Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a fascinating story looking about whether better adoption of financial planners by the military could help stem the pace of military suicides, and help more soldiers get and maintain their security clearances, as financial troubles are actually a leading cause of both military suicides and soldiers losing clearance. Unfortunately, though, thus far the military has been resistant to allowing personal financial advice to be delivered to soliders beyond general financial education, due in large part to an unfortunate history of questionable "financial advisors" taking advantage of and abusing soldiers with high-commission investment products.
This week's articles also include a number of technology-related articles, including two about some of the latest technology and productivity tools for advisors striving for greater efficiency and scalability in their firms or simply running a "pared-down" practice with fewer (or no) staff, a look at some of the "high-touch" technology trends emerging to better engage interactively with clients, a "surprise" announcement by Orion Advisor Services that it is turning the bulk of its portfolio management software platform into open source code to better support integrations from partners and enhancements to its offering, and the announcement that online brokerage platform Motif Investing is rolling out an advisor platform that will allow unlimited client trades for $20-$50 per month (per client) and raised another $35M of venture capital to continue fueling its growth.
We also have a few financial planning articles that are more technical in focus, including a look at best practices in measuring and evaluating risk tolerance, a new software solution called PocketRisk for measuring client risk tolerance, and an interesting discussion of how newly-minted ultra-high-net-worth clients often experience the transition to wealth as though they are "immigrants" in a new land, with all of the challenges common to most immigrants, from how to adopt to a new environment to the difficulty of raising children effectively in a culture in which they did not grow up themselves.
We wrap up with three interesting articles: the first is an interesting look from Mitch Anthony at just how artificial the "retirement" finish line really is, and whether the whole concept of retirement may actually be a relatively limited and short-term phenomenon that is already unraveling; the second is a great overview from technology consultant Bill Winterberg of the major trends in advisor technology, from CRM to rebalancing tools to financial planning software and more; and the last is a fascinating look from Bob Veres at how the next generation of financial planners are beginning to set roots for a very different kind of financial planning world than their predecessors, in everything from how they deliver their services, to what services they deliver, and even how their practices are structured and how their clients pay them in the first place!
And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end! Enjoy the reading!
Weekend reading for May 10th/11th:
Could Planners Stem The Military Suicide Rate? - This cover story for Financial Planning magazine looks at the troubling challenge of suicides in the military, and how financial planners can play a role in preventing them. Contrary to the popular belief that battlefield-related mental trauma is a driver of military suicide, a Pentagon study of 301 active-duty military suicides in 2011 found that more than 50% were among service members who had never deployed (though overall the suicide rate for veterans is significantly higher than the general population); the other factors driving military suicide include financial troubles, mental illness, marital problems, and substance abuse, and is perhaps exacerbated by the fact that almost all active-duty soldiers carry a $400,000 government life insurance policy (which does pay even in cases of suicide). The situation receives further attention because indebtedness is also the top cause that soldiers lose security clearances. While the Department of Defense does hire hundreds of financial advisors to assist in the armed forces, fears of the sale of unsuitable financial products to service members have led to rigid rules that generally limit advisors to purely giving financial education and not individual-specific planning and advice, and some advisors have lost their jobs for giving life-saving advice to the military. Nonetheless, an increasing acknowledgement from the Department of Defense that suicide is about more than just the aftermath of the battlefield and mental illness is increasing interest in finding a more advice-driven solution where financial planners can play a role.
Honing the Advisor’s Tech Edge - This article from Research Magazine looks at some practical applications of today's digital technology for advisors, both tools that are specific for the industry and more general software applications that can be relevant for advisors and their productivity. However, cutting edge technology is only valuable if you can put it to good use, so ultimately the first step is to change/standardize your own processes and procedures, so that technology can provide further scalability from there; a recent Fidelity benchmarking study found that the top performing firms were the ones best at harnessing technology effectively, not necessarily choosing the latest innovations. The first recommendation from the article is to continue adopting web-based software, as tools that operate from the cloud eliminate the cost and worry of purchasing and maintaining servers to run your business. Web-based platforms are also able to more easily talk to other software, which allows integrations like CRM tools that automatically pull in material from clients' social media activity, or financial planning software that is always up to date with the latest client data, or rebalancing software that can pull in client investment details, figure out appropriate rebalancing trades, and then submit them directly to custodians to execute. Other popular technology tools include more interactive and collaborative financial planning software, social media tools, and online marketing strategies. Advisors who continue to serve their clients without adopting this technology may be able to keep them, but the article suggests it will be harder going forward to attract new clients, serve current clients cost-effectively, and eventually as today's baby boomers pass away and leave wealth to the next generation, younger clientele may outright reject advisors who aren't tech-savvy; firms that haven't adopted technology may also have more trouble selling their practices, as it leaves the burden for technology implementation to the buyer, which can adversely impact the price.
The Pared-Down Advisor - From Wealth Management, this article is a profile of some advisors who run very "pared-down" staff-light-and-technology-heavy financial advisory firms. One young advisor manages her year-old practice with a combination of free and low-cost software tools that together cost less than $100/month, relying heavily on cloud-based software that lets her "literally run my business from my laptop." Key software tools include using esignatures for documents, meeting with clients virtually using the free Google Hangouts platform, sending email newsletters to clients using MailChimp, facilitating monthly invoicing using PayPal, and a simple low-cost CRM called Less Annoying CRM (which costs a mere $10/month). The trend isn't limited to newer advisors, though; at larger broker-dealer Raymond James, there's also a big push on advisors being able to adopt mobile technology, and run more and more of their practices from an iPad tablet, using tools like Evernote for notetaking and Idea Flight for doing remote presentations over iPad. Another advisor avoids the hassles of back-and-forth efforts for scheduling clients by using ScheduleOnce, where clients can see the advisor's available time slots and pick three options that work (the advisor then selects one and the software sends out an email confirmation). Other tools suggested by the article include RescueTime for time tracking, and Dragon Naturally Speaking to dictate client notes and other correspondence.
High-Touch Tech Trends To Watch - In Financial Planning magazine, financial advisor Glenn Kautt looks at advisor technology not from the perspective of running the business, but how to manage and use client information to deliver advice and updates to the clients in a high-touch practice. For instance, Kautt notes how at a recent TD Ameritrade conference, he witnessed a panel session where the audience was presented with 10 successive questions and asked to respond to each quickly with their smartphones, and the votes were tallied on a big screen in seconds for all to see; the end result was a panel that had better perspective on the audience, and an audience that was totally engaged. Can you imagine using something similar with your own clientele? If you deliver educational seminars to your clients or prospects, what level of interaction could you have with your audience with this technology? Instead of doing time-consuming and expensive surveys with clients every year or two, what if you simply presented one or two questions every week to all of your clients with an "instant vote" weekly survey? Another high-touch option Kautt suggests includes the use of video, as we connect much more deeply and personally with video than we do with "just" written text, and it's a great way to reach clients who don't often come in for meetings or to client events.
Eric Clarke Rolls The API Dice By Posting Orion Software's Code Online - In a ground-breaking move in the financial services industry, Orion Advisor Services executive Eric Clarke has announced that the company is making its software code available online to potential partners using code-sharing platform GitHub. The apparent goal of turning Orion Advisor Services' code into what is essentially a form of an "open source" solution is to see it adopted as a core portal that more companies can integrate to more easily by having access to the code in the first place (where Orion ultimately benefits from wider adoption with more advisors and more accounts). Some commentators view the Orion effort as a second version of the "My Silver Bullet" initiative to push for better software integrations and data standards for the advisor (especially RIA) technology landscape; now, in essence, Orion's code itself may become the common shared point, its data standards implicitly becoming the standards for all to use thanks to the available depth of integrations. Notably, by being open source code, Orion also has the opportunity to improve on its own software more rapidly, as in the engineering environment, doing quality programming on open source code is a way one can advance their own career, and the crowd-sourced open-source code model has worked quite well in other industries. Ultimately, it remains to be seen what the impact will be, but many eyes are watching to see whether Orion's decision will (or will not?) finally help the industry better cohere around a common set of data standards for integration.
Online Brokerage Motif Introduces Flat Fees For Advisers - This week, online brokerage startup Motif Investing announced a new trading and rebalancing platform for advisors, with a unique flat-fee pricing that would allow unlimited trading at a cost of $20-$50 per customer per month (depending on the size of the firm). The new Motif advisor platform was voted a best-of-show winner (one of the top 8 out of 68) at the FinovateSpring technology conference in San Diego last month, and also announced a big new $35 million round of venture capital to allow Motif to further expand its services. The company also announced it will be launching a new family of smart beta "motifs" (or customized model portfolios made up of individual securities) for advisors next month, and already has consumers directly creating a wide variety of motifs (now numbering nearly 35,000, where users earn $1 in royalties every time someone buys their motif). There are now 10 RIAs on the new advisor platform, but another 100 RIAs are in the process of getting on board.
Measure and Manage Risk Tolerance More Effectively - In the Journal of Financial Planning, this article takes a broad look at some of the current challenges and problems with risk tolerance questionnaires, and how the process for advisors can be improved upon. The fundamental challenge is that risk tolerance questionnaires often have too few questions, and ask the wrong types of questions, often asking clients to engage in "affective forecasting" (trying to guess how they will feel in the future, which psychologists call "affect") despite the fact that we're generally terrible at making such predictions (how we actually handle the losses is rarely how we think we'll handle them ahead of time). We do this for a wide range of reasons, including that we simply misjudge when we're in a "cold" emotional state how we'll react when we're in a "hot" state instead, and also that we tend to both underestimate or outright disregard negative possibilities (even if they've been presented to us) and overestimate how intensely they will impact us before we adjust. In turn, this essentially leads us to feel "really bad" about failures but only "pretty good" about successes (which suggests that managing expectations lower so there are fewer/smaller failures is crucial). On the other hand, once something bad does happen, we tend to rationalize to it after the fact, which ironically means that clients may be more willing to "forgive" than one might expect (as long as the initial decision was well-informed and the client had bought into the plan in the first place). So how should all this be taken into account? The authors note the importance of assessing client willingness to take losses in dollar amounts (not just percentages), taking into account client goals and needs (though for financial planners this is being done already!), helping clients to keep recent market activity in context (so they don't misperceive risk based on recent results), and remembering the importance of building trust with clients, as they will tend to be more tolerant of risk that their advisor tells them it's ok to accept when they have deeper trust of the advisor in the first place. Notably, the authors don't ultimately recommend that all of this should replace a risk tolerance questionnaire, but that the risk tolerance questionnaire should just be part of a broader communication plan for each client.
New Test for Risk Tolerance - In Financial Planning magazine, technology consultant Joel Bruckenstein reviews a new risk tolerance software tool called PocketRisk. The company was created by John Ndege, a former Facebook employee who struggled in his own journey to find an appropriate risk tolerance tool to help him make decisions about his Facebook stock become liquid after its IPO, and ultimately decided to build a tool to fill the void he found. Taking clients through the process entails having the system send them an email (to which you can make some changes) inviting them to click on a link to take a risk tolerance questionnaire, which is estimated to take about 5-10 minutes to complete. Final results are reported on a 100-point scale (where 60% of respondents will score between a 40 and 60) and clients are shown both their score, and a general "risk group" (from 1 to 5) that they fall within. Clients can also see a chart of where their responses fell amongst the 5 risk groups for each of the 19 questions, so understand how consistently they were scoring in the final 'risk group' in which they fell. The end of the questionnaire also includes a final question that asks the client to rate their own score outcome and affirm (or not) if their results seem consistent with their own beliefs about their risk tolerance. From the technology perspective, Bruckenstein notes that the software itself is simple and intuitive, easy to sign up and use, and the output was appealing for clients. Pricing itself is "competitive" at $99/month for two users with custom branding, unlimited clients, unlimited risk profiles, email, and telephone support; there is also a "solo" version fo $55/month with a limit of 150 clients (but no custom branding and only email support). Paying annually allows the advisor to get 14 months for the price of 12. On the other hand, Bruckenstein cautions that to just use the trial version, you must supply a credit card, and remember to cancel later or you will be charged for the software; in addition, while PocketRisk allows the advisor to edit the email send to clients for the questionnaire you cannot create your own fully custom email template, and the process of connecting client's risk tolerance to an asset allocation is manual. In addition, at this point the software doesn't have any integrations, at least at this point, though Bruckenstein suggests that with some of these technology improvements, there's plenty of room for PocketRisk to win its share of advisors.
Newcomers And Natives In The Land Of Wealth - This article from Investment Advisor magazine is an interview with Jim Grubman of FamilyWealth Consulting, who works with ultra-high-net-worth families and their advisors on integrating wealth and life and recently published the book "Strangers in Paradise: How Families Adapt to Wealth Across Generations" as well. The key distinction that Grubman makes is that when working with ultra-high-net-worth (UHNW) families, it's crucial to make a distinction between those who were born into wealth (what Grubman calls "natives") or those who have come into wealth more recently (which Grubman dubs "immigrants in a strange land"). The metaphor is valuable not only to help acknowledge and affirm the discomfort that many who are new to wealth are feeling, but also highlights the challenge that all immigrants face: how to raise children in a culture the parent themselves did not grow up in. In turn, Grubman notes that most 'wealth immigrants' response in one of three ways: the Avoiders tend to focus on the negative aspects of wealth and avoid it, downplaying their wealth, reducing their children's exposure to it, and even being miserly; the Assimilators who are ecstatic to leave their middle-class life behind and engage in the 'nouveaux riches' stereotype; or the Integrators who try to hold onto some values and skills from their roots, but accommodate to their new life and 'culture' as well, though this approach is difficult as it requires a new level of openness to handle the complexities of wealth, including building skillsets for families to function well in society as [wealthy] adults, and learn to share family wealth and assets. Grubman also notes that some advisors can unwittingly inflict their own stereotypes about wealth onto client situations, potentially exacerbating the problems, though advisors who are well trained in these issues can be very effective at helping clients learn/adopt the crucial new skillsets and adjust.
An Artificial Finish Line - From Mitch Anthony in Financial Advisor magazine, this article looks at the entire construct of "retirement" and suggests that ultimately, the whole idea is nothing more than an "Industrial Age social experiment that... has run its course." The origins of forcing the issue of retirement at a particular age came from Chancellor Otto von Bismarck in the 1880s in Germany, which created a mandated retirement at age 70 when the average German worker only lived to 46. The concept came to the US during the Great Depression in the form of Social Security, in part as a lever to move older workers out and younger workers in (and still at the time the average worker lived only to the age of 62), and then accelerated once insurance companies and investment houses realized the approach was a great motivational method to get people to allocate more money towards savings (placed into insurance/investment products with their companies). Yet the problem is that this approach is leading to people retiring "with some means but very little meaning" as the reality is that leisure itself draws its merit and meaning from work; the joy of leisure is "I'm not working at the moment" but without work it can quickly become monotonous and boring (or introduce new stresses, as witnessed by the spike in divorce rates in the first two years of retirement!). Anthony suggests that the transition away from 'traditional' retirement will be accelerated by our increasing focus on pursuing fulfillment (as "meaningful pursuits" are supplanting "pursuing means"), the end of paternalistic employers providing pensions (as we have more control over defined contribution plans, we can redefine the balance), a move away from ageism and towards greater openness for people of all ages in the workplace (again, retirement was originally little more than a mechanism imposed upon individuals to move them out of the way to bring in younger workers, but is far less relevant as we transition from earning a paycheck with our physical capital to using our intellectual, experiential, and relational capital instead), and the industry's own challenge that in leading everyone to retirement we are moving clients towards depleting their own savings which eventually will force the industry itself to try to encourage people to work longer (and deplete AUM more slowly). The bottom line: as the need, relevance, and benefit of having an "artificial finish line" for the working years goes away, our views towards retirement are beginning to change.
The Big Trends in Financial Services Technology - In Morningstar Advisor, this "farewell" column by technology consultant Bill Winterberg (his last for the publication) takes a broad look at how technology for financial advisors has changed in the four years since he began to write the column, and how Winterberg expects it will change further in the coming years. When he started four years ago, Winterberg notes that advisors were just beginning to migrate from desktop- and server-based software to cloud-based applications, and the explosion of mobile devices has just begun to occur over the past four years as well. Looking over specific categories of technology, Winterberg's trend predictions include: in CRM, the use of "big data" to better analyze financial advisor practices and their clients, with better business intelligence reports (and 2014 may also be the year CRM starts to become more "social" with better integration to social media as well); in Portfolio Management, the big trends are not only the continued migration away from server solutions to cloud-based solutions, but that with online offerings portfolio performance reporting will cease to be a periodic printout or PDF and become an accessible piece of information on demand, 24/7; in Rebalancing Software, Winterberg anticipates the trend towards adoption will continue, with a wider range of solutions available at more varying price points; in Financial Planning Software, the core has remained constant for years, but online "client sandboxes", mobile browser compatability, and quick plan illustrations are on the rise, and Winterberg predicts more proactive monitoring and algorithmic-based intelligence and analysis coming in the future; in Electronic Content (Document) Management, Winterberg predicts slow but continued adoption; and in Online Advice, with platforms that will outspend advisors on technology and marketing and force advisors to adopt at least a comparable technology experience or risk falling behind. In the meantime, Winterberg pledges to still write "ad-hoc" for MorningstarAdvisor and for his blog FPPad, will be co-producing the T3 Enterprise Conference, and will be launching later this year a coaching and training program called "Building Trust Online".
Ten Ways the Next Generation of Financial Planners Will Change the Profession - In June, industry commentator Bob Veres will be a facilitator at the FPA NexGen conference, and in this article he distills ten key themes he sees that illustrate how the next generation of advisors will change the profession. The ten themes are: 1) the commoditization of ongoing asset management services (the advisor still works with the client to set the portfolio to the client's goals, but the ongoing processes are automated or outsourced altogether); 2) different business models, including charging on a monthly retainer fee basis instead of large upfront fees or charging based on assets under management; 3) expanding the client base into the middle market and away from just the affluent [baby boomers]; 4) more professional approach to managing their advisory firms, with better focus on adopting technology and standardizing processes/procedures to fit it; 5) working with clients remotely regardless of geography (e.g., via Skype or Google Hangouts, with paperwork completed using DocuSign); 6) increased focus on working in niches; 7) greater focus on offering a pleasant initial planning experience, crafting the plan in a more engaging and collaborative manner where the advisor serves as a "think partner"; 8) new ways of marketing, shifting from a focus on local reputation to a focus on your online "webutation" instead; 9) changing how information is organized and managed, working through financial planning via online dashboards and portals, not printed/paper statements and reports; and 10) an evolving structure for conferences, that similarly to the new planning process, is more engaging and collaborative than the traditional 'linear' teaching model.
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!
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. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read "FPPad Bits And Bytes" on his blog!
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