Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the latest research from the CFP Board on the gender imbalance in financial planning, which appears to be driven not only by a general lack of awareness of financial planning opportunities amongst women, but also a whopping $32k/year pay gap between similarly experienced male and female advisors. The research is part of a broader new “Women’s Initiative” from the CFP Board to support the growth of female CFP professionals.
This week’s articles also include a number of practice management topics, from the latest in how firms are being valued for mergers and acquisitions (the 2X revenue model is increasingly being replaced by more focused multiple-of-free-cash-flow measures), to a discussion of whether professional advisors should be paid based on the revenue they produce (or not) the way that brokers traditionally have been, to a look at how for many advisors the way to “break through” to the next level of the business is to recognize that things may need to be done differently in the past (i.e., sometimes it’s crucial to “let go” of the way things have always been done in the business!). There are also a pair of social-media-marketing articles: the first is a primer on popular third-party review sites Yelp and Angie’s list, which may be increasingly relevant for financial advisors now that the SEC has cleared the way for their use with its recent guidance; and the second is on the power of using YouTube for marketing your advisory practice (and how to easily get started).
We also have a few financial planning articles that are more technical in focus, including the latest research on “low vol(atility)” investing, whether advisors should focus more on establishing reverse mortgages earlier (even if only as a standby line of credit) rather than as a last resort, and how advisors can pair together large amounts of CDs and a modest allocation to equities to create the equivalent of various types of annuity guarantees at a far lower cost.
We wrap up with three interesting articles: the first is a summary of this past week’s Finovate (financial innovation) conference, which has been typically focused on banking or direct-to-consumer technology solutions but is increasingly featuring platforms that are targeting financial advisors as well; the second dives into the growing Schwab “franchise” model, which is now up to 24 independent owner-operated branches, and in the judgment of the author (noted industry commentator Mark Hurley) may represent one of the best opportunities in the advisory landscape right now, as firms become increasingly squeezed around marketing (a challenge that Schwab is uniquely positioned to address thanks to the strength of its brand); and the last is an interesting discussion of how BMW is completing rebuilding the car-buying experience, using “product geniuses” and interactive car-buying presentations, with some striking parallels to the transition within financial services from salespeople to advisors and the adopting of interactive and collaborative financial planning experiences.
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 3rd/4th:
For Female Advisors, a $32K Pay Gap – As part of its new “Women’s Initiative“, the CFP Board engaged Aite Group to study why there aren’t more women entering the world of financial planning, and the disturbing conclusion is a confirmation that yes, there is significant gender bias in the male-dominated financial planning world. The Aite Group study found that not online are female advisors on average younger, less experienced, and less likely to have equity in their practice than their male peers, but even at the same level of experience, revenue production, and ownership status, female advisors average $32,000/year less in compensation than their male counterparts. Yet the problem of getting women into the profession – the percentage of female CFP certificant holders has been flat at 23% for nearly a decade – isn’t just a matter of bias; the research also notes that there is still a significant lack of awareness of financial planning amongst female professionals, with non-planner women half as likely as men to know what financial planners do, half as likely to be familiar with CFP certification, and tended to have “misperceptions” about the amount of sales skills and understanding of financial markets necessary to do the job; accordingly, just getting financial planning onto their radar screen, with a proper perception of what it really is, may be the biggest potential boost to attracting women to the profession, especially since female CFP holders actually report higher levels of job satisfaction than their non-planner peers in other professions.
New Rules For Firm Valuations – The traditional “two times revenue” metric for the valuation of advisory firms is being increasingly eclipsed by more sophisticated valuation measures based on multiples of actual cash flows, and adjusted for factors such as demographics (of both the clients, and the advisors serving them), growth rates, and the depth of in-house talent. “Smaller” firms – e.g., those with $100M of AUM – are being valued at 4-6 times annual cash flow, while mid-size firms are getting 5-7X, and those with $1B+ of AUM are being bought at 6-9X cash flow. Notably, though, while the sophistication of deals is on the rise, the sheer number of deals is not; in fact, there is still a “surprisingly limited supply” and the predicated wave of baby boomer sellers has thus far failed to materialize (as previously predicted on this blog!). Instead, boomer advisors are finding themselves healthier, living longer, and consequently are staying in their firms longer, choosing instead to draw cash flow themselves along the way even if it means they never sell their practice; in fact, FP Transitions estimates that fewer than 10% of boomer advisors are likely to sell their firms at the end of their careers, and instead will simply maintain a lifestyle practice until they no longer can do so. For those who are selling, internal succession plans are on the rise, in part because cultural alignment with the buyer is often the biggest hurdle (a challenge in an external deal but generally a moot point with an internal one). Regardless of whether the plan is an internal or external succession, though, valuation remains important. In fact, an increasing number of firms are managing with a focus on valuation, regardless of whether they plan to sell in the near term or not, simply as a management tool to maximize (potential) value.
Should Advisors Be Paid Like Brokers? – In Investment Advisor magazine, Pershing Advisor Solutions CEO Mark Tibergien looks at the trends in how to compensate advisors, and the dichotomy between paying brokers “on the grid” with variable compensation (as has been traditionally done in the brokerage industry), versus a salary-style compensation as an advisory professional. The distinction is that paying on the grid – or variable compensation in general – is essentially an “eat what you kill” mentality, where compensation itself is the motivator; by contrast, the traditional model for professionals is more of a master/apprentice approach, where professionals are incentivized not merely by the compensation but by the calling of the profession, and while meaningful pay is important it’s a by-product of attracting the right clients and delivering value to them. In turn, Tibergien suggests that while brokerage firms have been converting to fee-based products, their ongoing use of variable compensation “on the grid” means they are still fundamentally trying to distribute fee-based products and not true advisory solutions. Ultimately, Tibergien suggests that a true professional positioning – and compensation – should position the advisor as an advocate for the client and not financial services products (for which even AUM fees still constitute a form of contingent product-like compensation, albeit less conflicted and more aligned than some other compensation systems). In the end, Tibergien notes that the elite advisory firms that are truly advice-centric tend to use a base-plus-incentives compensation structure, and structure their practices as ensembles that can help train and develop new advisors who want to follow a similar path.
Letting Go To Get To The Next Level – In Investment Advisor magazine, practice management consultant Angie Herbers provides the valuable reminder that in many businesses – including advisory firms – it’s crucial to remember that the skills that got the business to where it is today may not be the same skills that are necessary to move it forward from here. Instead, letting go of the past is often crucial to get to the next level. Accordingly, Herbers provides four key tips to move forward: 1) recognize your limitations and that you don’t know everything (just because you were successful in getting your business to this point, doesn’t mean you know everything you need to get it to the next level, so it’s ok to ask for help!); 2) build the right foundation for growth, which means having the right staff in the right positions (unlike many advisory firms, where the longest-tenured employees have been promoted far beyond their abilities and expertise and are now a blocking point to growth); 3) cocoon your business (once you’re well positioned for growth, let it happen organically, without a lot of outside influence); and 4) when the growth begins to happen, remember that it’s better to be the tortoise than the hare. The bottom line, though, remains that often reaching a new level means taking the firm in a new direction, and letting go of the way things have been done in the past.
Advisors’ Guide to Yelp & Angie’s List – Last month, the SEC issued new guidance on social media, and in the process cleared the way for advisors to “use” and reference third-party review sites. Accordingly, Victor Gaxiola of Hearsay Social walks through two of the most popular third-party review sites that advisors should now be thinking more about: Yelp, and Angie’s List. Yelp is a platform focused heavily on crowd-sourced user reviews – both good and bad – of various businesses, vendors, and professionals; while it started out primarily in the restaurant industry, it has expanded significantly in recent years. Advisors (or business owners in general) can set up a free account to post photos of their business and respond to customers/clients; because reviews can be posted for any business, though – even if the advisor isn’t set up there – Gaxiola encourages all advisors to check the site periodically to monitor for mentions of themselves or their firm. Angie’s List began originally as a call-in service and publication for reviews with a focus on contractors and other homeowner services, but it too has expanded significantly; unlike Yelp’s 1-5 star reviews, Angie’s List gives a report-card-style A to F grade, in addition to customer reviews, and again reviews can be posted regardless of whether the business has tried to create its own page there. Notably, though, Angie’s List does more to at least try to vet and “certify” the reviews, and verify they’re legitimate customers and not pretend reviews from the business itself or fake complaints from a competitor (unlike Yelp which has faced recent criticism over the volume of fake reviews). Bear in mind that ultimately advisors (or businesses in general) don’t control the reviews on these third-party sites – which is why the SEC has permitted them – but it’s important to be aware of whether/what’s being written there about your firm, as advisors who provide poor service are now somewhat more likely to be exposed.
YouTube: A Profitable Channel For Financial Advisers – This article looks at the benefits of financial advisors that utilize YouTube, a social media channel still eschewed by most advisors (a 2013 Aite Group survey found only 5% use YouTube professionally). The key benefit of YouTube is the ability for clients to connect visually with the advisor and get to know them better; it won’t likely be the key factor that wins the new client, but it can help to ensure there will be advisor/client rapport, and/or allow clients to screen themselves out of the process if they realize they won’t connect with the advisor’s communication style and philosophy (which in turn saves the advisor time in avoiding prospective client meetings that are doomed to go nowhere). One advisor suggests the easiest approach is to simply make videos of you answering questions that a client asks, such as “what is umbrella insurance”, recognizing that if one client asks the question, many others are probably wondering as well. Yet the point is not just for client education; YouTube videos may be shared by clients with others, and are indexed by Google which means they can show up in Google search results and generate prospective client leads even a year or more later. Starting tips include: don’t over-invest in equipment (a simple camera and a decent mic is enough to get started); make sure you put your name in the description and a link back to your firm; and focus on answering client questions, rather than just talking about yourself and what you do.
Can Boring Stocks Bring Investment Bliss – This article in Research Magazine by Texas Tech professor Michael Finke looks at a recent study from Research Affiliates in the Journal of Portfolio Management that finds low-volatility portfolios have beaten a cap-weighting U.S. stock portfolio by 1.84%/year from 1967 to 2012, even while exhibiting 19% less annual volatility, which means not only are the absolute returns improved, but the risk-adjusted returns (or excess return per unit of volatility as measured by the Sharpe ratio) are even better. Globally, the phenomenon of low volatility was even more of an improvement, with 3%/year higher returns and 27% less volatility. Notably, it appears the primary value of low volatility investing is not finding undervalued securities, but that it avoids the high fliers, and it can be lumped in as other “factors” investors can overweight, along with small cap, value, momentum, and illiquidity for a performance edge. But if everyone knows about the low volatility factor, will that invalidate it? Perhaps not, as researchers not that some investors are just so focused on investing in high-profile stocks – like buying Twitter and hoping to win the “lottery” – that they may persistently ignore better-valued investment opportunities, which means as long as investors chase hot stocks the low volatility companies can continue to outperform. While this may be appealing for investing purposes, it’s not without “benchmark risk” for the advisor (and their client), as in the short-term higher volatility stocks can and do outperform for periods of time, so many advisors may choose to make a moderate allocation to low vol, but not necessarily go all the way with their equity positions.
HECM Reverse Mortgages: Now or Last Resort? – In the Journal of Financial Planning, this research study extends the research on HECM reverse mortgages and the strategy of establishing a “standby reverse mortgage” line of credit for retirees to supplement their cash flows as needed, especially in later retirement if their portfolios are approaching depletion. Specifically, the research finds that, contrary to their popular use, it may actually be best for retirees to establish a standby reverse mortgage line of credit earlier, rather than later; by waiting, there is a risk that interest rates will rise in the future, which limits the available borrowing amount. By contrast, if the reverse mortgage line of credit is created earlier, the line of created is established and the available borrowing amount will simply grow faster if rates then rise later. Accordingly, the results find that establishing a reverse mortgage early can significantly improve the success rate of retirement income strategies, especially at 5%-6% withdrawal rates that may be threatened by poor market returns and/or may necessitate spending so high that a late reverse mortgage cannot save the scenario anyway if used as a loan of last resort. Notably, though, because of the time it takes for the line of credit to build – and for a portfolio to deplete in the first place – the primary benefit for a 30-year retirement plan doesn’t really kick in until 15-20 years after the loan origination date, so the strategy is most impact for those with longer time horizons for staying in their residence (and the total duration of retirement in the first place).
Investing Trick: Build Your Own Annuities – This article by Allan Roth in Financial Planning magazine looks at how advisors can build the equivalent of many popular types of annuities, simply using combinations of portfolio investments. For instance, the equity-indexed annuity, which typically provides a percentage of the upside price appreciation of an index like the S&P 500 (sans dividends) with a principal guarantee, can be replicated without an annuity using a combination of a bank CD and the S&P 500. In an example, Roth pairs together a 10-year FDIC-insured CD yielding 3.3% and an investment in the Vanguard Total Stock ETF (VTI); a $72,276.45 investment in the CD will grow to $100,000 in 10 years (providing a $100,000 principal guarantee), leaving the remaining $27,723.55 to invest in equities (for both the price appreciation and the dividend). However, assuming that stocks will have at least some value (after all, if the stock market is gone we’ll have bigger problems!), the funds could be divided differently; if the “worst case” scenario is that the total return of the market is merely down 50%, then the investor can allocate $56,588.19 in the CD and $43,411.81 in the index fund. Yet with this approach, if markets “merely” did a 4% average annual growth rate, the portfolio would return 3.61% with the guarantee; if the market is up 8%/year, the 10-year average annual growth rate would still be 5.57%, with the guarantee. Roth also looks at similar approaches for income annuities; for instance, he notes that using assets to support spending while delaying Social Security is actually a better deal than buying a Single Premium Immediate Annuity (SPIA), or the investor could put the majority of their assets into a 20-year TIPS ladder and buy a lower-cost deferred life annuity (also known as a “longevity” annuity) that doesn’t start until 20 years hence. Roth also notes that in practice, many variable annuity income guarantees are expensive enough that a conservative portfolio followed by a deferred life annuity may similarly be appealing in this context, especially for those who don’t need significant income immediately.
How The RIA Business Made A Dent At The 2014 Finovate Conference – This article from RIABiz, written by technology consultant Zohar Swaine, is a review of the recent Finovate conference, a semi-annual financial services technology innovation event that rotates between northern California and New York City. While traditionally an event that features technology solutions targeted either for large banking institutions, or those direct to consumers – many of the “robo-advisors” have premiered at Finovate in recent years – this year’s event included a number of notable features in the financial advisor space as well. Following the recent lead of Betterment and its Betterment4RIAs Institutional offering, Motif Investing is now also launching an advisor platform to support RIAs on portfolio construction and rebalancing. Overall, though, these announcements were still just a blip in the steady stream of companies that present at Finovate, in brief 7-minute hard-stop sessions where they pitch their solutions. Other highlights included a growing bevy of biometrics solutions (technologies that authenticate not using passwords but 5-10 seconds of normal speech, or a scan of the pattern of blood vessels in the eye), a demonstration from Fiserv using Google Glass to check account balances or purchase goods just by looking at a QR code, and more. Bill Harris of web-based RIA Personal Capital was also there, showing off a tool his advisors are using to generate “one-click” investment proposals (where at least 90% of the work of analyzing a portfolio and developing recommendations is done with a click), which right now appears to be used internally at Personal Capital but raised the question of whether it might soon unleash its technology for other advisors as well. And a solution called FlexScore, that allows consumers to enter their financial information and receive a “score” they can then try to raise with good financial habits, which simultaneously announced a launch partnership with mega-RIA United Capital. Ultimately, Swaine notes that the conference still isn’t very focused on the advisor channel in particular, and that there is far more opportunity; nonetheless, for those who are interested in checking it out, the next Finovate event is in New York City on September 23rd/24th, for a “mere” $1,195 pre-sale ticket.
An Incredible Opportunity – This article by industry commentator Mark Hurley in Financial Advisor magazine takes a look at the under-the-radar growth of the new Charles Schwab owner-operated “franchise” model it has been rolling out for the past 3 years, now up to 24 branches (in addition to its roughly 300 traditional branch locations). Hurley suggests that the Schwab franchise opportunity is an incredible one, due to changing trends in the difficulty of attracting new clients; for the past 20 years, the shift to defined contribution plans was driving consumers towards advisors, but the supply/demand imbalance is now correcting itself, billion-dollar firms are commonplace, and soon the demand for new clients may exceed the supply. The outcome of this progression is that Hurley predicts the cost to acquire clients – i.e., the amount of budget firms must allocate to market their services – will jump significantly in the coming years, and may soon be most firms’ largest operating cost. Why does this matter in the context of the Schwab franchisee branches? Because Schwab’s giant system represents a tremendous marketing opportunity for advisors who partner with Schwab, and as a result new franchise owners may find themselves building branches at the exact time that more and more advisors are approaching them to participate in the Schwab Advisor Network and pay more towards getting referrals that leverage the Schwab brand. While so far Hurley notes the new Schwab franchise system has had “kinks”, Schwab will ultimately figure this out and may even begin to sell some of its existing successful branches to franchisees as well. In fact, overall Hurley draws a parallel between the Schwab franchisee today, and the first McDonald’s franchisees of the 1960s, except that the Schwab franchise may even be less risky, because it already has a national brand to leverage.
BMW Radically Rethinks The Car Buying Experience – From Forbes, this article looks at some of the radical innovation happening in the car industry, not with the new cars being developed, but in the showroom where they’re being sold. The case-in-point example is BMW, which has an especially “complex” car-buying process, due to the availability of over 40 different models and even more configurations. Their solution? With an “obvious nod to Apple” the BMW stores rolled a new position in the dealerships called the “product genius” – a non-commissioned expert who knows everything about BMWs and their options and will spend as long as it takes to educate car shoppers, but with no sales obligations or expectations. Not surprisingly, the dealerships that piloted the program were skeptical, but in practice the program has been very successful – customer satisfaction was up, as people appreciated learning from the BMW geniuses, and the salespeople could focus solely on what they do best, which is facilitating the trade-ins, financing, and completing transactions. BMW is extending the changes further, by creating more open showrooms, replacing desks with tables where people can sit together in front of a large screen and view/visualize cars with different colors/characteristics working collaboratively with the BMW genius. While the context is car buying, the article has some striking parallels in the financial services industry, as financial planners increasingly fulfill the “genius” role of financial services products, working with clients collaboratively to help educate them and help them to visualize how the proposed solutions can fit into their plan.
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!