Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the mega-news that Charles Schwab is apparently in talks to acquire TD Ameritrade, in what would create an absolute juggernaut in the brokerage industry with nearly $5 trillion in assets and as much as a 70% market share of RIA custody… which in turn is already raising concerns about whether, at least when it comes to RIAs, creating “Schwabitrade” might actually go too far in reducing competition and industry innovation (not to mention the challenges of integration and managing advisor service at such scale).
Also in the news this week is an indication of the growing “turf war” emerging as everyone from private banks (e.g., Goldman Sachs) to robo-advisors converge on serving the mass affluent that historically were the bread-and-butter client of the independent RIA but are now increasingly hard to attract in a more competitive landscape, and an indication that the SEC may be preparing new Proposed Regulations on both the definition of an Accredited Investor and the RIA Custody Rule (both of which are badly in need of updating for the modern era).
From there, we have several articles on behavioral finance, from a look at the value of a financial advisor as one who helps to minimize potential regret of the few big irreversible financial decisions in life (where it’s crucial to have the right advice to ensure the right decision is made in the moment), the emerging rise of “financial therapy” as a complementary value-add for financial advisors (or possibly even the future of the financial advisor’s value proposition), and a look at how thus far Artificial Intelligence is still struggling with the sheer breadth and complexity of interpreting human emotions (and suggesting that AI may still be a very long ways off from really being able to replace human-to-human interactions on emotional topics and issues).
We also have several marketing-related articles this week, from exploring why RIAs often have difficulty getting clients to read their email newsletters (and what are realistic stats to expect for client open and click-through rates), the importance of storytelling to both convey a financial advisor’s value proposition to prospects and their recommendations to clients through a financial plan (which arguably should be more of a ‘storytelling aid’ than an analytical document), and the key pages that prospects actually focus on (and therefore every financial advisor should have) on their financial advisor website.
We wrap up with three interesting articles, all around the theme of making good career decisions: the first looks at how most people seek out the wrong kind of career advice (asking people in similar roles or other ‘successful’ people who tend to give advice from their perspective, instead of asking people who know you well personally or are in the company/role in question already who can really validate whether you understand the role and how good of a fit it really is, or not); the second explores how to find the right community of peers to help get that professional sounding board and support; and the last looks at how, because the best firms end out being exponentially (1,000X) more successful, the key to career success is less about finding the right dream job and simply about finding the right company (“rocket ship”) to get on board with… and figure out later how to get into the best role/seat on the rocket ship!
Enjoy the ‘light’ reading!
Charles Schwab Holds Talks To Buy TD Ameritrade (Rachel Ensign & Christina Rexrode, The Wall Street Journal) – The blockbuster industry news this week was the revelation that Charles Schwab is in talks to acquire TD Ameritrade for a value of $26B, and the deal, if consummated, would create an absolute brokerage juggernaut with nearly $5 trillion in combined assets, of which half would be attributable to an RIA platform that, combined, would serve upwards of 14,000 RIAs (or perhaps ‘just’ 10,000 as multi-custodial advisors get merged, which is still as much as 3X-4X the RIAs of the next largest RIA custody competitor, Fidelity). The prospective “#Schwabitrade” deal comes on the heels of Schwab’s announcement last month that it was cutting trading commissions to $0, forcing TD Ameritrade to follow suit (at a cost of nearly 15% of its quarterly revenue) and potentially having made the company vulnerable enough to be the potential subject of an acquisition in the first place. On the other hand, the sheer size of the prospective merged firm – and especially given the marketplace pricing power that Schwab already commands – raises questions of whether the prospective merger will survive the Department of Justice’s anti-trust scrutiny of mega-mergers, especially given the as-much-as-70%-market-share the combined entity would have in the RIA custody channel. And in fact, the advisor community appears thus far to be largely negative about the merger, with worries that it will lead to too-concentrated of an RIA custodial community that ends out unduly reducing competition, that the mega-firm may become so focused on large RIAs that smaller firms will receive even less service in the midst of almost-inevitable integration woes (especially given that Schwab in the past decade has eschewed smaller firms, which ironically is what drove the growth of TD Ameritrade in the first place), and the risk that Schwab will not maintain TD Ameritrade’s VEO platform in the long run that could ultimately be a severe blow to AdvisorTech innovation. Still, though, with TD Ameritrade’s stock up 21% on the news, it appears that the street at least thinks that TD Ameritrade’s long-term prospects are better being under the Schwab umbrella.
There’s A Turf War Coming In Financial Advice (Greg Iacurci, Investment News) – According to Fidelity Institutional president Michael Durbin, there is a “turf war” brewing in the financial advice industry across the spectrum, as discount brokers and robo-advisors try to move ‘upmarket’ into financial advice, private banks try to move ‘downmarket’ from the ultra-affluent into financial advice, and more generally “firms of all shape and size begin to train their sights on a broader swath of the end-customer market”. The focal point of this shift is the “mass affluent”, households with $100,000 to $1M of investable assets that represent the majority of the market opportunity. The trend can be seen in everything from the expansion of robo-advisors adding human CFP professionals, to Goldman Sachs acquiring United Capital (along with Honest Dollar and Clarity Money, FinTech tools that would help them expand their reach to the average investor). The broad impact of the expanding competition for the mass affluent – where solo advisors have historically thrived – is that organic growth, which ideally should be at least 6% to 7% per year (excluding market growth), is getting harder and harder for most advisory firms, that increasingly are struggling to differentiate themselves and articulate a clear unique value proposition in an increasingly crowded marketplace. Which in turn is driving firms to both specialize and find niches as a way to differentiate, or adopt different (i.e., non-AUM) pricing models altogether to either open new markets or better align their pricing with the value they provide.
Accredited Investor Definition & Custody Rule On SEC’s 2020 Regulatory Agenda (Melanie Waddell, ThinkAdvisor) – The SEC’s latest “Reg Flex” agenda of prospective regulatory updates is out, and queuing up on the list for 2020 are two major initiatives that may have impact for RIAs: changes to the Accredited Investor thresholds as the SEC (re-)evaluates whether income and net worth are really the right means to determine who is a “sophisticated investor” who should be able to invest in private funds; and the SEC’s “Custody Rule” that determines when and how RIAs have custody of client assets (or not). The SEC has already given some indication of how it hopes to “harmonize” the various Accredited Investor and other exemptions for companies that want to raise equity under Reg D, though critics point out that with only a tiny percentage of current accredited investors actually allocating to private investments, and limited evidence of any demand from non-accredited investors, it’s not actually clear whether there’s a true need to reform the rules (and potentially expand “access” to private investments as industry groups are demanding). On the other hand, the advisor community will more likely welcome an update to the RIA Custody Rule, in a world where the SEC has had to issue over 50 FAQs in recent decades as the RIA model has evolved (including recently some controversial guidance on how certain Standing Letters Of Authorization or “SLOAs” can trigger custody) and a rule update is arguably overdue (not to mention how to handle ‘new’ assets like cryptocurrency from an RIA custody perspective). The initiatives are part of a broad “Reg Flex” approach SEC Commissioner Clayton has taken in the past year, with a specific focus on reviewing and updating old outdated rules that would have the broadest relevance and impact for investors.
The Value Of A Financial Advisor: Navigating Life’s Big, Non-Reversible Decisions (Tadas Viskanta, Abnormal Returns) – While having some level of technical expertise is necessary for any skilled profession, as long as other human beings are involved, arguably any and every professional service still boils down to “people management”, from wildlife management (which is actually less about designating wildlife reserves and more about helping people not leave out exposed food that makes bears want to come and dig through their trash cans) to financial advice itself (which isn’t just about the technical knowledge, but actually getting clients to implement the advice they’re given and change their behavior). On the other hand, there has been recent concern in the industry about whether “behavioral coaching” is really something investors want and are willing to pay for – recognizing that most people don’t want to admit about themselves that they’re so ‘crazy, stupid, or reckless’ that they need someone else to ‘save’ them – but arguably as long as human beings are human, with all the tendencies towards inertia and resisting change (even when it’s good for us), there will always be room for advisors to add value if only by helping clients do what they know they should do but still need some coaching to actually do. In addition, though, Viskanta points out that one of the biggest prospective value propositions of financial advisors is specifically to help clients make those few big-but-irreversible decisions (from the timing of when to claim Social Security, to whether it’s better to take the pension or a lump sum, the sale of a business, tax-efficient withdrawals and Roth conversions, or timing the decision to retire in the first place). Especially recognizing that many of these decisions aren’t purely financial, but also involve real human trade-offs (e.g., what is my life after retirement or the sale of my business, beyond the purely financial issues)?
Why The Best Person To Give You Money Advice May NOT Be An Accountant Or Financial Advisor (Leslie Albrecht, MarketWatch) – For most people, money is deeply personal, evoking a wide range of emotions from greed to fear, and often laden with additional emotional attachments (e.g., a big inheritance isn’t merely a pile of money, but represents choices in whether or how to honor the legacy of the person who bequeathed it). As a result, sometimes the money advice that people need most is not a quantitative analysis of what they can afford to do (or not), but help in unpacking the emotional turmoil that is attached to the money. Which in turn is leading to the rise of the “financial therapist”, who combines together the technical knowledge of a financial advisor with the skillset of a psychologist, but focused primarily on the therapy aspects that help clients to uncover the source of emotions guiding their money decisions (and hopefully in the process ending any of their self-destructive money behaviors – those situations where clients acknowledge that they ‘should’ be doing something with their money but in practice are failing to follow through on the behavior). In turn, the rising demand for financial therapy services has helped to drive the creation of the Financial Therapy Association, which in turn is creating a new Certified Financial Therapist (CFT) designation to help advisors develop the requisite skillset. The primary focus of the financial therapy process is helping clients explore their own “core beliefs” about money and how they came to hold them (e.g., Do they chase money? Are they terrified of running out of money? Is their self-worth tied up in their salary or net worth? Or do they avoid thinking about money at all costs?), as early-life “money scripts” can often ingrain such beliefs in a manner that becomes a self-fulfilling prophecy later (where clients self-sabotage their behaviors based on their early money beliefs). Ultimately, there’s still some debate about how best to bring financial therapy into the advisor-client relationship, and whether it’s more about financial planners learning therapy techniques, or mental-health counselors learning more about money, but early research finds that helping clients through their money beliefs does appear to help them feel happier and less stressed about their money (and in the case of couples, reduce their money-related stresses).
The Risks Of Using AI To Interpret Human Emotions (Mark Purdy, John Zealley, & Omara Maseli, Harvard Business Review) – Reading the emotions of other people is difficult, both because the emotions themselves are sometimes very hard to read, and also because they’re often a disconnect between how people say they feel and what they actually feel (and how they act because of it). In fact, one recent study of Super Bowl commercials found that the ads that people’s brains responded to were different than which ads they said they liked the most or least, suggesting that we don’t even interpret our own emotional responses correctly sometimes. Which in turn raises interesting questions and potential concerns as Artificial Intelligence (AI) tools are increasingly being adopted to try to read peoples’ emotions (e.g., decoding facial expressions, analyzing voice patterns, monitoring eye movements, etc.) in the hopes of better understanding them. In fact, one recent study found that the software may struggle with biases of its own, as the emotional analysis technology assigned more negative emotions to people of some ethnicities over others, and in general appears to be struggling to understand cultural differences in how various emotions are expressed (e.g., in Japan a customer who smiles signals politeness, but in Germany it’s a signal that they don’t need help from the store attendant). Ultimately, this doesn’t mean that all emotional AI is necessarily bad, as Purdy and his colleagues suggest that it may still be relevant and reasonable to use to understand how emotionally engaged employees actually are, create products that themselves adapt to consumer emotions (e.g., cars that adjust the temperature or jolt the seatbelt when a passenger acts drowsy), improve tools for measuring customer satisfaction (and spot “compassion fatigue” in customer service agents), and support learning experiences by providing feedback to teachers to help them heighten emotional engagement. Still, though, it’s crucial to recognize the sheer complexity of human beings and their emotions – even in the face of rising AI tools – and not to underestimate a fellow human being’s ability to better understand the emotional context of what someone is really trying to communicate (or not).
Why Nobody Is Reading Your RIA’s Newsletter (Alli Romano, RIA Intel) – In a world where markets and the economy have seemingly “big” news on an almost daily basis, and clients want to see that their financial advisor is “on top of it”, many advisory firms still prepare and send (email or print) newsletters to clients on a regular basis. The challenge, however, is that producing such newsletters is a lot of work, in a world where advisor email newsletters still might only have a 15% – 25% open rate and a 2% – 3% click rate (with one study by Campaign Monitor on the financial services industry finding an average open rate of 18.2% and an average click-through rate of 2.7%) targeting 500 prospective and/or current clients. Notably, part of the challenge for firms is simply finding the right level and depth of content to connect with clients, finding that often content with a more “personal” tone tends to connect (rather than more abstract and formal communication, and sending under the advisor or firm founder’s personal name rather than a ‘corporate’ email account), and that more visual content connects than purely written content alone (e.g., more USA Today than Harvard Business Review?). It’s also a good idea to help make email newsletters more “scannable”, including clear titles and short article intros (with links to click through for those who want the longer read), and being mindful of the subject line and headlines that may (or may not) draw readers into the newsletter in the first place. For many firms, there’s often a lot of trial-and-error along the way, but the reality is that when sending to large audiences en masse, it’s actually an especially good environment to try A/B trial test alternative options to see which one is better anyway!
How Storytelling Bolsters Financial Plans & Client Relationships (Angela Pecoraro, ThinkAdvisor) – As human beings, we are innately drawn to stories. In the investment context, we have a tendency to try to find the narrative (a story to explain the facts of the day, even if the events were actually just random noise!), and more generally researchers have found that stories tend to both resonate and ultimately be more memorable. In fact, one famous research study found that people are 22X more likely to remember facts if they are delivered within a story. The significance of this from the financial advisor’s perspective is that when you tell a story – to illustrate a financial concept or planning strategy, or to better explain your own services and how you help clients – it’s more likely to engage the client, be memorable, and can therefore help to actually drive action or a decision. Pecoraro suggests that this is especially true in the world of delivering financial plans to clients, which isn’t just about presenting a series of charts and numbers, but trying to actually weave them into a narrative story that helps clients better understand how they can proceed to achieve their stated goals. In this context, the financial plan itself becomes less the ‘analysis’ of the plan, and more a storytelling aid to support the narrative of what the advisor is trying to communicate about a recommended strategy or suggested course of action. Which suggests more broadly that financial planning software may still have a way to go in becoming more able to be customized to fit a storytelling narrative in how the plan is created and results are presented in the first place?
What Do Investors Focus On When They Visit Financial Advisor Websites? (Jack Waymire, Seeking Alpha) – Choosing a financial advisor to whom one might hand over their life savings is a high-stakes decision, and as a result in the modern world, consumers are increasingly looking to the internet as a means to conduct “due diligence” evaluation of a prospective advisor they may choose to work with. Which is important not only because it means a growing number of prospective clients may find their way directly to a financial advisor’s website – either by being referred to it, or simply Googling the name of the firm or the name of the advisor themselves to see what they find – but also because it means it’s increasingly important to consider exactly what information an advisory firm provides on its website to help clients get the answers they want and need to make a decision. Waymire suggests that there are a number of key areas that every financial advisor website should have: an “Our Team” page that talks about the advisors at the firm themselves and their experience and credentials; a “Who We Serve” page that helps prospective clients know if they’re a fit (or save their time if they’re not); a “What We Do” page that describes the services provided (in enough detail that they can make a connection); and an “Our Practices” page that explains how the firm is compensated, how it interacts with clients, and how it protects client information (given the growing consumer focus on cybersecurity and preventing identity theft). And it’s important that this information all be clearly accessible from the main menu of the advisor’s website, because Waymire’s own recent research finds that the average time on a financial advisor’s website is just 2 minutes and 33 seconds… so that’s all the time an advisor has to deliver enough relevant information to connect with a prospective client online.
You’re Probably Asking The Wrong People For Career Advice (Hunter Walk) – When trying to make a career path decision or evaluate a prospective offer with a particular company, most people tend to ask for input from two groups: their friends in similar jobs, and the ‘most successful’ people they know within the industry. But Walk cautions that in the end, the advice often received starts with “If I were you…” which means the advice is actually a response based on their own values and interests, and that they’re not actually trying to see the choice and prospective trade-offs through your eyes. By contrast, Walk suggests that career-advice-seekers tend to undervalue those who know them deeply and personally (regardless of any expertise in the company/industry in question), because those are the people who know what’s really important to you, and can truly help reflect back whether the opportunity is a good idea or not and help you identify your own blind spots. In addition, Walk suggests that career-advice-seekers also don’t do enough to make inquiries with those who have direct experience with the company/role/people being considered, who can really share first-hand what it may be like to take that leap, and help confirm (or disconfirm) whether the role is really likely to be what you think it will be. In other words, the best career advice comes not from people in similar jobs or the most successful people in general, but specifically those who either know you deeply and can validate your thinking based on you as an individual, or who understand the job deeply enough to be able to validate your understanding of the work, the culture, and the company you’re considering.
4 Ways To Find Your Advisor Community (Jarrod Upton, ThinkAdvisor) – No one likes going through life alone, and that trait as human beings drives us towards everything from marrying a spouse to joining and engaging with friends and our local community, both as an opportunity to have shared experiences with others, and to connect with others and get feedback and support when we need it. In the context of being a financial advisor, Upton suggests that it’s crucial to be involved with some kind of professional community that helps you connect and provides you support from professional peers… with the caveat that getting involved in such communities is only valuable if they’re the “right” fit for your current needs, and business/career stage. Accordingly, Upton notes that the starting point to selecting what kind of community to get engaged with is deciding how much you want to engage (daily or weekly engagements, or monthly or less?), what you really want to learn (is this about technical information, career advice, managing a business, or something else?), what your desired outcome is, and the type of community you want to join (that has other like-minded individuals). Notably, though, finding community is ultimately about forming one-to-many relationships (i.e., it is not mentoring, which is a different thing altogether, although a mentor may emerge from a community). But the starting point is trying to find a community that you would want to be active with, and people you would be proud to associate with and spend time with (and would value opportunities to learn from!).
Private Stock Picking (For Your Career): Power Laws And Rocketships (Howard Lindzon) – One of the unique phenomena of the startup world is that the very best startups are worth 1,000X the median startup (following a Power Law distribution), which in turn means the long-term opportunities at such businesses are exponentially greater than the opportunities at any other business. The significance of this phenomenon is that it means in practice, it’s often far more important to pick the right company at which you build your career, than actually trying to pick the right role. After all, it’s always possible to find a new/different/better role at the company, especially as it continues to grow… leading to the saying “If you are offered a seat on a rocket ship, get on — don’t ask what seat”. The challenge, however, is that investors in startups may get days or weeks to do detailed due diligence on a company, while the average employee at best gets a handful of interviews and perhaps some Glassdoor reviews. And the matter is even more challenging, because investors can diversify amongst multiple companies, while a prospective employee only gets to pick one (or at least, one at a time) to work for. On the plus side, though, the ever-growing amount of information on the internet makes it more and more feasible for potential employees to evaluate prospective employers before taking a job. Which means, at a minimum, that it’s really worth taking the time when evaluating a potential new opportunity to hunt around and really try to figure out if it’s the right company (or rocket ship) that you want to get on board with (and if it is, don’t fret so much about what the initial seat may be, just get on board and figure it out later!).
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 as well.