Weekend Reading for Financial Planners (July 15-16) 2017 (2024)

Weekend reading for July 15th/16th:

Schwab Says Its RIAs See Steady Growth & Richer Clients (Christopher Robbins, Financial Advisor) - The latest results are out for the Schwab Advisor Services' 2017 RIA Benchmarking study, and notwithstanding the industry discussion about new competitive threats, the results are strong across the board for the RIA community. The median RIA on the Schwab platform grew at a 10% average annual compound growth rate over the past 5 years, as the median firm went from $358M in 2012 to $593M in 2016. Client growth was a somewhat smaller 5.2%/year of annualized growth, as the median RIA went from 266 clients in 2012 to 357 in 2016, suggesting that as RIAs grow in AUM, they continue to move further upmarket (larger average AUM per client). In fact, while the average client relationship overall rose from $1.6M in 2015 to $1.8M in 2016, the study found that firms with over $2.5B of AUM reported an average client size of more than $3M, compared to firms with $100M to $250M in AUM averaging only $1M per client. Other notable data points included: firms are still focusing on referrals (from clients, and centers of influence) as their primary planned growth strategy; firms that combine referrals with other market strategies are growing 2.4X faster than their peers (and the "other marketing" strategies are producing as much new business growth as client referrals now!); and the larger the advisory firm, the more they're looking to hire new financial advisors as relationship managers.

Asset Management Revenue Falls In 2016 For First Time Since 2008 (Ivan Levingston, Bloomberg) - In a new report released this week from Boston Consulting Group, the asset management industry grew by 7% to $69 trillion in the aggregate last year, but most of that growth was simply driven by rising markets, and the total revenue actuallydeclinedby 1%, with profits dropping 2%, as the shift to lower-cost investments continues to take its toll on asset managers. And notably, with index funds already approaching rock bottom expense ratios, the pricing pressure now appears to be expanding to alternatives (which make up only 15% of assets but a whopping 42% of asset management revenues), as "high-margin" (i.e., more expensive) products like infrastructure, commodities, private equity, and hedge funds are now being hit the hardest by decreases in expenses. Although price competition was still evident in passively managed strategies as well, with total revenue for those products remaining unchanged at about $14 billion, despite total passive product AUM rising by about $1.5 trillion from 2015 to 2016. The growth pressures are hitting medium-sized companies the hardest (i.e., those that are too broad to have a niche focus for marketing differentiation, but lack the size and scale to bring down their internal costs to compete with larger fund companies). In fact, the competition is so severe, that BCG found even amongst the 10 largest deals of publicly traded asset managers over the past six years, only four of them produced a total shareholder return that clearly outperformed the industry. On the other hand, the competitive forces –particularly here in the US –are still driving asset managers to search for new opportunities, especially in China, where the asset management industry is "significantly underdeveloped" but the country's AUM increased by 21% in 2016 (driven by a 17% rise in net new inflows from Chinese investors).

SEC Approves Major Exam Revamp (Dan Jamieson, Financial Advisor) - After being discussed for several years, the SEC has approved a FINRA proposal to revamp the traditional "Series" licensing exams into a two-tier examination system. The first tier will be the "Securities Industry Essentials" (SIE) exam, which will cover "entry-level" industry basics, and can be takenwithoutbeing sponsored by or associated with a broker-dealer. Once completed, then in order to actually engage in the securities business, prospective brokers would then take "top-off" exams (e.g., the Series 6, Series 7, Series 24, etc.), and become affiliated and licensed with a particular broker-dealer. The shift is intended to make it easier for those who are interested in the securities industry to get their foot in the door, and be able to access and complete the initial SIE exam without needing to find a broker-dealer that will sponsor them. Notably, the newly approved proposal includes a few other changes to the standard Series licensing exams as well, including the use of "permissive" registrations, that will allow people to keep a license even when they don't perform the specific role covered by the registration (e.g., to keep your Series 24 even if you're not currently active as a principal for a branch). On the other hand, some are concerned that the new provision would make it too easier for unqualified individuals to obtain and "park" licenses, though ironically even FINRA pointed out that just being able to park registrations shouldn't matter, as individuals aren't required to have any experience to be licensed anyway!

Health Insurance Reform Uncertainty Hampers Advisers' Ability To Counsel Clients (Editorial Staff, Investment News) - For prospective retirees looking towards retirement, the current Congressional debate about health care policy and to "repeal and replace" the Affordable Care Act isn't merely a long-term policy decision for the country, but impacts their decision about whether to retire at all. In part, that's because the risk of losing access to today's health insurance exchanges means that "early" retirees not yet eligible for Medicare might be stuck unable to obtain health insurance until they turn age 65. And even if the private exchanges remain and ensure coverage despite pre-existing conditions, another proposed change would allow those between ages 50 and 65 to pay up to 5X the cost of coverage compared to younger buyers (as opposed to an age-based limit of only 3X today), which would increase the cost of coverage for early retirees (albeit with the benefit of reducing the cost of coverage for younger individuals).In addition, proposed changes to Medicare and Medicaid could also change the potential scope of health care costsinretirement, too. For instance, a new House bill would mandate that states include all home equity above $560,000 in determining Medicaid eligibility (right now, states have the option to allow for higher limits), which could force many clients of financial planners to sell the family home and downsize to pay for their nursing home care. And of course, there's also wide debate about the future of tax reform, which could similarly have substantial impacts on prospective retirees and their ability to afford retirement –but with Congress stuck debating health care right now, it's not at all clear when or whether tax reform will even be taken up, and what might actually be passed into law next year (or not).

Big Social Security COLA Will Be Offset By Medicare Premiums (Mark Miller, Reuters) - After a 0.3% cost-of-living adjustment (COLA) to Social Security in 2017, preceded by a zero COLA in 2016, the "good" news is that it looks like Social Security's COLA in 2018 should be about 2%, which would lead to an increase of $27.20/month on the average $1,360 monthly benefit from Social Security. However, for most Social Security recipients, they likely won't see this increase, thanks to the so-called "Hold Harmless" rules that have been in effect for the past 2 years. The Hold Harmless rule is the one that limits the dollar amount of any increases in Medicare Part B premiums to the dollar amount of Social Security's COLA increase– effectively ensuring that net Social Security benefits do not fall for all of those who have Medicare Part B premiums subtracted from their Social Security checks. As a result, those who have been enrolled in Social Security for the past two years are only paying $109/month in Part B premiums, while those who weren't protected by Hold Harmless (in particular, new enrollees, and those who were impacted by the income-related surcharge on Medicare Part B premiums), have been paying $134/month, shouldering all of the 'burden' of the past two years' worth of Medicare Part B premium increases. But with the 2018 Social Security COLA, the Medicare Part B premium increases of the past two years will now be redistributed back to the whole population of Social Security recipients, which could lead to a fairly significant "spike" in Part B premiums as Hold Harmless unwinds. On the other hand, the size of the spike will likely still be less than the current $134/month that nonprotected Medicare Part B recipients are paying, which means for those who didn't get to benefit from Hold Harmless in the past, their Part B premiums could actuallydecreasein 2018!

5 Ways To Get The Most From Medicare (Mark Miller, Morningstar) - Given both the cumulative costs of both Medicare itself, and the portion of health care costs not covered by Medicare, maximizing Medicare to the extent possible is crucial to help control total health care costs in retirement (which is estimated to be a whopping $322,000 in today's dollars for a healthy 65-year-old couple). Tips to ensure retired clients get the most from Medicare include: 1) Remember to enroll on time in the first place (generally the 7-month period that begins 3 months before your 65th birthday, and ends 3 months afterwards), although those who receive Social Security benefits at age 65 are enrolled automatically (and while you can decline Part B at that time if you wish, most shouldn't, given substantial lifetimepremium penalties that will apply in the future if you're not already receiving creditable coverage from an employer); 2) don't forget to consider a Medicare Part D prescription drug plan as well (which also has a penalty for waiting, at 1%/month of late enrollment tacked onto your drug plan premium in the future), although those who are just using some inexpensive generic drugs might do well to simply pay for them out of pocket; 3) consider a Medicare Advantage plan (the managed care alternative for Medicare) instead of the traditional fee-for-service Medicare Part B and Part D plus Medigap supplemental coverage (and if you skip Medicare Advantage, be certain to actually buy a Medigap policy during initial enrollment, as insurers can't decline coverage or charge higher premiums to those who purchase at that time); 4) be cognizant of the potential impact of the premium surcharges for Medicare Part B and Part D based on income, which kicks in once AGI exceeds $85,000 for individuals or $170,000 for married couples (determined using your prior year's tax return with a one-year lag, such that 2018 premiums will be based on the 2016 tax return); and 5) once you're enrolled, be certain to review any annual updates regarding coverage, particularly for Medicare Part D (as drug plans may change), and Medicare Advantage (where the health care network of doctors and medical facilities may change).Also, remember that once you enroll in Medicare –even if it's just Part A –you're no longer eligible to contribute to a Health Savings Account (although you can still take tax-free withdrawals from an HSA, including to pay for Medicare Part B premiums!), nor can you receive premium assistance tax credits anymore if you're getting health insurance via an exchange!

DIY Advisor Marketing To Sharpen Your Message (Gail Graham, Financial Advisor) - Advisors often end up spending a non-trivial amount for marketing materials that don't necessarily produce much in actual results... which Graham suggests is because often, the advisor's core marketing message is unclear in the first place (which makes the marketing materials a waste). But how do you refine your core message in the first place? Graham suggests a starting point is to form a small "message development team" (e.g., 5-7 smart and objective people you respect and are willing to give you tough feedback, such as a client advisory board). Once you have your team, the first step is to have all of them visit someotherfinancial advisor websites, and collect the key ideas and messages that stand out (good or bad), ideally with screenshots for visual support. Then, get them all together for an afternoon, with three flip charts or white boards (one for "ideal clients", another for "what we offer", and the last for "why it matters"), and for each of the selected high-quality websites from the prior step, note how they answered each of these items. Once you've done this, pull up your own website and other marketing collateral, and have the group assess your own messaging strengths and weaknesses, based on this feedback (and where you use "weak" language, such as lofty expressions that don't really say anything meaningful). With this feedback, you can then sit down to try to really refine your own message, focusing on who you are really best at working with, how you differentiate, and why those differentiators should/do matter to your target clients. And remember, most advisors resist being specific, but the reality is that it's the specificity that truly differentiates you to the people you actuallydowant to reach!

Advisor Marketing Advisors From The Pros (Journal of Financial Planning) - For many financial advisors, marketing just feels overwhelming, with a never-ending series of "you shoulds" being thrown at us (you should be on Twitter, or Instagram, or giving seminars, or updating your website...), and so this article attempts to drive to a conclusion quickly by asking a series of marketing pros for specific top tips. A few of the suggestions include: the most underutilized social media platform by financial advisors is Twitter (get started by following industry leaders, see what they do, and then emulate it in your own target market); if your problem is actually that you're "too" successful, and can't respond to all the comments, design someone in your advisory firm responsible for "customer service" and have them reply to the comments (e.g., on your Facebook page); be certain your marketing includespictures, of you and your team, as people connect better with people than just text-based biographies; be certain to have some "call to action" on your website beyond just your contact form, as the latter is a "close the sale" kind of page, but you also need a "lead generation" option (e.g., give away a free ebook or download in exchange for their email address); and don't be afraid to check out what other advisors are doing who are having marketing success, and use it to inspire your own ideas for reaching your target clientele, too, although remember the best marketing doesn't necessarily have to be "different" or the "next big thing", it just needs to reach and resonate with the people you're trying to do business with! Also, remember to share what you dooutsideyour firm/office as well as what you do in your business... as again, prospective clients want to connect with you as a human being, not just an advisor and business.

Niche Or Nest: Which Is Best? (Tony Vidler, Financial Advisor Coach) - A marketing niche is a certain target market of potential clients who have some commonality regarding their issues and needs... such that once you understand a few of them, there is a good chance you'll understand nearly all of them, which allows the advisor to refine their services and solutions to match the niche's needs and become a dominant provider. By contrast, Vidler suggests that there's also such thing as a "marketing nest", which is a physical place or other community of people who spend time together –such as employees of a particular company, or a community group, where their "shared experience" is not based on demographics but affiliation to the community. In the short term, finding a good marketing nest –a community in which you can establish yourself as a known provider –can be a good path to acquire clients in volume and reasonably quickly, working any/all opportunities that present themselves once you establish yourself in the nest. Notably, though, Vidler argues that in the long term, niche marketing still has the better payoff, as it allows the advisor to deepen expertise, more clearly differentiate themselves, and ultimately generate more inbound referrals as the recognized "go to" person for particular needs or problems. Which means ultimately, niche marketing may be the best strategy in the long term, but tactically finding a nest is more likely best for nearer term marketing results.

Integrating Behavioral Finance, Financial Psychology, and Financial Therapy Into The 6-Step Financial Planning Process (Derek Lawson & Brad Klontz, Journal of Financial Planning) - The "traditional" 6-step financial planning process is heavily focused on evaluating goals, analyzing strategies, and making recommendations, based on what is quantitatively and economically the "best" path to achieve the client's stated goals. Yet the reality is that often clients struggle to implement those recommendations, don't always understand why the recommendations are best for them (due to existing biases), or may find that their goals themselves shift (such that the recommendations aren't even relevant anymore). The end result is that, given the strong emotions that arise around money, effective financial planning must incorporate some aspects of "behavioral finance", or even "financial therapy" and financial psychology, as a means to help clients move forward. Yet unfortunately, most financial advisors have little or no training in the emotional factors around money. So how might the two overlap into a cohesive process? Lawson and Klontz give a number of examples where financial therapy and psychology principles can be incorporatedintothe existing 6-step financial planning process, including: when defining the scope of the client relationship, the advisor's ability to establish rapport and make clients feel heard through "reflective listening" techniques are crucial; when going through the data-gathering process, consider the techniques of "motivational interviewing", where questions are deliberately framed for open-ended prompts that stoke discussion (e.g., not "when do you want to retire" but "describe your ideal retirement", or instead of "do you want to leave money to your children?" try "tell me more about what you want to see happen with your assets when you pass away"); during the analysis stage, be certain to consider any of the client's existing money anxieties or beliefs, or "money scripts" that may bias their views (e.g., using the Klontz Money Script Inventoryto determine if they are money avoiders, money worshippers, focus on money status, or have high money vigilance); when preparing recommendations that entail making changes, consider how ready clients actuallyareto change, and whether they need more support in the change process; when implementing, consider giving clients "homework" (or "tasks" or "experiments") to try that help them to move forward to the next step and minimize procrastination; and when in the monitoring phase, recognize all the behavioral biases that can surface (e.g., wanting to follow the herd, be impacted by confirmation bias, etc.) that may impair the client's ability to stay on track (in addition to monitoringwhether anyfinancialchanges need to be made to stay, or get back on, track).

Active Listening (Shane Parrish, Farnam Street) - There are few things more frustrating than feeling like you're not being listened to, yet most of us are never actually taught how to really listen effectively... where we don't just "hear" what's being said, but actually "listen" to gain comprehension and understanding of what's being said, and why, and the underlying intentions and non-verbal communication. Proactively attempting to listen effectively is often dubbed "active listening", and leverages a series of techniques (which can be trained and learned, such as from Mortimer Adler's classic book "How to Speak, How to Listen") to help ensure that the listener comprehends, and that the talker feels heard and understood. The starting point is toreallyensure that you comprehend what's being said – even asking "can you explain that like I'm five years old?" as a way of ensuring mutual clarity can be effective. Of course, not everything that is said will be retained, either, which means it's especially important to really try to focus on what's being said (and not just trying to think of what our own next response will be). And because a conversation is meant to be a two-way street, it's also crucial to respond effectively –by restating to show the other person that we really heard what was said, and showing that we understand and have empathy for the underlying emotions being expressed. Notably, the relevance of active listening goes far beyond just an advisor-client relationship, but can be especially effective there, not only for the client to feel heard and understood, but also because as advisors we have a tendency to focus the conversation around ourselves, our knowledge, and our capabilities (in an effort to demonstrate our value), instead of keeping it focused on the client.

How To Develop More Confidence As A Planner (Dave Grant, Financial Planning) - The deep dark truth is that most financial advisors are plagued by a lack of confidence in their abilities, and the effect isn't even unique to just newer advisors, as even experienced advisors can sometimes succumb to the "imposter syndrome" of feeling like someone may soon discover they're not so great at what they do (even if the truth is that they reallyaregreat!). The ultimate goal is to be able to confidently communicate your abilities and value, to the point that even if/when a prospect says "No", you feel secure enough to simply accept that result, knowing that other opportunities will come, and not succumbing to the temptation to "force" the relationship by discounting your value and services. For some advisors, the reality is that their lack of confidence comes from the fact that they aren't entirely happy with –and believers in –their firm and what it does for clients, and their lack of confidence in their firm's investment or financial planning philosophy translates through as their own lack of confidence to clients and sabotages their own success (solution: change firms, or go out on your own, because this isn't going to work!). Although for most, confidence starts at home, with a supportive family who agrees with your career choice, which makes it easier to show up for work every day (and find support when the inevitable bad days come, especially if you're an entrepreneur advisor who goes out on your own). And for some, education (e.g., getting credentials like CFP certification) can help their confidence too, along with the confidence that comes from simply gaining additional years of experience. For those who still need even more of a support network around them, getting together with a group of like-minded peers in a Mastermind group can help a lot, too. And in the end, remember: it's an abundant world, with more than 100,000,000 households in the US, so it's OK if a few of them say no to you, as there's no scarcity of opportunities for people to do business with you!

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.