Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with industry news that Morningstar has finally launched its own Model Marketplace, attached directly to Morningstar Office, but with the capability to customize model marketplace strategies to individual client needs (as a midpoint for advisors between fully building their own portfolios from scratch, and fully outsourcing to a TAMP). Also in the news this week was a new proposal from FINRA that would require broker-dealers who house a high volume of recidivist (repeat-offender) brokers to put aside extra dollars to help pay arbitration awards for damaged clients… which at best will help reduce the number of unpaid arbitrations to consumers, and may simply help discourage those broker-dealers from hiring repeat offenders in the first place (by increasing the cost of capital for them to do so).
From there, we have several other notable industry studies released this week, including one that finds the affluent are increasingly willing to pay for financial advice (but are by and large very dissatisfied with their current providers), another that found only 13%(!) of adult children have any intention of using their parents’ financial advisor (raising questions of whether advisors need to do a better job building relationships with next generation clients, or simply accept that next generation clients don’t want to work with their parents’ financial advisor in the first place), and a third finding that the majority of financial advisors are not happy at their current firms because they don’t feel well engaged by the firm and aren’t clear on how to proceed up the career track from where they’re at.
We also have a few articles on spending habits of the affluent, from one article exploring how wealthy Millennials spend money very differently than prior generations (from a greater desire to spend on VIP experiences, to the rise of luxury streetwear), to another looking at how the affluent are increasingly trying to be private in their real estate transactions, a discussion of Merrill Lynch’s new approach to helping the ultra-high-net-worth make prudent spending decisions (when “can we afford it” is no longer a constraint), and a discussion of when and whether parents should tell their teenagers the details of their household financial situation and how much they make.
We wrap up with three interesting articles, all around the theme of exercise and getting healthy: the first looks at the rejuvenating effects on heart and artery health that can come if you start to exercise more (even if you’ve been sedentary for years or decades); the second looks at a fascinating study that finds, even a decade after getting more physically active, there are still lasting positive effects from having exercised more in the past; and the last looks at the growing volume of research on the “biophilia hypothesis”, that as human beings we have an innate connection to nature, and that we can lift everything from our mood to our health by taking more regular walks outside and taking in a little more nature!
Enjoy the “light” reading!
Morningstar Launches A Single Platform For Multiple Model Portfolios (Bernice Napach, ThinkAdvisor) – After an initial announcement all the way back in early 2017, Morningstar this week finally launched its widely anticipated “Model Marketplace“, which will allow advisors to research third-party investment models, customize the strategies as necessary to fit individual client needs, and then execute the trades (at “no additional cost”… beyond ostensibly whatever underlying trading costs the advisor’s own platform may assess). Initially, the Morningstar Model Marketplace is launching with 13 asset managers, including strategies from BlackRock, Vanguard, and Fidelity (though, notably, not Morningstar’s own Managed Portfolios). The model marketplace, which Morningstar is framing as an “app store of investment models”, will be integrated into (and thus distributed through) Morningstar Office Cloud, the company’s portfolio performance reporting solution, with direct integrations to research and screen the models and their underlying holdings against Morningstar’s existing analytics tools. The trend towards model marketplaces appear to be accelerating, as a 2018 Cerulli survey showed 26% of advisors, representing about $5.3T in assets, now use models in combination with their own research to further customize (as compared to only 12% who fully cede discretion to a third-party)… representing a significant base of advisors who aren’t willing to use a TAMP, but might use an (advisor-customizable) model marketplace instead.
New Rules For Broker-Dealers That Hire Problematic Brokers? (Kenneth Corbin, Financial Planning) – This week, FINRA opened up a request for comments on a new proposal (via Regulatory Notice 19-17, creating a new FINRA Rule 4111) that would require broker-dealers who hire brokers with problematic disciplinary histories to put dollars into a special fund that FINRA will then hold and use to potentially use (as needed) to pay out arbitration awards to consumers who are harmed by but cannot collect from a broker. The primary goal of the rule is simply to increase the cost and scrutiny that is placed on brokers who have already previously caused consumer harm, given that there appears to be a concerningly high recidivism rate amongst brokers (i.e., brokers who have had a prior infraction against a client are disproportionately more likely to cause client harm again). In addition, the allocation of broker-dealer surcharges in hiring recidivist brokers into a fund that pays otherwise-unpaid arbitration awards can also help protect the subset of consumers who are harmed by a broker, do win in arbitration, but then are unable to collect (because the broker and/or broker-dealer doesn’t have the financial wherewithal to pay the damages anyway). Notably, the rules are only anticipated to have a material impact on a small subset of broker-dealers, who when compared to their peer group of similar-sized firms, have especially high rates of recidivist brokers; in fact, through the end of last year, there were only 20 small firms, 10 midsize firms, and 5 large firms that had an outsized number of BrokerCheck disclosures, who would be subject to the new “Restricted Firm Obligations” rules, out of nearly 3,800 broker-dealers in total. Nonetheless, the fact that FINRA examiners are still limited in their ability to compel change at such broker-dealers – at least until after consumer harm occurs, and at that point it may be too late – the hope is that by singling out the highest risk firms, and compelling them to set aside more dollars to actually be accountable for the actions of their brokers, it may be more feasible to compel such firms to change their own internal hiring and compliance practices.
Wealthy Clients Willing To Pay For Financial Advice, And 33% Have Switched Providers To Get It (Jennifer Ablan, Reuters) – In its latest 2019 Global Wealth Management Report, EY finds that affluent wealth management clients are increasingly willing to pay for financial advice… but that few feel they’re getting that full value from any one provider today, such that the affluent are choosing an average of five providers today in order to get that advice, 1/3rd have switched investment managers over the past 3 years, and another 1/3rd plan to make a switch in the next 3 years. Overall, the survey shows growing interest in both FinTech providers and more independent advisors (who the affluent view as being more capable of providing customized services). However, FinTech tools appear to be adapting to the needs of the affluent more quickly than traditional advisors, such that in 2016 only 20% of the affluent expected to use mobile apps for wealth management activities by 2019, but in practice, 41% today prefer mobile apps as their primary channel. Still, though, the research also shows that the wealthy still want human interaction as well, with 25% preferring face-to-face meetings or phone calls (up to 42% when they’re receiving broader financial advice). Overall, though, 46% of wealth management clients said they were unhappy with their fees and do not trust they are being charged fairly, with the dissatisfaction spiking to 66% amongst ultra-high-net-worth clients in particular, who indicated they increasingly prefer fixed-fee and hourly support methods for greater “transparency, objectivity, and certainty” in their payment methods to advisors.
Only 13% Of Adult Children Would Use Parents’ Advisor (Investment News) – A recent study from Cerulli finds that only 13% affluent adult children decide to work with their parents’ advisor, and of the 87% who don’t, 88% of them didn’t even consider doing so in the first place. And even amongst those who have received an inheritance, only 20% of recipients indicated that they maintained a relationship with the same firm, while 36% moved assets to be managed with the rest of their existing portfolio, and an additional 19% moved to a new advisor (or robo-advisor) platform. On the one hand, Cerulli suggests that this means advisors still have a significant gap in building relationships with the next generation of their existing clientele, to be able to retain those assets when clients die and bequest the portfolio to their children. On the other hand, the results also emphasize that in the end, consumers often simply see their parents’ advisors as just that – their parents’ advisors – and may simply prefer to seek out their own advisor, who’s a better fit for their particular needs, instead.
Are Firms Doing Enough To Retain Advisor Talent? (Emily Zulz, ThinkAdvisor) – A recent study from Fidelity on financial advisor retention and recruiting finds that only 6-in-10 advisors are satisfied with their career at their current firms, and only 4-in-10 are satisfied with their current firms themselves… a striking concern given that an emerging shortage for financial advisor talent is already making the job market increasingly competitive for firms. The primary challenge for such employee advisors appears to be their career track itself, with only 51% saying they even understand what they need to do to get promoted to the next level, and just 55% reporting that anyone at work had talked to them about their progress in the past 6 months. By contrast, the more successful firms that were doing better retaining advisors were more likely to be focused on what Fidelity calls the “ABCs” of engagement: Asking for opinions and feedback (so advisors feel connected to the firm and its culture); Building programs that help meet advisor needs and help them develop; and Communicating clearly around everything (from the firm’s mission, to what it takes to be successful there). Or stated more simply, the employees who were more engaged with the firm were more likely to be satisfied with the firm. Overall, Fidelity provided three core recommendations to increase advisor engagement: encourage events that allow colleagues to become friends; identify ways to recognize employees for their work; and engage employees one-on-one to discuss their own individual progress and growth.
7 Ways Rich Millennials Are Creating New Trends And Status Symbols (Hillary Hoffower, Business Insider) – One of the most striking differences in generational spending patterns is that while Baby Boomers were more likely to spend money on “things”, Millennials are more likely to spend big on experiences, instead… and the most affluent Millennials are spending even more on experiences as their own form of “luxury” spending. Key distinctions in affluent Millennials spending patterns on ‘luxury’ include: a tendency to spend extra on “VIP experiences” (e.g., a special section at the nightclub, or a music festival with a gourmet private chef and golf-cart chauffeur service); a desire for more exclusivity and customization in their experiences rather than just formal high-end service (e.g., cocktail butlers in their hotel rooms, rather than simply white-glove and white-table-cloth service); a preference for brands based on their mission and values (and in particular, Millennials are more likely to switch providers if it’s someone who speaks more directly to their personal values and passions); affluent Millennials are using social media to exert influence over (fashion and other) trends, taking power away from traditional media publications in the process; the “sharing economy” is moving up to the affluent as well, with services like Rent the Runway that allow affluent Millennials to rent high-end clothing to a day or a month; and luxury streetwear is going mainstream, with the luxury sneaker as the new clothing status symbol, from $900 on Balenciaga’s Triple S sneakers to $495 on Lanvin low-tops. Of course, financial advisors aren’t necessarily likely to get into the high-end fashion world… but the trends are a striking demonstration of the gap between the kinds of status symbols that advisory firms traditionally flaunt to show their own status (e.g., dark wood paneled desks), and the tastes of affluent Millennials today.
Secret Luxury Homes: How The Ultra-Rich Hide Their Properties (Judith Evans, Financial Times) – In London today, as many as 40% of the transactions for the most exclusive real estate (generally homes costing $10M+) are being done entirely off-market as private transactions that are never even listed for sale. The secrecy appears to be driven in large part by simply a desire for privacy amongst the ultra-wealthy (from anyone/everyone from paparazzi to stalkers), but has now gone so far as to engage in purchases through indirect entities (to reduce public records of who made what purchase or sale), and maintaining house staff who even themselves may not know when their affluent owners will be coming or going. Ironically, though, such privacy in the luxury home market is now being at least partially curtailed by a wide range of anti-corruption and anti-money-laundering rules being put in place by governments around the world, effectively trying to separate a ‘normal’ desire for secrecy from actually-illicit behavior and attempts to hide assets (leading in the UK to the rise of “Unexplained Wealth Orders” where regulators can make inquiries about the source of funds for significant asset purchases for “otherwise-lower-[or-unstated]-income” individuals to determine if criminal activity or political corruption may be involved). Though with the rising trend of populism and a backlash against wealth inequality globally, there is more anxiety than ever amongst the ultra-affluent, who in the past may have flaunted wealth, but now increasingly seem to be trying to reduce its public visibility instead (if only so their friends, family, or the public don’t realize how wealthy they might have actually become!). In fact, the desire for privacy in high-stakes transactions has even led to the point of new startups like “Invisible Homes“, which ironically provides an online (but still private) marketplace to buy and sell high-end real estate!
Inside Merrill’s New Framework For Wealthy Families (Jane Wollman Rusoff, ThinkAdvisor) – As a part of its “Center for Family Wealth Dynamics and Governance”, Bank of America Merrill Lynch has developed a new working paper entitled “Considerations for Decision-Making Around Expenditures”, which is intended to help ultra-high-net-worth families figure out how to effectively communicate about their wealth, particularly with respect to how to make (and instill in children) good spending decisions… in a world where “Can I afford to spend on X?” really is not a constraint, and instead the conversation must shift to “Should I spend this amount on X?” Which in turn raises the question of what criteria, exactly, the family will use to make that determination and leads to what the Center calls a “Purpose of Wealth Statement” for the family that can be used as a filter for such decisions. Notably, though, the core of the spending conversation with the ultra-affluent isn’t all that different than anyone else, and revolves around four key questions: where are we now; where are we going; how will we get there; and how are we doing? Instead, the significance of a more structured approach is that when the dollar amount itself isn’t the constraint, it’s necessary to assess spending decisions against the family’s overall key goals and the outcomes they want in their lives (and how money fits into those pieces). Which are issues that become particularly relevant for the newly rich after the initial “honeymoon” phase wears off, and they realize the complexity they now face about how to make “good” spending decisions. Not to mention the breadth of requests that they get, such as friends and family members asking for loans, for which it may be necessary to establish additional guardrails – e.g., creating a fund to support education for family members, which both provides that support, but also gives a framework to say “we value education and have established a vehicle to help our family members with it…” which also implicitly is a means to say “no” to otherwise-difficult-to-say-“no”-to family requests for money as well.
Should You Tell Your Teenager How Much Money You Make? (Wall Street Journal) – Talking to children, especially teenagers, is difficult regarding almost any topic, but especially about the sensitive topic of money. As a result, nearly 40% of young adults felt that their parents were reluctant to talk to them about money and finances when they were younger, and about 14% said their parents never discussed financial topics at all growing up. Of course, if children are never educated about money at all, it’s difficult for them to become financially-responsible adults themselves… which then raises the question of exactly how far parents should go in talking to their children about money (and the family’s own finances). On the one hand, explaining how much the family makes can help put its financial decisions in context; on the other hand, knowing how much parents make can potentially drive a wedge between family members (especially if the parents later need to say “no” to spending choices that their teenager may now believe that they can/should be able to afford). Advocates for transparency suggest that in the end, the benefits outweigh the concerns, both for the opportunity to teach more about money itself, and because parents who can afford a purchase but still choose to say “no” have an opportunity to demonstrate money values as well (and that affordability alone shouldn’t be the only driver of a spending decision)… although it may still be a good idea to introduce the conversation gradually (rather than just dropping everyone’s income all at once over a dinner table conversation). On the other hand, critics suggest that in the end, children won’t have much context to really understand what a salary amount means anyway – whether it’s $50,000/year or $5M – and that if the family wants to teach money lessons, it can teach money lessons, regardless of how much the family actually makes. (And without the concern that the kids will then try to justify their spending or compare their parents’ income to others.)
Exercise Makes The Aging Heart More Youthful (Gretchen Reynolds, New York Times) – For people who have become more sedentary as they age, it often takes a health event (or at least a health scare) to find motivation to start exercising again… only to find that it may already be too late, as by our mid-to-late 50s, portions of our heart muscle have already begun to atrophy and weaken, and major cardiac arteries are already stiffening. However, recent research finds that even at middle age, it’s not too late to “remodel your heart” by starting to get more exercise… with the caveat that as we age, the frequency of exercise needed may be higher as well. In one recent study, middle-aged adults who exercised at least 4X per week were found to have healthier heart muscles, and another recent study found that even amongst 70-year olds, those who exercised regularly (4X or more per week, and not “just” 2-3X per week) had healthier arteries. The best news, though, was that even amongst those who had been sedentary, middle-aged men and women who started to exercise 4-5X per week were able to improve their heart and artery health over a period of two years… suggesting that while heart muscles and arteries do age and stiffen, increasing levels of engagement really can help to ‘rejuvenate’ them again as well!
10 Years After An Exercise Study, Benefits Persist (Gretchen Reynolds, New York Times) – A recent study finds that the benefits of exercise may be more persistent than most ever realized, as researchers who followed up on subjects from a prior exercise study found that even 10 years later, the participants still showed positive after-effects of their exercise stints during the study itself. Specifically, researchers followed up on a 1998-2003 study called Strride (Studies Targeting Risk Reduction Interventions through Defined Exercise), that had put hundreds of sedentary overweight volunteers aged 40-60 into either a control group or an exercise group that walked and jogged, and found that even 10 years later at a ‘reunion’ study, the exercisers were still of similar weight and health to 10 years prior (and those who had continued to exercise during the interim were even healthier than they had been 10 years prior), while the control group had continued to gain more weight, had larger waistlines, and were even less fit now. Notably, though, different types of exercise had different lasting effects; those who had exercised more vigorously had retained more of their aerobic capacity, while those who ‘merely’ walked for exercise had decreased aerobic capacity but did still have better metabolic health overall. The key point, though, was still simply that not only had engaging in exercise helped those middle-aged individuals to improve their health, but the effects were remarkably long-lasting for a full decade thereafter as well!
Why Some Doctors Are Prescribing A Day In The Park Or A Walk On The Beach For Good Health (The Conversation) – According to the Biophilia Hypothesis, human beings have an innate relationship to natural – ostensibly a lasting vestige of our early days as a species when we were even more reliant on the outdoor – such that being outdoors more often can actually help to promote our well-being, prevent disease, and/or speed up recovery. And a growing base of research suggests this really is the case, from one study that four surgery patients with a view of trees out their window reported less pain and faster recoveries than those who only had a view of a wall, other studies have shown a reduction in pain through viewing natural scenes (or even nature videos and pictures!), and those who have more exposure to natural light also seem to experience less pain and stress (and require the use of less pain medication) than those who did not have such exposure. Though it appears that the benefits aren’t solely curative in nature, but also preventative, with recent research founding that taking walks in outdoor natural environments has positive benefits for everything from mental health to mood to blood pressure and heart rate. In turn, the research is now raising new questions, including what exactly constitutes ‘nature’ (e.g., does it have to be a national park, or just an urban park, or can it be a picture of a park?), and what’s the required dose? Thus far, research suggests that at least 150 minutes per week of outdoor time appears to have demonstrable positive effects. Still, though, with Americans spending an average of 90% of their time indoors, arguably there is more need than ever to try to find at least some time to take a walk!
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.