Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a great overview of the current landscape of CFP Board registered programs and the ongoing efforts to raise the profile of financial planning in colleges, from shifting programs into business schools, to boosting funding and alumni/corporate giving, to simply building more awareness of financial planning on campuses. Given the industry demographics, the opportunity for young people entering financial planning today is tremendous, but only if they know about it in the first place! There's also an article looking at how a number of large firms are entirely retooling their advisor training programs to make the entry path for young financial advisors more appealing, and a brief look at some how firms are bringing in junior advisors to work with clients.
From there, we have a long list of practice management articles this week, including: the rise of "bogus" award/recognition programs for advisors and an increasing volume of "advertorial" solicitations (where advisors can pay to be featured in a major publication's "top advisors" list or have a profile article written about them); tips for solo advisors who are looking to sell their practices (from two solo advisors who recently did sell their firms); a discussion of some of the latest advisor outsourcing trends around investment and back-office support; a look at the decision to become a hybrid RIA and when it's better to use a broker-dealer's corporate RIA rather than create an independent one; and a sample template for building your business plan as a new financial advisor (or perhaps an existing one planning on launching a new advisory firm).
We wrap up with four interesting articles: the first looks at the rise of social media in wirehouses and large broker-dealers, who have been 'laggards' with social media in the past, but are now accelerating adoption with some highly capable (and compliant) enterprise social media tools; the second is an RIABiz profile of Motif Investing, which has now raised an astonishing $86M of venture capital, despite having only about $86M in managed assets, raising the question of what the tremendous opportunity really is that the VCs see in Motif's future; the third examines some recent criticism of the famous Dalbar research regarding the investor behavior gap, suggesting that while there are still investors who harm themselves, the Dalbar methodology of calculating returns may be drastically overstating the issue in the aggregate; and the last is an interesting recent interview with Sebastian Thrun, founder of the first MOOC, who has now acknowledged that a purely free technology-driven open education just doesn't work very well because students don't follow through, and that charging a little more to add a human service layer component may ultimately be the superior model... which has very interesting implications for the current traditional-vs-robo-advisor environment as well!
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 17th/18th:
Planners on Campus - This article from Wealth Management looks at the current environment of financial planning programs on college campuses, and challenges that financial planning seems to be having in getting more traction in higher education institutions, where - despite the clear demographic trends in the industry moving towards a shortage of financial advisors - the demand of students to enter financial planning is lackluster. In 2012, colleges graduated only 637 students with an actual degree in financial planning (though there are estimated to be up to another 2,000 students graduating with a financial-planning-related degree each year); to put that in context, Merrill Lynch alone has 3,500 recruits in its training program each year. While the number of college programs is on the rise, now up to 120 baccalaureate programs in 2014 (an increase from only 90 in 2009) with a whopping 52 more in development, the number of students has remained relatively flat, and there are estimates that half the programs may have no more than a dozen students, while just a handful of popular programs have more than 100 enrolled. The problem appears to be exacerbated by the fact that programs themselves are not always well recognized within the college institutions; of the 120 undergraduate programs, less than a dozen actually offer a bachelor's degree in financial planning, while the rest graduate students with diplomas in anything from business administration to finance to agricultural economics; overall, less than half of the programs are housed in a business school at all. While arguably financial planning is distinct enough it doesn't "need" to be within a business school, the issue is that business schools do tend to attract the students predisposed towards finances in the first place, which means programs not in the business school just don't draw their attention. And unfortunately, because most business schools are focused more on corporate finance, many aren't interested in having financial planning programs focused on personal and household finances, and still view financial planning as a "trade" more than a "profession" worthy of better academic support. In addition, because alumni support for financial planning programs tends to be weak (primarily because most of today's veteran financial planners didn't study financial planning in college in the first place, and/or didn't even go to college), a lack of funding makes it even more challenging to raise the profile of financial planning in the eyes of school administrators, though programs like TD Ameritrade's NextGen Grant Program and technology vendors like MoneyGuidePro are helping. Overall, the profile of financial planning is continuing to rise, and there are more business schools adopting financial planning programs, but until there's better financial support for programs, and more demand from financial planning firms to hire students, the growth may continue to be very slow.
Looming Advisor Shortage Demands New Training Approach - With more than 1/3rd of financial advisors retiring in the next decade, the industry needs an estimated 200,000 new professionals to keep up, yet the existing training approach to develop today's young financial advisors is severely outdated; the Generation Y "Millenials" have different (and generally more collaborative) learning styles, and often want and need more structured guidance about the steps to take for the path to success, with one-on-one coaching and ongoing feedback. Notwithstanding these challenges, there's a lot of desire to figure out how to effectively attract and retain young advisors; they can be easier to integrate into the culture of a firm (as there aren't old habits to "undo"), are less expensive than recruiting experienced advisors, and have a longer time frame to add value to the firm. So how are firms adapting? Many large broker-dealers have been retooling their training process entirely, focusing on everything from more experiential learning (a little less lecturing and a bit more doing), to integrating video into training, to trying to build more of a culture that supports the development of new advisors (which in a large firm environment, can vary significantly from one branch to the next) with more proactive mentoring. Firms are also trying to figure out new ways to help young advisors attract and retain clients; for instance, adopting a "puppy dog approach" - if you give a family a puppy, they never bring it back; if you give a prospective client some helpful initial planning, they're likely to simply ask for more and become a client. Other emerging trends in the advisor training space include: more fast tracking (putting young advisors in front of clients faster, rather than keeping them in back-office positions for a year or two); a push for women; military outreach (recruiting advisors out of the military); helping young advisors to go all in and form a real "heart connection" to their firm (help them to recognize how the work they do really matters).
Succession Planning: How to Partner With a Younger Advisor - For veteran advisors, there is a growing list of benefits to bringing in younger advisors, from the potential to become a succession plan for selling the practice, to showing a third-party buyer that the practice is viable beyond just the original owner, to the simple benefit of better ensuring continuity of service for clients. In addition, younger advisors have the potential to bring in younger clientele who can improve the long-term financial strength of the practice as older clients decumulate and/or pass away. Unfortunately, though, finding a good junior advisor has become difficult, due both to the industry demographics (66% of advisors are over age 50, but only 3% are under age 30), and notwithstanding this challenge many advisors continue to put the process off, feeling too stressed to do it during bear markets and too comfortable to do it during bull markets. Nonetheless, for advisors who are pursuing the issue, younger talent is coming from many sources; some bring in interns and then develop them, while others are looking to their broker-dealers or custodians to help them find or partner with younger talent on their platform. When the younger advisors do come on board, they are generally immersed into the practice immediately, participating in meetings with clients to start building trust (and make it clear that clients can call either the veteran or junior advisor as needed), transitioning duties that free up time from the veteran advisor, and transitioning the practice gradually with ownership sold incrementally over time.
Something Is Not Always Better Than Nothing - This article by advisor Dan Moisand in Financial Advisor magazine looks at the rising number of opportunities, both good and bad, for advisors to try to gain credibility through the media and implicit third-party endorsements. While the SEC has approved advisors getting reviewed on third-party sites like Yelp, and some have been effective in getting "earned media" (where the media calls you to interview or write a column), many are now buying their way into such solutions. While it has long been true that with local publications, being an advertiser often "helped" to also become the subject of a (favorable) story, increasingly online local and online publications are offering outright "advertorials" where advisors can pay to have profiles written about them, that appear as normal content. The phenomenon is not just local, though; Moisand was recently contacted by an organization that was considering him as one of the area's "Most Dependable Wealth Managers" and if selected, would be featured in Forbes. Yet as it turned out, the cost to "support" the effort was $8,000, which was essentially just the cost of being placed in an ad that the sponsoring organization was buying in bulk and then re-selling/offsetting with the advisors they solicited (and of course, for the advisors who were "featured" in Forbes, there was no mention of the ad or a cost!). And more recent version from Advent Media Group for $7,900 gets advisors profiled (no award, just "profiled") in Bloomberg BusinessWeek, Forbes, and Fortune in a "Special Advertising Section" and in some cases there are even pay-to-appear opportunities for television shows as well (including In View hosted by Larry King). In the even more questionable camp, though, is what appears to be a rise of what Moisand calls "bogus awards", such as a program by the "Consumers Research Council of America" and SLD Industries that notified advisors that they were "one of the best advisors in the country" and offered them plaques and certificates to commemorate the feat, but turned out to be little more than a plaque-selling enterprise that had suckered professionals in many industries (accentuated when one advisor actually managed to get the award for his dog). The real issue, though, is not just how questionable some of these awards and pay-to-play appearances are, but Moisand suggests that as the SEC pays more attention to testimonial issues, there may be some additional scrutiny on these third-party awards/recognitions a well, so watch out, as omitting disclosure of a financial element/cost for an award or recognition program could land an advisor in regulatory trouble.
23 Tips for Selling a Solo Practice - This article is a summary from the recent NAPFA conference of several solo planners who sold their practices; one anticipated simply winding down her practice with her clients (letting them slowly decumulate and pass away as a natural progression), but then decided to sell her practice after seeing a fellow advisor do so and realizing that she no longer enjoyed the work as much and was burning out and that she didn't really want the practice to just die away, while another transitioned out for a desire to spend time with grandchildren. Highlights of their tips to "do it right" with a transition, and maximize the value, include: remember you are transferring (client) trust, not just a business entity; buyers want to buy a business, not a job, so do the hiring of junior staff necessary to make it feasible for the business to operate itself; don't just hand off the company to a buyer and disappear, it has to transition over time to ensure clients retain; give away or sell clients who produce low revenues to a different planner (for whom they may still be "big" clients); use a third-party firm like FP Transitions to help market your business for sale; raise your fees if necessary to keep them in line with the industry (your buyer will likely do so anyway, but raising them first allows you to gain the value); fire undesirable clients (especially ones that might someday raise legal issues); simplify client portfolios so it's easier for a buyer to take over; be prepared for both client emotions, and your own; recognize that a sale could come quickly, or take a very long time; know your buyer (are they investing in your business, or just looking to flip it?); and make sure you can live with yourself afterwards (have a plan for what you will do after you've exited your practice!).
When Investment Advisers Outsource - This Reuters article highlights the rising trend of advisors outsourcing administrative tasks, or their entire investment management process, to allow them more time to spend with clients and/or focus more on financial planning issues. In addition, the outsourcing solutions often allow smaller advisory firms to access resources that would typically only be available to larger firms or institutions. While advisors can piece together providers multiple outsourcing solutions for everything from portfolio construction to rebalancing, research, and back-office support, a recent survey found that amongst those who outsourced, 53% are using a Turnkey Asset Management Platform (TAMP) as a one-stop shop. Popular TAMPs include AssetMark, Envestnet, and Symmetry. The most common objection to such outsourcing solutions appears to be a concern about costs, but the reality is that fees and services vary tremendously (some high, some low) across the landscape. Many advisors also note that they are concerned clients won't respond well to the idea of outsourcing, although a survey of advisors who did outsource found that 92% reported clients responded positively once the outsourcing decision was announced, and the depth of specialists and expertise that would be backing the advisor were explained (though clearly if the advisor's primary value proposition is their hands-on investment management, the solution may still not be feasible). Given the simplification to their practice with outsourcing, some advisors reduce their own fees once working with a TAMP, such that the all-in costs are still comparable to a 'typical' 1% fee. The article wraps up with a good list of issues to consider when evaluating a TAMP, including: does the provider share your investment philosophy?; what services do you really need (just outsourcing parts, or a full 'soup-to-nuts' offering?); what are the advisor and client minimums (which vary significantly from platform to platform); get a rundown of all fees and costs; who is the firm's custodian (some TAMPs will provide access to a big custodian that would otherwise have a $10M minimum, which is appealing for newer advisors); and how easy will it be to transition in and out of the provider (what are the logistics if you want to change solutions in the future?). (Disclosure: I am also a partner in a TAMP and advisor investment/back-office outsourcing solution called Pinnacle Advisor Solutions.)
4 Reasons Not To Launch Your Own Hybrid RIA - As the financial services industry at large shifts from its commission-based roots to a more commission-and-fee environment, it's not surprising that some of the greatest growth has been occurring in the "hybrid RIA" channel. For advisors with a broker-dealer who want to become hybrid advisors, this presents two potential paths: to become an investment adviser representative of the broker-dealer's subsidiary corporate RIA, or create/join an independent (generally advisor-owned) RIA while maintaining a relationship with the broker-dealer for 'just' the commission-related business. Establishing an independent RIA has been a popular route for many advisors, who don't want to route all of their fee revenue through the broker-dealer's channels (where the broker-dealer keeps a slice); however, as this article points out, there are advantages to going the corporate RIA route rather than opening up an independent RIA. Key issues to consider include: Size of the fee business (the cost to create and maintain an RIA, including compliance, has a cost; advisors with less than $100M may simply find that the corporate RIA is more cost-effective, as the revenue-sharing cost to the corporate RIA is less than the overhead costs of doing it independently); service model (integrating the back offices of a broker-dealer effort and an independent RIA can be complex, if the advisor still plans to do a lot of business in both channels); a desire for multiple custodians (it's more feasible to have multiple custodians with an independent RIA, though bear in mind this may not be feasible or cost-effective either until the RIA practice is fairly large); and succession planning issues (is the exit plan ultimately to sell to or tuck in to an outside RIA where having an independent RIA makes sense, or in the end will the advisor likely try to sell to another firm within the broker-dealer network, where being under the corporate RIA eases the transition)?
Creating a Business Plan for Your Practice: Questions to Answer Before You Launch - This article by advisor Mary Beth Storjohann from the XY Planning Network blog discusses the template she used to build her business plan for launching her own advisory practice last year, building on resources from the Small Business Administration and the "3-day Chic Start" course from Chic-CEO.com that she used to help guide her through the creation process. The starting point is to create a mission (present tense list of goals and how you will get there) and vision (future tense goal of how you see your business in the future and where you want it to be), and define what your value proposition will be (why in the end should potential clients work with you and not the competition). Next comes your organizational chart, which may simply be you, but early on may include some outsourcing partners or external consultants/experts you may use as well. It's also important to estimate your start-up costs, and whatever software, tools, and systems you may need, and detail what legal structure you plan to use for the business (LLC, S-corporation, or sole proprietorship? Then consider the environment for your business; what are your competitive advantages, and what are the barriers you will need to overcome. Ultimately, this process culminates in detailing out exactly what services you plan to provide, what pricing you will use, and how you will market those services. Once the business plan is fleshed out, you can begin to craft action items of what steps need to be done to complete the details of the business plan, and set a timeline for it. (The article includes an actual business plan template you can use at the end.)
Social Media's New Champions - This cover story from On Wall Street looks at the rising adoption of social media in large wirehouse and other broker-dealer firms, which were arguably laggards in the social media environment early on but have been making significant strides lately. Morgan Stanley now allows advisors to use LinkedIn and Twitter "with full access" (and estimates about 6,000 of their advisors, or 35%, have gone through the process of getting approved to engage in social media), and monitors them using enterprise social media compliance tools like Socialware to be able to quickly pre-review advisor content, post it, and archive the articles and activity. Wells Fargo is in the process of adopting Socialware as well, having launched a pilot project with 100 advisors in late 2012, and now expanding it tenfold in the coming year. More recently, social media enterprise compliance solution Hearsay Social appears to be gaining strides, based not only on its compliance capabilities, but also its "social signals" tools that monitor client social media activity and alert the advisor when the client posts notable news, picking up both smaller and larger broker-dealers as clients, from Wedbush to Raymond James, and then providing training to help advisors get up to speed on how to implement the tools and use the platforms effectively. Other notable enterprise tools include PeopleLinx, which can look through an advisor's social media network on LinkedIn and Twitter and "score" prospects based on pre-set criteria to help advisors determine who they should seek out to get introductions. Another tool is Relationship Science, which draws on public information available on the web to fill in more details around an advisor's client or prospective client list (again, including who might be able to provide introductions to additional 'warm' prospects, such as determining what philanthropic organizations include overlap of several clients and prospective clients where the advisor might want to network). Notably, though, virtually all of these latest tools are targeted primarily for larger firms as "enterprise" clients, suggesting that the balance of technology supporting social media may be shifting from small firms to larger ones.
The Two Big Moves Motif Is Making - This article from RIABiz looks at Motif Investing, a platform that allows investors to buy thematic investment "motifs" with baskets of up to 30 stocks like "natural gas stocks" or "3D printing stocks" or even "high-end dividend stocks", priced for a low flat fee. Although it remains to be seen whether motifs will fully gain traction, the company is certainly gaining interest, raising another $35M in venture capital last month (including participation from J.P. Morgan and Goldman Sachs) and bringing its total venture capital to a whopping $86M. The idea is to make it much easier for investors to invest in themes - for instance, buying into a robotics theme or a 3D printing theme just requires the easy purchase of a motif, rather than a more time-and-dollar-costly exercise of studying and buying a long list of individual stocks. (In essence, the motifs are similar to mini-ETFs, but anyone can create motifs and make them available through the Motif Investing platform for consumers to purchase, with a small 'royalty' fee going to the motif creator anytime a purchase occurs). Yet so far, investment dollars don't appear to be accelerating - RIABiz estimates Motif has only attracted "about a dollar of managed assets for every dollar of venture capital invested" (implying Motif only has about $86M in actual AUM to match is $86M of venture capital) - yet interest remains that Motif can either take on behemoths like DFA (by forming "smart-beta" or factor-weighted motifs as a kind of "open architecture DFA"), or may be able to go global offering simple motifs to make investing more accessible to those who don't currently participate much (especially outside the U.S.). A new advisor platform will allow advisors to offer motifs directly to clients for $20-$50/month per account (and the upcoming "smart beta" motif models will be available exclusively to advisors). However, it remains unclear if Motif can achieve the same levels of diversification as a full DFA solution, given the limitations of only 20-30 stocks in a motif. On the other hand, Motif's solutions available on a flat-monthly-fee basis may also be a threat to robo-advisors - and/or traditional advisors? - who are still charging on a percentage-of-assets basis (though other similar platforms, including an earlier version of Wealthfront, struggled with the same model). Ultimately, though, it's not entirely clear if Motif is raising capital to pursue a particular disruptive idea, or if it's still simply throwing a lot of ideas at the wall to see which ones will stick, but the fact remains that there are a lot of venture capital dollars flowing towards the company to see if something will work.
Just How Dumb Are Investors? - In the Wall Street Journal, columnist Jason Zweig looks at the latest Dalbar research, which finds that the average investor in all U.S. stock funds earned 3.7% annually over the past 30 years, a period during which the S&P 500 index earned 11.1%/year, which in turn means investors underperformed the market by approximately 7.4%/year for three decades. Yet while a great deal of research has shown that investors do tend to 'chase' performance, with money flowing in when markets are hot and then leaving when markets are down and people are scared, some are questioning whether Dalbar may be overstating the matter. Professor Ilia Dichev, an accounting professor and leading expert on how to properly calculate returns, has studied the matter and suggests that stock investors underperform by a much more modest 1.3%/year. Dichev and several other return-calculation experts point out that there are problems with the Dalbar research methodology - specifically, that its formula has the effect of taking returns over the full period and dividing them by total assets at the end, including money that was added along the way but wasn't there from the start, which has the end result of making it appear that investors are lagging more than they actually do. (When the underperformance is calculated assuming ongoing annual contributions instead, the investor behavior gap virtually disappears, even with Dalbar's numbers!) In addition, Dalbar doesn't compare the return of fund investors to the return of the funds themselves, but to a costless index instead. Ultimately, this isn't to totally dismiss that there are investors that make mistakes and chase returns, but it does emphasize that, at least in the aggregate, investors may not be nearly as "dumb" as the Dalbar research makes it appear.
A Q&A With “Godfather of MOOCs” Sebastian Thrun After He Disavowed His Godchild - This article is an interview with Sebastian Thrun, the founder of Udacity and generally viewed as the 'godfather' of Massive Open Online Course (MOOC) companies, which have been aiming to disrupt and "democratize" higher education by making high quality education open and available for free by massively scaling into huge online classes. Yet Thrun has now effectively conceded failure to the MOOC model, as less than 10% of MOOC students were even completing a class. However, that doesn't mean that Thrun is giving up on MOOCs entirely; instead, the realization has been that just providing access to education alone isn't sufficient, and that with a (moderately priced) service layer on top that supports the students, completion rates rise significantly and learning outcomes are improved. Yet the service layer requires human support (it includes virtual meetings using Google Hangouts with a fleet of mentors who provide coaching throughout the class), so it can't be done for free, and thus Thrun says it's not really a MOOC anymore, and it's not completely "Open" if it costs money. On the other hand, while a pay-to-play format isn't entirely open (though the content itself is still free for those who are self-motivated enough), Thrun notes that the online education platform can still lower the cost of education by a factor of ten (which may still be highly disruptive competition to traditional educational institutions). While the article is written in the context of MOOCs, it likely has some interesting parallels for the intersection of traditional financial advisors and robo-advisors, where similarly there may be challenges in purely self-directed investors using technology and getting all the desired outcomes, but a heavy-technology-plus-human format may be able to deliver most of the value at a fraction of the cost of traditional providers.
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!