Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the announcement of a new advisor leadership succession training program from Philip Palaveev of the Ensemble Practice, called G2 Leadership Summit, that will train advisors in groups of 50 to handle the real-world challenges of advisory firm ownership and management with a series of mock management scenarios. When viewed alongside a ‘similar’ training program launched by Schwab last year, the new program underscores a positive broader trend of leadership development efforts in the advisory world.
From there, we have a couple of practice management articles, including: a look at the lessons financial advisors can learn from how TurboTax did and did not impact CPAs (where self-service tax preparation software still only serves about 30% of households!); an interview with Dr. Brad Klontz about the rise of “financial therapy” and advisors incorporating behavior change management into their skillsets in serving clients; how to deal with a “ransomware” virus (and ideally how to avoid it in the first place!); how recent changes to the Facebook API may soon force advisors to adopt Facebook Business Pages instead of using their Personal Profiles for business; and an interview in the Journal of Financial Planning about how advisors can profitably serve Gen X and Gen Y clients but must abandon the AUM model to do so.
There are also a few technical financial planning articles this week, from a recent tax proposal to limit the transfer-for-value rules on life insurance that could create problems for clients transferring life insurance policies in/out/around of their business; a discussion of the common “myths” about bonds, such as the fact that back in the early 1980s bonds had a higher nominal yield but actually produced a lower after-tax after-inflation yield than they do today; and the recent Zahner court case that may help clear the way for short-term Medicaid-compliant annuity strategies.
We wrap up with three interesting articles: the first looks at how not all clients who ask “What do you think I should do?” to their advisor actually want advice about what to do (many are just looking for the advisor to validate their pre-existing idea, or to help them figure out their own solution); the second is a discussion of “The Experience Economy” and how advisors can avoid the commoditization of various parts of financial services by not just giving better service but crafting an experience around the process; and the last is an article by referral marketing expert Steve Wershing about how advisors calling their firms “boutique” may actually be inhibiting referrals, and that if the goal is to convey that the firm provides deep personalized service the best way to convey it is with examples of what the firm actually does, not by using the limiting “boutique” label!
Enjoy the reading!
Weekend reading for October 3rd/4th:
Philip Palaveev and Bob Oros Create Hunger Games-Style RIA High Jinks (Lisa Shidler, RIABiz) – Most professionals get opportunities to practice and learn their trade (e.g., medical interns get cadavers, law students have moot court), but there are few such opportunities for financial advisors… so practice management consultant Philip Palaveev is teaming up with Fidelity to create such a program, dubbed G2 Leadership Summit. The basic structure is that newer advisors – ostensibly those on a succession planning path in their own firms – will be grouped up into teams that will compete against each other in how to handle mock versions of real life advisory firm challenges, from a 30% market crash to the retirement of the firm’s chief rainmaker or how to replace a problematic but key piece of technology. The overall leadership program (somewhat reminiscent of Schwab’s Executive Leadership program for RIA successors) will run for a full 2 years, culminating in a 2 1/2 day session where the teams present their strategies and solutions, and Palaveev aims to add in 50 new advisors to the program in cohort groups every 6 months. Notably, Palaveev partnered with Fidelity for the program, it is not exclusive to Fidelity-based advisory firms; any advisors are welcome, at a cost of $1,500/quarter for the participants (though Fidelity clients will get a $250/quarter discount, and first dibs to sign up).
TurboTax And CPAs: Lessons For Planners On Robo-Advisors (Angie Herbers, ThinkAdvisor) – Despite the introduction of the first do-it-yourself tax preparation software programs like TurboTax nearly 30 years ago, tax-preparing accountants are still going strong, and in fact the typical 2014 tax return fee was $273, an increase of 4.6% over the prior year, and up 11% from two years ago. In fact, when looking across the entire landscape of US households, only about 30% of filers are using self-preparation software like TurboTax, while the remainder still use a CPA or tax preparer, or human-based tax preparation franchise such as H&R Block or Jackson Hewitt. Thus, to say the least, robo-tax-preparation hasn’t led to the demise of tax preparers; in fact, as Herbers notes, it’s likely that a significant portion of the 30% of filers who use the tools today probably were always going to self-prepare, and simply use the software as an easier alternative to previously doing the returns by hand (not necessarily in lieu of using tax preparers). Herbers suggests that the path may be similar when it comes to investment advice and robo-advisors, noting that while there may be some downward pressure on pure investment-only AUM services, firms that help clients manage complexity – by offering financial planning – should continue to survive and thrive, just as being a human being that helps navigate complexity has allowed tax preparers to continue despite 30 years of TurboTax. In other words, while advisors who really offer nothing more than what robo-advisors do may be in trouble, Herbers suggests that financial planning is actually the anti-commoditizer, though ultimately financial planning fees may have to be unbundled from a lower-cost ‘core’ AUM service to compete (though doing so may finally get advisory firms figure out how to effectively price and deliver financial planning to really be profitable, and not just a loss-leader for AUM and other services!).
Dr. Klontz’s Financial Therapy Aims to Cure Your Clients’ Fear of Change (Jane Wollman Rusoff, Research Magazine) – Ultimately, financial planning advice is meaningless for clients if advisors can’t get them to actually implement the recommendations, and accordingly there is a growing awareness of the need for advisors to understand the psychological underpinnings to behavior change. At the forefront of this movement is Dr. Brad Klontz (and his father Ted Klontz), who speaks on incorporating behavior change techniques into the financial planning process, is active with the 6-year-old Financial Therapy Association (now over 200 members), and recently published the book “Financial Therapy: Theory, Research, and Practice” as well. This theme of “Financial Therapy” is meant to recognize that many of the problems that people have with money aren’t problems of information and knowledge, but of behavior and the dysfunctional relationship that many clients have with money, which according to surveys has been the #1 stressor in the lives of 3/4ths of Americans for the past decade. Ultimately, the point here is not to turn financial advisors into psychologists and have them function as therapists, but simply that by better understanding the psychological underpinnings, advisors can better understand why clients may be engaging in certain financially-self-destructive behaviors, and have better insight about how to help them change (especially since it turns out that confronting clients about their issues is actually one of the least effective strategies to get them to do something about it!). In fact, Klontz’ research finds that just understanding the “money scripts” that a client learned in their early years – money avoidance, money worship, money status, or money vigilance – is remarkably predictive of the client’s income, net worth, and potentially destructive money behaviors (not to mention the conflict that it can cause between spouses with different money scripts)… but also provides some guidance about how to help clients work through the issues, too.
Don’t Pay the Hacker’s Ransom (Dan Skiles, Investment Advisor) – In our increasingly digital world, various forms of “cybercrime” are on the rise, and one of the most concerning is the emergence of “ransomware” viruses. As with most computer viruses, a ransomware virus typically gets activated by clicking on a link from a hacker’s email (often made to look like a legitimate email even though it’s not), opening an infected attachment from such an email, or by going to an infected website that hasn’t taken precautions itself. Unlike other viruses that may just render your computer dysfunctional, though, a ransomware virus operates by either taking over the computer and locking it down so you can’t log in, or encrypting the files on your computer with a password that renders them unreadable – which means your computer and files may be fine and intact, but you can’t get to them. From there, the ransomware virus prompts you to pay a “ransom”, often via bitcoin, to (re-)gain access to your computer and files again. And notably, if you had access to your company’s computer servers, all files on the server could be caught up in the ransom demand (you can determine the source by checking the Properties –> Details –> Origin section of the file in Windows, and see which computer/user last saved the file, ostensibly in its now-encrypted form). If you are impacted by a ransomware virus, Skiles notes that the first step is to completely disconnect the computer for any other computers or servers, to keep the issue from spreading further, and then you can use anti-virus software to remove the virus (though ideally, you should run a robust anti-virus software to help prevent the infection in the first place!!). Ultimately, Skiles notes that some firms may have to pay the ransom and hope that the cybercriminal really does unlock the files (which does happen at least sometimes), but ideally good anti-virus procedures and proper backups (which can be restored once the virus has been eliminated) will make it unnecessary to do so… which is good, because not paying the cybercriminal’s ransom also ensures you aren’t rewarding the behavior!
How Facebook’s Unfriendly New Privacy Strictures Are Edging RIAs Into The Social Media Monster’s Business-Page Boonies (Lisa Shidler, RIABiz) – Recently, Facebook changed some of its privacy rules for Personal Profiles (i.e., personal pages), which included altering its API in a manner that prevents third-party firms from automatically pulling all activity from the page. The problem is that API was the means that social media compliance tools like Hearsay and Smarsh rely upon to capture and archive an advisor’s Facebook activity, and the loss of the API suddenly creates a significant compliance concern. And not only are there now limitations on capturing Facebook Personal Profile activity, but the changes to the API also prevent third-party platforms from capturing Direct Messages on the platform, which again presents compliance oversight concerns. On the other hand, these changes do not impact the Business Pages section of Facebook, which means advisors can still create and use Business Pages in a compliant manner – but now may actually be forced to do so to stay compliant. It’s also notable that the recent API changes have limit the ability of third-party platforms to scan the connections of advisors, which means third-party software that tracks the significant life events of their connected clients and prospects is no longer viable either (instead, the advisor would have to actually log in to Facebook and see the events in their own personal feed) – a significant challenge, as some advisor social media platforms have explicitly advertised their “social listening” tools that Facebook’s API change will now limit them from delivering on.
Serving Gen X and Gen Y, Being Virtual, and Rethinking the AUM Model (Carly Schulaka, Journal of Financial Planning) – This article is an interview with Alan Moore, who founded his own RIA in his mid-20s after being fired from another RIA, and pioneered the business model of serving younger Gen X and Gen Y clients as a monthly flat-fee subscription. After joining a study group of other advisors doing the same thing, he co-founded the XY Planning Network, which champions the business model and supports advisors who wish to deliver financial planning services to a younger clientele themselves. In the interview, Moore provides perspective on a wide range of industry trends, including: the industry’s problem in serving young clients is not that they can’t be served profitably, just that it requires a different business model and structure than the traditional AUM approach (as young people may have the financial wherewithal to pay for advisors on a monthly basis, just like their gym membership and phone bill, just not as a percentage of their still-modest assets); it may seem “risky” to go out and start your own advisory firm, but it’s even riskier rely on a single job for all of your income when your boss could decide at any moment to fire you; location-independent financial advice (working with clients remotely using tools like Skype or GoToMeeting) is on the rise, and opens the door for a newfound flexibility for advisors to create work/life balance for themselves when no longer tied to a physical office location; planning advice for younger clients is important but fundamentally different, focusing less on retirement projections and tax planning and more on debt management, student loans, budgeting, and cash flow management, as well as considering the “income” side of the ledger (from negotiating salary raises to starting businesses or looking for “side hustles”); the value of having an advisor study group for peer accountability and people with whom you can share your wins and losses; and that in the long run the AUM model may survive, but as a niche model for the high-net-worth while the broader base of advisors moves on to other business models like monthly retainers instead.
The Tax Man Cometh for Life Insurance Death Benefits (David Cordell & Thomas Langdon, Journal of Financial Planning) – The standard rule for life insurance is that death benefits are paid out tax free under IRC Section 101(a)(1). However, an exception called the “transfer for value” rule stipulates that if a life insurance policy is sold to someone else (i.e., “transferred for valuable consideration”), the death benefits become taxable to the extent they exceed the purchase’s cost basis in the policy. The rule is designed to reduce the incentives for people who purchase life insurance policies on themselves to sell them to third parties who might want to engage in ‘morbid speculation’ on the deaths of others. On the other hand, the reality is that sometimes there are bona fide reasons to sell a life insurance policy to someone else, particularly in business situations, and accordingly there is an exception-to-the-exception rule that allows death benefits to remain tax-free even after a sale if the policy is sold to the insured (e.g., where a business with key-person life insurance sells the policy to the insured after he/she retires), or is sold to a corporation in which the insured is a shareholder, a partnership in which the insured is a partner, or outright to a business partner of the insured. Notably, a proposal earlier this year under the President’s budget, as published in the Treasury Green Book, would change these rules, and make the purchase of a policy by the insured into a taxable death benefit, and similarly would make the transfer to a corporation or partnership a taxable death benefit if the insured is a 20%-of-greater owner of the business. Ultimately, it remains to be seen whether these proposals will come to pass, but advisors should be aware both because of the potential adverse impact of trying to unwind business life insurance arrangements in the future, and because this could just be the first shot across the bow of greater overall scrutiny from Washington about the tax benefits traditionally associated with life insurance.
4 Big Myths About Bonds (Allan Roth, Financial Planning) – While virtually all advisors typically include bonds as a part of the allocation of client portfolios, clients have increasingly pushed back on their bond allocations lately, particularly given today’s low interest rate environment. Yet Roth points out that in practice, to complain about low rates misunderstands the real role that bonds are intended to play in the portfolio… because historically, they’ve never really given a very good after-tax income, even when rates were higher. For instance, in the 1980s, U.S. Treasury Bonds paid a 12% interest rate, but after taxes that yield might have been only 8%, and given a 13% inflation rate at the time, the real return on those bonds at higher yields was worse than it is today at lower nominal yields and low inflation! Of course, given low interest rates, bond returns may be worse if/when/as interest rates rise, yet Roth points out that recognizing this mathematical fact doesn’t mean it’s right to do anything about it… after all, many economists have been calling for higher rates for 6 years now, only to be repeatedly proven wrong, such that those who tried to defend against rising rates (e.g., by shortening duration) have just left even more return on the table (by investing in lower shorter-term yields, and missing out on the chance to roll down the yield curve)! Of course, in the short term an interest rate increase will cause bond prices to drop… but again, unless you’re perfect at calling the timing of that interest rate increase, it doesn’t necessarily pay to try to avoid it. Instead, simply recognize that in the long run, higher rates are ultimately a good thing, as clients with even just intermediate bonds will have an opportunity soon enough to reinvest at those higher rates!
Court Clears Path for Medicaid-Compliant Short-Term Annuities (William Byrnes & Robert Bloink, ThinkAdvisor) – An increasingly popular strategy in recent years has been to use immediate annuities to convert assets into income streams that may avoid the strict available-resource rules for Medicaid… ideally done in a manner that even allows the annuity proceeds to be used to pay for long-term care expenses during the initial years while waiting for Medicaid eligibility. In turn, states have increasingly challenged these strategies, claiming they are an abuse of the system. But a recent Third Circuit case, Zahner v. Secretary, Pennsylvania Department of Human Services found that even a short-term immediate annuity that pays out over 12 or 14 months can be “Medicaid compliant”. While the state suggested that annuities with payout periods so short (and not related to life expectancy) shouldn’t even be considered annuities, the state upheld that the contracts were still annuities under the law. And as long as the annuities otherwise complied with the “Medicaid compliant” annuity requirements under the Deficit Reduction Act (that the contracts be irrevocable, non-assignable, actuarially sound, and provide payments in equal installments over the term, with any remaining payments payable to the state), it was valid for Zahner to exclude them as available assets. Of course, the reality is that the government could still someday alter the rules more substantively to disqualify such annuities as qualifying under the Medicaid compliant rules… but until then, this new Third Circuit court case seems to clear the way for the strategy to continue for the time being.
Giving Advice: Active, Reflective, or Validating (Heidi Maston, Iris) – While all of us as advisors routinely hear the question from clients “What do you think I should do?” Maston points out that in reality, not every client or prospect who asks the question is actually looking for a direct and literal answer to it. For instance, some people who ask “What should I do” actually have a plan already about what to do, and are looking to you to validate their already conceived plans, providing positive feedback (or maybe tactful constructive criticism) but with little actual desire to hear your solutions; you might recognize such situations because the prospect or client explains the situation as though the plan is already set, and immediately pushes back on any alternatives that you might proffer as suggestions. In other situations, prospects or clients who ask “What should I do” are really looking for someone to help them talk through the process so they can figure it out for themselves; in other words, they’re still not looking for proactive suggestions and feedback, but want a form of reflective advice where the advisor helps guide the conversation by reflecting back thoughts and ideas to help the client iterative themselves towards a solution. Of course, in some cases the prospect or clients asks “What should I do” because they really do want active advice and guidance, has a clear understanding of their objectives, and just want help about how to achieve them. The key point, though, is that if you don’t take a moment to recognize which “type” of advice the client or prospect really wants, you may waste a lot of time – or outright frustrate the client – providing the “wrong” type of answer to the question.
The Experience Revolution (Brett Davidson, FP Advance) – In the ideal scenario, financial planning can be a truly transformative experience, as the client who comes in with a ‘simple’ problem around their retirement plan or portfolio ends up a few weeks or months later with a comprehensive financial plan that redefines their relationship with money and the trajectory of their life. Of course, the caveat is that even for firms where the planning itself is transformative, the experience of going through it rarely is. Yet Davidson suggests that a “transformative experience” is what planners should aspire to, borrowing a page from brands like Apple or Disney (or Build-A-Bear). And the key distinction is that not only are experiences more powerful, but consumers will also pay far more for them in the first place, particularly in a world where so much else (e.g., basic investment management) is being commoditized. In other words, as described by authors Pine and Gilmore in their book “The Experience Economy“, the goal is to create memorable events for clients, such that the memory of the event itself becomes the “product” you’re selling. Yet the challenge is that making an experience transformative – and consistently so – requires firms to standardize their processes and procedures in the first place. Fortunately, this is a goal that ironically today’s “robo” competitors may help, as advisors increasingly adopt the technology tools themselves.
The Boutique Delusion (Steve Wershing, The Client Driven Practice) – For small advisory firms, a popular approach to differentiating is to refer to the firm as “boutique”, implying a deep level of personal service, accessibility to the firm owners/principals, customized advice, and personal attention. And while that may be an appealing level of service to offer as a means to differentiate, Wershing notes that in the long run this kind of brand promise can get advisory firms in trouble – because it also effectively implies that the firm will never grow and never change and may become overly reliant on its (founding) principals to stay personally connected with every client to deliver. In other words, a founder that promises boutique service to clients is almost an outright contradiction to a firm that will outlive its founder as a business, and a firm built on boutique service may actually be discouraging clients from referring because they fear (intuitively or explicitly) that helping the firm grow means the firm will lose its boutique experience! Notably, Wershing points out that firms don’t have to stay small to deliver great service – the Ritz Carlton does it with size and scale, and there are few companies that know more about us than the behemoth that is Amazon! However, the very term “boutique” does imply a small size by definition, which means firms that really mean to say “we give great service” may be limiting themselves by using the word “boutique” to describe it. So ultimately, Wershing suggests that if the goal is to communicate that you give deep individualized service, then say it, without the “boutique” euphemism; or ideally, come up with specific demonstrations and examples of how you deliver customized services to clients, to really drive the point home!
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.