Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the big news that despite all the recent buzz, it appears that the SEC may be waiting nearly a year to release a final version of its Regulation Best Interest advice rule… but only because the Department of Labor may also be working in coordination with the SEC on its own version of an updated fiduciary rule as well. And also in the news this week is an announcement by the CFP Board that the organization is expanding its Mentor Match program, from what over the past two years was focused primarily on mentoring for young women entering financial planning (as part of its Women’s INitiative or WIN program), to be available to any CFP certificant instead.
From there, we have a number of additional articles on retirement planning, from a look at the rise of “financial freedom” and “financial independence” as an alternative to the traditional label and approach of “retirement,” to a fascinating look at the spectrum for total financial dependence to total financial independence (on a 17-step scale!), and the phenomenon of “microadventures” as a way to have more enjoyable vacation experiences even when you don’t have the time for an extended vacation (whether during your working years, or in “busy” retirement itself!).
We also have several practice management articles this week, including: an articulation of the key difference between being a manager and a leader; a different way to think about who your most “valuable” clients are (based not just on their revenue or referrals, but how much they value what you do as a financial planner in the first place, which makes them more likely to become your long-term advocates); why it may be better to ditch the Annual Review for As-Needed Reviews instead; and a look at ideas about how to name (or re-name) your advisory firm if you don’t want to simply name it after yourself as the lead advisor/owner.
We wrap up with three interesting articles, all around the theme of how to make better decisions: the first explores the so-called “distinction bias,” and how we tend to overweight and overvalue small differences (and misjudge how much we’ll really care about them in the future) when we compare objects side by side; the second looks at how delaying decisions tends to increase their stakes, so often the best way to make “easier” decisions is simply to proactively make more/faster small decisions instead; and the last looks at the growing base of research around decision-making itself, and how to better frame decisions for yourself with techniques like creating a “premortem” analysis or doing proactive scenario planning… or if you want to use the traditional “Pros and Cons” list, at least be certain to assign values or weights to them so that you give each factor its proper consideration!
Enjoy the “light” reading!
Final SEC Advice Standards Package Coming [Not Until] September 2019 (Melanie Waddell, ThinkAdvisor) – This month, the SEC published its regulatory agenda for the coming year, with a note that a Final Rule on Regulation Best Interest (along with the new Form CRS, and potential adjustments to investment adviser regulation) is projected for next September of 2019, which in turn implies that final implementation of any new rule won’t likely occur until late 2020 or early 2021. The delay comes as a surprise to some who anticipated that a final rule could be out by the end of this year, but earlier this week the Department of Labor also announced that it is planning to issue a revised fiduciary rule next September to replace the one vacated earlier this year as well, which suggests the primary reason for the delay on the SEC’s rule is that the organization is actively coordinating with the DoL as well. At the same time, a great deal of controversy remains surrounding the SEC’s proposal itself, with critics suggesting that Regulation Best Interest just opens new fiduciary loopholes for hybrid advisors and doesn’t go far enough on title reform, and a growing number of consumer advocacy organizations (most recently, the SEC’s own Office of the Investor Advocate) are raising concerns that Form CRS will not resolve the investor confusion that it was designed to alleviate. And in the meantime, with Democrats increasingly likely to take control of at least the House of Representatives, Democratic Representative Maxine Waters may soon become chair of the House Committee on Financial Services, which raises additional questions about whether the final SEC proposal may become more stringent (or at least the SEC will have more trouble watering down its fiduciary obligations for brokers) next year, given Waters’ strong support of the prior DoL fiduciary rule as well and her already-public opposition that Reg BI “falls woefully short.”
CFP Board Expands Mentor Program (Jadah Riley, Financial Advisor) – Two years ago, the CFP Board created its “WIN-to-WIN Mentor Program,” a part of its Women’s Initiative that was designed to pair together prospective female CFP certificants with experienced female practitioners. And now, after more than 700 women CFP mentors worked with over 1,600 mentees, the CFP Board is expanding the program to be available for any/all CFP candidates (regardless of gender) through a newly expanded Mentoring program, with a continued focus in particular on supporting the growth of both female CFP professionals and also racial diversity of CFP professionals. On its updated Mentor-Matching site, CFP candidates will be able to create more in-depth profiles to share details and be better matched to a prospective mentor. Interested CFP certificants who wish to be mentors themselves can apply here.
Why Clients Say Financial Freedom Trumps Retirement (Evan Simonoff, Financial Advisor) – One of the most fascinating aspects of the modern era of retirement is that, due to improving longevity (thanks to medical advances), a whopping 2/3rds of all the people who have ever lived to 65 years old in the history of the world are alive today. As a result, demographics and generational researcher Maddy Dychtwald suggests that humans in the aggregate still haven’t really had time to consider the true implications of living a really long life. The first significant implication is that “retirement” itself, particularly at a specific target age like 65, probably doesn’t make sense anymore… in fact, only 29% of Americans today even state they want a “traditional” full-stop retirement, and while only 8% want to continue working full-time, the majority want to either be able to continue to work part-time, or to be able to cycle back and forth between work and leisure. Which in part is simply able staying attached to a (reliable) income, but is also because after people retire, they discover that loss of social connections becomes the biggest void in their retired lives. Which in turn means that the optimal “retirement” is less and less about actually retiring (especially in the literal sense of withdrawing from their previous working world and lifestyle), and instead is more about re-visioning a new life (or work/life balance). As a result, Dychtwald’s research actually notes that only 18% of people today report they want to stop work permanently, while a whopping 51% view “financial freedom” (rather than retirement) as their primary goal instead.
The Spectrum Of Financial Dependence And Independence (Morgan Housel, Collaborative Fund) – While the classic dream of accumulating wealth is to retire, or at least to become “financially independent,” Housel suggests that in practice, there are many different levels across the spectrum, from being (totally) financially dependent, to (totally) financially independent. Which is notable both as a way to understand where people are currently, and also is valuable in helping people set a target of what they should be trying to reach next, in order to progress and improve their financial situation. In Housel’s framework – which arguably applies for both individuals and businesses – the tiers from financial dependence to independence are: Level 0) Complete financial dependence on the kindness of strangers who have no vested interest in your success; 1) Complete financial dependance on people who want you to succeed because they like you and their reputation is attached to your success (e.g., parents supporting children, or seed investors supporting a new startup); 2) Complete financial dependence on people with a vested interest in your financial outcome; 3) Ability to partially support yourself by adding value for others while still somewhat reliant on external support; 4) Ability to fully support yourself by adding value for others, but value that is marginal and easy to replace; 5) Enough savings to cover run-of-the-mill problems; 6) Enough savings to cover large, unforeseen problems; 7) Retirement savings, education savings, and avoidance of consumer/auto debt; 8) Ability to pick a job, or specific customers, that avoids the most egregious examples of BS and unnecessary hassle; 9) Becoming comfortable enough with your social status that you don’t feel the need to flash expense goods; 10) Ability to say “no” to banks, whose debt you don’t need (including mortgages); 11) Few realistic situations would ever cause you (or your company, or your family) to fall back below level 5; 12) Interest and dividends cover more than half your living expenses; 13) Your assets and their reasonable return expectations will cover basic living expenses for longer than your life expectancy; 14) Your assets cover above-basic living expenses with reasonable return expectations; 15) Independence lets you do and say what you please, unconcerned with other people disagreeing with you; and 16) Meaningful philanthropy is the only reasonable way your assets won’t compound faster than you spend.
Microadventures Before And After Retirement (Darrow Kirkpatrick, Can I Retire Yet?) – During our working years, most people at best only get a few weeks of vacation each year, and often struggle to even use that. And ironically, for many, it’s not better in retirement either, as everything from to-do lists to routine local activities or volunteer commitments can still make it difficult to get away for longer trips. As a result, Kirkpatrick suggests a better approach is to seek out “small adventures,” which may be no more than a day or few at a time, and usually not far from home… as the reality is that once you head off the beaten path, there is often a great deal of beautiful wonder even close by to where we live. The essence of these “Microadventures” (as author Alastair Humphreys has dubbed them), is doing something that is new, takes you out of your comfort zone, or otherwise somehow pushes your personal limits… which could be as simple as traveling across town to a new museum, or driving “just” an hour away for a (complete) change of scenery. And notably, because the whole point of an “adventure” is to go somewhere and get away, the mode of transportation matters as well, and presents another adventure opportunity unto itself (e.g., choosing to ride by train, bus, boat, or by foot, rather than via a car)… which in turn also means it’s important (and part of the adventure) to figure out how to pack light enough to make that feasible. So whether it’s simply walking from your house to a local hill or park you can camp out at, or biking your way to someplace to hike, camping out of your car, or taking more thematic journeys… the key point is simply that you can pack a lot of “vacation” adventure into a surprisingly short amount of time, if you just take a moment to plan out how even venturing forth locally can become an “adventure” when it means going someplace or doing something entirely new!
Are You A Leader Or Manager? (Angie Herbers, ThinkAdvisor) – While there’s a lot of appeal to running a “nimble” small business, in the end the biggest challenge is simply that small businesses face many/most of the same challenges as larger businesses, but have fewer resources to solve them (both in terms of staff resources and simply time of the business owner to focus on working on the business on top of the work he/she is doing in the business). As a result, eventually advisory firms (like any small business) grow to a point where the owner themselves reaches a crossroad, and must decide whether to become full-time advisors (and hire someone to actually run the business), or become CEOs themselves (and hire others to be the advisors for the firm’s clients). Of course, the reality is that even as advisory firms grow, the founder/owner has a growing responsibility to manage their growing team. But as Herbers notes, “managing” a growing firm is fundamentally different than “leading” it as a CEO, where the former is about directing employees and focusing their activities (what they do and how they do it), while the latter is about asking questions and “influencing” employees to execute their jobs at the highest level they are capable of. For instance, a manager might direct an employee to generate a report on the number of clients each advisor of the firm works with, while a leader might ask “Are you busy and able to help me with something? I’m trying to determine how efficient our advisors are and would like a report. Do you have suggestions on how I can create it? Are you capable of creating it? And if so, when do you think you can have it to me?” Which ultimately is important not just for engaging employees to unleash their own creativity on how to do projects, but also because employees who don’t feel like they have autonomy in their own jobs can ultimately lose job satisfaction and motivation, especially for the most otherwise-high-performing employees who may feel like they always have to wait around to be directed, and eventually get bored and move on to another opportunity (i.e., another job) instead.
Who Are Your Most Valuable Clients? (Tony Vidler) – Most advisory firm owners have at least some sense of who their most valuable clients are, but Vidler notes that few firms ever actually formally define and quantify what really makes a client one of the firm’s “most valuable” (which is crucial to segment solutions and resources accordingly). The most obvious way to categorize clients is simply based on revenue, directly recognizing which clients pay the most (which for AUM firms is often simply done by the client’s assets, which revenue is based on assets under management anyway). But Vidler notes that just looking at current assets or revenue can miss big differences in cumulative lifetime value from one client to the next… given that one client might be an accumulator while another is spending down in retirement, that one is more time-demanding than another, or simply that one is nicer and more pleasant to work with than another (which impacts the mental toll the client takes to be serviced!). And of course, there’s also the business development potential, as some clients are more active sources of referrals than others. At the most basic level, though, Vidler suggests that the best way to segment clients is simply based on whether they really get the value of your advice in the first place, and the extent to which they treat you as a professional, versus an order-taker. Because even an affluent order-taker client is still effectively just “renting” your business, and can move on at any moment, while clients who really value you and your advice are also the most valuable to the business because they truly become engaged with the business and advocate for its success. And so rather than just segmenting clients by assets or revenue or referrals, Vidler suggests instead segmenting clients by the categories of: 1) (Future?) Advocates; 2) High-Value Clients; and 3) Customers. From there, you can give great service to customers, and great service plus a high level of personal attention to high-value clients. But it’s the Advocates to whom you really want to give everything you can.
The End Of The “Annual” Review (Stewart Bell, Audere Consulting) – It’s a staple of financial advice around the world to periodically (most often, annually) conduct a Review meeting with clients. Yet Bell asks an important fundamental question: why do we arbitrarily conduct reviews annually, instead of conducting reviews as needed (i.e., at the request of the advisor or client because there’s an actual reason for the meeting)? Of course, by conducting regular annual meetings, it gives us an opportunity to do the regular work that may need to be done in the client relationship or to implement the client’s plan, and often there’s work to be done at each meeting. Yet sometimes, there isn’t – the client really is already on track and implementing, and the bulk of the meeting is just wasted with idle chit-chat to fill the time. And in other situations, the problem is that there’s a real problem in the client’s life, urgent enough that just waiting until the next annual review meeting will be too late to add value. Which means, at best, the value of the regular annual review meeting is somewhat random as to whether it really provides much of any value. For some advisors, though, the fear of shifting from a steady annual review to as-needed reviews is that it’s harder to price the relationship, since it’s hard to know how demanding the client will be… except in reality, that’s a challenge with clients already, especially since if the client really did have an urgent issue, most advisors would take the call/issue anyway. And there’s always the risk that clients won’t contact us when there actually are opportunities to help unless we’re already regularly meeting with them… except Bell suggests that may simply be a matter of educating clients about all the life transitions we can help them with, so that they really know what to contact us about in the first place. And there are lots of ways to use other communication tools, from quick phone calls to text messages to emails, to do check-ins with clients (often on an automated basis) to see if a meeting needs to happen. Ideally, though, following a more “as-needed” approach to reviews simply moves us away from getting paid for our time (to conduct those annual or more-regular meetings), into being paid for the value we actually add (in the meetings that happen when they need to happen and there’s an opportunity to add value!).
Naming Your Financial Advisory Firm: Is It Time For A “BackRub”? (Kristine McManus, Commonwealth) – One of the “surprisingly” challenging aspects of starting an advisory firm is simply to name the firm, as the name makes both an implicit or explicit statement about what the business does (Smith Financial Planning… guess what we do!?), and the overall brand and vision of the firm. In particular, a lot of advisors focus on the question of whether to name the firm after themselves – e.g., “Smith Financial Planning” based in Omaha – or to use a more neutral name instead (e.g., “Omaha Financial Planning” owned by Smith?). For some, it’s appealing to name the firm after themselves simply because it’s intended to be an advisory firm built around themselves and their value. But for others, it’s simply easier to name the firm after themselves, than to come up with a more neutral name. Accordingly, McManus provides some suggestions about how else to name the firm, for those who are looking for inspiration (beyond their own surname). Options include: geographic or natural landmarks (e.g., Atlantic, Pacific, Coastal, Acorn, Oak, Black Mountains, etc.) or simply town/city names; intrinsic qualities or values (e.g., Affinity, Integrity, Legacy, Milestone, Navigate); Aspirational words that draw people in and that they might want to pursue/achieve (e.g., Summit, Prosperity, Empower, Pinnacle); Hobbies or Interests (Rivettas that works with engineers who place rivets, or Centered Wealth Strategies by a former basketball center); or specializations or niches (e.g., Retirement Planning Resources, Financially Wise Women). Ultimately, the key is to pick a name that comes with some story that can be told, to further draw someone’s interest into the firm. Though remember, even if you don’t like the firm, there’s always a possibility to rename it, just as back in the 1990s there was a company called “BackRub” that tried to analyze and categorize the importance of websites based on their Back-links… but ultimately realized they were indexing so much data, that it was better to have a name that pointed out the sheer volume of data they were analyzing, so they decided to rename the company “Google” (after the number googol) instead. Although it was likely traumatic at the time to rename the company, thus far, it looks like the rebrand has turned out just fine.
Distinction Bias: Why We Make Terrible Life Choices (Lakshmi Mani) – Life presents a never-ending series of trade-off decisions. In some cases, the trade-off can have long-reaching effects (e.g., which college should I attend, or which neighborhood should I live in), while others are far milder (should I buy the 40″ or the 45″ television). Yet researchers have found that as human beings, we have a “distinction bias” to turn even more incremental differences into a much bigger deal than they actually are. For instance, when standing in the store, comparing that 40″ HDTV to the newer 45″ model might look like a noticeable difference… but when you’re actually sitting in your living room just looking at it, you’re unlikely to even notice/realize/remember the difference anymore. In essence, our brains utilize two different modes for evaluation: a “comparison mode” when we’re actively making a choice, that tends to be very sensitive to small differences between options; and an “experience mode” that we use to evaluate whether we’re happy in our lives and what we’re experiencing… where there typically is nothing else to compare it do. Yet the challenge is that while our brains are good at making comparisons, we’re remarkably bad at predicting how much happier we’d actually be as a result of those comparative choices… from whether a 45″ TV would really make us happier than a 40″ TV, or whether a 1,200 square foot home will make us happier than 1,000 square feet, or whether earning $70,000/year will make us happier than $60,000/year. So how can you manage around the Distinction Bias if you don’t want it to control you? Mani suggests a few strategies, including: try to evaluate choices independently rather than comparing them side-by-side (i.e., focus on what you like/dislike about each, instead of specifically comparing/contrasting to each other); know your “must-haves” before you make the decision (so the marketing doesn’t cause you to focus on comparative features that don’t actually matter much); and recognize that because we tend to quickly adapt as human beings, make sure you don’t over-optimize for things you’ll soon just adjust to anyway (e.g., the bigger TV or the bigger house).
Want To Make Better Decisions? Do This! (Darius Foroux, Medium) – Despite the effort that we usually put into making decisions, especially on important issues, it’s remarkable how often we still end up making what turns out, at least in retrospect, to be a bad decision. Famous investors Warren Buffet and Charlie Munger, though, advocate that the better approach is to simply figure out what you should avoid doing (i.e., identify your common mistakes, and try to avoid making those mistakes) instead. In part, the benefit of doing so is simply that you can avoid “analysis paralysis” by potentially overpressuring yourself and overthinking a decision. But the point isn’t about avoiding decisions at all. Instead, it’s simply about trying to minimize the big irrevocable mistakes. Which means the starting point is actually just to focus on making good small decisions instead – before they potentially become big and more problematic. In fact, the faster you make small decisions without procrastinating, the less likely they are to compound into bigger (and more difficult, and higher stakes) decisions in the first place. Thus why the longer you stay in a bad job, the harder it is to leave, and the same is true for a bad business relationship, a bad personal relationship, or any number of products and services we may buy (and increasingly struggle to get rid of the longer we’re engaged there). The key point, though, is simply to understand that not making a decision is itself still a decision… and one that often makes future decisions harder. So the earlier you can make small decisions, that are often more straightforward, the less risk there is of getting stuck with a big and bad (and turns out to be wrong) decision later.
How To Make A Big Decision (Steven Johnson, New York Times) – The famous scientist Charles Darwin is best known for his work on evolution and the origins of species, but he’s also known for having been a supporter of the famous “Pros and Cons” list for making a big decision; in fact, there’s still a copy of the list he made at age 29 about whether he should get married, weighing (admittedly somewhat dated) benefits like “children (if it please God)” and “charms of music and female chit-chat” against cons like “conversation of clever men at clubs” if he remained a bachelor instead. Yet nearly 200 years later, it’s surprising how often we still use “Pros and Cons” lists to weigh our complex decisions, despite a growing science around how we actually make decisions (and how to make better ones). According to Johnson, who details the research in his recent book, “Farsighted,” more recent key insights into modern decision-making techniques include: it is important to think through the alternatives to any course of action being considered (i.e., don’t frame a decision about “whether or not” to proceed, and instead find at least one alternative so you’re choosing “which one” instead of “whether” instead); in the business context, the more diverse the people who are making the decision and weighing the alternatives, the more likely it is that a full range of views will be considered and that a good decision will be made (even though diverse groups, because of their diversity, tend to be less confident about their own decisions!); consider evaluating multiple scenarios by trying to conduct a “premortem,” where you pretend in advance that a decision did not work out, and then try to identify the most likely causes that might have made it fail (so they can be avoided in advance); and if you have to make a “Pros and Cons” list, don’t just make the list, add some values or “weightings” to them, to help measure which factors are really the most important or not… to literally help ensure that you give all the pros and cons their proper consideration.
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.