Enjoy the current installment of "weekend reading for financial planners" – this week’s edition starts off with a nice article from Financial Planning magazine highlighting the top 25 schools teaching financial planning, including both adult certificate education programs and the rapidly rising number of undergraduate and graduate degree-based programs. From there, we look at a number of practice management articles, including an interesting discussion of whether it’s better to segment clients based not on their assets or wealth but instead by how engaged they are with your financial planning services, a young planner’s "NexGen" look at succession planning as a buyer, a look at how to keep your best new employees rather than driving them away, and a discussion about how if turnover does happen it can still be taken advantage of as a growth opportunity for the firm. From there, we look at a few more technical articles, including a discussion from Texas Tech financial planning professor Michael Finke about how neuroscience research is changing our understanding of how to manage and motivate clients towards their financial goals, a discussion of important caveats to bear in mind for clients looking to create a Spousal Lifetime Access Trust (SLAT) before the end of the year for estate planning, and a discussion from John Hussman that notwithstanding recent data the US may already be entering a recession. We wrap up with three interesting articles, one a look at how FINRA is opening up their arbitration process for (Registered) Investment Advisers that want a less expensive alternative, a list of 31 tips to improve your financial planning firm’s blog, and a discussion about how technology is magnifying the positive results of good managers but also the negative results of bad ones. Enjoy the reading!
Weekend reading for November 10th/11th:
25 Great Schools For Future Financial Planners – This cover article for Financial Planning magazine provides a great look at the current landscape for schools that teach financial planning – a space that is rapidly evolving, in particular as financial planning education increasingly shifts from adult certificate education programs to undergraduate degree programs… the number of CFP Board-registered undergraduate degree programs has jumped by 20% in the past 2 years alone, with many more in development. In total, there are now 336 registered programs, and almost half are tied to an undergraduate or graduate degree. The article lists the 25 "best" by an albeit subjective determination of asking for opinions of industry leaders (rather than any kind of quantitative system); nonetheless, it’s a strong list (sorted alphabetically) that provides a glimpse as to where the leading programs are today, sorted by adult certificate programs, degree-based programs, and those that offer both choices.
Client Engagement Segmentation: Seeing Clients for More than Their Money – This article from Financial Planet – the blog of the international Financial Planning Standards Board – discusses the popular practice management strategy of client segmentation, but from a novel perspective: instead of segmenting clients by their assets or net worth, segment them by their level of engagement and enthusiasm for the firm. For instance, your "A" clients are not your wealthiest clients, but instead are (any) profitable clients who really ‘get’ the value of what you do; "B" clients are those who are profitable, but haven’t fully bought into the value of financial planning yet; "C" clients are those who are not profitable, but still ‘get’ what you do and buy into the value of planning (and therefore may be effective referral sources); and "D" clients are those who aren’t profitable nor value financial planning anyway. The key distinction to all of this: judge your clients less by how profitable they are (as long as they meet some reasonable minimum), and more by how engaged they are with you and the value you provide.
Succession Planning: A NexGenner’s Perspective – This article by financial planner Joe Pitzl in the Journal of Financial Planning provides an interesting discussion about succession planning from the perspective of the successor, as Pitzl himself is three years into a succession business transition where he was the buyer of the practice. For instance, Pitzl notes that from the buyer’s perspective, the younger planner is often looking at the business with a 20, 30, or 40 year time horizon, which can create conflict with a selling owner who is generally viewed the business through a much more near-term lens. Pitzl also notes that the firm he bought is the fourth firm he has been associated with since graduating college, and provides his perspective on what drives loyalty, noting that a firm’s mission and cause are the most driving force for young planner loyalty. Other notable insights from Pitzl: many veteran planners have an unrealistic expectation their employees will work the often ‘crazy’ hours they worked early on, forgetting that most people who want and choose to work that hard in a business will probably go start their own and not work for someone else; that a lot of veteran planners seek out a ‘mini-me’ version of them themselves 20-30 years younger when what they really need is a client caretaker, not another entrepreneur; and that it’s false that young people don’t like to sell, but that if you want them to sell you have to give them the autonomy to create something they can feel ownership in and be proud to sell.
Young Guns: How to Keep Valuable New Employees for the Long Term – This article by practice management consultant Angie Herbers in Investment Advisor magazine discusses employee retention, and calls on firm owners to step up with better practice management and staff management skills that give young employees a chance for growth. The article notes that today’s young employees are more aggressive than ever about always looking for new opportunities – even while currently working – and as a result, must always be challenged with new opportunities in the business. Unfortunately, many young employees aren’t challenged, or worse find their challenge is dealing with the firm’s outdated technology, rather than the challenge of positive growth opportunities, and the problem is only exacerbated by poor management skills of the owner. The bottom line for Herbers: owners need to do a better job of making sure they hire for the right fit in the first place, set aside time to teach young staff the firm’s way of doing things, and then get out of the way and let the staff grow, innovate, and develop from there.
We Get Along Without You Very Well: Employee Departures Can Build a Stronger Business – This article by Mark Tibergien in Investment Advisor magazine explores how employee turnover can actually create a stronger business, despite the fact that most business owners fear losing employees. After all, Tibergien notes that losing employees is an inevitable reality; the real stress is not when the employee leaves, but when you realize that you don’t have a candidate internally to replace the person and need to start a search from scratch outside the firm. Thus, the real key is to prepare for the reality that a key employee can leave at any point, and build an individual succession plan for each of those key individuals and roles. This allows the business to minimize disruption in ongoing business activity, maintain profitability and margins, create opportunities for the remaining employees to grow, have flexibility to adjust organizational and staff structure over time, and to potentially re-energize the firm and light a fire. For those firms that don’t necessarily have the bench strength to grow current staff into any/every possible position – Tibergien suggests that challenge itself is one of the key reasons why financial planning firms need to continue to grow and gain better scale.
This Is Your Client’s Brain on Finance – This article by Texas Tech financial planning professor Michael Finke looks at how studies of the brain are impacting our understanding of how people make financial decisions, especially as neuroscience research evolves from simply looking at people with damaged brains (observing how their behavior is different), to mapping the brain for normal healthy people and simply observing what parts of the brain are activated during various financial cognitive exercises. This has allowed researchers to see that many financial decisions we make are actually driven by the emotional part of our brains, not the logical rational part – a fundamental breakdown of the assumption that most people will make rational financial decisions. Why does this matter? Not only because people often make poor emotional decisions in times of distress, but because it also means that cold rational logic is a poor motivator, too; for instance, neuroscience suggests that focusing on numbers and a dollar amount to save to reach a retirement goal is actually a terrible to get someone to engage in such saving. Perhaps the most striking comment from the article: "Explaining a concept in a visual or emotional sense uses much more of our brain functions than is used by numbers. If you think of people as being emotional and visual, you’ve essentially tapped into 70% of the brain real estate. There is that rational side, but that rational side might be more like 20% of the real estate."
Prudence in Establishing a Spousal Lifetime Access Trust – This article is actually from the December 2011 Journal of Financial Planning, but given the rising popularity of exploring end-of-year gifting strategies for affluent clients – where a Spousal Life Access Trust (or "SLAT") is a popular strategy – the insights of this article become highly relevant again. A SLAT is a trust that provides lifetime income to a spouse while using an individual’s unified exemption amount; think of it like a bypass trust, except it’s funded with a lifetime gift, and not at death, which is especially appealing to use the current $5.12 million exemption before it potentially declines. However, to use a SLAT effectively, it’s important that the client not be the trustee and have retained control, and restrictions must be in place to ensure that distributions cannot be used to discharge a grantor’s legal spousal support. Perhaps most important is the fact that husbands and wives cannot set up reciprocal SLATs for each other, without running afoul of the reciprocal trust rules; instead, only establish a SLAT for one spouse but not the other, or have a difference in beneficiaries (for instance, husband’s trust for wife, but wife’s trust for children).
Stream Of Anecdotes – In his weekly missive, John Hussman of Hussman Funds discusses the recently improving economic data points, but notes that most economists view them as an ongoing stream of anecdotes, rather than looking at new data in the overall context, which results in giving excess weight to result data points and misinterpreting a series of new trends that in reality aren’t distinguishable from random noise. Accordingly, Hussman suggests that some of the recent data points on the economy, present just such a scenario, and then when viewed in the proper context, do not contradict his view that the economy is likely already in recession (which Hussman notes the consensus has never accurately determined until well after the fact); for instance, while many were upbeat about the 45,000 job "beat" in the latest monthly employment data, it was only after a "seasonal adjustment" of more than 1,000,000 jobs, and was against a backdrop of weak economic and manufacturing activity. Whether Hussman is ultimately proven right or not remains to be seen, but he does present a strong (albeit troubling) perspective that we may be closer to market danger than we realize.
FINRA Arbitration for Investment Advisers Explained – This article from the Wall Street Journal discusses how Investment Advisers now have the option to use FINRA arbitration to settle legal disputes with clients, which is generally less expensive than other third party arbitration options that RIAs often use. FINRA’s arbitration process can’t be used unless both parties agree to it, and for now it’s only being allowed on a case-by-case basis; furthermore, because of the limit of FINRA’s jurisdiction, both parties must acknowledge that FINRA can’t actually enforce an arbitration settlement (it would have to be enforced by a court). Critics of the new arbitration option suggest that it’s simply an attempt by FINRA to further incorporate itself into the issues of RIAs as a part of its ongoing attempt to regulate them; proponents indicate that this may simply be a more appealing, less expensive way for aggrieved clients to complete an arbitration process.
31 Tricks To Be A Superstar Blogger – A lot of articles provide a list of tips, but I thought this one from Heidi Cohen was particularly good as a checklist of ideas and issues to consider if you’re creating or just reviewing and refreshing the look of your blog. While there’s nothing entirely novel in the list, it’s quite thorough in issues to consider, from making sure your blog has a strong foundation and theme, your brand is visible, you’re using effective plug-ins that make it easier for people to share your content, make sure you pay attention to the blog article’s headline as well as content itself, and make sure you reveal your human side by engaging with your readers when they leave comments on your site.
Is Technology Making You More (or Less) of a Jerk? – This article from the Harvard Business Review starts with a striking quote by Warren Buffet – "Of the billionaires I have known…" he declared, "If they were jerks before they had money, they are simply jerks with a billion dollars." The article suggests that a similar phenomenon occurs with managers and technology – those who are excessive micro-managers simply end out using technology to be even more oppressive micro-managers, while good managers use technology tools to manage even more effectively, mentor their employees, and inspire them. The end result – the use of technology magnifies the good and the bad. Although written for a general business context, this is arguably a good reminder for financial planning firm owners as well. As the article suggests: "Review [your] last 100 network communications — text, email, SharePoint, LinkedIn, etc. — and ask [yourself]: What’s the mix between messages that might be interpreted as management, micromanagement and mentoring?"
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!