Enjoy the current installment of “Weekend Reading For Financial Planners” – this week’s edition kicks off with a look at what a Biden administration may mean given the increasing odds that the Senate will remain Republican (by winning just one of the two Georgia Senate run-offs), which could stymie major tax legislation from the White House but leaves the way clear for potential new fiduciary regulatory reforms for financial advisors (as a new SEC Chair or Department of Labor Secretary from the White House is all it takes to potentially queue up a new rulemaking process in the coming years).
Also in the news this week is a fresh Risk Alert from the SEC’s Office of Compliance Inspections and Examinations highlighting that, as RIAs increasingly expand into multiple locations, they’re not always implementing appropriate ‘branch office’ compliance oversight programs, and the CFP Board has published a new set of “sample” (consumer-tested) Engagement Letters that CFP certificants can use both to describe their services in plain language and also to meet the CFP Board’s own new “Duty to Provide Information” obligation that took effect on June 30th.
From there, we have several practice management articles, from a look at how, despite the industry buzz of “consolidate or perish”, that small independent advisory firms continue to thrive, and it’s some of the largest advisor platforms that appear to be struggling to maintain their size (despite their scale!), to a reminder of the key areas of an advisory business that must be balanced in order to drive (sustainable) growth, and a good discussion of what a COO actually does in a growing advisory firm that has more than 10 employees (and requires an additional level of infrastructure and management to keep the firm organized).
We’ve also included some articles on client communication this week, from some suggestions on questions to ask new (or prospective) clients to help deepen the relationship, tips on how to make virtual client meetings more collaborative (by not just screen-sharing but creating visuals that the advisor and client can collaboratively fill out and complete), and a good reminder that even though the work-from-home environment may feel more casual it’s still important to remember that clients can see you (at least when the video is on!) and that putting together a professional look still matters in a professional services business.
We wrap up with three interesting articles, all around the theme of the ongoing challenges for both teams, businesses, and individuals continuing to work from home: the first explores how effective team communication in a virtual environment is all about “bursty” communication (with concentrated groups of meetings, followed by blocks of focus time); the second explores the ongoing challenge of loneliness when working from home for extended periods of time; and the last looks at what some businesses are starting to do now to head off the growing concern of work-from-home burnout, from ‘spontaneous’ 3-day weekends to allowing team members the option for 30-hour work weeks or simply having “self-care” days where it’s required to turn the computer/laptop off, step away, and unplug from the home office that is otherwise so hard to disconnect from when it’s right there in the house!
Enjoy the ‘light’ reading!
Biden Win Signals Regulatory And Tax Changes For Advisors But Split Congress May Slow Tax Changes… (Andrew Welsch, Financial Planning) – While still on the campaign trail, then-candidate Biden pledged to repeal President Trump’s Tax Cuts and Jobs Act rate reductions on high-income earners, and as Biden is declared the winner of the election, the industry is positioning for the potential of major tax legislation in 2021. However, the reality is that Republicans have retained 50 seats in the Senate, with two Senate seats in Georgia facing January run-offs, and Republicans only need to hold one in order to retain a majority in the Senate… which is expected to substantively slow Biden’s ability to drive Democrats’ planned tax legislation. As a result, any tax legislation in the coming years is anticipated to be more moderate, the result of perhaps some compromises around economic stimulus in response to the coronavirus pandemic’s ongoing economic impact, and political commentators are increasingly suggesting that any tax legislation from Democrats in the next two years is likely to be symbolic attempts that fail to pass in the Senate, positioning Democrats to pick up the effort again if they are able to win a Senate majority (and hold control of the House) in the 2022 midterm elections. When it comes to advisor regulation, though, the odds are quite different, given that regulation is driven by agency leaders that President Biden would be able to appoint directly and begin to implement directly from the executive branch of government. In fact, buzz already began this week that Biden has been in touch with Gary Gensler (known for his aggressive regulation against Wall Street when he led the Commodity Futures Trading Commission) to examine financial regulators for potential changes, and picked up further when it was also revealed that former Manhattan (i.e., Wall Street) Federal prosecutor Preet Bharara may be under consideration to become a future SEC Chair (though he’s also rumored to be under consideration to lead the Justice Department). In other words, new leadership at the SEC – or the Department of Labor – could lead to a revisiting of either the latest conflicts-friendly Department of Labor Best Interest rule or the SEC’s own Regulation Best Interest, suggesting that 2021 may become a busy one for substantive new proposals on advisor regulation (even if substantive tax legislation is more likely to be gridlocked).
SEC Cites ‘Vast Majority’ Of Multi-Branch RIAs For Compliance Defects (Kenneth Corbin, Financial Planning) – This week, the SEC’s Office of Compliance Inspections and Examinations (OCIE) released a new Risk Alert from its recent sweep of exams looking at RIAs with multiple office locations (i.e., “multi-branch” RIAs)… which found that many RIAs are not doing a good job implementing compliance oversight when they expand from one to multiple office locations. Amongst the “range of deficiencies” that OCIE found were branches operating under outdated policies and procedures, advisors in branches not realizing they were taking actions that constituted having custody over clients’ assets (from being a trustee on a client’s account, to holding client checks in a branch office, or overly broad disbursement authorizations over client accounts via SLOAs), a failure of advisory firms to oversee their own fee billing processes (such that they failed to catch fee billing errors themselves when they occurred), and multi-branch firms that were not sufficiently overseeing the investment advice of the IARs in their various office locations (from investment decisions themselves to disclosures of conflicts of interest and how they were making trading allocations). Notably, in the end, OCIE Risk Alerts simply highlight compliance failures that happened in the particular firms that were examined, but are viewed as an indicator of the SEC’s focus in upcoming SEC audit examinations… in effect, a warning shot across the bow to RIAs with multiple office locations to get their own branch oversight processes and procedures in good order before their turn comes up for their next SEC audit.
CFP Board Provides Sample Engagement Letters To Comply With ‘Duty To Provide Information’ To Clients (Melanie Waddell, ThinkAdvisor) – As a part of its new Standards of Conduct that took full effect on June 30th, the CFP Board now requires CFP certificants to provide certain upfront information to prospective clients, including a description of its services, how the client will pay, how the CFP professional (and related parties) are compensated, details of any public disciplinary actions or bankruptcies, material conflicts of interest, and more… leading tens of thousands of CFP certificants each trying to figure out how best to draft the required documentation for prospects. To facilitate the process, the CFP Board announced this week that it is providing two sample Engagement Letters that advisory firms can use as a template to provide the required information to new clients – one for advisors providing non-financial-planning, financial advice, and a second for more comprehensive financial planning recommendations (which must include additional details about the scope of engagement with the client, the period over which services will be provided, and the client’s own responsibilities in the advice engagement). Notably, the required ‘Information’ letters are not meant to replace an advisory firm’s agreements/contracts or other legal documents or disclosures (e.g., the delivery of Form ADV, Form CRS, etc.), and instead are meant to provide simpler, more upfront information for clients about the nature of the engagement. In fact, the CFP Board notes that it actually developed the sample letters using consumer testing to identify the most effective “plain language” to reduce client confusion and increase trust (a noted distinction from the SEC’s own controversial Form CRS that has been criticized for just increasing consumer confusion). Though in practice, most would likely agree it’s still confusing for consumers to receive ‘yet another’ required disclosure document from their advisor. Still, though, with the new ‘Duty to Provide Information’ requirement from the CFP Board, it’s nice to now have a Sample Engagement Letter template to work from!
Why Small Is The New Big For RIAs (Timothy Welsh, ThinkAdvisor) – The big buzzword in the world of practice management for financial advisors is “scale”, amid growing calls of fee compression, rising tech costs, high client acquisition costs, and the burden of compliance, implying a sheer ‘necessity’ that RIAs will have to merge and consolidate in order to survive and thrive. Yet, as Welsh notes, in practice, even the largest independent broker-dealers and wirehouses have struggled to get past about 15,000 – 20,000 financial advisors (even amidst all their mergers, acquisitions, and recruiting). The challenge in part is that with a historical turnover of advisors near 15%, those mega-firms have to add 2,000 – 3,000+ new advisors per year just to stay even, or more than 200 advisors per month (or 50/week, or 10 per day), which itself imposes incredibly difficult recruiting challenges and costs on large firms. In addition, the financial services industry at large is rife with examples of firms that get so large that the sheer span of control necessary to survey their own landscape leads to lapses in risk controls and rising risk levels that can result in missteps or even breakups or spinoffs. In fact, even when looking at other professions, the reality is that 70% of lawyers work in practices with 10 or fewer attorneys, and almost half work as solo lawyers; similarly, 99%(!) of CPA firms have 20 or fewer people, and the majority have no more than 5. In other words, the reality is that, at a certain point, greater size actually imposes more costs – to maintain the overhead and infrastructure required, from compliance oversight to recruiting – which in turn results in higher minimums (both for clients, and for advisors to join), forever leaving the door open for newer players to serve newer financial advisors (and even reach a size and scale to support more advisors who aren’t just new anymore), and just as technology makes it more and more feasible for solo/independent advisors to operate as small practices (and rely on their software providers serving thousands of advisors at once to achieve their own economies of scale). Or, stated more simply, despite the calls that consolidation and scale are ‘inevitable’, in practice, there is little precedent for such consolidation occurring when compared to other professional services firms, and, as it turns out, it’s some of the largest firms that may actually be struggling the most to maintain their current size and scale.
5 Tasks RIAs Must Balance For Growth (Angie Herbers, ThinkAdvisor) – Ideally, an advisory firm will excel in all areas of the business at the same time, operating like a well-oiled machine. In practice, though, advisory businesses always have room for improvement, growth and success creates new pain points and areas to improve, and advisory firm owners often end out spending their days and weeks shifting from putting out one fire to the next (from the client unhappy about some aspect of the firm’s service, to a team member who is out sick and needs to be covered for, or a new marketing strategy that needs to get developed and rolled out). Yet Herbers suggests that the pain points that will emerge in a growing advisory firm are not entirely random, and instead are a function of the firm’s growth and the behavior of its owners in managing that growth. In particular, trying to focus on too many areas of the business at once – beyond the available resources to focus – can result in firms that end out shifting their efforts too quickly to ever shore up one area before moving on to the next, inevitably resulting in relapses as the prior ‘fixes’ don’t hold. Accordingly, Herbers frames up the core areas of the business into five essential categories that drive growth and success, each of which should be considered by the firm owner: Client Service (what the firm actually provides to clients and the experience it provides as a part of that delivery); Operations (how the firm does the behind-the-scenes work necessary to produce what it sells on a sustaining basis, from its technology to its onboarding and training of employees); Human Capital (attracting and retaining talented employees, and the compensation and incentive structures that go along with this); Sales (the way the firm influences prospects in the marketplace to do business with the firm); and Marketing (how the firm makes prospects aware that it exists and has solutions available). Ultimately, the core point is that instead of simply trying to ‘fix’ whatever the latest problem is, the better approach is for firm owners to score themselves across each of the five domains, and then engage in a more focused effort to tackle and improve whatever is the weakest category in the business (and then roll up their sleeves and really dive into that area with intention).
The Most Important Hire For A Growing Advisory Firm: The COO (Allan Boomer, Financial Planning) – The majority of advisory firms are effectively “lifestyle practices”, as the Investment Adviser Association shows that a literal majority (almost 57%) of RIAs employ fewer than 10 people and are built primarily around the founder, and hiring is primarily focused on those who can leverage the founder’s time (from administrative assistants to paraplanners and associate advisors). But for advisory firms that want to grow beyond this point – whether to grow an enterprise for financial success, or a ‘small giant’ to simply expand reach and impact – hiring decisions become more complex, both because with size comes an increasing necessity to fill out the operations and infrastructure side of the business (beyond just client-facing advisors and support staff to those particular advisors), and also because the oversight and management of that growing base of employees becomes a challenge unto itself. Accordingly, Boomer suggests that, in practice, scaling advisory firms should consider hiring a Chief Operating Officer (COO) to be the driver of the firm’s management team and oversee all the non-investment/non-client functions of the (growing) advisory firm. In the case of Boomer’s own firm, his COO has duties broken down into four core areas: Leadership and Management (from human resources to recruiting and retention and training and development, along with the firm’s service standards in how quickly they respond to clients and how they present their marketing materials and communications); Efficiency (taking a hard look at the processes and procedures the firm uses, such as figuring out how to refine the firm’s time-intensive quarterly billing process with new software); Growth (which in the case of the COO, means planning out strategic initiatives to highlight the firm’s advisors externally to build the firm’s marketing brand); and Administration (from dealing with regulatory to tax compliance obligations).
Six Questions To Engage Your Clients (Amyr Rocha Lima) – It’s often said that the key to success as a financial advisor is about building strong relationships with clients by asking “good” questions… yet remarkably little is typically said about what questions, exactly, are “good” to ask in the first place. Accordingly, Lima shares some of his favorite open-ended questions that he uses to engage with clients and prospects, including: “What prompted you to contact a financial planner?” (and giving you a chance to understand what pain point they’re struggling with that prompted action.. a prime opportunity to connect and build rapport with the prospective client by showing how the advisory firm can address that specific issue that’s weighing on them so heavily!); “What would be a great outcome for you in working with a financial planner?” (as the irony is that while the industry is increasingly focused on how advisors should explain their value to clients, the reality is that clients will often tell you exactly what is valuable to them if you simply take the time to ask!); “What would be a great outcome for you from this meeting today?” (because, in the end, clients find value in the relationship and advisor meetings when they leave the meeting having their issue answered… not necessarily addressing what was on the advisor’s agenda!); “What does retirement mean to you?” (as we often talk about helping clients achieve their retirement goals, but the truth is that “retirement” means very different things to different clients in the first place!); “What are your biggest concerns right now?” (as if you don’t find out what’s really on their mind, the client is more likely to come away from the meeting dissatisfied, either because their actual concern wasn’t addressed, or, even worse, because they were distracted by their actual concern and didn’t even fully pay attention to what else the advisor was talking about!); and “What changes or challenges do you expect to happen in the next five years?” (which can provide a helpful roadmap of where to focus future planning meetings and conversations, rather than simply asking ‘has anything changed in your financial life’ at each review meeting and only finding out about planning opportunities after they’ve already happened and it’s too late to plan!).
How To Listen Better In Online Meetings (Dan Smaida, Advisor Perspectives) – One of the big frustrations for most financial advisors in the pandemic environment has been the loss of in-person client meetings. The good news, at least when meeting virtually, is that it can be easier to share information (by literally screen-sharing it!), and being able to turn on the video does at least put the “face-to-face” back into virtual meetings. The bad news, though, is that much non-verbal communication is still lost in a virtual setting, making it harder to convey empathy and really connect with clients. To overcome the challenge, Smaida suggests that it’s even more important to frame effective questions in the first place… not necessarily by scripting a checklist of questions (which can feel cold and disconnected), but at least by planning out a “line of questioning”, and considering using visuals to help support clients literally visualizing and thinking through the process (e.g., instead of just asking them to share pros and cons, make a T-chart and actually fill it out with them on the screenshare so they see the conversation take shape). In fact, advisors who anticipate having an extended conversation with clients can even plan out a series of (visual) questions in a PowerPoint (or equivalent) presentation, laid out, not for the purpose of “presenting” to the client (in one-way conversation), but having a progression of visuals to talk through and collaborate around to facilitate the conversation (which means not using PowerPoint’s presentation mode, but simply keeping the document open to edit it on the fly with clients as they respond to the questions). From the advisor’s perspective, the appeal of this approach is that it also provides a focal point for the advisor, to capture notes in real-time (as the client responds to the visual cues), discuss with the client if the notes accurately captured their concerns, and make sure you keep the camera on so you can make (virtual) eye contact with the client throughout and actually see how they’re taking in and responding to the information as well!
Remember, Clients Can [Still] See You (Philip Palaveev, Financial Advisor) – The shift to videoconferencing as a result of the pandemic has driven financial advisors to work from home, a setting that makes many of us feel more relaxed (and, literally, “at home”) in a manner that can help build client rapport… but an environment that, if we’re not careful, may lead some to become a bit too relaxed and casual in what is still ultimately a professional services engagement with clients. And the matter is especially important when prospecting for new clients, when first impressions still matter as much as ever, and an overly casual virtual meeting risks undermining the perceived professionalism of the financial advisor from the very moment of the first impression. Accordingly, Palaveev provides a number of actionable suggestions, including: take the time to invest into getting some reasonable ‘professional’ equipment for your video meetings, considering not only a good webcam but also a good microphone; giving consideration to your presence, including not only how you personally show up, but literally whether you’re visible to show up on the camera (i.e., consider how your office/computer are oriented relative to the window, and/or consider buying some lighting equipment); give some consideration to our office environment/background as well, as a neutral natural background is easier for people to look at than a ‘fake’ virtual background (and virtual backgrounds have a tendency to blur the edges of your face and further distract the client from the visual face-to-face connection); be certain to turn off other applications, as the reality is that people on the other end can easily see when you’re looking somewhere else on the screen and are distracted (which is quickly off-putting to the listener); and remember if it’s not easy to schedule an appropriate video call, it is ok to just revert back to a simple phone call with the client, if that’s easier, too!
Successful Remote Teams Communicate In Bursts (Christoph Riedl & Anita Williams Woolley, Harvard Business Review) – Team communication in a physical office is relatively straightforward: a combination of team meetings, impromptu conversations, “walking down the hallway” to knock on someone’s door, and social interactions (e.g., Happy Hours) that give time to further chat and digest the week’s activities and ideas… all of which are substantively disrupted in a virtual work-from-home environment. Yet recent research suggests that, in practice, effective team communication really does have a ‘natural’ cadence… of “bursty” periods of high communication followed by extended periods of little to none (when the deep work can get underway and creativity and innovation emerges). The significance of this is that successful teams should actually avoid real-time message-based communication (e.g., email and texting), and focus instead on more asynchronous communication (where it’s “OK” for teammates to just not respond until they’re ready and feel like it, allowing them to stay focused on their deep work instead). In turn, facilitating communication then happens via scheduled meetings, or even scheduled blocks of time where teammates are open for meetings (with the caveat that also means that when meeting time is not scheduled, meetings do not happen so focus time can be preserved!), facilitated by emerging new tools like Minglr. In turn, when ‘bursty’ communication occurs, Riedl suggests it’s also best to have that communication still focus on a narrower set of topics, maximizing the creative conversation around that topic instead of trying to cram in too much (at the cost of not having the time to go deep into any of them); similarly, if several topics have to be covered, consider separating their communication threads (e.g., don’t send one email on 3 topics, send 3 separate emails with 1 topic each). And Riedl’s research also shows that when trying to support creativity, it can actually be better to turn off the camera, as we may be more likely to pipe up with ideas when we don’t see someone is ‘on a roll’ while talking (i.e., sometimes visual cues end out cueing us not to speak up, such that removing the visual and doing an audio-only brainstorming session can actually help!). The key point, though, is simply to recognize that creativity and team connection are best served by bursts of communication… followed by ‘bursts’ of focused deep work periods without interruption so we can actually focus on doing our best work!
The Quiet Grinding Loneliness Of Working From Home (Simon Usborne, The Guardian) – In the era of in-person office environments, working from home and being able to avoid the commute sounded like a luxury, but now after 6+ months of forced work-from-home, more and more employees are missing being able to chat with co-workers by the coffee machine and the opportunities for spontaneous social interaction with colleagues. Yet despite the concerns of lost human interaction, more and more companies are suggesting that the shift to work-from-home may be permanent, whether a function of saving rent on office space, a desire for more flexible hiring (not tied to only the local base of employees), or even the ‘geographic arbitrage’ of hiring good employees from lower-cost-of-living areas. Still, a recent UK survey found that 61% of workers would now return to work immediately if they could, and Facebook reports that, while half of its employees are expected to work from home by 2030, only 20% were enthusiastic about doing so. And the leading reasons for wanting to go back to the office: social and mental health issues, including and especially feelings of loneliness, an area that has seen little study because up until the pandemic, the frequency of ‘permanent’ work-from-home jobs was still quite rare (barely 5% of all jobs). Still, though, some studies have found that productivity appears to improve in work-from-home environments, as the common distractions of the office disappear, raising questions of where exactly the balance point should be between work-from-home and in-person work. In fact, even as some firms see better productivity in work-from-home, more than half a million people have tuned into “The Sound Of Colleagues“, which creates office-like background noise to listen to while working from home! Which means at a minimum, even businesses that are pledging to remain in a work-from-home environment for the benefits of productivity and reduced office distractions are still increasingly focusing on how to re-create some of the vital positive interactions of the office workplace… potentially even including a ‘smaller’ office where employees can still periodically come to a central location to connect, whether for creativity and collaboration, or simply to feel a little less lonely and isolated.
Companies Offer Creative Solutions To Worker Burnout During The Pandemic (Chip Cutter, Wall Street Journal) – Burnout in the workplace is “insidious”, because it rarely comes about in a clear moment of breaking; instead, it happens very slowly over time, building and building until the proverbial straw breaks the camel’s back… a challenge that is increasingly common as the work-from-home pandemic shutdowns continue (or in many states, are just now coming back into effect), and the cumulative effect of months of limited interaction with friends, but constant interaction with email and Slack and CRM notifications, takes its toll. In fact, the rise of work-from-home burnout is becoming such a concern that more and more companies are beginning to re-evaluate how they handle everything from employee meetings and work schedules to overall employee well-being in an effort to head off burnout tendencies before they hit a breaking point for more and more team members. Which is leading some companies to begin implementing virtual training for managers on how to spot burnout in their teams, from how to listen for (and make employees feel heard about their) burnout warning signs, to no longer asking “How are you?” but instead asking “How are you really, really doing?” Other tactics from companies have included a weekly “good news Friday” memo pointing out eight good things that happened in the week; giving team members the option to work just 30 hours a week (with a small pay cut) for those who would prefer more work/life balance; adding employee benefits like child-care coordinators and additional child-care subsidies for work-from-home parents struggling with schooling-from-home children; rolling out “self-care” days where team members are encouraged to disconnect from the computer or even having impromptu three-day weekends; and consider expanding access to counseling and mental health services, for those who may be struggling with more than ‘just’ what workplace benefits and managers can address.
I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!
In the meantime, 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, and Craig Iskowitz’s “Wealth Management Today” blog as well.