Enjoy the current installment of “Weekend Reading For Financial Planners” – this week’s edition kicks off with the industry news that mega asset manager Blackrock is making a “billion dollar bet” on the future of direct indexing by acquiring SMA provider Aperio (the #2 provider of direct indexing solutions, behind #1 provider, Parametric, that itself was acquired last month as part of the Morgan Stanley acquisition of Eaton Vance), as interest grows in both the tax-optimization benefits of direct indexing and also the ability to “customize” index allocations to clients’ ESG or other individual preferences (e.g., the S&P 500, but excluding tobacco stocks and with an overweight to renewable energy?).
Also in the news this week is an interesting J.D. Power survey that finds consumers during the pandemic are perhaps, not surprisingly, more likely to use mobile apps on their smartphone to manage their wealth but, surprisingly, are even more satisfied when they can use the app as a means to contact and communicate with their advisor (not in lieu of their advisor!), and the announcement that the Department of Labor is sending its controversial new fiduciary rule (that would begin to allow ERISA fiduciaries to receive commissions in certain circumstances) to the Office of Management and Budget to finalize… but it may already be too late to finalize the rule before the Biden administration takes office (and is expected to pause the rule for further review in what may ultimately send it back to the drawing table for a more fiduciary revision).
From there, we have several articles on marketing and client communication, including tips on how to make emails more engaging with colleagues, clients, and prospects, using a simple two-sentence directive approach, some thoughts on how to revise our approach and use of virtual meetings as it becomes clear they’re likely not temporary but here to stay permanently (at least in some form as part of the annual advisor-client relationship), and a look at whether compliance rules actually require video meetings with clients to be recorded and archived for compliance purposes (hint: probably not, as they’re treated like telephone conversations, but any written communication delivered as part of the video meeting does have to be captured and archived!).
We’ve also included some articles on cash flow and spending strategies, including a look at the immense opportunity of mortgage refinancing in the current environment (as mortgage rates continue to hover below 3%), some suggestions for cash flow/budgeting apps that clients can use to track and manage their own finances, and some ideas on how to engage children with (stock) investing from an early age to get them to begin appreciating the value of compounding (and the benefits of investing in long-term companies for long-term growth!).
We wrap up with three interesting articles, all around the theme of holiday gift-giving as we enter the December holiday season: the first two both explore some year-end gift-giving ideas that are “classy” but not budget-busting (important both for the economic cost to the business, and to avoid running afoul of the FINRA [and often RIA] $100 gift-giving limit!); and the last looks at how, in the end, we’re happier when we spend money on experiences and others rather than “things”, which can hold, not only for how we spend our own money, but also in how we use it to help others (which means giving services like TisBest or DonorsChoose) or spend on experiences that remain memorable long after the event has passed (available through services like Excitations and Xperience Days)!
Enjoy the ‘light’ reading!
BlackRock To Acquire SMA Provider Aperio For $1 Billion (Nicole Casperson, Investment News) – This week, mega asset manager Blackrock announced that it was acquiring Separately Managed Account (SMA) provider Aperio for $1.05B in cash. The significance of the deal is that Aperio was the #2 provider of so-called tax-optimizing “Direct Indexing” solutions (where the investors hold not an entire mutual fund or ETF index fund, but the underlying stocks of the index so that each individual stock in the index can be tax-loss-harvested if it’s down, even if the overall index is up), and is being acquired just weeks after the #1 provider (Parametric) was acquired by Morgan Stanley as part of its purchase of Eaton Vance. And notably, while Morgan Stanley is expected to leverage Parametric primarily internally across its own 16,000+ brokers and $2T of client assets, Blackrock works also exclusively with third-party financial intermediaries – i.e., other institutional investors, and a wide base of financial advisors – suggesting that Blackrock is now making a “billion-dollar bet” on Direct Indexing taking hold amongst financial advisors in the coming years (or at least, desiring to hold a hedge against the risk that it does, since a rise in Direct Indexing options would likely reduce the use of ETFs, including those manufactured and sold by Blackrock). Notably, though, Blackrock appears to be betting not only on the tax-optimization benefits of Direct Indexing but also on the potential to use such strategies for more “customized indexing” where individual clients can have their index funds modified for personal preferences (e.g., based on ESG criteria, such as an S&P 500 index holding that eliminates tobacco stocks and overweights renewable energy, or a Total Market index that adjusts factor allocations to underweight growth and large and overweight small-cap and value), in what Blackrock is dubbing “the twin engines of better after-tax performance and hyper-personalization”. Ultimately, it may not be clear whether Blackrock is picking up on an early trend, or may actually “cause” it to occur (given Blackrock’s own distribution capabilities), but either way, the fall of 2020 will likely, in retrospect, be seen as the watershed moment when the industry began to take Direct Indexing seriously.
Clients Using Apps To Reach Advisors Happier Than Other Investors (Michael Fischer, ThinkAdvisor) – According to a recent J.D. Power survey, consumers are significantly more satisfied when they can interact with their financial advisor by leveraging the firm’s mobile apps, versus ‘just’ being required to contact them through traditional means (e.g., telephone or email). The research, which was fielded in the midst of the pandemic, found that both do-it-yourselfers and “advised” investors are using wealth management apps more frequently during the pandemic, with those who use advisors even more likely to report that their usage has increased. Notably, though, remarkably few AdvisorTech portals for clients even offer such in-app messaging capabilities, including just 35% with any kind of chat functionality and only 41% offering in-app secure messaging. And even amongst the tools that are available, they are of limited effectiveness and rarely used. As a result, even amongst the 69% of consumers who indicated that they had communicated recently with their financial advisor during the pandemic, only 2% stated that the communication was done via mobile app or secure messaging. The key point, though, is simply to recognize that leveraging the use of wealth management mobile apps was not seen as an alternative to financial advisors, but instead an opportunity to increase advisor-client engagement!
DOL Sends Fiduciary Proposal To OMB For Final Review (Patrick Donachie, Wealth Management) – This week, the Department of Labor sent its new “Improving Investment Advice for Workers & Retirees Exemption” rule to the White House’s Office of Management and Budget (OMB) for final review. Unlike the prior Department of Labor fiduciary rule in 2016, though, this new Department of Labor rule aims to both reinstate the prior pre-Obama version of the Department of Labor’s rule to determine when ERISA fiduciary status would apply (which had been widely criticized for gaping loopholes that allowed salespeople to avoid fiduciary status by simply providing one-time, not-ongoing product recommendations), and would further enact a new exemption for ERISA fiduciaries to sell products and earn commissions, similar to the SEC’s Regulation Best Interest, as long as they adhere to certain “impartial conduct standards”. Ironically, though, the proposed rule was criticized both by fiduciary advocates for weakening long-standing ERISA fiduciary protections and also by the insurance industry that raised concern it could still expand the fiduciary scope to certain types of rollover-to-IRA-annuity recommendations. Nonetheless, the current administration is still seeking to finalize and implement the rule before the Biden administration takes office. However, it remains unclear if the Biden administration could still pause the new rule’s rollout shortly after taking office, halting it for “further review” that could ultimately kill the proposed rule. Stay tuned in early 2021 to see the outcome.
How To Engage A Prospect In Two Sentences (Sara Grillo, Advisor Perspectives) – The general aphorism of advisor-client communication is “more is better”; the greater the frequency and depth of communication, the more the advisor can show value, the client can feel heard, and the relationship can be supported. Yet in practice, the challenge is that overly lengthy and thorough communication can result in a lack of clarity about what comes next, as those reading a long communique may learn a lot, but feel overwhelmed about exactly what action they’re supposed to take… a lesson that any parent learns quickly with young children when there is precious little time and attention span in which to communicate key lessons, from “It’s bedtime. Who knows how to use a whisper voice?” to “Stop throwing Magna-tiles at your sister. How do you feel when people throw things at your head like that!?” But as Grillo suggests, this two-sentence communication style – the first providing some statement or clarifying information, and the second queuing up a command or a question – can be remarkably effective in working with clients and colleagues as well! The key is simply recognizing that when we’re so often overloaded with information, asking people to process just one idea at a time, or perform one action at a time, helps to provide key clarity about what to do next to keep the conversation, plan, or relationship moving forward. So when queuing up a conversation next, pause to consider what really matters most: 1) what is the one most important piece of information that the recipient needs to create total clarity about what they need to do?; and 2) what is the one thing they’re supposed to do first/next? Whether it’s seeking a contractor for graphic design (“I only work with vendors who fill out a W9 form. Will you send me yours before we begin any work assignments?”), or overcoming a challenging prospect pushing back on fees (“Ms. Garcia, I only do business when I am able to provide value way past what I charge. What’s the most important thing you are looking to get from this relationship?”).
The Future Of Your Virtual Meetings (Julie Littlechild, Absolute Engagement) – When the pandemic broke out and in-person meetings were suddenly forced into a virtual world, most advisors approached the problem as a “stop-gap” concern… how to make the best of a bad situation and manage client meetings virtually until it’s finally time to go back to normal and meet in-person again. Yet as Littlechild notes, by treating virtual client meetings as a temporary shift, we naturally limit how much time, focus, and investment we make into improving the process… even though the reality increasingly seems to be that virtual meetings, for at least some client meetings, may become a permanent part of our reality. So the question arises: if you knew/anticipated that virtual meetings will be a permanent part of the advisor-client relationship in the future, what might you start doing to improve on the process? Are there new skills to develop to communicate more effectively in a (sustained) virtual environment? Are there new processes to implement to book meetings virtually? Are there new/better tools to use? Littlechild suggests that the starting point is to recognize that virtual meetings operate better with more structured environments, which means creating (or ideally, “co-creating” with the client) an agenda for every virtual meeting, to ensure it really covers what is most important and timely. Second, recognize that one of the biggest challenges of “connecting” virtually is simply the visual connection… which means putting the camera in front of the screen, so that when you look at the client’s image on the screen, you’re looking at/through the camera itself (so the client feels like you’re really making eye contact with them!). And last, consider that driving client engagement in a virtual environment isn’t just about picking the “right” video conferencing platform (e.g., Zoom vs Webex vs Teams), but what you do to actually engage during the meeting, from screensharing to mind mapping software or virtual whiteboards.
Are Registered Reps Of Broker-Dealers Required To Keep A Compliance Recording Of Video Conferences With Clients? (Alan Foxman, Financial Planning) – When advisors have a ‘traditional’ in-person meeting with clients, there is generally no record of the meeting, beyond the fact that it occurred, and any contemporaneous notes that may have been taken… given that, in practice, it’s simply not feasible to set up video cameras and record all of our advisor-client interactions (particularly when they occur outside of our offices!). However, when it comes to the rise of videoconferencing in the pandemic, suddenly meetings are being conducted via video camera… and using software that even has a “Record” button built right in! Which raises the question: are advisors required to record client meetings that happen via video? In recent pandemic guidance, FINRA has indicated that it considers a video conference meeting with a client to be more akin to a telephone meeting than an in-person meeting… which means there may in fact be an obligation to record the meeting. However, under FINRA Rule 3170 – also known as the “Taping Rule” – telephone (and now video) meetings with clients only need to be recorded if the broker-dealer has a high percentage of brokers who have been disciplined (and in practice, there are currently only about half a dozen “Disciplined Firms” out of thousands of broker-dealers). Notably, though, while spoken video and telephone communications do not generally need to be recorded, any written communication that is shared – from Chat messages during the meeting, to slides or other screen-shared material – does need to be recorded and archived for compliance purposes.
Low, Low Mortgage Rates Make 19.4M Households Eligible For Refi (Alex Roha, Housing Wire) – As mortgage rates stay below 3% for the 17th consecutive week, dipping down last week as low as 2.72%, a recent study found that an estimated 19.4 million “high-quality” mortgage refinancing opportunities are available… those who have at least 20% equity in their homes, credit scores of 720 or higher, who are current on their payments, and could cut their interest rate by at least 0.75% with a refinance (saving an average of $309/month on payments). Though notably, time is of the essence, as Fannie Mae and Freddie Mac will be implementing an upcoming 50 basis point “adverse market refinance fee” to shore up their own refinance risk exposure effective December 1st. Though even with an uptick in rates from the new fee (at least for those whose loans would go through Fannie and Freddie), low mortgage rates still remain a compelling refinance opportunity for many advisors’ clients, particularly with estimates that an economic recovery in 2021 could lift mortgage rates higher again (with the Mortgage Bankers Association estimating mortgage rates at 3.3% by the end of next year).
Six Apps That Help You Track And Stick To A Budget (The Verge) – It was more than a decade ago that Mint.com burst onto the scene, leveraging login details that users provided to their various financial accounts to aggregate together a household’s financial information into one central place. In the years since, account aggregation and various PFM (Personal Financial Management) tools have become increasingly capable and sophisticated… to the point that today, it’s difficult to track them all and figure out which one actually is best! Accordingly, The Verge highlights a number of different tools that facilitate budgeting and financial cash flow tracking, including not just the old stalwart Mint.com itself, but also You Need A Budget (YNAB, which captures spending information and makes it easy to categorize, from savings to everyday expenses or various monthly bills), to Digit (which specifically focuses on automating savings tied to specific short-to-intermediate-term goals, and tracking savings progress along the way), or using actual (personal) accounting software like Buxfer. Also noted is Credit Karma (which doesn’t actually track a spending budget, but is good for credit score monitoring and identify theft monitoring). And of course, some will simply prefer to build their own spreadsheet using Google Sheets (or perhaps Microsoft’s new Money In Excel tool).
How To Get Your Kids Investing? (Howard Lindzon) – With the pandemic market volatility in the spring, many advisors were consumed with efforts in trying to keep clients invested and not sell in a panic. Yet the irony is that it appears to be the older clients (who advisors typically serve) that were most likely to panic-sell, while younger investors actually showed a strong inclination to buy during the volatile market dip, a combination of general market bullishness and perhaps the rise of popular young investing apps like Robinhood. Which raises the interesting question of what else we can do to encourage young people to invest at an even earlier age? One suggestion from Lindzon (via a friend of his) is to give young children (e.g., a 12-year-old) an initial sum of money (e.g., $1,000 or $10,000) to invest for 60 days, after which the parent takes their original stake back. If it goes up, the child keeps the difference as their investment returns (while if it goes down, the parent absorbs the loss… chalk it up to an investing “lesson” learned). The appeal of this approach is that it teaches and encourages children from a young age to start studying and trying to learn about stocks and companies. In fact, for Lindzon’s own children, he made a list of companies/brands that his children could learn about and were familiar with, in what he dubbed an “8 to 80” list (i.e., to hold for the long term from age 8 to 80!), such that by the time they’re young adults (taking control at age 18) they will already be able to see significant accumulated gains and hopefully gain an appreciation for the power of investing in good companies for the long run. Other options include buying books specifically written to encourage young investors, like Maya Peterson’s “Early Bird – The Power Of Investing Young”. But the key point is simply that in an era where fractional ownership of stocks is feasible – which means you don’t even need enough money to buy one whole share of stock to get started – it’s easier than ever to start kids younger than ever on investing!
10 Unique And Meaningful [Holiday] Gifts For Clients (Maribeth Kuzmeski, Red Zone Marketing) – As we turn the corner on Thanksgiving, the holiday season looms large… which means not only winter holidays and the turn of the new year but the annual season of gift-giving, to each other, and for many advisors, to their clients. In practice, advisory firms vary greatly in whether, or to what extent they give gifts, with some engaged in very deep and personalized gifts, others sending out mass thank-you letters and “a donation on your behalf has been made…” notices, some giving gifts to all their clients, and others giving gifts to just a select subset of their “A” clients. But in some cases, the problem is simply that for those of us not naturally wired as “good gift-givers”, it’s hard to know what a right/appropriate/”special” gift to clients might be. Accordingly, Kuzmeski provides a helpful list of moderate price (e.g., $25 to $75) gifts to give clients, including customized Yeti cups (including not only their popular mugs, but now a wide range of tumblers and wine glasses as well); some easily shipped food goods like a Cookie Bouquet, Harry & David’s Christmas Pie, a Wolferman’s Bakery Berry Breakfast Box, or (being a Chicago native), Kuzmeski’s own local favorite: Lou Malnati’s Chicago-style pizza. Other options include a personalized bottle of wine, a custom-branded JBL bluetooth speaker, or even a personal mini-fridge! Or for those not so food-inclined, Kuzmeski also suggests a personalized Globetrotter Travel Journal (a way to celebrate 2021 when we can all travel again!?).
10 Classy Holiday Gifts For Clients Under $100 (Michael Fischer, ThinkAdvisor) – When it comes to gift-giving for clients, providing a ‘reasonable’ gift is nice, but an overly lavish gift can be a problem… both because it can create undue pressure on the client for implied reciprocity, and also because FINRA outright prohibits advisors from giving gifts in excess of $100 per individual per year (and while RIAs can set their own gift-giving limits in their own compliance manual, they often also use a $100 nominal gift limit). Accordingly, Fischer provides a list of potential gifts for clients… that will not run afoul of the $100 gift limit, including a wall-hung wine rack, a “Gaucho” techpack (including charging cables and a mobile power bank in a nice leather pouch), or personalized leather cord wraps (for charging cables and such), a personalized leather Backgammon set, or food options like Louis Sherry’s Caramel Cashew Popcorn Jubilee, Maggie Louise “Warm Winter Wishes” chocolates, personalized wine tags, or a nice bottle of Kedem sparkling juice (for those uncertain which clients would be receptive to alcohol gifts, or not).
Giving [Holiday Or] Referral Thank-You Gifts That Actually Make Someone Happier (Michael Kitces, Nerd’s Eye View) – The conventional view of gift-giving is that it’s a way to express gratitude to others – whether in appreciation for something in particular they did, or simply for the relationship they have. The caveat, of course, is that such thank-you gifts only have a positive outcome if the gift is well-received by the client, is ‘appropriate’ in value (i.e., an outsized gift can create awkwardness for the client about whether/how they should respond), and does not overly monetize the gift (e.g., where giving a $25 gift card might just evoke the response “really, our relationship and that referral is ‘only’ worth $25 to you!?” because the gift card puts a concrete price tag on the gift). What the research on happiness and money tells us, though, is that we respond best when we spend money on experiences or on others, not just on “things”. In the context of (year-end holiday) gift giving, this means that instead of gifting “things”, advisors might consider gifting experiences from sites like Excitations and Xperience Days (which offer everything from a relaxing hot stone massage to an exhilarating ride in an old open-cockpit biplane)… where the memory of the experience may last far beyond ‘just’ the gift itself. Alternatively, for those who would rather gift-give in a way that further pays it forward, DonorsChoose provides a platform that allows teachers to post their classroom projects and request donations to fund them (where the advisor can make a gift ‘on behalf’ of clients, and even give the client the opportunity to search and pick the classroom project they’d like to support!). Or for those advisors who want to support a wider range of charities, TisBest allows someone to “buy” a charitable gift card, which the receiving client can (and must) use to donate to any one of the numerous charities on the TisBest list (and financial advisors can even add their custom image/logo to the charitable gift card itself). The key point, though, is simply that clients are more likely to find sustained happiness from the gift they receive when it’s either an experience that forms a memory they can cherish, or allows them to feel the psychic benefit of giving to others and seeing the good that comes of the dollars they directed to a good cause!
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.