Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the announcement that FINRA is considering a proposal that would reduce the obligation of broker-dealers to oversee outside RIAs of hybrid advisors... though it remains unclear if that means broker-dealers will finally be more hands-off from outside RIAs (and the revenue they charge for supervising outside RIAs), or simply require their hybrid advisors to either use the corporate RIA or the broker-dealer's custody and clearing services for the outside RIA instead.
Also in the news this week is a new letter from the Consumer Federation of America urging the Department of Labor to step up its enforcement of the now-in-effect Impartial Conduct Standards under its fiduciary rule (given the recent enforcement action by Massachusetts securities regulators against Scottrade), and the announcement that David Lau (formerly of Jefferson National, which launched one of the first RIA-friendly variable annuities) is launching a new company called DPL Financial aiming to bring an even wider range of no-commission insurance products to the RIA community.
From there, we have several articles around the theme of practice management, including a look at the new HIFON study-group-cum-membership-organization for operations staff members in advisory firms, a discussion of how the Super OSJ model in broker-dealers is evolving away from "just" providing compliance oversight to a wider range of back-office support and training and technology for their advisors, and a review of the current wirehouse landscape given the ongoing unraveling of the Broker Protocol.
We also have a few articles on financial advisor pricing and compensation, from suggestions on how to handle the infamous question "How do you justify the value of your advisory firm fees?", to a discussion about how advisory firm business and pricing models tend to change over time for an advisor, and why it's important for larger advisory firms to have a compensation model for advisors that covers all of their needs (following Maslow's hierarchy from covering 'basic' needs, to those for esteem and belonging to a community, and finally achieving greater levels of self actualization).
We wrap up with three interesting articles, all around the theme of getting your financial house in order: the first examines the rising trend of financial advice and financial wellness programs in the workplace, as employers are discovering that financial stress is so damaging to employee productivity that it actually "pays" to help employees get more financially literate and shore up their debt and emergency savings shortfalls; the second looks at new research finding that community involvement shows a strong relationship to one's self-assessed financial well-being (providing yet another example of how giving to others helps fulfill our own happiness); and the last is a great walk-through of all the various financial documents that we should keep, don't need to keep, or can at least scan electronically to help declutter the paper in our lives!
Enjoy the "light" reading!
Weekend reading for March 3rd – 4th:
FINRA Proposes New B/D Rule On Outside Independent RIA Supervision (RIA In A Box) - This week, FINRA released Regulatory Notice 18-08, which if passed would effectively relieve broker-dealers of most of their burdens and obligations to oversee the "outside" RIA activity for their hybrid registered representatives, winding back their current supervisory obligations under FINRA Rule 3270 and Rule 3280. Notably, the hybrid registered representative would still be required to notify their broker-dealer of their outside RIA business activity, and the B/D would have the right to affirm or deny the outside business activity – including making the approval contingent on the use of the broker-dealer's own custody and clearing services. But once approved, the broker-dealer would not need to capture all of the outside RIA's activities under its own books and records requirements. On the one hand, the shift should reduce the currently costly compliance burdens on broker-dealers to supervise their hybrid reps; on the other hand, for many broker-dealers, the "requirement" to supervise outside RIA activity is the primary reason that broker-dealers use to lay a claim on the financial advisor's outside RIA revenues, and without an obligation to oversee, it will be difficult for broker-dealers to justify charging anything to hybrid RIAs. In fact, the inability of broker-dealers to charge outside RIAs for oversight will likely compel them to shift their business models altogether, either requiring their registered reps to use the corporate RIA instead of their own, or alternatively requiring them to use the broker-dealer for custody and clearing (which allows the broker-dealer to profit by providing RIA custodial services, potentially at "captive" prices).
Fiduciary Advocate Calls For Immediate Enforcement Of DoL Fiduciary Rule (Mark Schoeff, Investment News) - After the recent enforcement action filed by the Massachusetts state securities regulator against Scottrade for failing to adhere to its own Department of Labor fiduciary rule policies and procedures, the Consumer Federation of America has submitted a letter of Labor Secretary Acosta urging him to have the DoL more proactively enforce the fiduciary rule... specifically, the Impartial Conduct Standards that did take effect last summer, even as the remainder of the Best Interests Contract Exemption requirements are delayed. As it stands, the DoL has already said that it intends to enforce against firms that are not making a "good-faith effort" to comply... but the Consumer Federation of America (CFA) points out that the recent Scottrade enforcement action suggests that the DoL isn't doing enough to check and see if firms actually are making proper good-faith efforts in the first place, and that firms themselves are taking the DoL's laissez-faire attitude as implicit permission to not fully comply with the rules. Notably, with the SEC expected to issue its own fiduciary rule later this year, the CFA also issued a letter to SEC Chairman Jay Clayton, urging him to include stronger sales-incentive prohibitions in the SEC's own future proposal.
Lau Launches Network To Bring RIAs Commission-Free Insurance Products (Christopher Robbins, Financial Advisor) - David Lau, who was previously an executive for Jefferson National (which launched one of the first low-cost RIA-friendly variable annuities, Monument Advisor, nearly a decade ago, before the company was acquired by Nationwide), this month announced the launch of DPL Financial Partners, which aims to launch an entire series of "commission-free" insurance products for RIAs, to reduce the need for RIAs to refer clients with insurance needs to outside insurance agents (and to eliminate the implicit "double layer" of cost that occurs when an advisor charges for insurance advice and an insurance agent is paid a commission for the implementation of the policy that the advisor already recommended). DPL is aiming to provide a wide range of commission-free products, including universal and variable life insurance, long-term care insurance, Medicare supplemental insurance, as well as a new series of variable annuities, while serving as the RIA's "third-party insurance department".
The HIFON Operations Community (Bob Veres, Inside Information) - In recent years, study or "mastermind" groups for financial advisors have become increasingly common. But now, advisory firm Director of Operations Shaun Kapusinski has created a similar kind of study group for the operations staff members of advisory firms. Dubbed HIFON (short for "High-Impact Financial Operations network"), the group started out as a collection of people comparing notes on advisor software and internal workflows and processes and procedures, but after growing to well over 100 ops professionals, is now pivoting into becoming an ops-related membership organization via the new HIFON website, including both structured monthly conference calls (broken into small groups for conversation, guided by a group facilitator), and a series of discussion boards on various advisory firm and ops-related topics, as well as presentations by key software and other vendors. More recently, HIFON even launched an internal jobs board for operations staff positions, and is building out a shared library of documents and templates. Basic membership costs $400/year (just access to the discussion board, vendor webinars, and job postings), or $600/year for "Core" (including the monthly conference calls and bi-monthly compliance discussions), or "Plus" for $800/year for operations staff members from firms that are $1B+ in AUM and want group calls with only other large firms (which have unique challenges of their own). Further information at the HIFON website.
Designing The Super OSJ Of The Future (Rich Whitworth, Investment News) - Broker-dealers are required to have a basic level of supervision and compliance oversight for each branch that they manage, and very large broker-dealers often established so-called "Super OSJ" (Super Office of Supervisory Jurisdiction) to provide compliance support to a group of branches. In recent years, though, Super OSJs have increasingly grown into more and more capable intermediaries within the broker-dealer ecosystem, providing not just compliance support (which may actually become more streamlined over time with enhancements in regulatory technology for advisors), but also providing more turnkey solutions around everything from investment research to paraplanning resources for the advisors under their supervision, to structured training programs and dedicated practice management support, and even "built-in" succession planning (by being able to facilitate mergers and sales of retiring solo advisors to other advisors under the OSJ's umbrella, which are also typically in the same geographic region as well). In addition, the growth and concentrated buying power of large Super OSJs is also making it possible for them to negotiate larger discounts on technology solutions, and even better payouts from the parent broker-dealer itself for all the registered reps under their supervisory umbrella!
Broker Protocol: Indecision Over Recruiting Agreement Is Rampant (Bruce Kelly, Investment News) - While thus far, "only" Morgan Stanley and UBS have left the Broker Protocol, the prospective unraveling of the Broker Protocol is leaving even brokers are still-in-the-Protocol wirehouses Merrill Lynch and Wells Fargo nervous, along with even those at independent broker-dealers who now have to wonder whether their firms might someday leave the Protocol with little warning. The decline of the Protocol isn't only a concern to those advisors who were someday thinking about going independent – and now fear they might not be able to – but even those brokers who simply anticipated that they might someday switch broker-dealers and earn a recruiting bonus (or be enticed to stay with their broker-dealer in exchange for a lucrative retention bonus). In the meantime, the question still looms about whether or how aggressive wirehouses that have left the Protocol will really be about pursuing their former brokers with Temporary Restraining Orders, though thus far Morgan Stanley in particular has already shown its willingness to aggressively pursue TROs and enforce its non-solicit agreements in a post-Protocol world (while there are no known incidents of UBS pursuing former brokers... or at least, not yet). For those who are at the already-Protocol-departed firms, they may have little choice but to prepare for lawsuits if they make a change. For other advisors, though, the question is whether to make a transition to an independent broker-dealer or RIA now, before they find their firms exiting the Protocol as well, as while both Merrill Lynch and Wells Fargo has thus far said they're remaining in the Protocol, it remains unclear whether they will change their minds later this year. In the meantime, there are more and more rumblings about whether regulators may intervene directly, for the protection of consumers who are otherwise often caught in the fray between the broker and their former wirehouse.
The Test Most Advisors Fail: "How Do You Justify Your Fees?" (Dan Solin, Advisor Perspectives) - Despite the fact that we're all in the business of being paid for financial planning advice one of the most difficult questions that most advisors face is how to explain the value that we provide in order to justify our fees/costs to clients. Solin suggests that the classic question "How can you justify your fees", though, could really represent one of three different issues. The first is simply to justify what your fees are, as they compare to other alternatives (e.g., robo-advisors), while the second is justifying the advisor's value (why are the [additional] fees worth the cost), and the last is really about differentiation (why "your" fees rather than the some other advisor's?). Yet it's important to clarify whether the issue is really about the fees themselves, the value proposition that underlies them, or differentiation from other alternatives, because the "right" answer will vary depending on the real underlying question. Accordingly, Solin actually suggests that when this question comes up from prospective clients, the advisor should respond with "I can tell you what we do for our clients and how much we charge. I can also answer any questions you have about our services, fees and what we do for our clients. With that information, you should be able to determine if we are the right fit." Or if it's about differentiation, with "I can explain what we do and describe our investment philosophy. I can also answer any questions you have about these services. I don’t know enough about what other advisors do to differentiate ourselves, but you should be able to make a decision about the right advisor for you once you have this information." The key point: it's actually about trying to shift the burden of persuasion from you back to your prospect, instead.
Why Is Pricing So hard For New RIAs (Dave Grant, Financial Planning) - One of the biggest challenges for advisory firms, especially new ones that are getting started, is figuring out the "right" price for your services... both with respect to the business model itself (e.g., retainer fees vs the AUM model), and just the level of fees to charge (e.g., 1% AUM fee or higher or lower, or $150/month or more or less?). Grant notes that when he first launched his own advisory firm, one of his main goals was to get away from the AUM pricing model (as his prior AUM-based firms had turned away a lot of clients who simply wanted to pay by the hour), and so he launched a combination of hourly and monthly retainer fee options... but then had to decide exactly how he would price the value of his time, and figure out what clients would pay. Yet in practice, Grant found that at $200/month, some clients worked through the plan too quickly and were "done" after 6 months... which led him to institute a 12-month minimum... only to find that some clients with significant assets were "underpaying" compared to the $5k - $10k/year they were already willing to pay other advisory firms... which led him to create a tiered service model instead... as his hourly pricing turned into project-based pricing as well. Ironically, Grant ultimately decided to revert back to the AUM model, with minimums that would allow him to "just" work with 20-30 affluent clients, to achieve the lifestyle goals he wanted from his practice. The key point, though, is simply that decisions about pricing models and who you want to serve are ultimately reflected across your entire advisory business, and other related decisions you will make... and as our goals and desires change and evolve over time, so too may our views of the "ideal" business model and service pricing as well!
Clearing Up Advisor Compensation Confusion (Glenn Kautt, Financial Planning) - One of the biggest challenges in business, from financial advisory firms to sports teams, is determining how to properly compensate exceptional talent. But as Kautt points out, it's not just a matter of designing the theoretically ideal compensation structure, but also recognizing that different types of compensation models may incentivize advisors differently based on their own needs and desires. For instance, Maslow's classic hierarchy of needs recognizes that people typically want to secure basic needs like physical (food & shelter) and safety (personal, financial, health), before moving on to needs for social belonging and esteem, and then finally self-actualization and transcendence. Accordingly, Kautt shares how their own firm tiered compensation accordingly, starting with Salary and Employee benefits to satisfy basic needs (compensation for physical needs, and helath insurance for safety needs), along with increasing job responsibility and authority and mentoring/coaching (to support social belonging and esteem needs), and support to develop professional education and ultimately professional reputation inside and outside the firm to facilitate higher level needs. Notably, not all employees will necessarily pursue the same or all parts of the compensation model at the same time... but that's actually fine, because the whole point is to have a range of compensation incentives that can help meet employees' needs and desires, wherever they currently are on Maslow's hierarchy!
Companies Pay Workers To Get Savvier With Money (Anne Tergesen, Wall Street Journal) - A growing number of private companies are initiating employee benefits programs that include financial wellness as a key component... not just because it's an increasingly appealing employee benefit in today's financially complex world, but also because businesses are actually finding that employee financial problems contribute to increased employee stress and reduced employee productivity that has an adverse impact on the business itself. Accordingly, some companies are paying for employees to attend financial education classes or meetings with financial advisors, while others are giving outright additional cash payments (e.g., as matching payments) to help employees reduce debt or shore up their emergency savings accounts. In fact, 17% of employers with financial wellness programs in 2016 are offering financial incentives to encourage employees to participate (up from just 10.7% in 2014). And notably, it's not just about online tools; many are offering one-on-one consultation opportunities with financial advisors as well. Which raises interesting questions about whether employee financial wellness programs may be a new channel of growth and job opportunities for CFP certificants... and whether at some point, workplace programs may become so popular that it will be more difficult for independent advisors to attract already-advised employee clients?
New Study Links Financial Well-Being With Community Involvement (Jadah Riley, Financial Advisor) - A whopping 9-in-10 Americans believe it is important to look out for one another, and as a result more than half of those in a recent financial security survey reported supporting someone else in their community during a time of financial hardship... leading to 69% of Americans stating that community involvement is vital to their overall well-being, and half of all respondents to state that being actively involved in a community improves their finances. Notably, in the context of this study, "communities" were defined very widely, and included family, friends, or neighborhoods (and more generally were defined by both geography, values, culture, and lifestyle). In addition, the study found that the desire for community spans generations, and in fact Millennials – despite their tech-savviness – were actually most likely to be involved in their community (and multiple communities), and preferred in-person engagement. All of which helps to reinforce the existing research that financial well-being is actually enhanced for those who give away at least a portion of their income to help others.
The (Long) List Of Financial Documents You Should Keep (Ron Lieber, New York Times) - For many, annual tax reporting season, and the flood of tax reporting documents that accompany it (from Form W-2s to various types of Form 1099s and more) immediately begins to raise questions about how many of these documents (and all the others that circulate through the household from year to year) actually need to be kept going forward, versus the ones that can be deleted or trashed or shredded in an effort to declutter. Accordingly, Lieber provides guidance on a wide range of various financial documents, and prudent guidelines on how long each type should be kept, including: to be able to defend an audit, the IRS expects you to keep tax returns and any/all supporting documentation for three years after you file your tax return (though it's prudent to keep them for six years, as the IRS can technically go back six years if there was a substantial more-than-25% misstatement of income); when it comes to receipts (from charitable contributions to meals receipts), the IRS says it's generally fine to simply keep digital (i.e., scanned) copies and not the originals (and bear in mind that while you may be able to request older transaction data from a bank, not all banks keep the data indefinitely, and/or may charge you for more distant historical records); and brokerage statements often need to be kept simply to be able to reconstruct cost basis, though fortunately the automatic basis tracking that most broker-dealers have been doing since 2011 reduce this burden (but still, keeping statements is a good idea for a while longer, as not all investments have been tracked throughout). In the meantime, many financial documents are important enough to be kept "indefinitely" (at least as long as they're active/relevant), including major loans (from student loans to mortgages) and their payoff letters, child support and alimony payment records, major insurance policies, and a home inventory of the things you'd want to replace if they're ever damaged or stolen, along with home improvement receipts (which may add to your cost basis years or decades later), and of course your birth certificate and Social Security card, too.
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.
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