Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the interesting announcement that SEC Commissioner Piwowar will be retiring in early July, a month before the public comment period closes for the new SEC advice rule, and raising the question of whether the SEC may end up deadlocked by the time the comments are in and it's actually time to deliberate on a final version of the proposed rule!
Also in the news this week was the announcement that Connecticut has passed a law that would allow its municipalities to create charitable entities to fund public services as a way to work around the new cap on the State And Local Tax deduction (and raising the question of when/whether the IRS and Treasury will challenge the strategy, and if it will ultimately end up in front of the Supreme Court), and the news that a new requirement for bond markup and markdown disclosures will take effect next week, in a move that could put new pressure on size of those trading commissions (or not, since the new disclosures only have to be communicated view printed transaction confirmations that not all investors read anyway!).
From there, we have several articles on industry shifts in advisory fees, including a fascinating overview of the various new advisory fee models that are emerging beyond (just) AUM, to the fact that a segment of financial advisors not only aren't experiencing fee compression but are actually raising their fees, and advice for firms that are struggling with fee pressures about what to do next (hint: it's all about giving deeper advice and differentiating beyond increasingly commoditized portfolio solutions alone).
We also have a few practice management articles, from tips about how smaller and solo advisory firms can (legitimately) make themselves look more credible in the eyes of prospects, to the benefits of trying to write a book as a financial advisor, and the value of engaging in PR strategies by doing media interviews to expand the visibility and presence of the advisory firm.
We wrap up with three interesting articles, all around the theme of advisor introspection and overcoming challenges: the first is a look back by an advisor who launched her own solo advisory firm 2 years ago, about what it really took to succeed (hint: it's more about the ability to adapt to challenges than to predict them in advance, and don't underestimate the importance and value of having a supportive community around you!); the second provides some tips to pass the CFP exam from someone who unfortunately failed her first attempt (in part by possibly over-focusing on her weak areas, and unwittingly scoring low in an area she thought was her natural strength!); and the last is a good reminder that if we as financial advisors really believe the primary value of advice is not just the information and expertise, but the benefit of having an objective third-party advisor who can view the situation with emotional detachment... that arguably most of us as financial advisors should have our own advisors too (because it's not just about the informational expertise we already have!), with the added benefit that if you really want perspective on how to improve your financial planning process with clients, you should try going through the process yourself, too!
And be certain to check out the video at the end – a fascinating look at how Will Smith's journey into becoming the "Fresh Prince of Bel Air" was driven by the failure to hire a financial advisor and make responsible financial and tax planning decisions after his first album went triple platinum, leading him to seek out new job opportunities because he was broke!
Enjoy the "light" reading!
Weekend reading for May 12th – 13th:
Piwowar Departure Will Complicate Action on SEC Advice Rule (Mark Schoeff, Investment News) - This week, SEC Commissioner Michael Piwowar announced that he would be retiring from the SEC, effective July 7th, following the completion of his 5-year term that ends in June. The news is significant, because this week the SEC's Advice Rule itself was formally published in the Federal Register, opening up the 90-day public comment period... that will end on August 7th. Which means that by the time the comments are in, and the SEC has to deliberate on a next step, it will be down to only 4 Commissioners, risking a 2-2 deadlock vote is Democratic Commissioners Kara Stein and Robert Jackson both object to the rule, or even if Republican Commissioner Hester Pierce objects to the rule (as she has already been critical of whether or how the SEC should be intervening at all with the current regulation of financial advisors). On the other hand, Kara Stein's term also ended last year, and while she has the option of continuing to serve for up to 1 additional year (until this December), her departure sometime this year could give President Trump up to two SEC Commissioner slots to replace. And even if the Democrat and Republican Commissioners are replaced with another pair of Democrat-and-Republican Commissioners, if the replacement Democrat objects to the rule (e.g., as not being stringent enough), and the replacement Republican also objects to the rule (e.g., on the grounds that the SEC shouldn't be intervening with additional regulation at all), there may also be enough votes to kill the SEC's proposal altogether. And until both are replaced, the SEC would be operating with only 3 commissioners, which means any one commissioner would effectively have a "pocket veto" by refusing to vote at all (which would leave only 2 votes, insufficient for a quorum, killing any momentum for the rule altogether. On the other hand, given the uncertainty of the mid-term elections, the GOP may be interested in replacing any retiring SEC commissioners quickly (anticipating that the Congressional environment could be less favorable for them next year). Nonetheless, the point remains that even aside from the details of the SEC's advice rule itself, it's far from certain there will even be enough SEC Commissioners in place to realistically move the rule forward this year.
Connecticut Passes Bill To Ease Federal Tax Burden (Joseph De Avila, Wall Street Journal) - One of the more controversial changes of last December's Tax Cuts and Jobs Act was the decision to cap the deduction for any State And Local Taxes (SALT) paid at just $10,000/year, which significantly curtails the deduction for state income tax payments in high-tax-rate states. A theoretical alternative to work around the rule would be creating state and local "charitable" entities, to which state income taxpayers could assign their tax payments, and instead claim the deductions as "charitable" deductions instead of state and local income tax payments (even though the state or municipal entity would have the charity fulfill the same purpose the state government agency may have already been doing in the first place). And now that New York and New Jersey have begun to work on such legislation, Connecticut has as well, passing this week a new state bill that would allow municipalities to form charitable organizations to receive contributions from residences in exchange for property tax credits (thereby allowing citizens to donate to the municipal "charity" to fulfill their property tax obligations, rather than making potentially-not-fully-deductible property tax payments directly). The caveat, however, is that the IRS is widely anticipated to challenge these new state-charitable-entity workarounds for the deduction, and the U.S. Treasury has already cast doubt on the legitimacy of the strategy. In fact, it appears that even in the municipalities in Connecticut may be waiting to see how the IRS and Treasury respond, before actually setting up the charitable entities they've now been authorized to create. Though with momentum for the effort building, it's only a matter of time before some official announcement emerges from the IRS and Treasury about whether/how the strategy can be legitimately done or not... or until the matter ends up in Tax Court for a judge to decide.
Starting Next Week You Can See Brokers' Profits From Bond Sales (Andrew Ackerman & Heather Gillers, Wall Street Journal) - Beginning on Monday, brokerage firms will have to start disclosing the magnitude of the mark-ups they're adding on top of bond transactions, in a world where most consumers still think that bond purchases are "free" because there's rarely a trading commission (as the bond dealer makes their money by buying the bond themselves at a lower price, re-selling it immediately to the investor for more, and earning the markup as its compensation for effecting the trade). Even more controversial has been the "markdown" that is applied to bonds that are sold (where the investor's price is marked down to a lower level so the dealer can re-sell it themselves for a profit), which must also be disclosed going forward, even as consumer surveys have found that investors previously thought a "markdown" meant they were getting a discount on their trading fees (rather than the markdown's actual purpose, which is to create the trading fee!). The change is expected to have a significant impact on bond pricing transparency, and some anticipate it could even drive more bond investors to shift to buying them instead through mutual funds or exchange-traded funds (which, thanks to their larger size and bargaining power, generally pay less than retail investors in bond markups and markdowns). On the other hand, critics suggest that the rule didn't go far enough, as technically the disclosure rule only requires the markup to be included along with the physical paper transaction confirmation, which many investors may not be opening and reading in detail anyway. And even those who do open the transaction confirmations and see the amount of the markup won't have any idea what other investors are paying for a similar transaction, which limits any effective form of price competition, in a world where currently dealer markups are limited to "just" 3% of the bond's price (though even that markup amount can be exceeded for thinly traded bonds).
Fees Are Not Just About AUM Anymore As Advisors Get Creative (Cyril Tuohy, Insurance News Net) - While the Assets Under Management (AUM) model continues to be the dominant advisory model, a growing number of alternative fee models are beginning to emerge as well. One recent study found that while nearly 88% of advisors still use AUM as part of their fee structure, a whopping 44% also used retainers, and 27% used hourly fees as well; in fact, barely 1/3rd of advisors now use an "AUM-only" model, as contrasted with an estimate of nearly 70% just 5 years ago. The drivers of the shift away from AUM-only appear multiple; in some cases, it's because the AUM model is not always well aligned with the actual value the advisor provides (especially for advisors that charge based on assets under management and add value primarily with financial planning services), while in other cases it's simply because charging based on assets limits advisors to only work with clients who have assets, and excludes the bulk of next generation clients who may have financial wherewithal to pay for advice but not via an AUM model. Leading alternatives now include: the hourly model (which isn't just about serving the middle market, as there are also ultra-wealthy clients who simply prefer to pay their advisor by the hour, like most other professionals employed by ultra-HNW consumers); an AUM-plus-fee blended model that includes more "basic" financial planning advice services for a flat fee, or more complex and ongoing services for an ongoing AUM fee; the fixed-fee-only model, where fees are often set with a minimum, and a complexity-based factor is used to adjust the fee based on the anticipated number of hours involved; the "McDonald's Menu" approach, which provides financial planning and investment management offerings in bundled packages that clients can choose from (e.g., a basic planning package for one dollar amount, a standard package for another, investment management for a separate AUM fee, and clients choose what they want from the menu of available services); a net-worth-and-income fee that is targeted for higher-income next generation clients who may have substantial income and a growing net worth but little in the way of liquid investment assets, who are served instead by a more holistic fee (e.g., 1% of income plus 0.5% of net worth); and an ultra-high-net-worth "super retainer" fee for more complex planning services for HNW clients, where the ongoing planning needs are inconsistent but can be very high value (e.g., assistance with a change in estate tax laws, or the sale of a business) when they do come along.
What Fee Compression? Advisors Find Success Raising Their Prices! (Tracey Longo, Financial Advisor) - Notwithstanding the media buzz about the risk of fee compression from the rise of technology and robo-advisors, some industry consultants are observing a counter-trend of advisory firms raising their fees by as much as 10-25 bps instead, as advisory firms are compelled to get better at creating and justifying their value proposition to clients, and then find it actually allows them to charge more for the greater level of services they're providing! Notably, though, fee increases do not appear to be occurring in "investment-only" firms; instead, it's occurring primarily at firms offering more comprehensive financial planning services, especially to more affluent clients, where a more holistic service that covers more than what other advisory firms provide is difficult to price-shop anyway. Greater pricing power also appears to be vested in larger advisory firms, which have more depth and economies of scale to offer a wide range of services (and thus charge more for them) in the first place. Notably, this is not to dismiss the fact that other parts of the financial services supply chain, including asset managers, issuers, custodians, and technology firms, are experiencing pricing pressures... but financial advisors themselves are maintaining fee stability, or even growing fees thus far. Of course, it's still important to properly communicate to clients the nature of the fee increase when it occurs, to ensure that they stay on board. But the point remains that as firms become more effective at differentiating themselves and explaining their value propositions, "raising fees" is actually becoming a viable revenue growth strategy!
Advisors Must Face A New Reality For Fees (Gail Graham, Financial Advisor) - Notwithstanding the discussion that some advisory firms are successfully raising their fees in the current environment, others are still struggling and discounting them. In fact, the recent 2017 Fidelity RIA Benchmarking survey estimated a whopping 64% of RIAs may be discounting their published fee schedules in an effort to win new business. Graham suggests the mere fact that consumers are trying to negotiate their fees at all, beyond just honoring whatever the published fee schedule states, is a sign that pricing power is shifting to consumers, who are becoming more discriminating about what, exactly, they're willing to pay for (or not). And the situation will likely only be exacerbated by the rise of Vanguard, Schwab, Fidelity, and other retail-facing firms that not only serve advisors but have their own "advisor" services, competing on price (e.g., Vanguard Personal Advisor Services charging 0.30%!) by leveraging their massive economies of scale. Ultimately, Graham suggests that the rise of competition and the pricing pressures that many financial advisors are experiencing still isn't a sign of doom and gloom, though; instead, it's merely a reminder that firms have to get very clear about what they do, the value they provide, how they differentiate, and be certain that their pricing model is aligned with the value they provide. For which Graham advocates separately out advice and investment management fees, given that for advice-heavy firms, a significant component of the AUM fee (especially in the early years) is really for non-AUM (or at least non-investment) advice services. And rather than just raising minimums and moving upmarket as firms grow, they should focus instead on better segmenting their services and retaining a cost-appropriate solution for clients that don't fit their core (more affluent) model.
The Right Way To Make A Small Advisory Firm Appear Larger (Sara Grillo, Advisor Perspectives) - For solo and smaller advisory firms, there's often a great deal of pressure to make the firm "appear" more substantive, especially given the industry data showing that more affluent clients prefer larger advisory firms (whether for the perceived trust of a larger brand, or the potential that a "bigger" firm will have more depth and capabilities). Some firms try to overcome this with statistics like "Our firm has a collective 30 years of experience" (as a way to characterize an advisor with 15 years of experience and two employees with 7-8 years each), but arguably the "average" experience of the firm is much more relevant (albeit less eye-catching) than the sum total (as in the logical extreme, having 30 interns with 1 year of experience does not provide 30 years of advice wisdom!). Or firms may show their "client advisory board", which is great for getting business advice as an advisory firm owner... but will prospective clients likely really care about where the advisor goes for his/her own business advice? So what should smaller advisory firms do to substantiate their presence and better legitimize themselves? Grillo suggests by starting with counting "the things that matter" – for instance, the firm has reviewed 87 estate plans, done 172 IRA rollovers, and been through 13 tax seasons, since that's the experience that is truly relevant for the prospects that may similarly hire the advisor to help with those services (and don't just say "dozens" or "hundreds" but be exact, as the precision carries even more perceived weight and legitimacy). Similarly, if you want to legitimize yourself with "social proof", build a following on social media, and include those counts, as there is a perception from consumers that 7,000 followers on LinkedIn or 4,000 on YouTube means "you're someone worth following". Another opportunity is to use an online scheduling app, which is not only convenient to let prospects schedule themselves, but when a prospect sees your calendar, and that it's mostly full, it again conveys that your services must be in demand, making them more likely to want to sign up themselves, too!
Is Writing A Book Worth The Effort? (Erik Strid, Financial Planning) - The idea of writing a book is highly intimidating for most, from figuring out "what would I say" to fill the entire length of a book, to the sheer time commitment that may be necessary to produce it. Yet Strid makes the case that ultimately, publishing a book is a phenomenal marketing opportunity, as it's a chance to communicate your advice philosophy and give prospects a way to learn about your services on their own terms... in addition to building credibility, since the public generally views authors as having unique wisdom and "automatically" being positioned as an expert. Not to mention the simple marketing strategy of handing out your book to prospects, or even asking clients and centers of influence to share it with their friends and colleagues. From the production perspective, Strid's first book took nearly 2 years to publish, after he spent almost a year drafting the manuscript himself, then paid an editor to help with the final draft, then used an online service to create the cover design, and finally self-published. For his second book, though, the process took just 3 months, after he hired a service for a fee of $1,800 that scheduled a series of conference calls with their ghostwriter to turn his words into a manuscript (following a template they provided), then produced the full first draft directly (which he subsequently edited himself to refine), and then completed the process of helping to create a cover design and post the final book to Amazon. In other words, the reality is that there are now a lot of very affordable services that can help to complete the process of publishing a book. The real question is simply whether you have some specific message you're passionate about in the first place... recognizing that even if you can only talk about it, there are writers out there who can help you translate it into an actual physical book manuscript!
Should I Respond To Media Queries? (Ingrid Case, Financial Planning) - When a financial advisor does an interview with a journalist, it's a mutual exchange of favors: the journalist needs a good source to make their story relevant to the reader, and the advisor being featured as one of those sources conveys an impression of credibility and expertise to the reader (and can outright attract prospective clients for whom that media visibility may be their first, and very favorable, impression). And of course, good media exposure in one publication can then be further amplified by re-sharing it out to the advisory firm's own social media channels. The challenge for many advisors, though, is simply finding media opportunities to give quotes in the first place, although a number of advisors get press questions through membership groups they're involved with like the Financial Planning Association or XY Planning Network, simply watching all the inquiries that come along, and responding to the ones that appear to be a good fit for their individual expertise. Unfortunately, it's not often easy to directly track business results from media exposure, but those who are regularly quoted affirm that it does help, from boosting your own website's credibility (with the links that may come back from media quotes), to boosting your perceived credibility in the eyes of your clients (who see you quoted), and the occasional instance where a prospect outright contacts the firm after seeing the advisor mentioned in the media. Firms that are even more proactive with a media strategy may retain a PR firm, or hire an employee whose job is to network with and maintain connections to journalists to create interview opportunities (while the advisor stays focused on clients, prospects, on the occasional media interview itself).
Life And Financial Lessons Two Years After Launching A Solo Advisory Firm (Meg Bartelt, FlowFP) - Many financial advisors don't launch an advisory firm to be an entrepreneurial business owner, per se, but simply because they have a vision to serve a certain type of clients a certain way, and want to be their own boss and control how it's done. Accordingly, as Bartelt notes, two years into the launch of her own firm for which she was "not a born entrepreneur", she recognizes the importance and value of having a strong community and support system around you, given the inevitable ups and downs of getting started on your own. For Bartelt, that included having both a study group of fellow planners (who were also newly launching their firms, with whom she could "commiserate, rant, share successes and knowledge and ideas, and encourage one other"), and a business coach, and taking day-long offsites (which Bartelt does with another advisor, as each challenges the other in their respective businesses), and then joining another study group of more established advisory firm owners that meet weekly... and also going to a marriage counselor to ensure that as a couple they could manage through both the stress and the outright "logistics" of managing a startup business within the family household. Bartelt also notes the importance of taking breaks to replenish, as the sheer immersion into launching your own firm can be both exhilarating, time-consuming, and exhausting, at the risk of leading to burnout; accordingly, Bartelt made a habit of exercising every morning, and then taking a quarterly night away in a hotel (just to create some personal mental space), and then deciding to create more structure and division between her work and home life but committing to not working on weekends at all. Other notable insights from the early years included that Bartelt's success was less about her ability to predict the unpredictable challenges, and more in simply her ability to adapt to the unpredictable when it occurred, and that it's absolutely essential to have a healthy financial foundation from which you can take risks in the first place.
5 Lessons From Failing The CFP Exam (Kate Dore, Cashville Skyline) - During the recent March testing cycle of the CFP certification exam, Dore sat for the exam for the first time... and was, unfortunately, one of the 39% who didn't pass. Thus, as a blogger, rather than writing the "how-to guide to nailing the CFP exam on your first attempt as a career changer" article she hoped to write, instead she decided to share her perspective and lessons learned having gone through and had it not work out. Key points include: 1) Don't try to attempt it alone (recognize the importance of having a support system to both stay on track with studying and to pick you up when a practice test beats you up, whether it's a spouse or family, or a Facebook group, or a study group); 2) Don't neglect your stronger areas (as most people focus primarily on their "weak" areas, but Dore actually spent so much time studying her weak areas, that she got a "low" score in one of her strongest areas, and that alone may have been enough to drag her pass down to a failure); 3) Treat self-care as part of your study plan (i.e., it's not just about scheduling the study hours, but also the sleep, food, and exercise hours to keep you in a healthy physical and mental state to prepare); 4) Focus on your own practice test scores and efforts, not what others are scoring (because in the end, it's about beating the pass score threshold, not everyone else's score!); and 5) Don't feel ashamed for failing the first attempt, as there were actually nearly 1,000 others who also failed the March exam... the real key to success is being better prepared to sit and pass the next time, as the CFP marks are still distinguishing with barely more than 25% of all financial advisors holding them today!
The Problem With Advice Givers Who Don't Take Advice (Stewart Bell, Audere Consulting) - One of the key value propositions of having a financial advisor is that it's not merely about the facts and expertise alone, but simply the benefit of having an objective third party look at your situation without the emotional attachments that can color our views. Yet as Bell notes, despite the fact that financial advisors talk about the value of having third-party objective advice to help avoid emotional blind spots... remarkably few financial advisors have their own third-party financial advisor to give that emotionally detached advice for themselves. Which is arguably not only beneficial for the financial advisor – as any consumer of financial planning – but can also provide invaluable business perspective, to truly understand what it's like to be on the other side of the transaction. In this context, Bell relates the story of Honda car designer Kunimichi Odagaki, who in 1990 traveled to the US, bought a mini-van, and traveled in it back and forth across the country to get perspective on what type of new mini-van Honda could build by experiencing the mini-van the way the end American consumer would (rather than just by doing surveys or focus groups); the end result was the Honda Odyssey, which became Honda's fastest-selling new car ever, that broke all records at the time. Because the reality is that, with mini-vans as with financial advice, it's hard as a producer (i.e., the financial advisor) to really understand the experience of the client, until you've actually experienced it as a client! More generally, it's important to recognize that even the best athletes continue to surround themselves with coaches who can add new perspectives and new ideas about how to get better... even when they're already gold medalists and world champions. In other words, part of the process of continuous improvement is continuing to put yourself into situations where you can learn more about what your clients want and need, and get outside perspective of how you can do better. Thus, Bell's challenge to everyone: if you're a professional financial advisor and you don't have a financial plan and you're not getting advice, go see a financial advisor yourself, and learn what it's really like to be financial planned upon!
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, you may be interested in the video below – a fascinating look at how Will Smith's journey into becoming the "Fresh Prince of Bel Air" was driven by the failure to hire a financial advisor and make responsible financial and tax planning decisions after his first album went triple platinum!
Will Smith tells the story of how he landed The Fresh Prince of Bel-Air pic.twitter.com/5ieV3p41uw
— Only Hip Hop Facts (@OnlyHipHopFacts) May 11, 2018