Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with a recap of the latest tax plan from Senate Republicans that was released this week, which is similar to the one issued last week by House Republicans, but contains a number of key differences (from excluding estate tax repeal but bringing back the medical expense deduction), setting the stage for challenging compromises as Republicans try to find a way to reconcile the differences between the two in a manner that stays under the $1.5T deficit target (necessary to avoid a Senate Democrat filibuster) but keeps enough Republicans on board to pass the legislation with a narrow 2-seat majority in the Senate.
Also in the news over the past two weeks is the announcement that the final version of a DoL fiduciary delay has been submitted to the Office of Management and Budget (OMB) for final approval to delay the full implementation of the Best Interests Contract Exemption until July of 2019 (and opening the door for the SEC to begin a rulemaking process of its own in the interim), and the news that Morgan Stanley has withdrawn from the Broker Protocol in what may quickly be an unraveling of the ability of brokers to change broker-dealers (at least, not without messy lawsuits and Temporary Restraining Orders) and cause a compression in the valuation of broker-dealer-based advisory firms.
From there, we have a number of articles on hiring and career development, including why advisory firms should institute a 6-week training and onboarding process for new financial advisors (including and especially for experienced financial advisors who can hit the ground running with clients but need time to be trained in how to do so consistent with the firm’s established processes and procedures), a look at a fascinating Millennial advisor survey that finds young advisors are most likely to leave and go solo between the ages of 26 and 35 (after they have a few years of experience but before becoming “too embedded” in an existing firm), and tips for employee advisors about what they can do to advance their own career and promotion prospects.
We also have a number of advisor technology articles this week, from a review of the latest from Riskalyze as the company continues to expand from “just” risk tolerance software into an increasingly comprehensive advisor platform, a discussion of the latest advisor technology developments at major broker-dealers like Commonwealth, LPL, and Securities America, and why video conferencing technology may prove to be even more disruptive to financial advisors and the delivery of financial advice than robo-advisors.
We wrap up with three interesting articles, all focused around the theme of working outside the office for improved productivity: the first explores the growing trend of conducting business meetings outside the office (from business owners meeting with key partners, to employees meeting with each other) as a way to improve both employee creativity and improve employee-to-employee connections; the second looks at the latest research that helps to explain why people can be productive in coffee shops (as it turns out, ambient noise is good and helps our creativity) but why open office plans are so inefficient (because ‘background noise’ from people we know tends to actually distract us), and a controlled experiment study in the benefits of working from home that found a whopping 13.5% increase in productivity by allowing employees to work from home… along with a massive 50% decrease in employee turnover rates!
Enjoy the “light” reading!
Weekend reading for November 11th/12th:
Senate Issues Tax Plan That Differs From House GOP Proposal (Richard Rubin, Wall Street Journal) – While the big news last week was the release of the House Republican plans for income and corporate tax reform, this week the big buzz is that the Senate just released its own version of the Tax Cuts and Jobs Act. While both are aiming for tax reforms that add up to $1.5 trillion of tax cuts over the next decade – the threshold necessary to allow the Republicans to pass the legislation in the Senate with a simple majority vote that can’t be filibustered by Senate Democrats – the two do differ substantively in many ways. First and foremost, the Senate legislation would keep our current 7 tax bracket structure (rather than the 4 brackets in the House proposal), but trim most brackets by 1% to 5% or so, with a top tax rate of 38.5% (down from the current 39.6%) on incomes above $1,000,000 (for married couples, $500,000 for individuals). With respect to various popular deductions and credits, the Senate bill would keep the medical expense deduction (which the House bill retained), the Student loan interest deduction (which the House bill repealed), and the current mortgage interest deduction (which the House bill capped at interest on only $500,000 of mortgage acquisition indebtedness), but would entirely repeal the deduction for state and local taxes (both income, sales, and property taxes, while the House bill would retain the deduction for up to $10,000 of property taxes). Both would eliminate personal exemptions and raise the standard deduction to $12,000 for individuals and $24,000 for married couples, both would keep the adoption tax credit (which was originally eliminated under the House bill, but brought back with revisions on Thursday), both would cut the top corporate tax rate to 20% (though the Senate bill would delay it until 2019), both would repeal the AMT, and both would double the estate tax exclusion amount (to $10.98M per person, or $21.96M for a couple with portability) although the House bill subsequently repeals the estate tax in 2024 while the Senate version would simply remain at the higher exemption level (and indexing for inflation). And the Senate would provide a much less generous version of the favorable treatment on pass-through businesses, providing them a 17.4% deduction on pass-through income that would result in only 82.6% of income being taxed (which at a 38.5% top tax rate, would amount to a top rate on pass-through businesses of 31.8% plus the 3.8% Medicare tax to a total top rate of 35.6%). The House is expected to vote on their version next week, with the Senate considering their version in the week after Thanksgiving, although ultimately to be passed into law the two bills must reconcile their differences and then passed in final form, which leaves open the question about whether lawmakers will be able to come to consensus about the differences between the two (which, given the maximum threshold of $1.5T in tax cuts over 10 years to pass with a simple majority, will require some level of compromises on key provisions to actually be passed sometime in December).
OMB Receives Official Proposal For 18-Month Delay To DoL Fiduciary Rule (Mark Schoeff, Investment News) – Also in the news last week was the announcement that the Office of Management and Budget (OMB) had received the Department of Labor’s official proposal to delay the full enforcement of the Best Interests Contract Exemption under the fiduciary rule by 18 months. While the rule still has to be reviewed, and could potentially be changed, it is expected to go through more or less as written, which would delay full enforcement of the rule until July 1 of 2019. The real significance of the delay, though, is not merely that it will give the industry more time to adapt to the fiduciary requirements (as many large firms have requested), but also because it opens an 18-month time window for the SEC to begin its own rulemaking process and potentially try to shift the fiduciary football back to its own jurisdiction. Which is notable both because it may potentially simplify and harmonize what are now overlapping and not entirely consistent standards between the SEC’s fiduciary requirements for RIAs and the DoL’s fiduciary rule for those working with retirees (not to mention FINRA’s own rules for brokers), but also because fiduciary advocates are warning that an SEC rulemaking process may (re-)open the door to brokerage firms to try to undermine the scope and consumer protections of the fiduciary rule. Stay tuned for fiduciary rulemaking from the SEC to be the hot topic throughout 2019… and the potential for more state regulators to follow Nevada’s cue in making their own state-level fiduciary requirements for brokers if the SEC appears to lag in its own efforts.
B/D Advisor Valuations To Compress As Morgan Stanley Withdrawal Unravels The Broker Protocol (Michael Kitces, Nerd’s Eye View) – Since 2004, the Protocol for Broker Recruiting (or “Broker Protocol” for short) is the agreement that most broker-dealers have signed that stipulates exactly what client information a broker can take with them when leaving the firm (without violating the firm’s non-solicit agreements, client privacy agreements, or confidentiality obligations under Reg S-P). The Broker Protocol was originally created by 3 wirehouses (Smith Barney now Morgan Stanley, Merrill Lynch, and UBS), as a form of “cease-fire” to reduce the frequency of lawsuits between the firms as they sued each other for recruiting away each others’ wirehouse brokers. Since then, though, the list of Broker Protocol signatories has grown to more than 1,600 firms, predominantly independent broker-dealers and RIAs, that have used the Broker Protocol as a means to recruit wirehouse brokers out of the wirehouse channel altogether. And given this dynamic – where the Broker Protocol no longer actively supports intra-wirehouse recruiting amongst the big 4, but breakaway broker recruiting away from them – Morgan Stanley made the bombshell announcement that it was withdrawing from the Broker Protocol, effective almost immediately (as due to some alleged lawyerly sleight of hand, Morgan Stanley effectively only gave their brokers 4 business days’ notice until November 3rd, instead of the normal 2-week notification process). The significance of the change is not merely that Morgan Stanley brokers will now face a repeat of the old “dark days” of breakaway broker travails, including what is likely to be frequent lawsuits to enforce non-solicit agreements and Temporary Restraining Orders (TROs) to block breakaway brokers from soliciting their own clients… but also that with Morgan Stanley out, other major wirehouses will likely follow, leading to an unraveling of the Broker Protocol altogether, where the only firms that remain are the ones proactively recruiting advisors in, but the firms brokers would be most likely to want to leave – and actually rely on the Broker Protocol – will drop out. And while the trend has started with wirehouse broker-dealers withdrawing from the Protocol, there’s a risk that independent broker-dealers will withdraw as well, at the same time that the use of non-solicit and non-compete agreements is also on the rise in the RIA community – an important reminder that “financial advisors” are ultimately just representatives of even their “independent” broker-dealer or RIA firms, and that unless the advisor actually owns his/her own RIA, “their clients” in the end are still clients of the firm and not the advisor themselves.
Advisors, Don’t Make This Big Mistake With New Hires (Angie Herbers, Investment Advisor) – The biggest capacity constraint of an advisory firm is the number of clients that an individual financial advisor can handle, such that ongoing growth eventually always necessitates hiring more financial advisors to serve them. Yet Herbers notes that the common solution – to continue to add clients until another advisor is needed, and then immediately assign the new advisor to those clients so he/she can “hit the ground running” with client revenue to serve – is often a recipe for failure for the firm itself. The reason is that onboarding advisors too quickly to work directly with clients skips the crucial phase of bringing the new advisor into the culture of the firm, to learn its approach to serving clients, it’s systems and processes, and to connect with the staff members that will support his/her team. Of course, lead financial advisors command substantial compensation, so it’s very expensive for the firm to bring on a new advisor and not have them immediate manage and be responsible for client revenue; nonetheless, Herbers suggests that running a six-week training program for new lead advisors joining the firm will ultimately pay off in reduced turnover costs of needing to replace lead advisors in the future. Specifically, Herbers advocates a process where the firm spends one week in each of the following core areas for bringing a new lead advisor up to speed in the firm: Week 1) an overview of the company, so the new advisor understands how to explain “who we are and what we do” from the firm’s perspective, the key people involved, and the technology that the advisory firm uses to operates; Week 2) training on general administrative procedures (getting into the office, the phone system, email/mail procedures, filing systems, etc.); Week 3) general client experience procedures (how the firm greets clients, sets appointments, handles post-meeting follow-up and action items, etc.); Week 4) marketing details, including how the firm explains its services and its positioning statement, the ideal client profile, its website/brochures and other marketing materials, key Center of Influence relationships, etc.); Week 5) the new client onboarding process to get started with new clients; and Week 6) how the firm conducts its ongoing client management and recurring meetings (when/how does the firm handle RMDs, rebalancing, billing, client meetings, preparing reports, etc). Notably, many firms probably don’t have all of this information written down in a structured way to teach in the first place… and in that case, the next/first 6-week employee onboarding process may be a good time to develop the material as you go, and at least then you’ll have it for all new hires thereafter!
Developing And Retaining Young Advisors To Carry On Your Legacy (Missy Pohlig, SEI Practically Speaking) – Earlier this year, SEI Advisor Network surveyed nearly 300 Millennial advisors, to explore what it is from the young advisor’s perspective that they want to be happy and successful in an advisory firm. The first key point is to recognize that Millennial advisors want opportunities to work directly with clients early on, and that they have a preference to serve their peers (other Millennials) as clients… which Pohlig suggests from the firm’s perspective, is a great way for those advisors to practice their skills and develop their abilities, which means there’s value for the firm even if those clients aren’t necessarily as profitable for the firm’s core business. Similarly, Pohlig’s data confirms that Millennial advisors really can be effective in helping firms to advance a firm’s technology, as more than 60% of Millennial advisors don’t view robo-advisors as a threat but as a form of technology that could help advisors (that they want to use). Perhaps most notable, though, is that Pohlig found that the really crucial point for Millennial advisors is when they’re in their late 20s and early 30s, as that is the point that they’re most likely to want to go out and start their own advisory firm, particularly if they don’t see an upside opportunity for partnership in the current firm; in other words, if advisory firms want to retain upwardly mobile Millennial advisors, it’s crucial to at least introduce the conversation of potential partnership or succession planning by their late 20s or early 30s, and not just wait until the owner is getting ready to retire, or the good Millennial advisor will have likely already gone to start his/her own firm by then.
Climbing The Ladder (Caleb Brown, Investment Advisor) – Setting goals is important for business owners to be able to focus the growth of their businesses, but it’s also important for employee financial advisors to develop their own career trajectories. Brown suggests nine core areas where paraplanners and associate advisors can focus to improve their own career/promotion prospects, including: Take on managing the firm’s internship program (or help establish one if the firm doesn’t have one), which is an opportunity to practice your leadership and management skills (necessary in the future to manage an advisory team of your own!); choose a technical skill to sharpen (that fits with the needs of the firm and who they serve), and focus on it, whether through continuing educational programs, or more substantive programs like a post-CFP designation; come up with a way to save your Senior Planner some time (and demonstrate your ability to fulfill delegated tasks); proactively trial new software programs (e.g., new financial planning software) that might be an improvement for the firm; run for leadership in FPA NexGen or NAPFA Genesis to further hone your leadership skills; start or join a study group to push yourself to grow further; take a communication course to strengthen your listening and question-asking skills (whether outside the industry, or a specialized program in the industry like Money Quotient, the Kinder Institute of Life Planning, or Sudden Money Institute); or seek out a co-worker you don’t know well and begin building a relationship with them, as it both expands your personal network, and is a good chance to build connections that improve communication around the office.
Riskalyze: Much More Than A Risk Number (Joel Bruckenstein, T3 Technology Hub) – In just 5 years, Riskalyze has gained rapid adoption and become the most popular risk tolerance software solution for financial advisors (according to the recent 2017 T3 Advisor Tech Survey). Initially, the company was known for its “Risk Number” process of evaluating client risk tolerance through a series of trade-off questions that boil down to a single risk tolerance score, but more recently the software has evolved into a solution that also facilitates portfolio evaluation and helps the advisor show how his/her proposed solution improves the client’s portfolio (from the perspective of aligning it with the client’s Risk Number). Over time, though, Riskalyze has increasingly evolved towards a holistic advisor platform, which under its latest “Riskalyze Premier” release now includes a client portal with account aggregation (“Asset Sync”), digital account opening capabilities, and a solution to support working with employer retirement plans and their plan participants as well (in partnership with Vestwell). And Bruckenstein notes that for Riskalyze-centric advisors, the expansion of Riskalyze’s dashboard tools, allowing advisors to track relevant data points and statistics across the practice (including and especially whether client portfolios continue to remain in line with their Risk Number), makes it increasingly valuable as a central advisor platform (and for the rest of their users, Riskalyze allows their data to be pushed into other software via APIs). Other recent notable features from Riskalyze include a new stress-testing “Scenarios” tools, new account workflows for their AutoPilot (robo-advisor-for-advisors tools), and an ongoing push to continue improving the advisor and client user experience (for which Riskalyze is already known).
Independent Broker-Dealer Technology: More Security, Better Platforms (Joel Bruckenstein, Financial Advisor) – The bad news of “robo-advisors” and a growing range of direct-to-consumer technology solutions is that they’re putting a spotlight on the cost of financial advice and forcing advisors to step up their value proposition, which is eroding margins for advisory businesses. The good news, though, is that improving technology is also making the advisory business more efficient, giving financial advisors more ability to scale and serve clients profitably. In the independent broker-dealer community, Bruckenstein highlights some of the recent advances at Commonwealth, LPL, and Securities America. At Commonwealth, the focus this year has been on figuring out how to better facilitate secure messaging with clients, in a world of hackers trying to impersonate clients to facilitate wire fraud or intercept email client communication with private client data; earlier this year, the company launched its own secure messaging tools, as a part of its Client 360 platform, that automatically fulfill compliance obligations (i.e., archive all communication) while ensuring the secure transfer of information and automatic logging of communication in the client’s CRM record. In addition, Commonwealth has expanded its CRM workflow engine, to further facilitate the automation of key tasks (including with standardized workflow templates for advisors to use and adapt). At LPL, the big news is the switch to its new advisor workstation, known as ClientWorks, to replace the old BranchNet system. Bruckenstein notes that the new ClientWorks system is “superior in every respect”, although LPL advisors will increasingly be required to route through ClientWorks to access new LPL solutions going forward (e.g., its Guided Wealth Portfolios robo-advisor-for-advisors platform, which is deeply integrated into ClientWorks). Also being released at LPL is a successor to its old Portfolio Manager tool, dubbed “Client Reporting”, which includes pre-built report templates and the ability for advisors to further customize them. Also notable at LPL is the company’s venture into financial planning software, with a “lite” version of planning tools dubbed Client Goals. At Securities America, the technology focus has been on regulatory and compliance issues, particularly with the DoL fiduciary rule looming, although now the firm is focusing on improving its core advisor workstation, with a pilot program coming in mid-2018.
The Most Disruptive [Technology] Force In Planning Today (Bob Veres, Financial Planning) – While much has been written about the disruptive potential of robo-advisors, Veres suggests that the most truly disruptive technology force in financial advice today is video teleconferencing tools (or “face-to-screen technology”). Because thanks to advisor video teleconferencing tools, advisors can work with their clients from anywhere… which makes it possible to move offices to another location (even another city or state) without abandoning clients, service clients from second or vacation homes, allow clients to be retained if they move and leave the area, and even retain staff members if they need to relocate. The implications of the shift are multiple – impromptu client communication is easier (no need to schedule a meeting and time to drive to/from the office), which allows advisors to communicate with clients more often and deepens the relationship, and makes it feasible to build the business with clients regardless of their geographic location in the first place (though it also means advisors not in your area will compete with your business and clients now!). For those with niche practices, though, the opportunity is especially appealing, as many niche practices that were never feasible in a world where the advisor could “only” serve clients in their local area are suddenly quite possible in a geographically unconstrained advisory business… and clients with specialized problems can find their way directly to their specialized advisors with a simple Google search. With the caveat, though, that most financial advisor websites will need a substantial upgrade to attract and retain digitally-engaged clients of the future.
When Office Meetings Leave The Office Behind (Paul Sullivan, New York Times) – In the world of startup businesses, where the hours are often long, it is increasingly popular for business owners to “mix it up” with a range of activities to keep employees engaged in meetings. Yet as it turns out, mixing up the locations where employee meetings happen can actually help improve productivity and facilitate better communication. For instance, one firm began ‘forcing’ workers to take walks or bike rides during the day, but only if they were done with colleagues as a way to discuss work outside the office (where some fresh air and getting away from in-office distractions can actually help spur creativity). And notably, such perks are increasingly popular amongst workers as well, especially for this in middle-and-upper-income jobs, where beyond a requisite level of financial security, it’s less about more dollars, and more about employees wanting to feel like they are part of a community they (want to) belong to. Other firms have encouraged employees to go meet “anywhere” out of the office, from the SoulCycle gym to getting a manicure together, which has the added benefit of helping improve employee retention as co-workers bond into friends. In fact, one business owner conducts her meetings in a Himalayan salt room in Manhattan. Obviously, as the author points out, “not everyone likes to leave a meeting with a dusting of salt on their suit”, but nonetheless the point remains that unconventional meeting spots are becoming increasingly popular as a way to help employees and business partners to better connect.
Why You Can Focus In A Coffee Shop But Not In Your Open Office (David Burkus, Harvard Business Review) – In recent years, there has been a backlash against the negative productivity consequences of “open office” arrangements (where there are no walls/doors separating employees), as the level of distractions and lack of sound privacy in an open office makes it hard for employees to focus. Yet the irony is that many people can be remarkably productive at other “open” spaces like coffee shops, raising the question of why some types of noise (in an open office) are so counterproductive, but other types of noise (in a coffee shop) are fine. One recent study found that some moderate level of ambient noise is actually a positive, and helps our minds to think more creatively (although anything too loud, or too quiet, loses the benefit), and another specifically sound that certain types of white noise trigger brain waves that appear to be related to creativity. But why is the white-noise-of-chatter effect so effective in a coffee shop, but not in an open office? The problem appears to simply be that in the open office, we know our colleagues who are talking, which means we can’t help ourselves from getting drawn into the conversations of others, and that kind of interpersonal interaction is a disruptor to focus and creativity (as is most types of multi-tasking efforts). In other words, trying to find your focus isn’t about finding freedom from noise, but freedom from interruptions.
Why Working From Home Should Be Standard Practice (Ari Surdoval, TED Ideas) – The standard fear of most employers is that “working from home [will become] shirking from home”, and that employees will just binge-watch Netflix and blow off their actual work duties. As a result, telecommuting in the aggregate has still grown slowly in the U.S., where it’s estimated that the number of employees who telecommute is still only 2.4% of the workforce (compared to 10% – 20% who work remotely in other countries, particularly those that have even more congested cities with less housing affordability). And unfortunately, there has been a dearth of studies to really analyze the issue (at least, ones that weren’t already biased in favor of supporting a work-from-home conclusion). Fortunately, though, a Stanford economics professor had a recent opportunity to conduct a real-world controlled experiment to test the impact, as one of China’s largest travel agencies decided to offer more than 500 of its call center employees the chance to work from home (with a control group that had to stay in the office, based on the day-of-the-month of their birthdays to ensure employees were “randomly” assigned to each condition). The results of the study: not only did the firm save $1,900/employee over the course of the study by not needing to provide a workspace, but employee productivity increased by 13.5%, employees took shorter breaks, had fewer sick days, took less time off, and had a massive 50% decrease in employee turnover. Although notably, almost half of the remote employees ultimately decided they wanted to come back to the office, feeling that working from home was too isolating, which suggests that ultimately the ideal solution may be a combination of partially working from home, with the rest of the time still in the office to connect with colleagues.
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.