Enjoy the current installment of “weekend reading for financial planners” – this week’s reading kicks off with two interesting bits of regulatory news: the first discusses a recently released report from FINRA focusing on broker-dealer conflicts of interest, and advocating that brokerage firms need to do a better firm of focusing on their clients’ interests and mitigating or avoiding their conflicts of interest (though the word “fiduciary” isn’t actually used); and the second looks at a sharp rise in the number of arbitration settlements that brokers are getting expunged through FINRA, as a redemption process that was theoretically supposed to be used in just “limited, unusual circumstances” is now getting approved in almost 97% of requests over the past several years, in the process obscuring consumer access to important information about an advisor’s regulatory record.
From there, we have a number of practice management articles this week, including: some tips on how to prepare clients for what may soon be an onslaught of direct hedge fund advertisements and marketing; how to defend your online reputation from negative publicity (hint: the best defense is a good offense); how some advisors are successfully differentiating themselves as “remote” advisors working virtually with clients; the problem with the “access to principals” paradox where advisors promise clients to have direct access to them, simultaneously promoting the growth of the firm but limited its growth potential and equity value; how to create a tagline for your advisory practice; tips to crafting a good career plan for your advisors (why do we create financial plans for all of our clients but no career plans for our staff!?); and a fascinating article looking at how to build a good partnership/ownership culture in an advisory firm.
We wrap up with three interesting articles: the first looks at a recent study that finds financial literacy may not actually be very effective at helping consumers with their financial problems, and that other techniques (like “just-in-time” education when needed, or even developing more simple rules of thumb) may actually be more advantageous; the second provides a great reminder of the importance of reducing our distractions to focus on our work (and that multitasking isn’t really beneficial, despite what many think); and the last is an article from financial advisor blogger Josh Brown that tells the story of why and how he got started as a blogger, and how other advisors can do so, too. Enjoy the reading!
Weekend reading for October 19th/20th:
Finra Nudging Brokers Toward A Fiduciary Standard? – Earlier this week, FINRA released a new “Report on Conflicts of Interest” based on internal research it has done with more than a dozen large broker-dealer firms, finding a wide array of conflicts of interest that FINRA suggests need to be more actively managed, or avoided entirely. In fact, in the report FINRA suggests that firms need to set a “tone from the top” in trying to implement a code of conduct based on the “best interests” standard for clients, avoiding recommendations that favor proprietary products and compensating brokers independently of the products they recommend. Though the actual “fiduciary” standard is never mentioned, the report nonetheless implies that FINRA is trying to nudge its broker-dealers in that direction, either because FINRA anticipates that some form of uniform fiduciary standard may be coming, or alternatively perhaps because it wants to demonstrate that it can effectively regulate such a standard to eventually increase its regulatory purview over RIAs. Ultimately, the kinds of client-first standards the report suggests in managing and avoiding conflicts of interest are described as “best practices” – which means living up to the standard would be entirely voluntary – and there is not any kind of actual enforcement of such a standard from FINRA at this time. Nonetheless, the question remains of whether FINRA may be starting to shift itself and its capabilities towards regulating a fiduciary standard for all advisors.
‘Alarming’ Number of Brokers’ Arb Records Wiped Clean: Study – According to a recent study by the Public Investors Arbitration Bar Association (PIABA), there has been an “alarming” increase in the number of arbitration cases in recent years where brokers are getting their records expunged and wiped clean. From 2007 to 2009, 89% of expungement requests were granted in cases where there actually was a financial settlement or award (implying some damages occurred, of which consumers ostensibly should be aware!); from mid-2009 through 2011, the rate rose further to 96.9% of expungement relief granted when requested. Sometimes shocking levels of persistence occurred (with success); one broker requested expungement 40 times, and arbitration panels granted such relief to that individual 35 times. While arguably there may be instances where expungement is appropriate – which is, after all, why the option exists in the first place – PIABA makes the case that it’s no longer merely an “extraordinary relief measure” where it is being sought and granted in more than 90% of settled cases. In response, FINRA has indicated that the rise in expungements is largely attributable to a 2009 rules change (Regulatory Notice 09-23) which expanded the number of customer claims reported against brokers (including some actions that brokers claim were attributable to their broker-dealer but to which they had no real connection), and FINRA also notes that while a record-high number of expungements are being approved, the total number of expungements is still less than 5% of the total number of customer disputes being filed. Nonetheless, PIABA – and NASAA as well – suggest that FINRA needs to review its expungement process, as providing consumers with a public record of prior broker infractions is an important consumer protection, and the expungement relief is so widespread that it is becoming a “systemic” FINRA problem. (Michael’s Note: Particularly as sites like BrightScope draw increasing attention and make it easier for consumers to find out about advisors’ regulatory records!)
Preparing Clients for New Hedge Fund Advertising – The SEC recently reversed an 80-year ban on hedge fund advertising; as a result, hedge funds will now be allowed to solicit deposits from any investor who meets the minimum accredited investor standard of $1 million of net worth or annual income over $200,000, a concern to many advisors whose clients will likely be solicited (and with worries about how aggressive hedge fund marketers might be). This article reproduces a letter sent my financial planner Karen Keatley to her clients, which dispels a lot of myths and confusion around hedge funds, and may be helpful for advisors as talking points with clients. For instance, Keatley notes that many talk about hedge funds as a new/different asset class from stocks and bonds, when in reality hedge funds are simply comprised OF stocks and bonds (and/or other asset classes), which means for better or worse the value of hedge funds is their ability to trade those asset classes, not that they are an asset class. In fact, Warren Buffet simply calls hedge funds “compensation schemes” with high costs (typically 2%/year in costs plus 20% of profits to the investment manager, though “pricing pressures” have recently reduced this to 1.8%/18% instead); the problem, though, is not simply the costs themselves, but that since the managers are compensated for profits but don’t bear consequences for losses, they are incentivized to take greater risks (heads you both win, tails only you lose). Another challenge to hedge funds is their lack of liquidity and transparency, which in theory are trade-offs for greater investment returns, but in practice often fail to deliver; while public returns for hedge funds may look appealing, they are plagued by survivor bias, self-selection bias, liquidation bias, and backfill bias, which may be inflating hedge fund returns by as much as 4.4% to 7.5% per year. The investor limits on hedge funds are intended to restrict them to “sophisticated” investors with greater means, though Keatley notes that the thresholds were established in 1982 and in inflation-adjusted dollars the net worth requirement would/should be $2.3 million, not $1 million.
Defend Your Online Reputation Before It’s Too Late – This article from marketing consultant Kristen Luke makes the fundamental point that while many advisors have been cautious to engage in social media and online marketing due to a fear of accidentally generating negative publicity on the internet, the reality is that having a negative online reputation is a risk regardless of whether the advisor is engaged or not. For instance, one firm had an incident with a former employee that resulted in a public SEC document, and going forward anytime clients searched for the firm the SEC’s unflattering information showed up at the top of the results; in other case, a firm received a bad review on Yelp, and due to anti-testimonial rules the advisor wasn’t able to take control of the Yelp profile, yet they couldn’t otherwise respond to the Yelp complaint, either. However, the reality is that while these situations may seem beyond the advisor’s control, there is something that can be done – to engage in online marketing enough to ensure that all the top search results in Google are favorable to the firm. For instance, having active social media profiles, writing press releases, producing original content, establishing online profiles at places like NAPFA, FPA, CFP Board, or BrightScope, or writing guest posts on other blogs, can all help advisors dominate the search rankings with their own (favorable) material, which means even if these is something negative, it may be pushed so far down the search results that few will ever actually see it. In the meantime, you can check out a tool like Google Alerts to monitor your own name and your firm’s name, so you’re aware when something new (and hopefully not bad) shows up on the internet about you.
Remote Practice a Competitive Advantage? – This article provides a review of a practice management session from last week’s NAPFA National conference, where advisors discussed working with clients on a remote/virtual basis, and the advantages that it brings. For one advisor, the primary advantage is lifestyle flexibility, and the ability to (continue) working with clients on an ongoing basis even though he travels about three months per year, though his transition to virtual started out of necessity, in a relocation to be closer to his children; while a few clients resisted (and he returns to his Pennsylvania office to see them once a year), new clients have embraced the virtual relationships and find it easier to fit their financial planner into their own busy lives. For another advisor, he finds that clients who themselves have adopted a mobile, virtual lifestyle are especially drawn to the model, even when they otherwise live close by. A key staple of the virtual advisor is the use of video and webcams, though the panelists suggested that for advisors serious about pursuing the route, skip free offerings like Skype and Google Hangouts and invest instead in a subscription to GoToMeeting or Join.me, and make sure you’ve got sufficient bandwidth for streaming video (and hopefully your clients will have enough bandwidth as well!). While not all clients will want to work remotely, the rising demand for the service in the first place means those who are adopting remote practices are finding themselves at a competitive advantage for a certain clientele, and are building their entire practices around it, from virtual webcam meetings to cloud-based file sharing and paperless e-signatures, especially when done from areas that are less expensive, allowing them to work virtually with clients in more expensive areas who may not want to work with “expensive” local advisory firms.
Why Clients Can’t Have You Only – On the Financial Planning magazine blog, marketing consultant Steve Wershing looks at what he calls the “access to principals” paradox, where advisors often “sell” the fact that their clients will have access to the owner/principal/president/partner of the firm as a key value proposition, yet the reality is that while doing so may help to bring clients on, it also severely limits the growth of the firm. Eventually, time management becomes an issue, as the advisor simply runs out of time with too many clients to personally service, and everything about the practice becomes purely reactive to client requests. And in the long run, committing to client access to principals is not only limiting to the growth of the firm, but also its equity value; after all, if the primary value for clients is not “working with the firm” but instead is “working with you” it will be difficult to find a buyer willing to offer much for the firm! Another challenge to tying all clients to the principal of the firm is that it provides no career path for younger advisors in the firm, as clients may resist working with a different advisor in the firm after being “committed” to the original principal (and staff aren’t likely to exhibit much of an ownership mentality in the business when the clients are dissuaded from working directly with them!). Ultimately, this doesn’t mean that the principal of the firm shouldn’t be the primary rainmaker, but instead simply recognizes that just because the owner brings the clients in, doesn’t mean the owner should be working with every client; in fact, if the ultimate goal is to really grow the business and its equity value, learning to attract clients to the firm but hand them off to staff and other advisors is a key pillar for success.
Financial Advisor Taglines: FAQ, Slogans, Examples, and More – From the blog of practice management consultant Suzanne Muusers, this article looks at the advisor of “Advisor Taglines” that can be attached to an advisor’s name, firm, and brand, to help communicate its benefits quickly and easily, especially in a world where many advisory firm names are relatively bland and don’t necessarily convey much about what the business actually does or why it’s unique. The key, though, is to really communicate benefits in the tagline; not just something about being “experienced” or “dedicated to success” that doesn’t really differentiate from everyone else who claims the same thing (and clients don’t really know what that means to them anyway!). Examples might include something inspirational (“Growing Your Dreams”) or a target market (“Investing in Womens’ Dreams”) or future-focused (“Building a better financial life”) or appealing to the right-brained (“Create the Life you Love”). Key points for tagline success are to keep it short, make sure you know your target client and speak to them, communicate a unique strength and an (emotional) benefit clients can derive from it, and ultimately publish your tagline on your business card, website, brochure, and elsewhere… but make sure you double-check the trademark and servicemark websites to make sure it isn’t taken, first!
Smart Career Plan For Advisors – From Financial Planning magazine, financial planner Dave Grant makes the important point that advisory firms often invest heavily in crafting customized financial plans for their clients, yet invest relatively little into creating customized career plans for their advisors, even though the costs of turnover and the benefits of good human capital investment are tremendous for most firms. So how can a firm craft an effective career plan for advisors? Grant says it ultimately boils down to three key areas: 1) Know Your Staff (just as with clients, you can’t craft an effective plan until you understand their goals and capabilities); 2) Think Big Picture about your own firm (if you don’t know who you’re trying to serve and what you’re trying to deliver to them and how you’re going to differentiate, it’s almost impossible to craft a plan for your staff to help you succeed!); and 3) Customize and Adapt (recognize that the career plan is not only specific to the individual, but that the training necessary to develop that person over the next 3-5 years is specific to their strengths and weaknesses). Some additional tips include: have advisors attend not only industry conferences with other advisors, but also conferences in their target niche; mandate that each staff member acquire an outside mentor; encourage advisors to research their own possible resources; and recognize that even as a track is built, realize that it may change and adapt over time as the needs of the firm and the goals of the advisor shift, which is entirely ok… after all, a financial plan isn’t a once-and-done static document, either.
A More Perfect Partnership – In Financial Advisor magazine, practice management consultant Philip Palaveev looks at what it takes for an advisory partnership to be successful, noting that while many advisors look for complex equity schemes, messy scorecards to allocate profits and income, and other financial tools to improve their partnerships, the real issue is usually one of culture and whether the firm has cultivated a mentality where everyone really tries to do what is best for the firm… and trusts that the other partners will do the same. The issue is similar to the role of law and morality in society; in the absense of morality, law is vulnerable and futile to change behavior, as it really just serves to shape behavior at the margin after morality has taken hold; similarly, in the presence of strong firm culture, the need for contracts to regulate partner behavior is greatly diminished, and in general with strong culture all equity arrangements that are in place will work better and more naturally. So how can an ownership culture be cultivated? Palaveev suggests there are five key cornerstones: 1) A “firm first” fiduciary attitude of all partners on behalf of the firm (as with many lasting structures in human society, it’s crucial to have the “leap of faith” where we submit our self-interest to the greater goal of the group, or else the firm is little more than “an opportunistic band of individuals who may or may not take the next step together”, though it’s important to recognize that cultivating this behavior takes time and will not always be immediate when new partners are admitted); 2) Behave like a (true) partner and lead by example (the power of partnership is partners acting like owners and leading by example to show employees what is expected, which means (learning to have) at least some competence in all key areas); 3) Balance involvement with decisiveness (all partners should be involved, but over-involvement can make a firm incapable of making decisions and acting, so a strong governance model is ultimately key); 4) Create accountability (in a good partnership, fellow partners and the firm should be that source of accountability, and should be respected as such, and be cautious about complex formulas for rewards and punishments that turn what should be morally accountable behavior into a financial game); and 5) Have the difficult conversations (too many partnerships avoid difficult conversations that just compound problems). The bottom line is that a good partnership doesn’t just happen overnight – most of these are areas for constant work and improvement, not a once-and-done effort; nonetheless, with a strong cultural foundation in place, a lot of the other issues a firm is struggling with may suddenly become a whole lot easier.
Financial Literacy, Beyond the Classroom – In the New York Times, this article by Richard Thaler looks at a recent financial literacy survey, which asked three remarkably simple personal finance questions, yet only 1-in-3 Americans over age 50 were able to get all three correct. Of course, this general failing of financial literacy by the public has been the basis for a rising call for better financial literacy programs, yet the research is actually surprisingly mixed about just how effective financial literacy is. Yes, those with greater financial literacy tend to be more financially successful in saving for retirement and staying out of debt, but those with greater literacy also tend to be more educated in general and its hard to separate the isolated benefit (or limited value thereof) of financial literacy. In fact, a recent meta-analysis of 168 other scientific studies on financial literacy found that while financial education is laudable, it doesn’t seem particularly helpful, as those who receive it are not actually performing noticeably better when it comes to saving more or avoiding ruinous debt, and the results are especially weak amongst those with the lowest income (who arguably need the help/improvement the most). This isn’t to suggest that we should ignore financial education altogether, but simply to recognize that, just as we don’t remember very much as adults about our high school chemistry classes, we may not retain all that much from high school finance classes, either. So what’s the alternative? Thaler suggests three options: one is “just-in-time” education, where education is compulsory but only at the time it’s needed (such as a mandatory student loan course right before committing to a student loan); the second is to establish more effective rules of thumb (which despite their detractors in the financial planning community, do appear effective at helping to guide people towards appropriate financial decisions); and the last is to simply make our financial system more user-friendly, such as establishing consumer-friendly defaults and easier to use and understand financial tools.
Distractions Cost Money – In Financial Advisor magazine, business consultant David Lawrence provides a helpful reminder that all those distractions in our working day can add up to a lot of lost time – and therefore, lost money – as studies have shown that a distraction from an analytical task can take 10-20 minutes to get back on track (multiplied by all your time, distractions, employees, and workdays throughout the year, that’s a lot of inefficiency!). Distractions can generally be of two primary types – visual (from people walking by the office, to those pop-ups on your screen that announce the arrival of a new email!) and auditory (noises, people talking, and other loud distractions). Notably, even multitasking is technically a distraction; while many people claim that they are effective multitaskers, researching is now showing that multitasking is still less effective than simply focusing on one task, and then the next, and then the next. So how do you overcome a world of distractions? Lawrence has several great tips, including: tame your phone (have an assistant screen calls and only “distract” you with the ones that really require your immediate attention; corral your email (don’t respond to emails continuously as they come in; instead, set time blocks each day for managing email and knock through them all at once when you’re able to focus on them); close the door (avoid walk-in distractions, or at least create some structure where there are certain times you can focus uninterrupted); reduce clutter (all those papers on your desk can become a distraction; do something about them, or get rid of them!); find your ideal noise level (if you work best in silence, make it silent, though some people actually work better with some background noise, so you may wish to play some mild/soothing background music); get plenty of sleep (being sleep makes you more distractable); use a to-do list (helps you to focus on what needs to be prioritized to get done); take planned breaks (if you can focus effectively, you’ll need some breaks to refresh for the next focus period!); and finally, reduce/eliminate multitasking, because no matter what you think, it’s really not helping.
The ‘Why’ And ‘How’ Of Blogging – On Investment News, popular advisor blogger and “Reformed Broker” Josh Brown shares some of his insights about blogging as an advisor with a great deal of experience doing it. As Brown notes, his blog and web presence have dramatically changed the trajectory of his life and career, but his blog began 5 years ago for little more reason than his wife and son were out and he had nothing to do, so he just made a quick website and started writing whatever came to his mind. Early on, Brown notes that his articles were little more than venting – which he felt safe in doing in part because he didn’t really expect anyone was going to find it and read it anyway – yet a few other bloggers found his material and began to read and share it, and suddenly the blog was growing, so he kept going. Over time, the presence of an audience becomes a responsibility of its own, providing support and encouragement to keep writing, creating pressure on the writer to keep improving, and learning over time what works and what doesn’t as blogging habits and rituals are formed. While on the one hand this means an increasing amount of blogging “work” Brown notes at the same time that the lines between free time and work begin to blur, as you inevitably get more immersed into your subject matter, between to make connections and friendships, and find an audience that continues to build. Ultimately, the outcome is influence marketing, without a PR firm and a lot of expensive overhead… just simple authority earned through the authenticity of sharing your thoughts and value on a regular basis, which has tremendous value, but for which there is no shortcut. Accordingly, Brown’s advice is straightforward: if you want to try out blogging, just start and try it. Start quietly, and let it be messy while no one is reading you anyway, and as you find your voice, you’ll find the “why” of blogging begins to take on a life of its own.
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. You can see below his new Bits & Bytes weekly video update on the latest tech news and developments, or read “FPPad Bits And Bytes” on his blog!
I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd’s Eye View – including Weekend Reading – directly to your email!