Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the news that New Jersey is about to launch its own version of a fiduciary rule for advisors, driven not by New Jersey legislators but directly from the New Jersey state regulators, as a state-level fiduciary movement appears poised to surge again in the face of federal regulators failing to address the fiduciary gap.
From there, we have a number of additional articles of notable industry news, including: the SEC’s ongoing hiring freeze is threatening to reverse its recent increase in the examination rate, as by 2019 it’s projected there will only be 1 SEC staff member for every 20 RIAs the regulator oversees; state securities regulators continue to step up on regulation and enforcement, with actions against unregistered individuals reaching a new record in past year (likely as a result of the surge of fraudulent cryptocurrency offerings); the College for Financial Planning has partnered with US SIF to launch a new sustainable, responsible, and impact investing designation (the Chartered SRI Counselor, or CSRIC); and the CFP Board’s Center for Financial Planning is partnering with Wharton on a new course in Client Psychology.
We also have several practice management articles this week, from a look at how hybrid robo-advisors and their salaried employee advisor jobs are providing a new career track alternative for financial advisors, to the importance of getting good at retention of existing advisor employees (given the incredibly high cost of turnover for experienced employees), a deep-dive look at what it really means to “manage” a client relationship, and an exploration of whether financial advisors should be learning more “conflict resolution” skills to help clients (especially couples and families) navigate their money conflicts.
We wrap up with three interesting articles, all around the theme of recognizing that we must sometimes embrace imperfection: the first is a powerful reminder that going beyond about 80% of the way on “surface shine” is rarely about actually improving the outcome and more about just satisfying ourselves; the second discusses how we often look to experts and their habits to figure out an optimal approach to something new when the truth is that we really need to just get started (because the “optimal” is rarely necessary to start!); and the last explores how the key to improving over time is to recognize that failures will happen, and those who improve the most are the ones who are willing to actually talk about them, and avoid the natural tendency to just sweep the embarrassment under the rug and move on before we have a chance to actually learn from the experience.
Enjoy the “light” reading!
New Jersey Could Be First In Fiduciary (Blue) Wave With Pending Proposal (Mark Schoeff, Investment News) – In the coming week, New Jersey’s Bureau of Securities is expected to formally propose a new rule that would require all financial advisors in the state to be fiduciaries and put their clients’ interests ahead of their own when making investment recommendations. What’s notable about this proposal, though, is not just that it will require all advisors to actually be fiduciaries (not just disclose whether they are fiduciaries, as has been proposed in some other states), but that it is being proposed not by the New Jersey legislators but directly by the existing New Jersey securities regulator, which means it could potentially get done a lot faster than prior states’ legislative proposals that were often stopped in the legislative process by fiduciary opponents. Of course, regulatory rules aren’t necessarily “final” either, in that they can still be overturned in courts – as occurred to the Department of Labor’s fiduciary rule itself. Nonetheless, with the Department of Labor’s fiduciary rule uncertain, and the SEC’s advice rule at best looking like a watered down version of non-fiduciary “best interest” protection, there is still a lurking movement amongst states to fill the fiduciary void being left by federal regulators. And as the fiduciary rule itself has become a more partisan issue, the trend now appears to be continuing as other states (with Democratic majorities in particular) appear to be taking the lead in trying to sustain new fiduciary rulemaking (either though, arguably, the basic ideal that advice should be in the best interests of the person receiving it transcends traditional party lines).
SEC Hiring Freeze Will Leave Just One Examiner Per 20 RIAs By 2019 (Tracey Longo, Financial Advisor) – With the ongoing shift from brokerage to advisory showing no signs of stopping, the number of RIAs continues to rise every year, with total RIAs up by 15% (and AUM up by 40%) since 2016. Yet the SEC’s annual funding from Congress has remained flat (at $1.6B) since 2016 as well, resulting in a hiring freeze that remains in effect today, and has triggered a 5% decline in SEC staff… which at current levels of RIA growth means that by next year, there will be nearly 20 RIAs for every SEC staff member, raising concerns about whether the SEC will be able to further improve its examination rate that is still “only” at about 15% of RIAs per year (and a whopping 35% who have never been examined). Given these constraints, the SEC is pushing for Congress to approve additional hiring, particularly in its OCIE (Office of Compliance Inspections and Examinations) area. Notably, though, the SEC’s Office of Inspector General also points out that the SEC has hampered itself with failures to streamline processes and better leverage technology, and could still improve its own allocations of human capital and other resources by doing better risk-based targeting of RIAs in the first place (in particular, by assessing a risk to the firm based on its last exam, to determine how soon the firm realistically needs to be examined again). In the meantime, the SEC’s resources are also being strained by growth in other areas it’s responsible for overseeing as well, including more clearing agencies, more municipal advisor registrants, increasing cybersecurity threats, and the rapid growth of blockchain and cryptocurrencies.
State Regulators Brought Hammer Down On Unregistered Advisers More Than Registered Ones In 2017 (Mark Schoeff, Investment News) – In its latest enforcement report, the North American Securities Administrators Association (NASAA) reported that for the first time ever, it brought more regulatory actions against unregistered individuals and firms than registered firms (up 24% over the prior year), though the rise appears to be associated not with “traditional” investing infractions but a rise of potentially fraudulent cryptocurrency activity in particular (supported by a coordinated “Operation Cryptosweep” effort by more than 40 state agencies). In the domain of registered firms, NASAA also reported that for the first time, cases against RIAs themselves outnumbered the cases against broker-dealers, although it’s not entirely clear whether this is due to greater enforcement against RIAs, reduced enforcement against broker-dealers, or simply because so many broker-dealers are now hybrids that any action against them by state securities regulators would target their corporate RIA (and thus be recorded as an RIA enforcement action) anyway. Though NASAA notes a particular focus on trying to crack down on “bad actors,” given the unfortunate tendency for repeat offenses from a small subset of problem advisors. Cumulatively, state securities regulators obtained $486M in restitution for investors (up from $321M in 2016), plus assessing $79M in fines, and may rise further in the coming years as the recent NASAA model rule to combat senior financial abuse has now been adopted in 18 states (ostensibly with more to come in 2019).
First-Of-Its-Kind Certification Introduced For SRI Investing (Sarah Min, Investment News) – This week, the College for Financial Planning announced the rollout of a new designation in partnership with US SIF to introduce a new certification for advisors specifically on Sustainable, Responsible, and Impact (SRI) investing. The new “Chartered SRI Counselor” (CSRIC) designation, at a cost of $1,300, will require 45 hours of coursework across 7 modules, covering everything from the history of SRI, portfolio construction principles, ESG performance and risk, and fiduciary standards and best practices. Of course, the challenge remains that the advisory industry is oversaturated with an abundance of designations, but as CFP certification becomes more and more ubiquitous, it is still becoming increasingly relevant and necessary for more specialized “niche” designations (like the new CSRIC) to emerge to help advisors formulate their post-CFP specializations (as CFP certification itself is still important, but no longer the differentiator it once was, as more and more adopt it!).
The CFP Board And Wharton Launch Client Psychology Course (Asia Martin, Financial Advisor) – The rise of the robo-advisor, and more generally the commoditization of basic asset allocation, has driven an increased focus on the role of the financial advisor to not just help clients craft portfolios, but to actually stick with them and close the so-called “behavior gap” (the difference between the returns the markets provide, and the returns that investors achieve after the adverse impact of their own behavioral biases). In this context, the CFP Board’s Center for Financial Planning announced a new partnership with the Wharton School of Business to launch a new course on client psychology, which will be offered in two 3-day modules at the University of Pennsylvania next spring (with a sister course in San Francisco next August). The course itself was developed from the CFP Board’s recent book on “Client Psychology,” which delves into the academic research on behavioral finance, biases, and the other psychological challenges that can impact or influence clients’ ability to achieve their goals.
A Human Touch In A Digital World: The Alternative Career Path Of Hybrid Robo-Advisors (Ryan Neal, Investment News) – In their early days, “robo-advisors” lauded themselves as a pure technology (cheaper) alternative to human financial advisors. However, in practice, the adoption of pure B2C robo-advisors has languished, while so-called “hybrid” robo-advisors (that employ human advisors who simply work with clients virtually using technology) have flourished instead, from the independent Personal Capital to the large-firm offerings from Vanguard Personal Advisor Services and Schwab Intelligent Advisory. And in fact, the hybrid robo-advisory firms are growing so much, now, that they’re emerging as an alternative career path for human financial advisors themselves, where the combination of efficient technology and centralized firm-wide marketing means advisors “just” have to actually do financial planning for clients and service them, while operating in a fiduciary RIA environment, and earn a more stable salary without being burdened by traditional business development responsibilities that still exist at most other advisory firms. In addition, to the extent that most hybrid robo-advisors today are targeting the mass affluent, rather than ultra-high-net-worth investors, the model has also become an appealing career option for advisors who simply want to serve more “mainstream” investors rather than millionaires and multi-millionaires. On the other hand, critics suggest that targeting less affluent clientele, while paying “just” a salary, will limit the ability of hybrid firms to attract top talent, and that as a result the firms will mostly end up with inexperienced talent and have to rely on just reading scripts and answering only basic questions. Yet in a world where more and more advisors just want to do financial planning, and independent RIAs already have reached the crossover themselves where there are more employee financial advisors than advisory firm partners/owners, arguably the rise of job opportunities at hybrid robo-advisor world simply mirrors what is already happening amongst RIAs… except that many of the largest hybrid robo-advisors still have greater resources to market and attract clients to them and their advisors in the first place!
The Importance Of Employee Retention: Hiring Can Be A Bigger Cost Than Payroll If Not Done Right (Kelli Cruz, Financial Planning) – Hiring a good staff member isn’t cheap, and losing a good one that has to be replaced can be even more expensive, with some research suggesting that the average cost of turning over a highly-skilled employee can be more than 200% their annual compensation (once considering the full impact of training costs, lost productivity during the transition, etc.). Which means, ideally, advisory firms will take steps to avoid losing their good employees in the first place (just as we try to avoid losing good clients!). And Cruz suggests that one of the biggest keys to retaining good employees is giving them ongoing opportunities for additional training and development (i.e., investing into them), because employees that see growth and upside where they are will have little reason to leave and go elsewhere! Key tips that Cruz provides to support this include: create and promote a culture of learning (where employees feel safe to point out when they have deficiencies and can ask for training, rather than feeling ashamed), especially for ongoing employees (as most firms front-load training for new employees but then don’t sustain it in subsequent years); give employees the flexibility to choose their training topics (because the reality is that they know their needs better than you do anyway, not to mention building better loyalty!); be willing to utilize both internal and outside training resources (from internal meetings and lunch-and-learns, to certifications and designations, technology systems trainings from vendors, etc.); and start a mentorship program that pairs junior-level employees with more senior professionals in the firm (or consider outside mentoring programs in the profession like FPA’s MentorMatch or NAPFA’s Mentor Engage). The key point, though, is simply that in the end, employees are more likely to continue to invest themselves into firms that invest in them.
What Managing A Client Relationship Really Means (Philip Palaveev, Financial Advisor) – One of the key differentiators between an operations staff member or a paraplanner versus a lead financial advisor is that the latter has the responsibility to manage the client relationship. Yet as Palaveev notes, not all advisors actually proactively manage their client relationships… which is about more than just being prompt in responsible to client needs and requests, and instead is about actually setting goals and managing expectations (i.e., the “rules of engagement” that clients are expected to follow in order to properly engage with the firm itself). In other words, really managing client relationships isn’t just about giving clients help when they want and need it; it’s also about ensuring that clients don’t abuse the relationship, that they make requests that the firm can actually (efficiently) fulfill, and that the relationship is profitable and successful for the firm as well. Key points to actually proactively managing the client relationship include: clearly defining and getting agreement from the client about the goals of the relationship; setting and managing expectations of the client about what success really means (from what a realistic turnaround is for service issues, to the fact that a diversified portfolio of stocks and bonds will never match the pure stock market returns in a bull market); defining the rules of engagement to work with the firm (i.e., who to contact for what); prioritizing client requests where many of them come in at once; identifying opportunities to do more for clients where appropriate to deepen the relationship; and communicating when a change needs to occur in the relationship (e.g., a fee increase). And managing these dynamics are important, because in the end the very key to “delighting” a client is to exceed expectations… which means ensuring that clients have realistic and reasonably grounded expectations in the first place! Unfortunately, though, there’s very little out there to teach client relationship management skills, and Palaveev suggests that as much as 70% of professional skills are simply learned through practical experience, with only 20% from coaches and mentors and 10% from classes and reading… with the caveat that a good foundation from the latter 30% can still greatly accelerate the learning process for the other 70%!
Planning For Conflict In Client Relationships (Sarah Asebedo & Emily Purdon, Journal of Financial Planning) – In the famous “Orange Story,” two children are fighting in the kitchen over an orange, to the point that the father threatened to take the orange away, the mother suggested that they just cut the orange in half and let them split it, but the wise old grandmother (a retired mediator!) asked each child why they wanted the orange, and found out that one wanted to make orange juice while the other wanted the orange peel for a muffin recipe… such that the optimal win-win solution was simply to let the first child use the orange to make orange juice and then give the remaining orange peel to the other for the muffin recipe. The key point is that finding such win-win solutions required additional time and effort beyond just taking the orange away or cutting it in half, but that but allowing each child (party) to express their needs, it’s often feasible to find a superior solution. And as Asebedo and Purdon note, these kinds of conflicts are not uncommon in families in general, and especially when it comes to the subject of money. Which suggests that financial advisors themselves could stand to get better training in “conflict resolution” skills, to help find such win-win solutions for clients in situations of (family or other) conflict. The situation is complicated by the fact that not all clients respond to conflict in the same ways – some collaborate towards a resolution, while others avoid, and still others may compete, compromise, or accommodate to find a resolution. Yet in the world of conflict resolution, there are a number of approaches to handle such situations, from reflective listening to reframing… which, arguably, should be increasingly included in the curriculum for financial advisors and how we are trained to handle such client situations!
The Myth Of Mirror Magic (Seth Godin) – As human beings, we spend a lot of time looking in the mirror (either figuratively, or literally), trying to assess what we need to tweak in our outfit, our social media presence, our marketing materials, etc. Yet the reality is that we often just end out spending an inordinate amount of time on the things that don’t really matter; in the end, you don’t choose your friends because they had eyeglasses with the perfect shape, and you don’t choose which books you love based on the perfect typeset of the cover. Not that some level of basic curb appeal doesn’t matter – whether in-person or online – but in the end, Godin suggests that most of the time, getting 80% of the way there on “surface shine” is likely more than enough, and the tweaks beyond that are probably just for ourselves, not really for those we’re seeking to serve.
The Power Of Imperfect Starts (James Clear) – One of the most straightforward ways to work towards a goal is to find someone else who’s already achieved it and then reverse-engineer their strategy. The caveat, however, is that the systems and habits that successful people use today may not necessarily be the same ones they were using when their journey began, and solutions that are optimal today may not necessarily be optimal to get started. For instance, you don’t really need the best new running shoes to start running, the best new cooking bowls to start eating healthy, or the best new backpack to start hiking; there may be optimal versions of each used by those who are the best at what they do, but they’re just not necessary in the beginning. The same is true with businesses; some of the best businesses have great logos, but the reality is that when you’re getting started, the most important task is getting new clients, not the perfect professional logo (which can be optimized later instead). In essence, the risk is that saying you “need to get all your ducks in a row” can often be a crutch used to avoid taking the sometimes-scary steps that are really necessary to move forward (e.g., focusing on the logo instead of contacting prospective clients who might say “no”). Because in the end, as Clear notes, “an imperfect start can always be improved, but obsessing over a perfect plan will never take you anywhere on its own.”
Talking About Failure Is Crucial For Growth (Oset Babür, New York Times) – Virtually every business professional has at some point flopped on a big presentation, where even after all the careful preparation and practice, when the day comes, everything seems to go wrong. And the aftermath of such failures can be very challenging, not just for the actual business outcome, but the personal embarrassment and lost self-confidence and self-esteem (which researchers have found can take such a mental toll on us that it mimics actual physical pain). Yet the challenge is that the embarrassment in turn often causes us to hide from or cover up our failures… which eliminates the opportunity to actually learn from them. Because in practice, often the best thing you can do after a failure is to open up and get input and perspective about the failure from others, who may identify key steps for improvement you might not see yourself (or alternatively, may point out it wasn’t even as bad as you feared). In addition, doing such conversations face-to-face is especially powerful, both for the feedback itself, and because in a professional environment, having such candid and vulnerable conversations can itself help increase the strength of the professional relationship with colleagues, humanizing the individual and making them more approachable and relatable in the workplace. The key, though, is not to just share a story of how badly things went, but to lead with the question, “Can you help me with this?” Both because it’s more constructive… and because most of the time, other people want to be helpful, and sometimes all it takes is asking to activate that spirit of helping. Especially when communicating with your professional colleagues and peers.
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.