins of this viewpoint go back to a paper by Richard Easterlin in the 1970s which found that there was no relationship between absolute income and well being around the world; richer countries did not necessarily have citizens with more happiness and higher subjective well-being scores than those from poorer countries. However, the research did find that within a country, richer people were somewhat happier than poorer people, and therefore concluded that absolute wealth doesn’t really matter, but relative wealth still does, as we judge ourselves to others. In other words, you’d be happier earning $50,000 in a country where median income is $25,000, than if the median income were $100,000, even if your income remained the same. More recent research by Justin Wolfers and Betsy Stevenson, though, is finding that the between-country effects are just as big – or even bigger – than the within-country effects; relative wealth matters, but absolute wealth really does matter too. What changed from the old research to the new? The later research appears to use better cross-national data, which is providing a clearer picture. This has been further supported by additional research that is beginning to look at different ways to measure happiness and well-being – given that it is subjective, after all – and the newer results are also finding a stronger relationship between income and life evaluations across countries than previously believed. In a surprising twist, though, slicing the data even more finely reveals that in fact, it’s life satisfaction that appears to be more income related, not happiness itself; for instance, even poor people can have a health balance of positive and negative emotional moments, with a balance that tilts towards happiness, but having more money does help people to be more satisfied with their lives overall. So the bottom line – money does matter, but it’s actually less about happiness, and more about life satisfaction. If you want happiness, look elsewhere, from your temperament, to creating more meaningful friendships and relationships.
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!