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Weekend Reading for Financial Planners (Sep 15-16)

Posted by Michael Kitces on Friday, September 14th, 7:03 pm, 2012 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a tough look at the CFP Board's fiduciary standard, raising the question of whether fiduciary is just an advertising gimmick or whether it's really being enforced as such, along with another recent study that finds the majority of investment assets in the country are being managed by firms with questionable and conflicted business models, or an outright series of regulatory infractions. From there, we look at a few more upbeat industry articles, including two recent studies on planner compensation, one showing that income for senior planners is up 14% in the past two years, and another finding that all else being equal CFP certificants average $5,000/year in additional compensation over non-CFPs. There's also a discussion of how some firms are developing new training programs to bring more young people into financial planning, and a look at the firm LearnVest which had a "Best In Show" appearance at this week's Finovate conference with a new iPad app for clients and an announcement of SEC registration as the firm aims to bring financial planning to "the other 99%" of Americans. We also look at two marketing articles, one on how financial advisory firm aggregator HighTower is using social media on a larger firm scale, and an interesting discussion of whether local radio shows still have some marketing value, along with a review of the latest MoneyGuide Pro G3 release. We wrap up with a nice list of market and economic commentaries to check out if you're looking for good content to stay educated, an interesting discussion about whether we are sometimes too conservative in our recommendations as planners and the impact that can have on clients, and an article about whether the social media revolution is about to get "a little less awesome" as investors put increasing pressure on social media firms to shift from the "making delightful and cheap things" stage to the "making money" stage. Enjoy the reading!

Weekend reading for September 15th/16th:

Is the Fiduciary Standard a Joke? - This article by Allan Roth in the Wall Street Journal's Personal Finance blog tells a story he covered in greater detail in an AARP Magazine piece a few months ago, in which he was contacted by a client for a second opinion and discovered a situation where the previous "advisor" had sold a commissioned annuity, then also charged a 1.6% annual fee to manage it, and also failed to fully disclose and explain compensation details to the client, despite the fact that the individual was a CFP certificant. Roth notes that when the client ultimately complained, the insurance company and broker-dealer immediately offered to unwind the contract, and refund the money with interest and without penalty, yet when a complaint also went to the CFP Board, it resulted in no public discipline - suggesting that at best, the certificant received only a private censure and that the scenario was not viewed as a breach of fiduciary duty. While we don't have all the details, this nonetheless suggests that while the fiduciary standard may be a nice ideal, it's unclear whether it's really being effectively enforced as such by the CFP Board. 

An Ethics Test Your Adviser Might Not Pass - This article from discusses recent research from Diligence Review Corp that has been making the media rounds. The research looked at where assets are held and the number of regulatory incidents of those firms, finding that $23 trillion - almost 50% of all AUM - are held at firms flagged as "red" which means a persistent series of regulatory violations suggesting "a systematic culture of breaking the law." Another $21.6 trillion is held at firms that were flagged as yellow, which were firms that didn't have regulatory violations but had a business model with potential conflicts of interest (such as firms that provide advice but also generate commissions). Only $4.7 trillion was held at firms marked as green, which had no regulatory incidents and low conflicts (ostensibly describing fiduciary RIAs). Notably, though, the distribution by number of firms looks different - while red firms held almost 50% of assets, it comprised barely 10% of the sample by number; similarly, yellow firms that held more than 40% of assets comprised less than 50% of firms, and the remaining nearly 50% of firms flagged green hold less than 10% of the assets. Since there is no trend data over time, it's difficult to draw clear conclusions about whether assets are moving from red to green, but nonetheless the results still show that as of now, the overwhelming majority of assets are with firms with regulatory issues or looming conflicts, and that while RIAs represent a large number of firms they still control a tiny amount of total assets.

Planner Compensation Grows in 2012 - This article from the FPA's Practice Management Solutions highlights results of the FPA's 2012 Financial Planning Compensation Report, and provides 2-year trend results on income growth relative to 2010. Income of Senior Financial Planners climbed 14% on average, from total pay of $105,000 to $120,000, while average compensation of CEO/owners rose 13% from $200,000 to $225,000. In addition, 66% of firms report that they anticipate increasing staff compensation further in the coming year. Also notable about the results, though, are changes in compensation for other positions in firms; for instance, Compliance Officer compensation leaped a whopping 52% in 2 years as the compliance burdens rise, while compensation declined by 26% for estate planning specialists as rising estate tax exemptions reduce the demand for complex estate planning strategies for many firms and clients.

Do CFPs Really Make More Money Than Non-CFPs? - This blog post from practice management consultant Angie Herbers on AdvisorOne highlights some of Herbers' recent research, finding that on average CFP certificants earn $5,000/year more in base salary than non-certificants (as opposed to the recent Aite Group study that showed CFP certificants also tend to have higher total compensation as well), and that the effect seems to hold regardless of whether the individual is a new planner out of college, a lead advisor on a team, or anywhere in between. Herbers hypothesizes the reason is that the CFP is recognized enough that employees who earn it demand higher compensation, and that firm owners have responded accordingly - and that because a higher base salary is also the base from which future raises are paid, the difference persists. 

Training The Next Generation - This article from Wealth Management looks at some new ways that advisors are being trained in today's world, as firms increasingly focus on the issue in light of the industry's troubling demographic trends and prospective advisor shortage that may be coming soon. The problem is that new advisors can cost as much as $300,000 for a firm to train over several years, before there is much revenue generated for the firm, which represents a significant and painful investment, as barely 20% of rookies even survive 4 years in the business. As a result, firms have tended to hire career changers in their 30s and 40s, who have some business and world experience and theoretically, betters odds of success. Nonetheless, some firms are looking at alternatives. Advisors Ahead focuses on providing training for prospective college graduates, with a focus on job skills relevant in planning firms like emotional intelligence and the softer side of working with clients, along with mentoring and license exam preparation. Raymond James has built an "Advisor Mastery Program" which includes an intensive multi-year program, pairing younger advisors with a senior mentor, and getting young planners onto teams early so they begin to learn the realities of the planning world. Overall, the most significant shift is simply a recognition that it's no longer about getting young advisors into "production" as quickly as possible. 

Financial Planning For The 99 Percent - This article from Inc. magazine highlights Alexa Von Tobel of LearnVest, which was just recognized this week as one of the "Best In Show" demonstrations (for the second year in a row) at Finovate, the financial innovation conference in New York City. LearnVest, a company profiled previously on this blog, this week launched an iPad app built around their MyMoneyCenter (framed as an alternative to, and announced its SEC registration, as the company continues in the direction of providing basic financial planning to the masses with plans ranged in cost from $89 to $599 per year. The company is hiring CFP certificants across the country to serve the financial planning needs of its clients, who are served on a remote basis using LearnVest's technology-leveraged platform.

Hightower's Growth Is Accelerated By Social Media - This blog post from Relay Station Social Media discusses the use of social media by HighTower, an advisory firm aggregator that has quickly catapulted to being one of the largest in the space. While so many firms have viewed social media with trepidation, or outright avoided it, HighTower views it as a strong marketing opportunity. The firm has developed processes to distinguish between content that is not business related (which gets archived for random review in the future), versus that which is business related (which gets pre-reviewed, with a dedicated compliance officer assigned to the firm to expedite the process). Although the article is light on results, it notices that after Google and Bing searches, HighTower's #3 and #4 sources of website visits are from LinkedIn and Twitter, which appear to be the platforms where HighTower advisors are focusing the most (with some Facebook and YouTube presence as well).

Building Share of Mind as a Local, Vocal Name - This article from Marie Swift highlights how some firms are building their marketing not through new channels like social media, nor by asking more for referrals, but by going back to an "older" approach: being a regular guest on a local radio show and establishing a local, vocal presence. Swift notes that despite the rise of podcasts and other new media, radio still has a strong base, and found several advisors in various geographic regions who are still finding it a very effective use of marketing dollars. Swift then provides some tips for getting started if you're interested in exploring this further as a marketing avenue.

Easy As Pie - This article by Joel Bruckenstein in Financial Advisor magazine is a review of the new G3 edition of MoneyGuide Pro by PieTech, which is one of the most popular financial planning software packages. Bruckenstein notes that the goal of the new software was to try to keep it simple, while still adding functionality for those who want it, and believes that it generally succeeds. New features include a module to simply and quickly construct a retirement plan in minutes, for clients who have less complex needs, and new risk tolerance process (for those who don't take advantage of the FinaMetrica integration), new SuperSolve functionality, and a "Play Zone" where clients can experiment with the inputs to their plan interactively and see the results. The new software also includes a basic Social Security maximization tool, a "What Are You Afraid Of?" section that shows how the plan will respond to certain "disaster" scenarios (like a future cut in Social Security benefits), and a Presentation Mode to ease delivery of information to clients from within the software itself. Overall, Bruckenstein concludes that the new software is a better, smarter, more intuitive financial planning application than the previous version.

Market Commentary With Wit And Wisdom - This brief article by financial writer Susan Weiner on her blog provides a nice list of individuals who provide ongoing market commentary - an elite list of writers who have both wisdom in their writings, and some wit that makes it entertaining (or at least, not unbearable) to read. Highlights include the daily commentary Dave Rosenberg at Gluskin Sheff, PIMCO's Investment Outlook column, Memos from the Chairman from Oaktree's Howard Marks (recommended by yours truly), and John Hussman's weekly market commentary. If you're looking for some new market and economics reading to keep you better apprised in the world, this is a great list of options to consider.

Are We Assuming Too Much? - This article by Dan Moisand on the Financial Advisor magazine raises the question "Is the financial planning community leading clients to lives less fulfilling than they could be?" Moisand raises the question after attending two recent client funerals, and notes that we spend a great deal of time trying to keep clients so constrained by defending against disaster scenarios - for instance, "only" spending money at a 4% safe withdrawal rate despite the fact that's unnecessarily low 99% of the time - instead of focusing on helping clients to live and enjoy their retirement years. Similarly, Moisand notes that despite the conservatism often used for mortality projections - a topic recently discussed on this blog - a quick scan of the obituaries reveals only two people who even lived to their 90s, and both died in their early 90s. Given the uncertainties involved, it's difficult to come up with a concrete conclusion, but nonetheless the article is a good reminder that excessive professional conservatism can have a real lifestyle cost for clients.

Why the Social Media Revolution Is About to Get a Little Less Awesome - This article from The Atlantic looks at how the business dynamics have shifted for social media companies since the Facebook IPO. Given how the stock price has declined, due in large part to the lack of clarity for Facebook's business model (despite its incredible user base), venture capital firms are apparently increasing the pressure on young social media firms to justify how they will monetize - which in turn is causing those businesses to reconsider how open their platforms are. The article suggests that while this may ultimately be a necessary business trend, it will probably mean that social media platforms of the future may be less open, and potentially less free, as they shift from "just" growing a user base to actually having an economically viable way to monetize. Simply put, the potential is that we're shifting from the "making delightful and cheap things" stage to the "making money" stage, and that as a result, things are going to be less delightful.

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!

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  • Dick Purcell

    Michael, thanks for calling attention to those first two readings, regarding the issue of fiduciarity.

    In those two, and in discussions of Allan Roth’s that I‘ve searched, I’ve been disappointed again to see again that while the spotlight is trained on misperformance of advisors, again there’s not a peep about the near-universal betrayal of the interests of the investing public by the universities.

    University eminences have no reluctance to heap their scorn on advisors’ heads, as demonstrated just this Spring by professors at Harvard and MIT and one of the Bodies. I wonder when or if some planners will blow the whistle on what university investment education has done and continues to do to the investing public and most financial advisors.

    Despite the fact that 99% of U.S. investors are individuals, the universities and professors drown the investment world with droppings from investment education designed instead for financial and academic interests, virtually the opposite of what The People and their advisors need in all the most fundamental ways: investment purpose, assumptions, and presentation.

    Purpose: For investment comparison, divert the investor from his multi-year dollar purpose to technical specs of return rate for the mere volatility-dominated individual year. There the investor cannot see what might be best for his future – nor see the terrible long-term costs of fees.

    Assumptions: Through teaching of benchmarking and such, spread the notion that gambles within an asset class have grounds for future-performance assumptions equivalent to those of their entire diversified asset classes.

    Presentation: To get us to swallow this stuff, drown us in volume, half-million-word investments textbooks. And cover it in labels so misleading Madison Avenue would be proud – “expected” for arithmetic mean returns that are not expected, “risk” for a techie measure of single-year variation to help divert investor focus to their short-term fears.

    This stuff floods out to fill the training of all advisors – CFPs, ChFCs, CPA/PFSs, RIAs, CFAs . . . and shapes the world of our 100 million investors. A few are wealthy or smart or lucky enough to see through it for themselves or have the best advisors who have taken the 12-step recovery from it. But most of our fellow Americans are victims, with blindly selected investments, very commonly drained by excessive fees.

    Want to take the most important step make the fiduciary standard do what it should do? In the current discussion of who should be subject to the fiduciary standard, throw the investment EDUCATORS in – the individuals and the institutions.

    Here are some free ideas about what investment education for guiding people should be:

    Dick Purcell

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Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

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