Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with a recent Guidance Update from the SEC about cybersecurity, suggesting that the regulator is increasingly concerned about whether RIAs are properly stepping up to their obligations to protect client data and whether they are really prepared to deal with a potential data breach.
From there, we have several technical planning articles this week, from a look at how clients might need to update the gifting provisions in their Power of Attorney documents in light of current Federal gift/estate tax exemptions, to the growing trend of “Impact Investing” for especially higher-net-worth clients, tips for how to utilize family resources when a child or grandchild is going to college while minimizing any adverse impact on financial aid, and a roundtable interview on the current issues advisors should be thinking about when it comes to health insurance and the new health insurance exchanges.
We also have a couple of practice management articles, including: the differences in how top RIAs do marketing compared to their peers; the challenges that advisory firm owners/founders face as the business continues to grow; a look at how mega-accounting firm Deloitte is revamping its system of managing employee performance and reviews (with lessons for us all about how to better manage employees); and a look at technology tools that may be helpful for advisors trying to revamp their online presence from website to social media and more.
We wrap up with three interesting articles: the first is commentary from FPA NexGen President-Elect Rianka Dorsinvail about how advisory firms should think about hiring and retaining young talent; the second is a profile of Apex Clearing, the platform that has powered most “robo-advisor” start-ups in the past several years and is now looking to offer its tools more directly to traditional RIAs as well; and the last is a sad reminder that as clients age, financial decision-making capacity is often one of the first things to go, which makes it especially important for advisors to be watchful as the first line of defense… and have a plan in place about how to contact other family members for support, should it become necessary to do so.
And be certain to check out Bill Winterberg’s “Bits & Bytes” video on the latest in advisor tech news at the end, including the latest from the Shareholders Service Group (SSG) conference, a partnership between Orion Advisor Services and Jemstep Advisor Pro, and the latest from the SEC on cybersecurity issues for advisors.
Enjoy the reading!
Weekend reading for May 2nd/3rd:
SEC Urges Advisers To Draw Up And Implement Cybersecurity Plans (Mark Schoeff, Investment News) – This week, the SEC came out with a new Guidance Update on Cybsecurity for advisors, pushing RIAs to create a formal written plan on how to prevent and handle potential client data breaches. The guidance suggests that RIAs should be conducting periodic assessments of the data it collects, the vulnerabilities of their systems, their data security controls (e.g., what is password protected or not, what is encrypted or not), and how they would handle a breach if it occurred. Notably, the guidance is ultimately just that – “guidance” – and doesn’t actually carry the force of a new SEC rule. Nonetheless, the increasing focus on cybersecurity from the SEC (and also FINRA) suggests that cybersecurity issues are more likely to be raised in RIA exams going forward, and that the SEC may soon begin enforcement actions against firms that failed to have sufficient cyber defenses and a proper plan in place if/when a breach does occur.
Do Powers Of Attorney Need New Gifting Rules? (Martin Shenkman, Financial Planning) – While the Power of Attorney document is standard (or even boilerplate!) for many clients, Shenkman suggests that given changes in the Federal estate tax laws in recent years, it’s time to do a review of client documents. In particular, advisors should be reviewing the section authorizing the client’s agent to make gifts on behalf of the client (typically up to the annual exclusion amount) – a power which made sense in the past, but often does not anymore. After all, given a current estate tax exemption amount of $5.43M in 2015, only about 0.2% of taxpayers are now exposed to the Federal estate tax, which means Power-of-Attorney-based gifting provisions may just not be necessary anymore. However, including them anyway raises additional risks for clients, especially given the ongoing rise of elder financial abuse, and as a result clients with no estate tax exposure should consider a more limited non-gifting Power of Attorney now. Alternatively, for the small subset of clients whose wealth is in excess of the Federal estate tax exemption, Shenkman suggests that revisions are also needed, because a $14,000 annual gift just isn’t large enough to materially impact (and generate tax savings) for a large estate; instead, documents might actually permit for even larger gifts, perhaps to existing irrevocable trusts (to get subsequent growth outside the estate), and especially if there’s an opportunity to avoid state estate taxes as well. In some cases, clients might have already maxxed out their lifetime gift exemption (e.g., gifting up to $5M back in 2012 when it was feared the exemption would lapse back to $1M), but given ongoing inflation adjustments to the exemption (now up to $5.43M) additional gifting may be desirable… but again, would be limited unless the Power of Attorney gifting provisions are broadened.
The 100% Club (Leila Boulton, Financial Advisor) – A growing number of high-net-worth individuals are pursuing so-called “100% impact” investment strategies, an investment approach where assets are allocated towards companies to achieve positive and measurable social or environmental outcomes, as opposed to just maximizing traditional financial returns. Impact investing can be viewed as an extension of “Socially Responsible Investing” (SRI), which started as an approach of “negative screening” (avoiding investments in businesses that weren’t socially responsible), evolved to “positive screening” (searching for businesses that did engage in best practices on environmental, social, and governance issues), and is now evolving further to target businesses that are expected to provide measurable societal improvements (e.g., organic food producers, renewable energy generators, etc.). Although there is generally still some expectation of financial return as well, the goal is not a trade-off between responsible investing and financial returns, but an alignment of both public benefit and some investment performance (though notably, some studies find that SRI-related factors are correlated with superior risk-adjusted returns in the long run as well, and especially during bear markets). A recent Financial Times survey found family offices are allocating an average of 17% of AUM to impact investing, and another survey found some multi-family offices as high as 80% or even 100% allocations to impact investment strategies. A growing number of organizations, like 100% Impact Network, are emerging to help the wealthy deploy capital into impact investing strategies, and more generally allocations to SRI strategies rose 76% (from $3.74T to $6.57T) from just 2012 to 2014 (now accounting for 18% of all U.S. assets under professional management). Additional resources for those interested include ImpactAssets’ “Invest With Meaning” issue briefs.
College Strategies: Best Way to Help With the Tuition Bill (Jen Miller, Financial Planning) – As college costs continue to rise, the average tuition, room, and board for a private four-year college stands at $42,419/year for the 2014-15 school year, with $32,762/year as the cost for out-of-state students at public four-year colleges, and $18,943 for in-state students. Which means for many families, just contributing to a 529 plan and letting it grow to the extent possible just won’t be enough. And unfortunately, for those struggling to afford college, help from other friends or family members can adversely impact financial aid as well, unless done properly. For instance, wealthy grandparents may want to fund a 529 plan at $14,000/year, $28,000 with gift splitting, or up to $140,000 for a married couple that takes advantage of the 5-year averaging rules, which “works” because non-parent-funded 529 plans are not considered an asset on the FAFSA. However, the timing of the distributions out of the 529 plan is crucial to avoid adversely impacting financial aid for the child, because distributions from a non-parent-funded 529 plan are treated as income of the student (even if the distribution is otherwise tax-free), and student income reduces financial aid by 20 cents on the dollar. Accordingly, non-parent-funded 529 plans are best used for expenses at the end of the junior year and for the senior year of college, after the last FAFSA form will have already been filed. Alternatively, grandparents might actually want to fund a 529 plan in the name of the parents, which will be counted as a parental asset at 5.64%, but avoids having distributions treated as the student-child’s income at 20%. Another alternative is for family members to pay the (grand)child’s tuition directly, which avoids gift tax limitations as long as the funds are paid directly to the financial institution, but again may impact the student’s financial aid if done prior the second half of the student’s junior year.
Navigating the Affordable Care Act: Understanding the Law and Planning Implications for Clients (Roundtable, Journal of Financial Planning) – This roundtable interview takes a fresh look at the Affordable Care Act and the health insurance exchanges, now that we’ve been through two rounds of open enrollment and have just wrapped up the first tax season under the new law. Thus far, the view is that the ability to get access to health insurance without worrying about insurability has been a success, but unfortunately the complexity of purchasing coverage has been complex and challenging, and the IRS appears to be going through substantial “growing pains” in handling and overseeing the premium assistance tax credits. Advisors and clients must also be cognizant that while the overall coverage rates of policies on the exchanges are ‘standardized’ into the Bronze, Silver, Gold, and Platinum tiers, different plans may have very different doctor and provider networks, which is crucial for HMO plans and can have significant cost implications on in-network vs out-of-network reimbursement for PPO plans as well. Advisors must also be cognizant of client income – specifically, Adjusted Gross Income – to recognize planning opportunities for the premium assistance tax credit, which can apply even for clients who have a lot of wealth as long as their income is low enough to meet the thresholds. Other notable aspects of the current health insurance market include: working with a health insurance agent doesn’t cost any more than getting coverage on an exchange, and may be very helpful for clients (and advisors) navigating the process for the first time; the SHOP exchanges (for small businesses) don’t appear to be going anywhere, even as the individual health insurance exchanges are growing; and advisors have the opportunity for impactful conversations with clients around retiring early, starting new businesses, and other opportunities that become feasible when there is access to health insurance directly from an exchange (and without requiring a traditional employer to offer coverage).
3 Things Top-Performing RIA Firms Do (Jamie Green, ThinkAdvisor) – The most recent 2014 Fidelity RIA Benchmarking Study, which focused on marketing and business development, finds that the “market leaders” in growth are unique in the way they achieve that growth. First and foremost, market-leading firms spend more on marketing and business development – an average of 2.4% of revenues, compared to only 1.8% for other advisors firms – which helps them achieve 40% more client growth, 23% more asset growth, and 20% more in revenue growth. The market-leading firms are also more likely to have a marketing plan with clear goals, assigned leaders, and deadlines for implementation, creating the accountability necessary to ensure success (along with compensation tied to actual marketing results). Notably, the Fidelity benchmarking study also found that market leaders were more likely to be engaging on social media, have a structured story for the business that can be consistently told by any/all staff members of the firm and that can be further tailored to different segments the firm is targeting, and are more likely to have reciprocal referral relationships with Centers of Influence (where referrals are sent to the COI, and are received back in turn).
Secrets To Growth: The Difference Between A Racehorse And A Pack Mule (Joe Duran, Investment News) – Duran notes that advisory firms that start strong out of the gate like a racehorse often slow and struggle over the decades, becoming more like a stodgy and stagnant pack mule as the years go by and the advisor reaches a comfortable point in the practice. In fact, Duran notes that firms typically fall into one of four consistent stages of development: 1) a firm of up to 150 clients, where the advisor knows all the clients personally and serves them with a generalist support staff, and the income of the practice is driven primarily by the wealth of the clients (wealthier clients = bigger revenue stream); 2) a firm with 150-500 clients, where “top” clients are still served by the founder/advisor, while a segmented lower tier of clients are serviced by associate advisors, and the founder is swamped with the blend of regular client meetings and managing the operational issues of the growing business; 3) 500 – 1,500 clients, where the firm is making the transition from owner-as-advisor to owner-as-business-leader, as clients are generally shifted away from the founder to other advisors, and the founder’s focus is on whether the other advisors in the firm are doing high-quality work for clients; and 4) 1,500+ clients, where the founder focuses on growing the business as a standalone enterprise (and typically has no more direct clients), and clients themselves are truly clients of the firm and not just any particular advisor. The challenge from the advisor/founder’s perspective, though, is that it takes different leadership skills to keep growing the firm through each stage, especially when facing the transition from the 2nd tier to the 3rd (when the firm transitions from a “lifestyle” practice into a bona fide enterprise unto itself). Founders often get “stuck” when they are unable to shake old habits and ways of doing things, are unwilling to let go of how business was done in the past, cannot maximize the people in their business (which is crucial to growing an enterprise business that is bigger than just the founder), and/or become trapped by the capacity limits of an ever-more-complex business.
Reinventing Performance Management (Marcus Buckingham & Ashley Goodall, Harvard Business Review) – Mega accounting firm Deloitte is looking to revamp its entire performance management and review system. The company has used many of the ‘traditional’ tools – employees receive annual objectives, ratings after a project is finished about how well they are achieving objectives, all of which culminates in an end-of-year review meeting. Yet internal studies found that not only was the process poor at providing effective real-time feedback – an end-of-year review is too late for constructive feedback about a project earlier in the year – but that the firm’s leadership was cumulatively spending a whopping 2 million hours a year setting the ratings for their 65,000 employees… and the ratings weren’t even very good, as it turns out our assessments of the skills of others are heavily influenced by our own biases. Instead, then, Deloitte is shifting its performance reviews to be more future focused, looking instead at what the team leader would do with the person in the future (e.g., would you want this person on your team again in the future, is this person ready for a promotion, is this person at risk for low performance, etc.), which results in less biased feedback. Deloitte is also aiming to provide far more regular feedback; in fact, their internal studies find that the highest performance results when team leaders check in with each team member weekly – which may be time consuming to do in addition to the work as team leader, but the authors suggest should be the primary work of a team leader in the first place. Perhaps most notable, though, is that studies also show that one of the best predictors of whether employees and teams perform well is simply how much they agree with the statement “At work, I have the opportunity to do what I do best every day.” Which means ultimately the goal is simply to get the person into the right position that focuses on his/her strengths, and then “just” provide regular feedback that helps to continue to direct and fuel their performance in a forward trajectory.
25 Awesome Financial Advisor Technology Tools (Craig Iskowitz, WM Today) – This article is a review of the presentation by advisor tech guru Bill Winterberg at the recent T3 Advisor Technology conference, which provided suggestions of technology tools that advisors can use in today’s digital world. Much of the discussion focused on the advisor’s digital presence; with 71% of US adults using Facebook, and 52% of online adults using two or more social media platforms, advisors should aim to have a presence on most or all of the “big four” social media platforms of Facebook, LinkedIn, Twitter, and Google+. To be compliant with social media (and website and other digital activity), look to a compliance technology solution like RegEd or Smarsh (neither of which, ironically, were at T3!), and advisors can leverage their time invested on social media using tools like Hootsuite, Sprout Social, or Buffer. Advisors should also be certain that their websites are fresh and up to date, ideally including video and the increasingly popular ‘lead generation’ risk tolerance tools that can be embedded into the site like Riskalyze, PocketRisk, or Rixtrema. Once a website visitor becomes a “lead”, it’s also necessary to have a means of keeping that prospect engaged until they are ready to become a client, which means offering a service like an email newsletter that can maintain a drip marketing presence, using services like Campaign Monitor or MailChimp. When prospects are ready to schedule an appointment, consider offering automated scheduling tools that can also be built directly into your website, such as Appointy or Booker or Doodle. And once prospects are ready to come on board, using electronic signature tools (whatever is available via the broker-dealer or custodian) to avoid the hassle of physical paperwork and “wet” signatures.
A Young Planner’s Advice to the Profession (Rianka Dorsainvil, Wealth Management) – This article, by FPA NexGen President-Elect Rianka Dorsainvil, shares her perspective on what young planners need when coming into the profession, and how seasoned advisors and their firms can help both young planners and also themselves in the process. Key points include: recruit top talent by building relationships with CFP Board registered programs (which you can find at most of the top industry conferences); utilize top talent not just for ‘busy work’ but productive projects of the business, like reviewing internal processes and technology, or tackling research projects; just as clients want a plan for where they’re going, so too do top talent young planners want a career path of where they can go within the firm (as Dorsainvil notes, “we thrive best when we know what is expected of us”); recognize that not all career paths are necessarily about working with clients, as some young planners may actually prefer a more analytical back-office track; consider internal mentorship programs (pairing up firm principals and a young planner) to develop young talent; encourage young planner involvement with NexGen itself, as having a support network of other planners can help facilitate their own professional development; recognize that if you hope your young planner will be your succession plan, that the process of building trust with clients takes a long time, so it’s crucial to start earlier than later.
With Robo-Advisors On The Rise, Robo-Custodian Apex Is Rising With Them (Lisa Shidler, RIABiz) – While traditional custodians like Schwab and Fidelity have just been ramping up their online capabilities over the past few years, Apex Clearing Corporation was ahead of the curve on capabilities, and as a result has been the clearing and custody platform of choice for almost every “robo-advisor” in recent years, from Wealthfront and Betterment to Robinhood and Personal Capital. Notably, Apex is actually a rebrand of Penson Worldwide, a company with a long track record of cutting edge technology that supports emerging online trading platforms – its prior clients/”successes” include TradeKing and Zecco in 2010/2011, and CyberTrader and thinkorswim long before that; however, Penson was caught in a scandal in 2011 when its assets had been invested into illiquid bonds tied to one of its directors, and as Penson sold off assets – including its clearing unit – Chicago-based Peak6 Investments bought it, renamed the unit Apex, and gave it the opportunity to grow again under new management. Rumors are that Apex has also been very ‘flexible’ on pricing, allowing it to compete for early robo-advisor business where every penny counts given the robo-advisors’ own razor-thin margins, though Apex insists its pricing model is sustainable given its own investments into technology. Going forward, it remains unclear whether existing custodians will begin to step up and compete more directly against Apex, or whether its capabilities – including strong API-based web services that allow a lot of flexibility for startups to build whatever they want and need – will allow it to continue to compete. In the meantime, there are also discussions about whether Apex will pivot successfully to work more directly to RIAs as well, giving them the capabilities to create their own “robo” solutions directly with Apex with a new “tech-in-a-box” platform being built jointly with Tradier.
As Cognition Slips, Financial Skills Are Often the First to Go (Tara Siegel Bernard, New York Times) – Studies show that the ability to perform simple math problems – and handle financial matters – are one of the first set of skills to decline when diseases like Alzheimer’s and dementia strike. In fact, even cognitively normal people sometimes show notable declines in financial decision-making ability in later years, making it challenging to even identify those who have lost some financial capacity. And with an aging baby boomer population – within 10 years, 66 million people over the age of 65 – and the fact that about half of current adults in their 80s either have dementia or some form of cognitive impairment, the problem is becoming more and more concerning as a broad societal issue, especially since this group also has the greatest concentration of wealth (having accumulated over a long lifetime). In many cases, a financial advisor or adult child may be the first to witness warning signs, which are often subtle, but may include situations like clients who seem to make more math errors than they used to, take longer to complete financial to-dos than they did in the past, or become more confused about financially-related rules like how medical deductibles work; of course, for clients who weren’t as financially sophisticated and relied more heavily on the advisor in the first place, it can be even harder to identify a change in financial capabilities. Some advisors will arrange with clients in advance (e.g., with a signed “letter of diminishing capacity”) about who should be contacted amongst close family or friends to help intervene if the advisor senses that there may be a problem.
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!