Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with a fascinating new consumer study finding that the titles that financial advisors use really do matter, particularly when it comes to the perceived loyalty that the individual will give to their clients, with “financial planners” and “financial advisors” gauged as significantly more trustworthy than stockbrokers and insurance agents… and raising questions of whether the SEC should have gone further in its title reform efforts under Regulation Best Interest.
Also in the news this week was an announcement by the CFP Board, in response to the recent Wall Street Journal article about its lax enforcement of standards, of the members of its new Enforcement Task Force, and that the task force will be comprised mostly of former securities regulators (suggesting that the CFP Board may indeed be preparing for a substantial step up in its enforcement efforts). In addition, the buzz is growing that the SECURE Act may finally be passed in the coming month (as an add-on to the budget legislation that Congress must pass by the end of September, and Jackson National paradoxically announced, that due to New York state’s new Regulation 187 fiduciary rule for annuities, the company will bizarrely be suspending its fee-based annuities but keeping its commission-based annuities in what appears to be an attempt to not have to disclose how significant the differences in costs and benefits may be between commission- and fee-based annuity contracts.
From there, we have several practice management articles this week, including a look at the new add-on services advisory firms are beginning to offer to help justify their advisory fees (and avoid needing to cut fees), the latest advisor benchmarking study that finds advisor compensation in various key roles may be starting to flatline (but only because firms are developing more traditional career tracks with formal promotions instead), issues to consider when instituting a new advisor bonus plan for bringing in new clients, what to consider to properly define who an “A” client really is (beyond just their assets under management or revenue to the firm), and what to consider when considering whether to make a counter-offer to an employee who says they’re leaving (and why it’s best to try to avoid ever being in such a position in the first place).
We wrap up with three interesting articles, all around the theme of entrepreneurship: the first looks at a recent study finding that despite the popular view that more heads are better than one, startups founded by solo entrepreneurs are more likely to survive and thrive than team-based start-ups (that in practice just end out being more likely to have critical disagreements about the vision or direction of the business and break up later); the second explores another new study, finding that the vision of young-genius entrepreneurs (e.g., Bill Gates, Steve Jobs, or Mark Zuckerberg) is really the exception to the rule, and the average age of entrepreneurs is actually 42, with the fastest-growing startups have an average founder age of 45; and the last explores the journey of entrepreneurship for advisory firm founders in particular, and the ways the role of the founder and the demands of the business on that founder change and evolve as the business itself grows and develops over the years.
Enjoy the “light” reading!
Investors Put More Stock In Investment Professionals Wearing ‘Adviser’ Label (Mark Schoeff, Investment News) – According to a recent new study from the Mercatus Center at George Mason University entitled “Consumer Perceptions of Financial Advisory Titles and Implications for Title Regulation” by Dr. Derek Tharp, consumers have a higher expectation about the level of service they will receive from those who use titles such as “financial planner”, “financial advisor”, and “investment adviser” compared to “stockbroker” or “life insurance agent”. Notably, consumers specifically understood that both stockbrokers and investment advisers might have similar skills, but that the “advisor” title connoted that the individual was looking out for them (similar to a doctor or lawyer). And overall, the advice-oriented titles were deemed to have similar competency and client loyalty as other professionals like doctors and lawyers, while the more sales-oriented titles were clustered with other sales-oriented roles like car salespeople and politicians. The significance of this research is that in its recent Regulation Best Interest reforms, the SEC explicitly declined to engage in title reform for hybrid broker-dealers, and even with respect to standalone brokers at broker-dealers only restricted the use of the label “financial advisor” itself and not other advisor-sounding titles; in other words, the research suggests that consumers do in fact rely heavily on the titles that advisors use to hold themselves out, and specifically with respect to their perceived duty of loyalty to the client, such that the SEC should at least consider creating a safe harbor for particular advisor-related titles that would be protected under regulation and could only be used if the appropriate fiduciary of loyalty is attached.
CFP Board Announces Enforcement Task Force Members (Melanie Waddell, ThinkAdvisor) – After a controversial Wall Street Journal article in July showed a substantial number of CFP certificants on the CFP Board’s “Let’s Make A Plan” website had material regulatory disclosures that weren’t acknowledged by the CFP Board (which instead implied those CFP professionals had a clean record and adhered to the CFP Board’s “gold standard”), the CFP Board immediately announced that it would begin to scrub its public list based on regulatory disclosures on the FINRA and SEC websites and that it would enact a new “Enforcement Task Force” to further explore how the CFP Board could bolster its enforcement policies. And now, the CFP Board has announced the members of the Enforcement Task Force, which notably include several “heavy hitters”, from Mercer Bullard (president and founder of the Fund Democracy shareholder advocacy group) to Michael Higgs (director of the Mississippi Securities Division), Nancy Smith (former director of Securities for New Mexico and a former staffer on the House of Representatives’ Subcommittee on Telecommunications and Finance), and CFP certificant and former CFP Board Chair Richard Salmen (ostensibly to provide the practitioner’s perspective on enforcement), in addition to Enforcement Task Force chair Denise Voigt Crawford (herself a former Texas state securities regulator). Ultimately, the Task Force is expected to formulate and provide recommendations to the CFP Board’s own Board of Directors after its November meeting, with a report that will be made public to all stakeholders, as the CFP Board stares down a prospective enforcement date of its new fiduciary standard next June. Ultimately, it remains to be seen whether the CFP Board can fully plug its enforcement gaps, due in part to the limitations it has by being a 501(c)(3) non-profit that maintains the marks but not actually a “bona fide” regulator with investigative powers… but the gravitas of the Enforcement Task Force members suggests that the CFP Board is taking the criticism and concern very seriously. Stay tuned for the report in November to see the final results.
Retirement Security Advocates Hope To Attach SECURE Act To Budget Legislation In Coming Weeks (Mark Schoeff, Investment News) – Earlier this year, the “Setting Every Community Up for Retirement Enhancement” (SECURE) Act passed the House of Representatives with a whopping 417-3 vote, but despite such bipartisan support, has remained stuck in the Senate since then with some Senators objecting to particular provisions (such as an attempt to re-introduce homeschooling expenses as a valid use of 529 plans, which was struck at the last minute from the Tax Cuts and Jobs Act back in 2017 as well). However, with several spending bills that must be passed by September 30th to avoid a government shutdown, there is a possibility that the SECURE Act could be attached to a Continuing Resolution to keep the government open as a way to get the legislation passed. If passed, the SECURE Act is anticipated to one of the biggest retirement reforms in years, from expanding the accessibility to create Multi-Employer 401(k) Plans (MEPs), to making it easier for defined contribution plans to offer annuities, as well as increasing the age for required minimum distributions (from age 70 1/2 to age 72), and potentially curtailing the ability to stretch IRAs and other retirement accounts after death. Though it still remains to be seen whether the exact provisions of the SECURE Act will remain intact or be changed at the last minute, particularly if negotiating is still necessary to get some of the remaining Senators on board.
Jackson National Suspends Fee-Based Annuity Sales In New York Due To Best-Interest Rule (Greg Iacurci, Investment News) – Last month, New York Insurance Regulation 187 took effect, which will require that all sales of annuity and life insurance products in the state be done in the Best Interests of consumers (with the requirement for annuities effective August 1st, while the life insurance requirement takes effect next February 1st). The rule is expected to bring an especially high level of new scrutiny to fixed life insurance and annuity (including fixed-indexed) products in particular, given that variable annuities and variable life insurance have already at least been subject to FINRA oversight, including both a requirement that more data points be collected for each client, and that annuity agents must more explicitly discuss negative product features in addition to positive ones (e.g., the potential that a 6% interest rate cap on a fixed-indexed annuity product could be reduced to 3% in the future). Ironically, though, in response to the rule, Jackson National announced that it is pulling not its commission-based annuities that would ostensibly be most threatened by a new fiduciary rule for annuity agents, but instead its fee-based annuity product instead. The reason appears to be a new disclosure requirement, that would require insurers to show a side-by-side comparison of fee- and commission-based products for consumers… as in practice, the commission-based marketplace for annuities is so much larger than for fee-based, such that the annuity carrier may fear that the disclosure requirements for the (smaller) fee-based products could undermine sales of the much-larger commission-based products. Given the rising interest amongst annuity carriers to serve RIAs, though, especially with a recent favorable Private Letter Ruling from the IRS about annuity fees, the withdrawal of the fee-based contract is likely temporary. Nonetheless, it does highlight the conflicted position that annuity carriers still face in trying to market fee-based and commission-based annuities through different advisor channels at the same time, given what may be substantially different costs or benefits of the commission-laden contracts versus their emerging fee-based brethren.
Financial Advisors Increasingly Expand Their Services To Justify Their Fees (Lisa Beilfuss & Gregory Zuckerman, The Wall Street Journal) – With the ongoing commoditization of pure investment management services, pundits have long predicted that the fees that advisors charge would soon decline; instead, though, advisory fees have barely budged in the 7 years since robo-advisors emerged, and instead it appears that advisory firms are trying to “value-add” their way up to justify their existing fees instead (even at the risk of sacrificing their profit margins). One emerging service is providing college counseling services for the children of clients, which may include assistance on financial aid applications, rearranging assets to qualify for more aid, consulting on college applications, and even providing support for selecting a college major or finding internships (with a few advisors going so far as to have been involved with the recent college-admission bribery scandal). In turn, the demand for help with college counseling for clients is spawning advisor support businesses like 123College (which provides advisors with presentations on college planning and then provides supporting marketing to fill seminar rooms of prospects to deliver the presentation). Other expanded services, particularly for more affluent clients, includes helping them find other professionals… including not just attorneys and accountants, but building contractors and architects, long-term care facilities for family members, bringing in trained psychologists to help families work through internal disputes, and one advisor even had to help an affluent family decide how to deal with the cremation remains of their parents (for which the ultimate decision was to spread the parents’ ashes at the family’s vacation home).
Why Is [Support] Adviser Compensation Suddenly Going Flat? (Brandon Odell, Investment News) – For the past several years, advisor wage growth has been rising at 5%/year or more (jumping as high as 8% in 2016), in what’s been viewed a dangerous combination of advisory firms rapidly growing and increasing the demand for hiring, coupled with a shortage of next-generation talent coming into the industry to fill those jobs (and thus increasing salaries as a result of the talent shortage). However, in the latest 2019 InvestmentNews Advisor Compensation & Staffing Study, the trend of rapidly rising advisor compensation suddenly appears to be cooling, with lead advisors up “only” 4.5%, servicing advisors up just 1.5%, and support advisors actually down 1.5%, despite median revenue growth of 11.1%. However, Odell suggests that the reason for the shift in compensation trends isn’t that the talent shortage has been relieved, or that there isn’t still a demand for hiring, but instead that advisory firms are altering (and in many cases, “right-sizing”) their advisor compensation, more clearly delineating advisors into proper roles and tiers, such that advisors don’t gain as much of a raise in their current role… their compensation increases come from earning promotions to move up the career track ladder instead. In addition, advisory firms also appear to be getting more aggressive in seeking out young talent, which paradoxically brings advisor compensation lower as recent college graduates don’t necessarily have to be paid as much as career-changers for entry-level service advisor jobs; in fact, amongst “super ensemble” firms (with $10M+ of revenue), a whopping 82% have now developed an advisor career path to nurture young talent rather than needing to hire lead advisors who are more expensive to recruit. Furthermore, flatlining of advisor compensation appears to also be at least partially tied to a flatlining in advisor productivity, with the average revenue per professional no higher in 2018 than it was in 2014, suggesting that despite all the time-saving advances in advisor technology, advisors are still being called upon to do more for their existing clients to maintain their fees, such that individually advisors aren’t growing the revenue they’re responsible for (which in turn limits the ability of the firm to compensate them more). The key point, though, is simply that the slowing in compensation for advisors doesn’t necessarily represent an ill tiding for the trajectory of advisory firms and the career opportunity of being an advisor, so much as it is a maturation of advisory firms themselves to hire younger and create more well-defined career tracks that advisors can progress through (and earn raises with the promotion to each new tier) instead.
How Much To Reward An Advisor For A New Client? (Philip Palaveev, Ensemble Practice) – Just a few years ago, it was not uncommon for advisory firms to target 20%/year growth, only to be “surprised” with 25%+ growth instead; with the ongoing crisis of differentiation, though, advisory firm growth is slowing, with the average firm targeting “only” 10% growth in 2018, and failing to even achieve that target (growing at “just” 9% instead). In an effort to jump-start growth, more and more advisory firms are looking to bonuses and other types of incentive compensation to encourage their advisors to bring in more clients, but Palaveev notes that while paying such bonuses does clearly communicate a signal to the team that growth is important, it doesn’t necessarily change their actual behavior. In other words, “bonuses don’t magically turn a non-rainmaker into [a] skilled networker,” as business development is ultimately a combination of both skill and motivation, and increasing the motivation doesn’t help if business development skills aren’t taught first. In addition, not all advisors are in a position to have the opportunity to engage in business development either. Notably, this doesn’t mean that business development bonuses are uniformly bad – and Palaveev notes several examples he’s observed that were successful (especially in salary-based firms that didn’t otherwise reward business development well), including paying 25% – 30% of first-year revenue, or perhaps with a partial “residual” (e.g., 25% in the first year, 15% in the second, and 5% in the third year), and a few firms that pay ongoing revenue-shares of 20% of more (though Palaveev cautions that in the long run, such agreements can be very binding on the profitability of most firms). Bear in mind, though, that if bonuses will be paid, it’s necessary to clarify exactly when they will and won’t be paid (e.g., only for new clients, or also for new assets from existing clients, especially if it’s a big deposit?), and how they will be split if multiple advisors are involved in the business development effort. The key point, though, is simply to understand that bonuses are best to help incentivize good business developers to do more, but firms with advisors who lack business development skills need to focus on the sales skills development first.
How To Define An “A” Client (Steve Wershing, Iris.xyz) – Advisory firms try to give a consistent and quality service to all clients, but it’s only natural to segment out a firm’s “top” clients, who mean the most professionally to the firm, and provide them an additional tier of service over and above the rest. The question, however, is how exactly to define who those “A” clients are that deserve an additional tier of service and support, given that by definition it’s not feasible to provide such additional services to all clients (or else it wouldn’t be a premium service for “A” clients, it would just be a standard service for all clients!). And of course, having a clear understanding of who the firm’s “A” clients are is also essential to understand how best to market to them to get more such clients. Traditionally, most advisors have defined their “A” clients by assets or revenue – and literally “who pays the firm the most”, but Wershing suggests that the starting point is to consider who you as an advisor can benefit the most, and what type of client(s) will benefit the most from the business itself. For instance, “A” clients might include: clients who engage with your full suite of services (as even a “big” client isn’t necessarily an “A” client if they only engage for investment management services and don’t use – and therefore don’t value, and won’t likely refer – the rest of your comprehensive services); clients who diligently follow up on their to-do items (who are thus the most likely to be transformed by your advice and enthusiastically refer you to others based on their good outcomes); clients who already give the firm referrals (which means their value isn’t “just” the fees they pay, but also what they generate in growth for the firm); and those who are “influencers” (have a connection in the communities where your target clientele is found, and can generate a disproportionate amount of visibility for and referrals to the firm).
Should You Counter-Offer An Advisor Being Recruited Away? (Caleb Brown, New Planner Recruiting) – There are few things more frustrating for an advisory firm owner to hear the words “I have accepted another offer…” from an employee, especially since such situations are most likely to arise with the best and highest-performing team members (who are thus the more likely to be recruited away). For most, the gut response is to take steps to try to retain the team member, by making a counter-offer to convince them to stay. As even if it’s costly to do so in the moment, it may still be less expensive than the cost of finding and training a replacement (or at least buys additional time to find and develop that replacement), and in some cases may highlight a situation where the individual actually should have gotten a raise and/or promotion and had just mistakenly been overlooked or held back longer than he/she should have. And fortunately, the data show that on average, employees accept 57% of the counteroffers to them, as once the terms are even, most employees will prefer the current and known to taking a leap to the unknown. However, in the end 80% of employees still leave within 6 months of accepting a counter-offer, and 90% leave within a year. As most of the time, the decision of the employee to leave and accept another offer is a symptom of a more substantive underlying issue of fit with the firm, for which a counter-offer of more compensation alone rarely ever remedies the issue. In addition, once someone has made up their mind to leave, and already envisioned themselves at a new firm, it’s hard to shake that vision (and their productivity never returns to normal). Accordingly, Brown suggests that it’s better to be more proactive with employee reviews in the first place, than to risk team member departures (where a counter-offer won’t likely be long-term effective), with regular discussions/reviews with team members, a career path that highlights how they can move forward, and even administering an anonymous career satisfaction survey just to understand whether employees themselves feel like they are on a clear track (or not, such that they might leave and pursue opportunities elsewhere instead).
Entrepreneurs Are Better Off Going It Alone (Cheryl Winokur Munk, The Wall Street Journal) – According to a recent working paper from business school professors Jason Greenberg and Ethan Mollick entitled “Sole Survivors: Solo Ventures Versus Founding Teams“, startup ventures founded by solo entrepreneurs had a better chance of survival than companies with two or more founders, and solo ventures were nearly 2.6X more likely to remain in business than those with 3+ founders, and on average generated more revenue to boot. The results of the study were based on a series of 3,526 businesses that were crowdfunded and launched via Kickstarter, and did find that solo-run companies tended to raise less money initially (even though they ultimately tended to grow more revenue and last longer). And a follow-up study being conducted with the Crunchbase Business Database, the Panel Study of Entrepreneurial Dynamics II, and a proprietary survey of more than 1,500 high-potential Wharton graduates, has preliminarily found similar results as well. The key distinction appears to be that in the critical early stages, solo-led firms can make more efficient decisions (and simply bring in help when needed), whereas team-based founders are more likely to need to build consensus, and therefore more likely to end out with contentiousness around key decisions that ultimately hamstring the business. Notably, though, a number of the biggest and most successful startups, especially in the tech realm, from Microsoft and Apple to Google, eBay, Netflix, and Facebook, all had team-led founders and simply ended up later with a single dominant team member. Nonetheless, the significance of the research is that it suggests, rather than emphasizing team-based dynamics for entrepreneurship, that perhaps the better approach is simply to teach entrepreneurs the skills they need to be successful on their own, along with how to hire the right people to balance out their skill sets if/when/as needed.
Founders Of Successful Tech Companies Are Mostly Middle-Aged (Seema Jayachandran, The New York Times) – In an upcoming study entitled “Age and High-Growth Entrepreneurship” in the journal American Economic Review: Insights, researchers have found that despite the “traditional” view that tech startups are borne from brilliant young minds (e.g., Mark Zuckerberg founded Facebook at age 19, Bill Gates was 19 when Microsoft was founded, and Steve Jobs was 21 when Apple was founded), the average age of founders is actually age 42, and that amongst the top 0.1% fastest-growing start-ups from 2007 to 2014, the average age of the companies’ founders was 45. The results actually support previous studies that have similarly found that owners of small businesses in general tend to be in their late 30s and 40s, though amongst the fastest-growing businesses, it turns out founders tend to skew even slightly older on average. Which isn’t to suggest that it’s hopeless to try to start a business at a younger age, as fluid intelligence that drives creativity and raw problem-solving ability actually tends to peak early (and can already be declining by the time we’re in our 20s). Nonetheless, crystallized intelligence – gained through experience – appears to be even more vital, which helps to explain why even in the world of Nobel prizes, the Nobel-worthy breakthroughs in medicine tend to arrive at an average age of 40. And in many cases, it takes a large numbers of years of experience in a particular industry just to identify what the key and unique business opportunities (that a startup could then be launched to solve) might be in the first place.
The Psychological Trajectory Of Advisor Entrepreneurs (Austin Philbin, Advisor Perspectives) – Advisors who launch their own independent advisory firms as entrepreneurs tend to have a somewhat consistent nature of being risk-takers (willing to go out and launch their own businesses in the first place), but Philbin notes that there is a “psychological arc” that advisory firm founders tend to share throughout the journey of building an independent advisory firm. The first stage is the startup phase of taking the leap itself, which Philbin notes is often accompanied by a sometimes irrational level of bravado… which isn’t necessarily a criticism, but simply a recognition that having the bravery to take the leap, and try to convince clients that a firm being created from scratch will really provide value and have staying power requires the founder to have a certain level of confidence and limits his/her ability to express vulnerability; unfortunately, though, such a mentality often also prevents advisory firm founders from seeking out help, leading many to unwittingly misdirect their focus, or blow unnecessary details out of proportion, without someone else to provide perspective on where it is best to focus. After the first year or two, the advisor enters the second stage of “adolescent mistakes”, where similar to going off to college, a lot of experimentation starts to occur, from new lines of business that are considered, to new positions that are created, and new clientele and marketing strategies are explored. Such trial-and-error isn’t necessarily problematic at all, but after a few inevitable failures, advisors in stage 2 often begin to focus more on their Profit And Loss (P&L) statement, focus more on setting (proper) employee compensation, and recognize the importance of managing and controlling costs to avoid the profitability of the business from spiraling downwards. After 5+ years, advisory firm founders enter the third stage of becoming an “adult”, and eventually becoming a “parent”, where the focus of the firm is increasingly on attracting and retaining talented employees, and fostering a culture where they can thrive, and as a result must also become more systematic and process-oriented as well… which eventually shifts to a focus on the legacy of the firm, and finding future successors who can someday take over the business and carry it forward in the future.
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.