Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that after several years of scrutiny, the SEC's examination rate for RIAs has risen significantly, up from an average of once every 9-10 years as recently as 2016 to an average of "just" once every 5 years this year (thanks in large part to a reallocation of examiners from the broker-dealer unit into the SEC's RIA unit instead). Also in the news this week is an investigation from the Massachusetts securities regulators into Wells Fargo Advisors, raising the question of whether the firm may be violating the DoL fiduciary rule by switching clients from commission-based accounts into fee-based accounts when it would have been better for them to just continue to pay occasional commissions in the original account. And new legislation has been (re-)introduced in Congress that aims to increase both the number of small businesses that offer an employer retirement plan (with a proposed up-to-$5,000 tax credit to roll out a plan), along with additional tax incentives for employers that create the plan with automatic enrollment provisions.
From there, we have several articles around the theme of marketing and engagement with clients, including a look at how systematically asking existing clients for their input on the agenda for each client review meeting can potentially increase referrals, how to more deeply engage clients by conducting a simple "Hidden Gems" poll with them, and how to reframe the traditional financial planning discovery questions around identifying client goals to more deeply understand what really motivates them and what they really want to work towards in their financial plan (that they may not have even realized about themselves yet).
We also have a few articles on practice management, including the importance of formally articulating the culture of your advisory firm, the issues to consider when it's time to increase the equity stake of next generation advisors who thus far only have a small slice of the business, and the rise of "co-planning" as a means to more deeply connect with clients and provide greater value in a more advice-centric future for financial planners.
We wrap up with three interesting articles, all around the theme of trends in the world of financial planners themselves: the first is a good dive by industry commentator Bob Veres into the world of CPA financial planners, who under the AICPA have their own membership group (now 11,500 strong and up 12% in just the past 2 years alone), their own designation (the PFS), and their own views about the professional status of financial planners; the second is a challenge by CFP Board CEO Kevin Keller on whether CPAs, who admittedly have very in-depth knowledge and training on tax and accounting issues, really have the competency to deliver personal financial planning services without going through training like CFP certification; and the last explores whether the best path forward for the profession is to get away from the rising volume of "disclosures" to address various fiduciary conflicts of interest, and instead establish a simpler system that "grades" conflicts of interest, both to help consumers evaluate which conflict of interest disclosures really "matter" or not, and also to provide a means for advisory firms to want to eschew their conflicts of interest rather than just disclose them (in order to increase their advisor rating!).
Enjoy the "light" reading!
Weekend reading for March 10th – 11th:
SEC Advisor Exam Rates See Sharp Uptick (Kenneth Corbin, Financial Planning) - One of the most controversial issues of the SEC's enforcement over RIAs is how infrequently it actually goes out to examine them... with annual exam rates hovering around 10% to 11% for years, which meant the typical (SEC-registered) RIA only had SEC examiners coming to visit once every 9-10 years. With rising scrutiny on the issue, though, the SEC appears to be implementing dramatic changes; as a result, the exam rate spiked by 40% last year, up to a 15% rate (which would have SEC examiners visiting RIAs once every 6 years instead of every 9-10 years), and thus far this year the SEC reports it is on pace for a 20%(!) examination rate (or an SEC examiner visit once every 5 years). Given that the SEC has struggled to obtain a greater budget from Congress to fund more examiners, the change appears to have been a result of an internal SEC reorganization that shifted nearly 100 examiners from the broker-dealer and market oversight units to the division that oversees RIAs (and mutual funds) instead, after recognizing that at least a portion of the SEC's oversight of broker-dealers was redundant to the broker-dealer examinations that FINRA already conducts. In addition, the SEC appears to be shifting how it conducts its examinations, typically arriving at an RIA with a narrower and targeted set of priorities (based on issues the SEC has identified nationally as being "high risk", such as cybersecurity or conflicts in retirement advice or hiring registered reps with prior disciplinary records) rather than just trying to pour over "everything" in the RIA. In other words, the SEC is trying to be more data-driven to focus on high-risk issues rather than just doing arbitrary full-scope audits. However, to avoid the perception that the SEC is just trying to become a "gotcha regulator", first-time investment adviser examinations are most likely to end with a deficiency letter citing areas the firm needs to improve in its policies and procedures – for which the SEC only intends to penalize (at least in most cases) if the issues aren't fixed the next time the examiners come back.
Wells Fargo Under Investigation For Switching Accounts From Brokerage To Advisory (Mark Schoeff, Investment News) - This week, the Massachusetts state securities regulator opened an investigation of Wells Fargo Advisors, specifically scrutinizing the manner in which the firm has been moving clients from brokerage accounts into managed or advisory accounts, along with the way it has been crafting 401(k) rollover and alternative investment recommendations, all of which are specific areas of focus under the Department of Labor's fiduciary rule. In fact, the investigation appears to be very similar to Massachusetts' other recent enforcement action against Scottrade, also for alleged violations regarding the DoL fiduciary rule (which in the case of Scottrade, was regarding their decision to run certain internal sales contests after creating internal DoL fiduciary policies and procedures that were supposed to ban such conflicted incentives). In the case of Wells Fargo, the concern is that clients who didn't actually want or need ongoing advisory or managed account services, for whom it would have actually been cheaper just to stay in a commission-based account with infrequent trades, may have been harmed by the switch to a fee-based account. Which is notable not merely with respect to Wells Fargo itself, but also because many other brokerage firms have also recently reported record profits at least in part based on the transition from commission-based to fee-based accounts (where similar allegations may arise), and also because the repeated actions by Massachusetts to enforce the DoL fiduciary rule at the state level raises the question of whether other state regulators may soon become more activist in their DoL fiduciary enforcement as well (even as the Department of Labor itself has indicated it doesn't intend to enforce the rules as long as firms may a "good faith" effort to comply during the transition period until mid-2019).
New Bipartisan Retirement Legislation Aims To Expand Small Business Employer Retirement Plans (Tracey Longo, Financial Advisor) - On Thursday, Senators Orrin Hatch (Republican from Utah) and Ron Wyden (Democrat from Oregon) reintroduced the Retirement Enhancement and Savings Act (RESA), which, similar to a prior version first introduced in 2016, aims to make a number of changes to improve employer retirement plan adoption rates, especially for small businesses. Proposed amendments include the opportunity for small businesses to earn a tax credit of up to $5,000 towards start-up costs to roll out an employer retirement plan, along with regulatory changes to further ease the ability of small businesses to join multiple-employer plans (MEPs), which use their collective size (by banding together multiple small businesses) to negotiate lower costs and achieve better economies of scale for the plan. Notably, the legislation would require employers to include automatic enrollment for employees in order to max out their tax credit (and would offer a $1,500 tax credit to add auto-enrollment to an existing employee retirement plan as well), and would remove the 10% cap on automatic employee contribution increases (making it easier for automatically-enrolled participants to increase their savings faster, particularly if they get a significant raise). And the legislation would also allow employer retirement plans to create a new lifetime income projection, that illustrates not only what the retirement plan is on track to accumulate by retirement age, but what monthly lifetime income it would translate into in retirement (ostensibly by using assumed growth rates and current annuitization rates of the projected balance), along with easing the safe harbor protections for employers that want to offer plan participants an option directly under the plan to elect to take a portion of their retirement savings as an annuity at retirement (by reducing the burdens on the employer to be responsible for independently determining the financial viability of the annuity carrier and be able to rely on state insurance commission analyses and the insurer's own representations). Although for retirees who don't want to be tied to their particular employer's retirement plan indefinitely, the legislation would also allow those who select a lifetime income option from an employer plan to still roll it over to an IRA, as long as the IRA provides the same (or "similar") lifetime income.
"Do With You" Gets More Referrals Than "Do For You" (Steve Wershing, Client Driven Practice) - While the debate remains about whether it's really a good idea to "ask for referrals" or not, a recent study on what makes advisors referrable found that asking clients what they want to discuss in advance of each client meeting (even when it has nothing to do with referrals) actually does increase client referrals. The reason, simply put, is that asking clients what they want to talk about gets them more engaged with the advisor and the financial planning process... and it's that higher level of client engagement that actually drives a higher flow of client referrals. Notably, though, the key here is not just about asking clients to participate and "engage" more with the firm's various events and programs (e.g., inviting clients to more client appreciation events), although that may help too. Instead, the real point is figuring out how to actually engage clients more deeply in the advice process itself – such as, instead of just having clients come in for review meetings, proactively asking them what they want to talk about at the next meeting, and seeing whether it actually has anything to do with reviewing the latest portfolio statement or not. And Wershing suggests this is especially important when it comes to ongoing clients – because it's easy to be highly engaged with clients initially, when all that collaborative upfront financial planning work has to be done anyway. The real challenge is figuring out how to keep clients meaningfully engaged after the intense upfront process (and perhaps the reason why so many advisory firms are seeing declining client referral rates is simply because so many firms have long-established, and therefore becoming-less-engaged, clients in the first place!?). Thus why Wershing advocates a rather straightforward process for renewing client engagement – two weeks before every scheduled meeting, have a staff member send a draft agenda to the client with a list of topics or issues the client wants to discuss, follow up with the client again one week in advance to ensure they've added to the agenda whatever they want to add... and then simply discuss the actual agenda the client wants to discuss (and be engaged with) at the next meeting itself! Not only because it increases the likelihood of having the discussion focus in the areas the client wants to discuss anyway, but because circulating the agenda and asking them to contribute topics in advance also helps to engage them more deeply in the process itself.
A Simple Client Communication With A Massive Impact (Julie Littlechild, Absolute Engagement) - While it's great to try to collect data about your clients and do a deep-dive analysis to understand the opportunities for your business, Littlechild notes that one of the best ways to solicit information from clients is to conduct what she calls a "Hidden Gems Poll", where you simply conduct a brief poll across a defined segment of your client base and ask them for their "one best idea" on a very specific topic. Notably, the point is to keep it light and easy to engage – so it's not about their "one best idea for living a more fulfilled life", but something simpler like their one-best restaurant, book, resource, app, blog, or class (because again, the whole point is to try to find "Hidden Gems"). So how do you actually execute a "Hidden Gems" poll? Littlechild provides a straightforward 6-step process: 1) Identify a client segment you want to reach and engage more deeply (e.g., those who are within 5 years of retirement, or work in a specific industry, or have young children or grandchildren, or share a profession), remembering that it doesn't have to be a huge group (as you're going for a list of hidden gems, not a statistically significant sample, so as little as 20-25 should be sufficient); 2) Decide how you're going to position the poll to engage clients (e.g., how will you connect it ot the value you're going to provide, such as a survey on best ideas for clients with grandchildren that will be shared with them to get new ideas on activities when their own grandchildren are in town); 3) Craft the question itself that you're going to ask (e.g., "Best vacation spot to bring the grandchildren" or "Best app to improve productivity" or "Best ways to teach children/grandchildren about giving back"); 4) Execute the poll, which can be done with survey tools like SurveyMonkey (which would even be free for a poll of this size!); 5) Create a summary of the results, for instance by writing up a list of the "hidden gems" answers, a brief description of each, and a relevant URL for people to click through for more information; and 6) Share your new Hidden Gems resource list with the clients you surveyed (or more generally, the segment of clients you were trying to engage with), which could be in the form of a blog post, or a quick video to talk about the results.
How A Personal Crisis Transformed What I Ask Clients (Dave Grant, Financial Planning) - While the focus of financial planning is on helping clients to achieve their goals, one of the biggest challenges is simply getting clients to understand the possibilities and clearly articulate what their goals actually are in the first place, both with respect to their financial plan, and even what they want out of their relationship with their advisor in the first place. And it's an issue that Grant became sensitive to personally, as his own advisory business underwent significant struggles in 2016, leading to a total rebrand, and forcing him to take a fresh look at his own goals – by figuring out what level of income was necessary to actually make him and his family happy, and then reverse-engineering how the business would need to be structured in order to accomplish that income goal... only to discover that then he felt enslaved to his income goal, guilty if he wasn't always working towards achieving or exceeding the goal, and then felt compelled to redefine success for himself again. But ultimately, the journey not only helped Grant to (re-)define his own goals more concretely, but led him to raise new types of questions with his clients as well – as now, when the planning relationship starts, he asks "What would make our relationship successful 12 months from now?", and as clients delve further into the planning process itself asks them "What would have to happen to make your life successful?", and then delves deeper with more follow-up questions that dive into the intangibles like "What would you like to improve in your life?", "What impact would you like to make, and to whom?", "What would you like to experience?", and "What needs to happen in your day that when you lay your head down to sleep, you do so with a smile?"
Culture Is Greater Than Life Balance (Ross Levin, Financial Advisor) - Every advisory firm has a culture, which represents the norms of behavior in the firm. Unfortunately, though, sometimes a firm's culture doesn't even align with the "aspirational framework" that they publish about themselves, which makes it especially important to understand your own firm's culture in the first place. Ideally, though, the firm's culture is deliberately crafted in a manner that will attract and retain the advisors and other staff that would be the best possible fit to move the firm forward. In fact, Levin has spent the past several years working on a "cultural constitution" developed by a task force within the firm that was designed to figure out how to better articulate who the firm really is, and what it really values, which they broke down into the areas of Mindset, Clients, Self, Team, and Firm. Articulating the core values of the culture in this way makes it possible to clarify important expectations as well – for instance, given that financial planning is a service business, "life balance" simply isn't always feasible, so Levin's firm deliberately did not include it as a cultural ideal, instead focusing on "Own Your Personal Development" instead (which may then include figuring out how to best create harmony against competing demands in our lives). Other elements that the firm identified as part of its conduct included being approachable for feedback (from both clients and staff), practicing self-reflection to develop awareness of their own strengths and weaknesses, and being willing to make changes (e.g., in the employee's role within the firm) to better align their role with their strengths. Of course, many of these are still ideals that any firm might want to work towards; the point is that by more clearly stating them, and crafting a statement about the culture of the firm that truly aligns to what they actually believe and do, it's more feasible to implement it effectively and live into it. And since a part of the culture of Levin's firm is community engagement, they are also participating in the Foundation for Financial Planning's "Be Our Guest" program to open up the firm to visitors to see everything the firm does (including its culture) for a day (and in exchange for a $1,000 donation to the Foundation).
Preparing For The Next Tranche In Your Succession Plan (Kem Taylor, FP Transitions) - Most internal succession plans don't actually sell the entire stake of equity all at once to the next generation of owners; instead, the transition is typically done more gradually, in a series of steps or "tranches" which gives both the founding and subsequent generations time to adapt (and afford) the equity transaction. In fact, FP Transitions advocates that the first tranche is usually a transition of "only" about 10% to 20% of ownership to the next generation, a form of "incubator" stage to allow parties on both sides to test the waters and decide if/whether/how they wish to proceed further. The caveat, however, is that it's not always clear when to proceed from the first tranche to subsequent ones, for businesses where the initial stage of next-generation owners do have a small slice, but the founders haven't decided yet how to proceed with the next (often bigger) slice. Of course, every transaction will have its own demands and specifications, but in general FP Transitions suggests that the second tranche should move the firm towards 70/30 or even 60/40 ownership (between the founders and the next generation), and that the second tranche should start before the payments are even fully done for the first tranche. Other relevant considerations for founders include: What hours do the founder(s) want to work (as the decreasing ownership percentage is usually accompanied by a decreasing hours worked per week, as the next generation prepares to more fully take over); What training are the founders providing to ensure that the next generation is ready to take over; what is the founder's own planned timing for a full exit (so there's time to execute multiple tranches as needed between now and then); to what extent is the founder actually financially ready for their own retirement; and is the founder ready for their own "next stage" of life, with something to move towards as they simultaneously move away from the firm. By contrast, next generation owners need to consider their own separate set of issues, including: their own comfort level in taking on greater levels of responsibility; whether they're ready and capable to support the revenue growth/business development/production needs of the business as the founders dial back; their own personal skills/professional growth to take over the firm; whether buying further into the firm, and taking on more responsibility, aligns with their own financial/personal/family goals; comfort with the risk (as well as the reward potential) involved in buying the firm; and their own ownership mentality and ability to set a vision for the future of the business beyond the original founders. Of course, there are also financial arrangements to sort out with the second tranche, but FP Transitions suggests that the blocking point is usually not the financials, but the other dynamics for both founders and next generation advisors as they prepare to transition to the next stage of succession.
Planning 2.0: Coplanning (John Anderson, SEI) - While Anderson works in the financial services industry, he's also been a consumer of the industry, having received his first financial plan when he was in his early 30s. At the time, he was single, starting to make some money, had a little debt, owned his first condo, and wanted to figure out how to save more. Yet when he went to hire a financial planner, what he received instead was a full leather-bound binder of a financial plan, beautifully prepared with charts and graphics addressing everything from his retirement to risk management (i.e., insurance) needs... but failing to feel like it was really personalized to him (in large part because many of the charts and graphs, in areas like estate planning, didn't seem relevant when he was single, in his 30s, with limited assets, and had never asked about estate planning in the first place). More generally, though, Anderson suggests that the real problem is that "The Plan" as created was what the advisor wanted to deliver, and not what he as the client actually wanted and needed; in essence, it was actually "the advisor's" plan, and not his as the client, as while he could have asked to make changes to the plan to adapt it further to his needs, he know that changes couldn't be made without a lot of effort (changes in the software and that leather-bound plan would have to be re-printed and re-bound!). By contrast, when Anderson went through a second round of financial planning more recently, the data gathering process was powered primarily with technology (spending downloaded from Quicken), and the plan was on computer (not paper) which made it easy to change and adapt on the fly. The end result was that this "co-planning" experience felt less like the advisor's plan presented to the client, and more like the client's plan in which they were actually engaged. Which is especially important as financial advisors shift from using financial plans as a lead-in to implementation (to sell a product or manage a portfolio), to getting paid for the advice itself... as in the end, clients won't pay nearly as much for a financial plan as they will for an engaging financial planning experience!
The Forgotten Tribe Of CPA Financial Advisors (Bob Veres, Financial Planning) - In the past, CPAs did accounting and tax preparation for individuals and small business owners, while financial planners provided more comprehensive financial planning advice (albeit in the early days to help facilitate the implementation of insurance or investment products). Yet in the CPA world today, and especially with the recent Tax Cuts and Jobs Act, the worlds of financial planning and tax planning are increasingly converging, as more and more CFP professionals provide some level of tax advice, and more and more consumers demand that their CPAs provide them financial planning advice. The end result is that the AICPA's Personal Financial Planning section is up to 11,500 members (up 12% over just the past 2 years alone), with a large number of CPA/PFS credential holders (the AICPA's version of the CFP marks), and many CPAs who are CFP certificants as well. And the potential for growth of CPA financial planners remains huge, as the AICPA overall includes a whopping 400,000 members. However, some conflict remains between the AICPA and the rest of the world of financial planners, as the CPA community generally doesn't even consider financial planning to be a distinct profession, but simply a specialty subset of CPA training (along with tax planning, audit work, forensic accounting, etc.). Nonetheless, Veres suggests that other organizations like the FPA, NAPFA, and IWI would benefit by working more collaboratively with this "other world" of (CPA) financial planners, especially given the sheer lobbying clout and relationships that the AICPA has with regulators and members of Congress. And CPAs have a long-standing history of "alternative" fee models that are still viewed as novel in the financial planning world, including various forms of hourly and retainer fee models that could potentially open up new markets of financial planning clients (although a number of CPAs also work in more "traditional" models including RIAs and specialty broker-dealers for CPAs like HD Vest and 1st Global). Not to mention that the AICPA has one of the best conferences for advanced financial planning education (the AICPA PFP conference, now part of AICPA ENGAGE). However, the fact that the AICPA remains on a 'parallel' track of financial planning growth also raises the potential for conflict between the CPA financial planners and their PFS designation, versus the CFP marks, especially since the CPA license itself requires a higher level of education (generally a Master's degree with 150 credit hours in accounting) than the CFP marks (with "just" a Bachelor's requirement, in any subject matter)... which raises the questions of whether or how the two organizations will be able to harmonize financial planning between themselves (and whether the CFP Board might grant the CFP marks to PFS holders in an effort to consolidate the two marks).
Why CPAs Should Become CFPs Before Calling Themselves 'Planners' (Kevin Keller, Financial Planning) - In recent years, a growing number of CPAs are beginning to offer financial planning services (from tax and estate planning, to retirement planning and succession planning for businesses), as it often complements what CPAs already do in their tax and accounting work with clients, and especially as the 'traditional' tax and accounting services of CPAs continue to face their own fee compression and margin challenges. Accordingly, the AICPA has begun to promote the "CPA Financial Planner", recognizing the growing consumer demand for "personal financial planning" services, and encouraging CPAs who provide those services to use that "CPA Financial Planner" label. The caveat, however, is that tax and accounting services are only a small subset of the broader domain of personal financial planning advice, and as a result Keller (from the admittedly conflicted position of being CEO of the CFP Board) raises the question of whether simply having the CPA license is sufficient to demonstrate actual competency in financial planning itself (beyond the tax and accounting domains), and especially since so much of the training and focus of accounting is retrospective (literally "accounting" for things that have occurred), while most financial planning is more future-oriented (determining goals and where clients want to go, and how best to get there given the trade-offs that must be made along the way). Of course, a number of CPAs already cross over to financial planning more directly, and approximately 1-in-10 CFP professionals are already also CPAs, who have the opportunity to "challenge" for the CFP exam as a CPA (but must still complete the exam and honor the CFP Board's Code of Ethics, just as CFP professionals must do in reverse if they wish to become a CPA). And in point of fact, thanks to the CFP Board's recent and ongoing public awareness campaigns, consumers are already more likely to think of a CFP professional than a CPA when they think of a financial planner. Of course, even the AICPA acknowledges that additional training in financial planning should be given to CPAs in order to be effective financial planners – thus the existence of the CPA Personal Financial Specialist (PFS) credential – but ultimately Keller suggests that if CPAs want to become "CPA Financial Planners", that the CFP Board "welcomes them with open arms" to adopt CFP certification as the standard for financial planning... rather than just taking on the label "CPA Financial Planner" without any training or education beyond a curriculum in tax and accounting (or a competing PFS designation).
Would A Ratings System For Advisors Prompt Better Behavior? (Kenneth Corbin, Financial Planning) - While financial advisors in both RIAs and broker-dealers are subject to a long list of disclosure obligations, it doesn't seem to actually be providing as much consumer protection as desired, with a growing recognition by regulators themselves that disclosure alone is not sufficient. In fact, an SEC advisory panel recently suggested that the SEC might consider a simple rating systems that evaluates a firm's conflicts, and gives them a grade or score (similar to the ratings from Consumer Reports) that helps consumers actually understand and weight the impact of various fine-print disclosures and potential conflicts. In other words, the ever-growing list of complex disclosure forms would be simplified into ratings that consumers could more easily digest (and then dig further into if they wanted to). Ideally, the benefit of such an approach is not only that consumers would get a better understanding of the importance of certain disclosures over others, but that firms themselves would then be incentivized to limit their conflicts of interest (rather than just disclosing them) in order to get a higher grade or star rating (akin to how nutrition labels in the food industry spurred competition amongst producers and restaurants to offer healthier food options). More generally, though, the effort to refine how consumers engage with financial advisors is simply a reflection of the fact that, despite a wide range of disclosures about the differences between broker-dealer and RIA (suitability vs fiduciary) standards of care, most consumers still don't actually understand the differences or their consequences – the ultimate demonstration that disclosure alone (at least or especially in the form of long legal disclosure documents) is not sufficient to protect consumers (or even to help them understand the decisions they face when choosing who to work with).
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.