Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off by diving into the big industry buzz of the past two weeks, where Ken Fisher, multi-billionaire owner of his eponymous $110B+ RIA, made sexually inappropriate comments at the recent Tiburon CEO Summit, spawning the financial advisory industry's version of a #MeToo moment that has led to not only Fisher being banned from several conferences (and the withdrawal of more than $1B of his institutional investors), but a rising focus on sexual harassment policies at conferences and the stories of women across the industry sharing their own experiences of sexual harassment, sexual assault, or outright rape at industry conferences.
From there, we have several more articles on industry news this week, including the FPA's decision to break with precedent and select its first non-CFP vendor representative as the next President-Elect for its National Board (from a company that also happens to be the FPA's largest corporate sponsor, and that directly opposes FPA's fiduciary advocacy lobbying efforts!), the CFP Board's announcement that it is gearing up a new Enforcement Plan for the coming year with its new Standards set to take effect (and in response to the recent WSJ article questioning its current enforcement standards).
There are also a few regulatory articles, from a new PIABA study finding that expungement requests for brokers with problematic disciplinary records has skyrocketed as creative lawyers appear to have figured out how to game the system, a critique from the Inspector General that the SEC is failing in its enforcement efforts (with an average of more than 2 years from when the SEC begins an investigation until it actually issues an enforcement action against a problematic RIA), and an alert from FINRA that it may soon crack down on broker-dealers' lax oversight of their brokers using text messages and social media messaging apps (without properly archiving and overseeing the communications, or failing to monitor their brokers from not using those channels if the broker-dealer states they're not permitted).
We also have a few investment-related articles, including a look at why the SEC's recent ETF rule will likely mean the death of the iNAV for ETFs (and why it may not necessarily be much of a loss in practice), how the industry has focused on declining ETF expense ratios but the average expense ratio that investors pay for mutual funds is also crashing (if only because investors have now put nearly 5X the dollars more into no-load mutual funds than loaded mutual funds as the industry increasingly shifts towards fee-based accounts), and how even as expenses on ETFs continue to lower there may be a floor appearing as recent ETFs that have launched with zero or even "negative" expense ratios are actually not attracting significant new dollars from investors.
We wrap up with three interesting articles, all around the theme of the challenges of burnout: the first explores the concept of "boreout", where an employee isn't necessarily burned out from too much work, but "bored out" from having too little work to do, to the point that it can actually result in deleterious health effects; the second examines the drivers of work motivation, and how compensation only carries someone 'so far' before other more intrinsic motivators become the primary drivers; and the last looks at a recent industry study finding that financial advisors themselves are experiencing far higher stress levels than the average person, for which the solution isn't necessarily about 'work-life balance' and spending more time with family, but being more proactive in taking control of the advisor's time and scheduling to have a more productive work day in the first place.
Enjoy the 'light' reading!
Outcry Over Ken Fisher Comments Could Mark Turning Point For Industry Conferences (Mark Schoeff Jr., Investment News) - The big industry news over the past two weeks was a series of sexually inappropriate statements made by Ken Fisher, multi-billionaire owner of Fisher Investments, the largest independent RIA with more than $110B of assets under management, at the private Tiburon CEO Summit in San Francisco last week, including statements that trying to get new clients is akin to trying to get into a girl's pants, references to women's genitalia, dropping acid, and late pedophile Jeffrey Epstein, which prompted financial advisor Alex Chalekian to break what is normally a strict "no social media" policy at Tiburon and broadcast a video on Twitter sharing what had happened. Tiburon organizer Chip Roame denounced Fisher's comments, announced that Fisher would be banned from the Tiburon Summit in the future, and in an Open Letter laudably commended Chalekian's courage to go public, noting that the purpose of Tiburon's no-media policy is to allow attendees and presenters to candidly and openly discuss their businesses and views (statements that, if delivered publicly, could be subject to SEC scrutiny if those firms were publicly traded), not to protect sexually or other inappropriate comments. However, with other advisors emerging to point out that it's not the first time Fisher has made such comments (and that he was previously banned from the Evidence-Based Investing conference last year for similar statements), and given Fisher's initial response (which was also accused of being tone-deaf to the issue), a backlash against Fisher Investments has continued to grow, with a Michigan pension fund pulling $600M of retirement funds from Fisher, the city of Boston's pension pulling another $248M, and Fidelity Investments now 'reviewing' its ties to Fisher as well (as Fisher Investments manages $500M for Fidelity's Strategic Advisors unit). More broadly, though, Fisher's Tiburon comments and the ensuing firestorm are increasingly being characterized as the advisory industry's version of a #MeToo moment, a turning point in awareness from a recent study just earlier this year showing that only 4.4% of male financial advisors (but 28.5% of female advisors) actually think sexual harassment is a significant problem in the industry, that may impact everything from which speakers are (or are not) invited to conferences, reminders of what kinds of behavior are (and are not) safe and appropriate in conference settings, more organizations establishing formal sexual harassment policies at their conferences, industry leaders sharing their own stories and experiences around industry sexual harassment, and spawning a courageous new blog series from former broker-dealer CEO and Impact Investing consultant Sonya Dreizler, who is sharing a series of real-world stories from women who have been sexually harassed, sexually assaulted, or outright raped at industry conferences.
I'm truly disgusted. pic.twitter.com/SKb3dYLV5h
— Alex Chalekian (@AlexChalekian) October 9, 2019
FPA Selects Largest Corporate Sponsor As First Ever Vendor Representative To Become National Board President (Michael Kitces, Nerd's Eye View) - Over the past year, the Financial Planning Association has had a tumultuous year, announcing its new OneFPA Network initiative at last November's Chapter Leaders Conference that would centralize and nationalize its 86 chapters by the end of 2019, only to have the chapters accuse FPA National of being out of touch with chapter needs, broadly repudiate the plan, and force the FPA to backtrack to a small "Beta Test" of just some of its originally proposed initiatives to be tested over the next several years instead. Yet despite concerns from chapter leaders that the National leadership is out of touch, this week the FPA announced its latest slate of National Board members and leadership, including the selection of Skip Schweiss, an executive with TD Ameritrade who leads its Retirement Plan Solutions offering, to become the FPA's first-ever non-CFP and vendor representative to lead the organization as the President of its Board of Directors. What's truly concerning, though, is not merely that the FPA leadership decided to break with precedent to elect a non-CFP vendor representative to its highest position of leadership, but that TD Ameritrade is also currently the FPA's top tier "Cornerstone" corporate sponsor, has been one of the largest corporate sponsors of FPA for over a decade paying an estimated $1M to $2M in sponsorship dollars over the years, and that TD Ameritrade has been actively lobbying against the uniform fiduciary standard that the FPA is actively advocating for. Which raises questions of whether Schweiss - who is known personally as a fiduciary supporter - will nonetheless have an untenable conflict of interest as a vendor representative of a company that publicly opposes the FPA's fiduciary advocacy agenda, and why the FPA thought that it was appropriate to ignore its own Conflict of Interest policy which mandates that FPA leaders shall "avoid placing, or avoid the appearance of placing... any third-party interest above that of the FPA". Furthermore, the addition of Schweiss to the FPA's Executive Committee, on top of incoming president Martin Seay (program chair for the Kansas State Financial Planning program), means 2020 will be the first year ever that the majority of the FPA's Executive Committee will be comprised of non-practitioners with no chapter leadership experience, at the exact moment that the FPA is trying to navigate an increasingly tenuous relationship with its own chapters and lift what has continued to be a rapid decline in its market share of CFP certificants from 50% back when FPA was formed in 2000, to only about 30% a decade ago, and barely over 20% today. Which is especially concerning, as with the ongoing commoditization of investment products and asset allocation forcing more and more financial advisors towards getting their CFP certification and becoming financial planners, the need - and opportunity - for a strong profession-wide membership association for CFP certificants has never been greater.
CFP Board Moving Ahead With Plan To Strengthen Enforcement By End Of Year (Mark Schoeff Jr., Investment News) - After a controversial Wall Street Journal article earlier this year took the CFP Board to task for omitting FINRA-reported violations of CFP certificants on the CFP Board's own "Find A CFP Professional" website, and the CFP Board's response announcing the formation of an independent task force headed by former Texas Securities Commissioner Denise Voigt Crawford to reform the CFP Board's enforcement procedures, the CFP Board announced this week that it is gearing up to release a new plan by the end of the year for stronger enforcement of the CFP Standards going forward. In the meantime, the CFP Board is already manually cross-referencing (with a team of 12 full-time temporary staffers) every CFP professional, when they renew, against existing SEC and FINRA records to verify their disciplinary history (rather than just relying on self-reporting as the CFP Board did in the past), while working with regulators to build a more automated technology solution to scrape the relevant regulatory data directly. The significance of the CFP Board's coming enforcement overhaul isn't just about better aligning CFP Board, SEC, and FINRA regulatory records and disciplinary history, though, but that with the CFP Board's new "fiduciary at all times" standards due to take effect next June 30th, the CFP Board's increased enforcement will coincide almost directly with the higher standards that CFP professionals will soon become subject to... and as a result, the CFP Board has already signaled that it anticipates there may be a pullback in the number of CFP professionals in the coming year.
PIABA Lashes Out At FINRA Expungement Process (Vicky Ge Huang, Advisor Hub) - In recent months, FINRA has been preparing a revision to its expungement rules with the SEC that it claims will make it tougher for brokers to erase complaints from regulatory databases (e.g., BrokerCheck), primarily by creating a new group of specially trained arbitrators specifically to hear such expungement cases. This week, the Public Investors Advocate Bar Association (PIABA) has requested an immediate halt to all requests by brokers to expunge customer complaints, alongside a new PIABA study that has found across 1,078 expungement-only cases since 2015, there has been an "alarming" increase in expungement requests (from 59 in 2015 to 545 in 2018), almost all of which are being approved, with fewer than 2% of brokerage firms opposing the expungements, and customers themselves participating in hearings in only 13% of the cases. In fact, PIABA went so far as to suggest that problematic brokers and their firms are "systematically gaming, exploiting, and abusing" the expungement arbitration process, highlighting how because FINRA permits expedited hearings with a single arbitrator when monetary damages are sought, brokers are requesting a monetary damage of $1 from their firms just to obtain the expedited and simplified arbitration process (which alone has cost FINRA more than $6M in lost revenue from hearing and other expungement hearing fees), and in turn is raising concerns about whether BrokerCheck itself is still a credible tool for investors to use to research the background of brokers in the first place. While FINRA has responded that it believes its new special roster of arbitrators will address at least some of PIABA's concerns about expungements when its new rules take effect, PIABA is urging FINRA and/or the SEC to create a separate Investor Protection Advocate that would participate in every expungement-only arbitration case.
SEC Failing In RIA Enforcement Duties: IG Report (Melanie Waddell, ThinkAdvisor) - According to a recently released report by the Inspector General, the SEC is failing to meet its regulatory oversight responsibilities when it comes to Registered Investment Advisers, including and especially when it comes to bringing timely enforcement actions against RIAs. In 2018, the Inspector General found that on average when the SEC opened an inquiry or investigation that resulted in an enforcement action, it took an average of 25(!) months for that enforcement action to commence (failing to meet a target of "just" 20 months). In addition, the Inspector General's office also reiterated (as it has since 2014) that the SEC's Office of Compliance Inspections and Examinations has been challenged in its ability to conduct sufficient examinations of RIAs themselves, and that the SEC needs to use better risk-based processes (and better leverage technology) to prioritize examinations. In the meantime, the Inspector General reported that its 2020 oversight of the SEC will focus on the SEC's own cybersecurity efforts with respect to its systems and data, even as the SEC has been requesting more resources from Congress to deepen its own Office of Information Technology to protect against external hackers and cyberattacks.
Brokers' Use Of Texting, Social Media Cited In FINRA Exam Report (Melanie Waddell, ThinkAdvisor) - In its latest 2019 Report on Examination Findings and Observations, FINRA reports that topping the list of recent broker-dealer examination findings is the improper use of texting, messaging, or social media apps (e.g., Facebook Messenger, WhatsApp, WeChat) to communicate with clients. The concern in part is that while many broker-dealers prohibit such communication tools, they are still failing to "maintain a process to reasonably identify and respond to red flags" that their brokers are using those impermissible personal digital channels anyway to communicate with clients. In addition, the FINRA report also notes that some brokers have been conducting "electronic sales seminars" in chat rooms that were not permitted by their firms (and/or were outside of their broker-dealer's supervision and recordkeeping oversight). To the extent that brokers - and their clients - are utilizing and/or demanding the opportunity to communicate using such digital channels, the pressure is now on broker-dealers to adopt technology that facilitates compliance for texting and other digital communication, as the fact that FINRA has identified this as a matter of concern, and reported it to broker-dealers as a concern, suggests there will be even greater scrutiny of broker-dealer oversight and broker use of texting and messaging apps in the coming years. (Which, notably, is permitted under FINRA Rule 3110... as long as broker-dealers maintain the proper supervisory archiving and oversight procedures of those digital communications.)
ETF Eulogy For iNAV (Lara Crigger, ETF.com) - Earlier this month, the SEC announced its new "ETF Rule" that will allow for custom ETF baskets, provide for daily portfolio transparency, and eliminate the time-consuming and costly exemptive relief process for creating new ETFs (which is anticipated to lead to a new boom in ETF launches). One change that has gone largely under the radar, though, is that a key requirement of the prior exemptive relief rules is that they also required ETFs to post an "Intraday Net Asset Value" (iNAV, also known as the Indicative Optimized Portfolio Value or IOPV)... and with the elimination of exemption relief for (most) new ETFs, so too will the requirement for new ETF issuers to disseminate iNAVs for their ETFs going forward be eliminated. Yet as Crigger notes, in practice it's not clear that the iNAV was actually achieving its intended purpose. In theory, the iNAV was supposed to be a means for ETF transparency, where companies would calculate the value of the representative basket of holdings in the ETF, divide it by the number of ETF shares used for the representative basket, and come up with an estimated value of the ETF's underlying holdings (which would be updated every 15 seconds throughout the day), thereby making it easier for investors to ensure that the ETF was trading consistently with its intrinsic value (or at a premium or discount). However, while that process is relatively straightforward for US-traded stocks, it quickly breaks down when evaluated across a wider range of ETFs, from bond ETFs (that may hold smaller bond issuances that don't trade for days or weeks at a time), or even 'just' holding foreign stocks (where the stock's foreign exchange isn't even open for trading during US hours, so there's nothing to price every 15 seconds). And in fast-moving volatile markets (when they crop up), when trades are occurring in fractions of a second, even an updated iNAV every 15 seconds will be grossly stale most of the time (and overall, an ETF.com analysis found that iNAV data is inaccurate for a whopping 80% of all ETFs!). In point of fact, iNAVs are already known by more ETF liquidity providers and authorized participants to be so inaccurate that they have long-since built their own real-time in-house up-to-the-second calculations of an ETF's "fair valuation" (with appropriate proxies for underlying securities that aren't currently trading, such as Japanese futures contracts as a proxy for a not-currently-traded Japanese stock). And while the iNAV might have still been helpful to retail investors - who lack such real-time ETF fair valuation tools - the SEC itself noted that in practice, it's almost impossible for retail investors to access ETF iNAVs for free (as they're not typically published to ETF issuers' own websites). Ultimately, the iNAV still isn't actually dead, as listed exchanges can and do still require issuers to disseminate iNAVs (which may be calculated by the listing exchanges themselves), but CBOE Global Markets has already announced that it intends to do away with the requirement now that iNAVs are no longer required in the SEC's ETF rule anyway. Whether any other alternative crops up to fill the void for the retail investor, though, remains to be seen.
The Invisible Race To Zero (Tobias Salinger, Financial Planning) - While the industry focus in recent months and years has been on the seemingly inexorable decline of index ETF expense ratios, and more recently of ETF trading commissions, the untold story is that the average expense ratio that investors pay for mutual funds has also been dropping precipitously over the past decade; since 2009, the net assets in load-based mutual fund share classes is down 6%, while assets in no-load share classes are up a whopping 144% (and now exceed loaded mutual funds by a ratio of almost 5:1) as the fee-based model explodes across both RIAs and broker-dealers. The shift away from load-based mutual funds has also indirectly impacted broker-dealers themselves, which typically receive a share of those commission/load payments as the distributor, with one Morningstar study showing that the average load-sharing to broker-dealers plummeted from 156bps in 2010 to only 88bps in 2017 (and from 89bps to 25bps for captive broker-dealers). In turn, load-sharing payments are now deemed to be so minimal that under a recent SEC rule change, mutual funds will no longer even be required to separately report the amount of load-sharing kickbacks to broker-dealers. The concern, though, is that as long as those load-sharing kickbacks still exist, it's important for them to be tracked, and the loss of available data for both researchers and policymakers about how broker-dealer load-sharing payments impact distributions and fund flows may be problematic going forward. The SEC maintains that such data was only used minimally, and consequently provided insufficient benefit relative to the cost burden of reporting the information, though consumer advocates suggest that perhaps the transparency of those load-sharing payments may have been part of what kept them in check in the first place.
Who Won The Zero-Fee ETF War? It Looks Like No One (Eric Rosenbaum, CNBC) - Over the past few weeks, the industry news has been filled with the reports of one major brokerage firm after another cutting their stock and ETF trading commissions to $0, from Charles Schwab to TD Ameritrade, and E-Trade to Fidelity. A similar trend has been emerging over the past year or two in the world of ETFs themselves, with upstarts like SoFi issuing a zero-fee (technically, a fee-waived) S&P 500 Index ETF, and Salt Financial issuing a "negative fee" ETF (which rebates money to shareholders who invest, at least until the fund reaches $100M in AUM). Yet with another big year of ETF flows - now nearly $200B in 2019 - the SoFi zero-fee ETF has gained only $55M of AUM, and the Salt Financial negative-fee ETF has garnered a mere $7.7M of AUM. Which suggests that there is a limit as to how low ETF fees can go, before it turns out investors may not care after all. On the other hand, expense ratios are clearly still a significant issue; of the nearly $80B of ETF flows in the 3rd quarter, $57.1B went to ETFs charging less than 10bps, $16B went to ETFs charging 11 to 20bps, $13B went to ETFs charging 21 to 40bps, and all ETFs with expense ratios above 40bps experienced in the aggregate net outflows. And it's not clear that it's just a matter of lesser-known brands, as JP Morgan launched an ETF earlier this year that provided core US equity exposure at an expense ratio of just 2bps, and that fund, too, has accumulated less than $50M of AUM. In point of fact, though, it turns out that the ETF space may simply be so overcrowded that it's difficult to launch any new ETF, as only four new ETFs in the past year have even breached $100M of AUM (despite $200B of net inflows to ETFs this year alone), and only two have reached $1B in AUM (both of which were seeded with big money from an insurance company anyway). Overall, then, the actual takeaway seems to be that in a world of zero- or near-zero-fee ETFs, the real driver is the asset manager's ability to distribute its funds by marketing them and connecting with relevant platforms, instead of just having a low expense ratio alone.
Bored To Death: What Is Boreout Syndrome? (Matt Davis, Big Think) - While many are familiar with the concept of "burnout", workplace researchers have recently discovered another phenomenon, dubbed "boreout", that can also create significant challenges for both employers and employees themselves. In essence, while burnout is typically the result of having too much to do at work (for a prolonged period of time), boreout occurs for those who have too little to do - the job where everything is done in the first hour or few of the day, and then there's 6-7 more hours to kill until the end of the day. Of course, in theory, employees who are bored could simply ask for more work, but in practice there's always the risk that if the employee highlights there's so little to do in their current job, the employer might decide to just eliminate and consolidate their job entirely... with the caveat that remaining unengaged still runs the risk that the employer will eventually notice the lack of activity and downsize the position in the future anyway. In one recent instance in France, an employee actually sued their employer for allegedly being "put in the cupboard" (i.e., was sent to a 'banishment room', a department with meaningless/unimportant/unpleasant work, in the hopes the employee will eventually just quit). And the issue has real physiological implications; one study found that those in monotonous jobs had significantly greater risk of heart attacks, and another found that frequently bored individuals were 2X - 3X more likely to die of cardiovascular disease (which researchers theorize may actually be because the terminally bored turn to other unhealthy habits, like smoking or drinking, to make their lives more 'interesting'). In addition, boreout employees actually appear to have worse job performance and make more errors (in addition to having higher absenteeism). One recent German book, "Diagnose Boreout", proposes a number of potential methods to resolve the issue, which not surprisingly focus on giving employees more tasks (and more challenging, non-repetitive tasks) to do, and making employees comfortable to talk about their need/desire for more work to do (without fearing they will be laid off).
The Riddle Of The Well-Paying, Pointless Job (Lawrence Yeo, More To That) - Work that is done without pay isn't a job (by definition), but work without motivation certainly can be, yet in practice firms often assume the two are in sync (or that the motivation for money from work and potential promotions is a sufficient motivator unto itself), when in reality that's not always the case. In fact, research suggests that better work may not come from a desire for more money and promotions, but instead that it's from a desire to do better work that leads to the accomplishments that produce such promotions, raises, and more subsequent income. The matter is further complicated by the fact that we don't necessarily want to improve in all aspects of our lives at the same time - for instance, the employee who wants to focus on being a better father, but isn't necessarily concerned about being a better employee (or vice versa). Which raises the question of how to turn a less motivated employee into a more motivated one... especially if it turns out that compensation alone isn't enough, and in a world where many jobs are administrative and clerical (where it's difficult to see the product and results of one's work). On the one hand, if there's no other motivating reason, money often can be a motivator... since there's literally no other reason for continued employment in the job. Yet the existence of volunteer work, non-profits, and charitable organizations, which often do extraordinarily difficult work (e.g., helping after natural disasters), suggests that there is ample room for other non-money motivators. Which has become known as the "two-factor theory" of motivation, that there's a certain set of minimum factors that are necessary or they detract from work (known as work "hygiene" factors, like reasonable compensation, job security, safe work conditions, good relationships with colleagues, and sensible company policies), but beyond those are intrinsic motivators (e.g., challenging work, recognition, responsibility, and personal growth) that become increasingly important once the hygiene factors are sufficiently covered. Such that those in non-profits may actually have greater job satisfaction than higher-paid jobs, because their intrinsic motivators are more satisfied (and their hygiene factors were at least sufficiently covered). Although notably, in some cases if the motivators aren't present at the current job, they can be filled by a "side hustle" or outside work (which eventually can lead to a new career unto itself!).
Advisors Are Exhausted, Stressed Out, And Irritated. How Can They Avoid Burning Out? (David Sterman, RIA Intel) - A recent survey by FlexShares found that financial advisors have an average stress level that is 23% higher than national norms, driven by not only the usual stressors of every job, but also increasingly intense competition, burdensome compliance rules, and of course the ever-changing outlook of the economy and markets themselves. The tell-tale sign of stress overload is a feeling of chaos and exhaustion, and increased irritability, which may be coupled with not sleeping well, gaining weight, and just feeling burned out. For which the first recommended solution is to draw a very sharp line between when you are working, and when you are not, as having the mental discipline to carve out your own time can help to get better rested and recharged. One advisor, Michael Kay, even wrote a book "The Business Of Life" to share his own turnaround story from stressed burnout to feeling in better sync with his practice. Although the FlexShares study actually found that on-the-job tactics to deal with stress, like being good to clients and using effective in-office time management, actually had a more positive impact than 'avoidance techniques' like exercising or spending more time with family and friends outside the firm. And notably, research shows that some level of stress is actually positive, helping to give us motivation and focus for bursts of energy; it's the toxic stress of prolonged adversity that ultimately becomes problematic (though notably, the study found that advisors with 20+ years of experience, who ostensibly reach a more stable point in their firms, actually experienced far less stress on average than those still in their first 10 years).
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.