Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with a new study from the Financial Planning Coalition that finds barely 1/3rd of those advisors who hold themselves out as “financial planners” are actually doing financial planning, and that therefore regulators need to be more proactive in overseeing financial planners and how they hold out to the public to reduce the confusion. Also included in this week’s news was a study from Cerulli Associates which finds that while the wirehouses have taken criticism for focusing on high net worth clientele, they really are providing the most comprehensive range of services to those HNW clients, beyond advisors at independent broker-dealers or RIAs.
From there, we have a number of practice management and technology articles this week, including a look at what advisors need to consider when adopting “e-signatures” for clients who want to sign documents electronically, a fascinating look at the challenges that large RIAs (e.g., $1B+) are facing in their efforts to grow to $5B and beyond (and what they need to do to take the next step), a review of the latest release of Redtail CRM, and a discussion of how InStream Solutions is transforming financial planning software from just a tool to analyze client situations to a firmwide tool to manage and oversee what advisors are recommending across all their clients.
We also have a few more technical articles this week, from a review of what “collaborative divorce” is all about and why divorcing clients should consider it (and also how advisors can actually do work as a “financial neutral” in a collaborative divorce specialist!), a study looking at how retirees spend their time in retirement (finding that most of their time is spent doing inexpensive leisure activities, and household activities that could actually reduce their cost of living in retirement!), and a great discussion of how young adults have so much job instability that perhaps they should be invested in an especially conservative manner with their portfolios and not aggressively as the conventional wisdom suggests.
We wrap up with three interesting articles: the first looks at the rising number of CPAs entering financial planning, and whether they could help fill the dearth of young talent in the profession; the second examines the latest benchmarking studies for financial advisors, and suggests that advisors may be too complacent about the potential impact the next bear market could have (and that they’re underestimating how reliant they’ve become on market growth to sustain their current growth rates); and the last looks at how even though all the buzz of the industry is about the threat of “robo-advisors” that the real trend that is currently underway has been the rise of “phono-advisors” – mega financial services firms delivered financial planning through call centers that already have more than 100(!) times the AUM of today’s robo-advisor platforms!
And be certain to check out Bill Winterberg’s “Bits & Bytes” video on the latest in advisor tech news at the end, including a recently announced Microsoft vulnerability (don’t open any suspicious emails with Powerpoint presentations attached!), and a look at advisor tech consulting firms now offering cybersecurity audits for advisors to identify any risks to client data! Enjoy the reading!
Weekend reading for October 25th/26th:
One-Third Of Clients Say They Didn’t Get Adequate Financial Planning Services (Emily Zulz, ThinkAdvisor) – This week, the Financial Planning Coalition released the results of a new study, conducted jointly with Fondulas Research in 2013 and 2014, which surveyed more than 1,250 participants online plus another 500 participants who had worked with financial professionals. The results of the study make the case that there is a lack of consistency and effective regulatory standards for those who hold themselves out as “financial planners” to the public. The issue is not that there are no regulators overseeing planners, but that the piecemeal approach combining FINRA, the SEC, and state investment and insurance regulators, results in only limited oversight in narrow areas and often for a limited period of time during a client’s scope of engagement. To make the point, the Coalition’s survey points out that nearly 1/3rd of consumers who worked with an advisor on a financial plan stated they did not receive the services they were seeking, and that 27% of those who wanted a financial plan didn’t get one. Adding to the confusion is the fact that consumers are confused by various overlapping labels, with 82% saying that financial planners are the same as financial advisors, 70% saying financial planners are the same as wealth managers, and 68% saying financial planners are the same as investment advisors. The Coalitions study was intended as a direct response to a 2011 GAO report – issued pursuant to Dodd Frank – that suggested further regulation of financial planners was unnecessary; the Coalition is instead suggesting that there need to be clearer competency and ethical standards for those who hold themselves out as financial planners, noting that the survey also showed that those who worked with CFP professionals had higher levels of satisfaction and reported receiving more realistic plans that met their needs. For those interested, a full copy of the study can be viewed here.
Wirehouse Advisors Lead in High-End Services (Suleman Din, Financial Planning) – In recent years, the wirehouses have increasingly focused on “big” advisors who serve “big” (ultra-high-net-worth) clients with a deep team-based service offering, and data from Cerulli Associates finds accordingly that the wirehouses really are providing the deepest breadth of services to high-net-worth clients. The Cerulli study shows that 90% of wirehouse clients receive estate planning services, compared to only 83% of regional broker-dealer clients, 80% of Independent Broker-Dealer (IBD) clients, and 66% of RIA clients; similarly 33% of wirehouse advisor clients receive concierge and lifestyle services, but only 16% of IBD clients and 22% of RIA clients, and wirehouses also lead in offering private banking services, and charitable planning as well. And the deeper breadth of services is reflected in the results of the typical AUM per wirehouse advisor, which is 50% higher than average advisor across all channel. On the other hand, while the average net worth of wirehouse clients and the AUM per advisor is higher, so too is the age of the clientele; across all channels, 71% of clients are over age 50, but amongst wirehouses 78% of clients are over age 50.
The SEC and E-Signatures (Tom Giachetti, Investment Advisor) – As the technology to facilitate a “paperless” office becomes increasingly available, more and more advisors have begun to shift towards using “e-signatures” for client documents. While e-signatures are permitted under the law and by regulators, though, there are some important compliance and legal issues to be aware of. The first legal issue is that while the Electronic Signatures In Global and National Commerce Act (ESIGN) permits the use of electronic signatures in business, the Uniform Electronic Transaction Act (UETA) is the state law that gives ESIGN force under local law – and notably, not all states have adopted UETA yet, so it’s important to verify that electronic signatures are permitted in your state in the first place. For RIAs, Rule 204-2 of the Investment Advisers Act also requires that RIAs keeping records in electronic format must have procedures to safeguard records (including limiting subsequent alteration or destruction), limit access to records to authorized employees (to maintain client privacy), and if the electronic version is a copy of a non-electronic original it must be complete, true, and legible. While ESIGN documents can comply with the SEC requirements, this does mean firms should have a written policy about how electronic signatures will be handled in a compliant manner. Notably, Giachetti also points out that it’s crucial to conduct appropriate due diligence on the e-signature program or platform/provider as well, to ensure that the platform/provider also maintains an appropriate level of security and client privacy, while also still being able to ensure that a signed document can be linked with the appropriate signer to validate the signature in the first place.
The Next Step (Philip Palaveev, Financial Advisor) – There are now about 250 advisory firms with more than $1B of AUM, and about 30 of them have more than $5B of AUM; 47% of these firms say that their #1 strategic priority is revenue growth (and 29% are focusing on organizational development and “internal growth”), so Palaveev looks at how these firms may have to change to take “the next step” and move forward. Palaveev suggests that the biggest issue for firms that want to go from $1B to $5B is to set a clear vision of where they’re trying to go; not just a revenue or AUM target, but something that gives the firm and its staff and partners a sense of purpose and why they should devote their energy to continue to push for growth, which is especially important as the firm grows so large there may be employees that the founders/owners have never even met! In turn, this unified vision is also crucial to develop business as a firm, as these large firms must learn to develop business beyond just the reputation reputation and capabilities of their founders (who cannot possibly support growth of such a large firm on their own). Other important aspects of change include: creating a lasting ownership structure (the firm needs a mechanism to add new partners, and retire older ones, with clear criteria for what it takes to become an owner and how the deal will be structured); learning to effectively separate ownership from management (as eventually there are too many owners to effectively run the firm by partner group consensus) by having an executive committee and a president of the company so that the firm structure runs itself (or as Palaveev puts it “an army follows a general, not a person, so you can change generals without changing combat success”, and firms must learn to do the same with their leadership); create a method to add “lateral partners” (who are added from outside the firm, not promoted from within); and be ready to expand by growing into new markets (and recognize the investment it will take, and the difficulty in managing operations and culture across multiple locations).
Tech Review: Redtail’s New Edition (Joel Bruckenstein, Financial Planning) – Redtail CRM is one of the most popular CRM software packages for advisors, now boasting a whopping 85,000 users, and has just released a major upgrade to its platform, dubbed “Project Tailwag”. Historically, Redtail has been popular in part because it’s rather inexpensive ($65/month for a single client database accommodating up to 15 staff members), and it is relatively easy to use. However, the “ease of use” for Redtail has also limited its features, which are now being bolstered with Project Tailwag. For instance, Redtail now offers a “Projects” tab that allows advisors to combine together checklists (simple lists of tasks) and workflows (tasks that are dependent on other tasks) to organize the firm-wide workflow (which can then be linked to particular clients, events, etc.); Redtail also plans to allow custodians and broker-dealers to create libraries of workflows that can then be made available to advisors on their platform (and relevant to their platfrom-specific needs and requirements). For office management, the new Redtail also has a “workload graph” that makes it easier for firms to track how much work is being done by particular staff members and how long it takes them. Other enhancements include expanded calendar capabilities, a more extensive contacts area, and new integrations to outside providers from Riskalyze to Morningstar, as well as integrations to social media platforms, and even Evernote. Also notable is the fact that the new version of Redtail has been built with a “mobile first” mentality, which should make it even easier for advisors to use from their mobile devices when out of the office.
The Tool That Will Transform Firmwide Financial Planning (Bob Veres, Advisor Perspectives) – Financial planning software InStream Solutions is one of the newer tools available for advisors, and like most financial planning software it does retirement and Monte Carlo projections, can help analyze Social Security, and even has some additional features like the automatic creation of mindmaps to help organize a client’s financial situation visually. But one of the software’s most notable features is its ability to aggregate together the recommendations being made across all advisors and their clients (anonymously), which originally was expected to be used by advisors to help them craft their own recommendations (think: getting insight into “best practices” recommendations from your peers), but instead is now being adopted by some larger financial planning firms who are using it as a tool to monitor the consistency of their advice across all their own advisors. For instance, the software’s management tools allow the firm to see how many clients are receiving financial plans, how comprehensive they are, how quickly they’re being delivered, and how often they’re being updated – which is especially helpful when an advisory firm has centralized management but a large number of advisory firm offices across the country (so it’s not possible to just look over the shoulder of the advisor to see what they’re doing with clients!). The InStream monitoring capabilities can go into significant depth about individual modules as well – for instance, to show how many clients, and even what the ages of those clients are, who are receiving college funding or Social Security projections. InStream also has “alert” capabilities, where the plans can be automatically monitored with set (firmwide) thresholds, and notify the advisor when there’s an issue; for instance, the software might continuously monitor every retired client’s Monte Carlo projection, running the updated projections every night and notifying the advisor any time the probability of success falls below a target success threshold (so the advisor can contact the client to initiate a discussion). The bottom line – InStream Solutions is beginning the transition of financial planning software from just being a tool the advisor uses to do projections with the client, to a firmwide management tool to monitor financial planning activity and recommendations for clients, ensure consistency across advisors, and begin to mine the “big data” opportunities of understanding more about the needs of a firm’s client base by analyzing plans and recommendations across all of them.
Collaborative Divorce: A Win-Win Dissolution (Olivia Mellan & Sherry Christie, Investment Advisor) – The statistics on divorce in the US are grim, with 1/2 of first marriages ending in divorce, 2/3rds of second marriages, and almost 3/4ths of third marriages, and the stories of messy divorces have been enshrined in movies like “Kramer vs Kramer” and “The War of the Roses”. Yet despite the fact that divorces are often contentious, a new movement called “collaborative divorce” is being promoted as a more harmonious option to try to dissolve a marriage without letting the situation become ugly. To understand collaborative divorce, it’s easier to contrast it to the other alternatives for determining custody of children and ownership of assets in a divorce. The first is through mediation, where a neutral mediator tries to facilitate the process; yet while mediation is relatively inexpensive, it’s not always effective if one partner is more emotional or less well-advised than the other (resulting in an unequal division of assets), or if the couples hurry too quickly through the mediation and end out with a solution they later regret. The second option is to litigate, where instead of having the parties interact with each other facilitated by a mediator, they engage via their lawyers instead, and if the lawyers can’t negotiate an agreement then the divorce court has to resolve the matter (with a long list of potentially destructive consequences for the family). Against the backdrop of mediation or litigation, “collaborative divorce” is the third option; in this scenario, the spouses sign a contract up front to agree to resolve the dispute openly and honestly (including an obligation to provide all relevant information necessary to make good decisions), and is handled with a supporting team that provides emotional coaching (via a mental health professional), unbiased financial advice (through a CPA or CFP professional), and a separate dedicated voice for the children (typically a social worker), along with attorneys for each spouse. The ultimate goal is reaching a signed settlement agreement acceptable to all parties, while still avoiding litigation; the depth of the team makes it more expensive than mediation, but less than the cost of litigation and a trial (and arguably, will have less emotional cost for the family as well!). While being aware of collaborative divorce is important for guiding clients who may be considering a divorce, the article also notes that the role of “financial neutral” can be a specialization for advisors themselves. For advisors interested in learning more, check out the International Academy of Collaborative Professionals.
How Retirees Spend Their Time: Helping Clients Set Realistic Income Goals (Charlene Kalenkoski & Eakamon Oumtrakool, Journal of Financial Planning) – This article looks at how retirees spend their time in retirement, specifically regarding the kinds of leisure activities they engage in, and the time they spend on household activities (e.g., preparing meals). Drawing on data from the U.S. Bureau of Labor Statistics’ 2010-2012 American Time Use Surveys, the authors studied both middle- and high-income retirees, and contrasted them to part-time and full-time workers. The results contained some obvious differences – most notably, that retirees don’t spend all that time working and doing work-related travel, and spend more time eating, drinking, and sleeping. But the results also showed some interesting distinctions, including that retirees tend to spend more time in expensive leisure activities (e.g., golf) but also inexpensive leisure activities (e.g., television and movies, and also reading). Retirees also spent significantly more time on food and drink preparation in their home, and also time on lawn/garden care and also interior cleaning and laundry. The ultimate point of the study – while conventional wisdom often suggests that retirees will ramp up their spending in expensive activities in retirement, the results of this research suggest that the bulk of time no longer working is spent on inexpensive leisure activity, and/or cost saving activities like various household pursuits (e.g., doing laundry and mowing the lawn instead of paying for it, and/or preparing food at home rather than buying prepared foods), which means expenses may not actually ramp up much in retirement after all.
What Are We Doing To Our Young Investors (Rob Arnott & Lillian Wu, Research Affiliates) – The traditional view of investing for young people, as embodied by today’s Target Date Fund (TDF) fund choices inside employer retirement plans, is that people should have the heaviest allocation to equities when they are young and then slowly shift their portfolios to bonds as they age and approach retirement – and given the use of TDFs as the default investment choice inside defined contribution plans, more and more young workers are being invested heavily in equities. Yet at the same time, recent research from Fidelity shows that 41% of those between the ages of 20 and 39 cash out part or all of their retirement plan assets when switching jobs – a situation that may only be exacerbated by the fact that job losses are probably more likely to happen during recessions when the markets will also be down, and that young adults generally have less job stability and a greater risk of unemployment in the first place. In other words, an equity-centric portfolio for young workers correlates their portfolio losses to their job losses, rather than diversifying them, and may leave the newly-unemployed forced to tap the account at the worst possible time to liquidate it. So what’s the solution? The authors suggest that the traditional “100 minus your age in stocks” rule of thumb is flawed and dangerous, and that the careers and human capital of young adults are already very volatile and “stock-like” to begin with; as a result, young adults instead should invest in “starter portfolios” that begin with just establishing an emergency fund, and then a conservative portfolio that is not correlated to the young adult’s job (e.g., investing 1/3rd each in stocks, bonds, and inflation hedges like TIPS or possibly REITs). Of course, an ancillary benefit of the approach is that it also allows young investors to get accustomed to investing – and investment volatility – more gradually, to also reduce the danger that a severe early bear market becomes a scarring investment experience for life! The bottom line: the data clearly show that a large segment of young adults do not really use their 401(k) investments as a retirement fund, but more like a rainy day fund when unemployment occurs, so it should be invested accordingly!
Are CPAs Key To Financial Planning’s Future? (Ilana Polyak, Financial Planning) – A growing number of CPAs are expanding beyond “just” doing taxes and accounting work, to providing a broader spectrum of financial planning work, and as a result the number of CPAs with the AICPA’s Personal Financial Specialist (PFS) designation is up 32% over the last 5 years, and the AICPA’s PFP conference this year set a new record with almost 1,250 total attendees. The expansion of CPAs into financial planning appears to be coming at all levels, from experienced CPAs who begin to morph their tax or accounting practice into financial planning, to newly minted CPAs who decide they don’t want to pursue accounting jobs directly and get hired into wealth management firms instead. Of course, many wealth management firms focused on high-net-worth clientele have had accountants working in the firm all along (given the complex tax situations of wealthy clientele), but the difference is that increasingly accountants are not just crunching numbers behind the scenes, but are instead shifting to be directly in front pf clients and managing relationships. Large regional accounting firms are also making the shift, driven in part by the fact that financial planning and wealth management services are now more profitable than many core accounting services (especially basic tax preparation, which has been commoditized by solutions like TurboTax), though sometimes culture clashes and turf wars can erupt between the “planners” and the “accountants” within the firm. Notably, even as many CPAs are moving away from a pure tax focus (or dropping tax preparation altogether), the CPA financial planners point out that their knowledge and experience with delving into tax returns can provide a treasure trove of planning insights and opportunities. While some advisors have expressed concern that CPAs moving into financial planning could be “competition”, given the industry’s demographics and the aging of the average advisor, CPAs becoming financial planners may actually provide a crucial lifeline to help replace retiring advisors in the coming years (though advisors who have relied in the past on CPAs for referrals may someday find themselves in competition with the prior referral sources!).
Enjoy It While It Lasts (Bob Clark, Investment Advisor) – The latest 2014 edition of FA Insight’s “Study of Advisory Firms: Growth By Design” is out, and overall the results find that advisory firms experienced a “stellar year” in 2013, and the typical firm owner was optimistic that prosperity would continue through 2014. In fact, from 2011 to 2013 the average advisory firm’s client list grew by 20.3%, AUM was up 50.2%, and revenues were up 41.3%; in the five years from 2009 to 2013, the average firm profitability was up from 11.3% to 22.1%, which in turn drove up the average income per owner from $227,959 to $344,279. Yet Clark cautions that when clients are “only” up 20% and AUM is up 50% (and revenues are up 41%), advisors may be confusing how much their firm is growing for how much their firm is enjoying the tailwind of market growth in recent years (given the S&P 500 was up 13% and 30% in 2012 and 2013, respectively). Clark also notes that for all the “hoopla” about growing large ensemble firms – which did have a whopping $726,267 of revenue per professional compared to only $246,107 at smaller firms – that owner income per revenue dollar was much higher at smaller firms ($0.61 on the dollar) than larger firms (only $0.42 on the dollar), implying that smaller firms may be more efficient than they’re given credit for (at least until they hit the wall on client volume and reach capacity). But ultimately, as Clark points out, the real question about growth and profitability is just how much all these numbers may be padded by the incredible 5+ year bull market that has been underway… and in turn, whether firms may not be sufficiently prepared for what the next downturn may do to their business. Which means if there’s anything that you as an advisory firm owned “wished you’d done in 2006” before the market peaked in 2007 and fell in 2008, it might be appropriate to revisit that plan now, while there’s still time before the next “surprising-but-not-really” downturn inevitably occurs.
The Documented RIA Threat, ‘Phono-Advisors’ And Their Nearly $300B Of Assets (Brooke Southall, RIABiz) – While much attention has been given to the “robo-advisors”, one of the biggest and most underappreciated advisor growth stories of the past decade has been Ken Fisher and the tens of billions he’s accumulated in his “phono-advisor” solution: building call centers in inexpensive locations and providing clients their advisor relationships by telephone. And the model is no longer unique to Fisher; as Southall points out, Merrill Edge now has about 1,000 call-center workers with $100B of AUM, Schwab has a 500-person call center with $60B of AUM, and Vanguard’s Personal Advisor Solutions has about 250 people and $30B of AUM. In this context, Southall suggests that the recent launch of Personal Capital also fits this model, where once again human advisors work with and serve their clients remotely. So why are these solutions getting more popular? The rise of technology appears to be supporting them, with increasingly sophisticated CRM software, and web portals for collaboration (not to mention the ability to effectively control quality at a centralized location). Of course, robo-advisors appear to be leveraging technology as well, but with only about $3B of actual managed assets amongst all the robo-advisors combined, so far the phono-advisor approach is already ahead by almost 100:1. (Michael’s Note: It’s worth noting that these “phono-advisor” solutions do vary in the depth of their actual advisor solutions; some are little more than an investment-only platform with an “advisor” account representative, while others staff financial planners with CFP certification providing a much greater depth of planning services. But while it may be overly broad to group all of these virtual-based financial advisors together, the point remains that “cyborg” human advisors leveraging technology are drastically further ahead of the full-on “robo-advisors” at this point.)
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!
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 latest Bits & Bytes weekly video update on the latest tech news and developments, or read “FPPad Bits And Bytes” on his blog!