Weekend Reading for Financial Planners (Jan 8-9) 2022

Weekend Reading for Financial Planners (Jan 8-9) 2022

Executive Summary

Enjoy the current installment of “Weekend Reading For Financial Planners” – this week’s edition kicks off with a study showing that private equity firms are targeting financial advisory firms with relatively clean disciplinary records for acquisitions, but that once acquired, advisor misconduct at these firms skyrockets an average of 147%! The reason for this jump is unclear, but potential explanations include heightened pressure from private equity owners to increase profits, or pushing too hard to cross-sell their other portfolio companies’ products and underestimating the compliance requirements of the advisory business. Either way, the study suggests that firm owners considering a sale who want to ensure that their clients remain in good hands could increase their due diligence of potential acquirers and their business practices!

Also in industry news this week:

  • A new FINRA rule went into effect on January 1 that will attempt to reduce the risk to consumers from brokerages with poor disciplinary records by requiring these firms to fund a segregated account to pay potential arbitration awards (and increase their cost of doing business as long as they insist on keeping problematic brokers onboard)
  • RIA M&A activity is expected to continue to surge in the coming year, according to a recent survey, with lofty firm valuations expected to sustain as well

From there, we have several articles on advisor communications and marketing:

  • How to respond when clients object to their advisor’s recommendations (and why asking more questions might be a better approach than more aggressive persuasion to get them to implement)
  • Why the best-performing types of pages on financial advisors’ websites include not only the basic “Who” and “What” of the advisors, but also show why a prospective client could be the right fit for the advisor and how the advisor helps their clients reach their goals
  • Why advisors should focus less on client referrals and more on Google Reviews as a one-to-many client referral platform in light of the SEC’s marketing and testimonial rule

We also have a number of articles on being an effective manager and leader:

  • Why sales training programs for financial advisors can prove ineffective if they use a “one-size-fits-all” approach without considering the personalities and needs of the advisors themselves
  • How leaders can thread the needle between micromanaging their team and being too hands-off by timing their help for when it’s needed most (and backing off when it isn’t)
  • Why most advisory firms need at least one person tasked with having a vision for the firm and a strategy to get there – which, as firms grow, may be someone other than the firm’s owner who is hired strictly for their “professional” leadership

We wrap up with three final articles, all about New Year’s Resolutions:

  • Why one advisor shifted from making New Year’s Resolutions to focusing on the habits that make it more likely he will achieve his goals (and letting the results fall where they may)
  • Ways individuals can make their financial lives happier in 2022, including by focusing internally rather than externally, simplifying their finances, and getting on the same page financially with a spouse
  • Why failing at New Year’s Resolutions can actually lead to better personal and professional growth in the future

Enjoy the ‘light’ reading!


Ben Henry-Moreland

Ben Henry-Moreland

Team Kitces

Ben Henry-Moreland is a Senior Financial Planning Nerd at Kitces.com, where he researches and writes for the Nerd’s Eye View blog, using his experience as a financial planner and a solo advisory firm owner to help fulfill the site’s mission of making financial advicers better and more successful. In addition to his work at Kitces.com, Ben serves clients at his RIA firm, Freelance Financial Planning.

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Adam Van Deusen Headshot

Adam Van Deusen

Team Kitces

Adam is an Associate Financial Planning Nerd at Kitces.com. He previously worked at a financial planning firm in Bethesda, Maryland, and as a journalist covering the banking and insurance industries. Outside of work, he serves as a volunteer financial planner and class instructor for non-profits in the Northern Virginia area. He has an MA from Johns Hopkins University and a BA from the University of Virginia.

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Advisor Misconduct Rises 147% After Private Equity Buyouts, Study Says (Jennifer Lea Reed, Financial Advisor) – The sale of a financial advisory firm can lead to significant changes for both the firm’s employees and its clients. The new owners might have different goals or practices, creating new incentives for employees (and potential follow-on impacts on clients). And with private equity firms increasingly targeting advisory firms for acquisitions, researchers at the University of Oregon have found that misconduct tends to rise at “retail-focused” firms (i.e., those providing financial advice and products to retail clients) after being acquired by a private equity firm. In fact, while the acquired firms had only 40% of the number of infractions of comparable firms before being bought (suggesting that private equity firms are looking for ‘clean’ advisory firms to acquire), the number increased 147% after the acquisition, driven by a rise in regulatory and customer disputes. The researchers found this was due to an increasing number of infractions by advisors who stayed with the firm (rather than being caused by new advisors brought in), perhaps because of increased pressure from the new owners to drive revenue growth, or because of a lack of familiarity with advisor compliance requirements by the private equity acquirers (e.g., as they try to cross-sell products from the private equity acquirer’s other companies?). Interestingly, this trend only held for retail-focused, SEC-registered RIAs and broker-dealers and not those working with institutions, suggesting that consumers are most likely to suffer when working with a private equity-owned advisory firm. So for advisory firm owners who are considering selling their firm, and want to ensure that their clients will continue to receive the caliber of service provided under their ownership, this research suggests that considering the motives and practices of potential acquirers could be an important part of the due diligence process!

FINRA Rule To Rein In Rogue Brokers Goes Into Force (Mark Schoeff, InvestmentNews) – Given the intangible nature of financial advice, financial advisors and their firms rely heavily on perceived trust and their reputation in order to get clients. With this in mind, the broker-dealer self-regulator Financial Industry Regulatory Authority (FINRA) has taken steps to address brokerages and their registered representatives with records of misconduct, to mixed success, particularly in light of research suggesting that brokers with a troubled regulatory history have a significantly greater likelihood of repeating their problem behaviors. FINRA’s newest action, Rule 4111, just went into effect on January 1, and attempts to further address firms with a significant history of misconduct. Under the rule, FINRA will make an annual determination of which brokerages pose heightened investor-protection risks, and the criteria used to make the decision include the number of firm-level and individual-level regulatory disclosures, adjusted for firm size. Those identified as meeting the preliminary criteria for identification will have the option of reducing their staff headcount to no longer fall under the criteria, or continuing through the process, at the end of which, the brokerage firm would be given a “Restricted Firm” status. Among other restrictions, these “Restricted Firms” will be required to deposit cash or qualified securities in a segregated and restricted account, which could potentially be used to fund arbitration awards(the size of the account will be determined on a firm-by-firm basis), and effectively increases the cost of doing business as a problem broker by needing to keep additional cash on hand (creating a further incentive for the broker-dealer to improve its standing by addressing its problem brokers). Notably, though, while the new FINRA Rule 4111 does have the potential to encourage broker-dealers to ‘clean their own houses’, it continues to embrace FINRA’s approach of permitting conflicts of interest in the brokerage industry in the first place, rather than trying to further separate which ‘advisors’ are in the business of selling products and which provide advice under a fiduciary standard in the first place!

RIAs Expect M&A Surge To Continue In 2022 (Michael Fischer, ThinkAdvisor) – When the economy was slowing in the early days of the pandemic, RIA owners expected Mergers and Acquisitions (M&A) activity to decrease, but just as the stock market has roared back, so too has RIA M&A activity. With the pandemic offering firm owners an opportunity to reflect on their future plans, coupled with a sharp rise in the valuation of advisory firms themselves over the past year due to the volume of demand, many have turned to external sales and the pace is expected to increase. According to a survey of 131 senior executives, principals, or owners of RIAs with at least $1 million in AUM by RIA practice management consulting firm DeVoe and Company, 63% of respondents said they expect M&A activity to continue to increase this year thanks to sustained high valuations, aging of firm founders, and a proliferation of acquirers, among other reasons. In addition, 60% of those surveyed said they plan to grow through acquisition in the next two years (an increase of 8 percentage points compared to last year’s survey), with the desire to acquire increasing with firm size. In fact, 90% of firms with at least $3 billion in AUM said they plan to make an acquisition during the next two years, while only 48% of firms with less than $500 million in AUM plan to do so. The two top reasons cited by respondents for wanting to make acquisitions were talent management, followed closely behind by wanting to increase clients and assets. Other reasons included expanding services and capabilities, extending infrastructure, and expanding their geographic footprint. Based on the survey results, firm owners who are considering selling their firms appear to be in a strong position in the coming year, as the “seller’s market” for advisory firms continues, while potential acquirers (especially those not already in the business of being serial acquirers) might have stiff competition!

The 10 Toughest Client Objections To Overcome (Allan Roth, Advisor Perspectives) – In a perfect world, clients of financial advisors would always be willing to accept their advisors’ recommendations and immediately take action. But in reality, gaining the client’s approval can be more complicated: Though advisors may perceive that that their recommendations are in the client’s best interests, they often have trouble getting their clients to see it from the same viewpoint. Clients may push back on their advisors’ recommendations for a host of reasons. They may hear narratives in the media about popular stocks or asset classes that convince them they are missing out on the next big investment opportunity (with GameStop stock and cryptocurrency being notable examples from the past year). They might cling to outdated pieces of conventional wisdom, like “retirees should own primarily income-oriented investments” (even when dividends and bond yields are at historic lows). Or they may just be subject to normal human biases, like overweighting risky assets when markets are up because they don’t perceive the risk (and losing that appetite when markets turn back downward and it becomes clear that their investments were risky after all), or being resistant to an initial tax hit for a strategy that may make them better off in the long run (e.g., making a Roth conversion or selling a high-cost mutual fund for a less-expensive alternative). In these cases, advisors can employ behavioral “nudges” that help clients overcome their initial objections and take action, or work to “coach” their clients on an ongoing basis to guide them through obstacles that might be getting in the way of taking action. But ultimately, when a client objects to an advisor’s recommendations, it may be better if the advisor’s first instinct is not to argue with or persuade the client, but to ask more questions. Because objections may often be rooted not in the client’s lack of knowledge about finance, but in the advisor’s lack of knowledge about the client and what goals and preferences are really influencing their decisions – meaning that, in an advice-based relationship where the aim is to help the client achieve their goals, the starting point for overcoming objections may be to dig deeper to better understand what is really driving those goals, rather than to persuade the client to take an action that they presumably wouldn’t resist if it was really aligned with their true goals in the first place?

12 Top-Performing Website Pages For Financial Advisors (Claire Akin, Indigo Marketing Agency) – A financial advisor’s website can serve many purposes. At a basic level, it is a place where prospective clients can come – perhaps through a Google search, a social media post, or a podcast – to learn about the advisor and their services, and (ideally) book an appointment for an initial meeting. But websites can also help an advisor serve their existing clients – for example, by providing a client “hub” where clients can access their financial accounts, file sharing vault, or financial planning software; or by providing a calendar link to make it easy for clients to schedule a meeting without going back and forth over email. These are the baseline tools for many financial advisors’ websites, but the top-performing sites – according to Akin’s Indigo Marketing Agency, which designs and builds advisor websites – go further to create a connection between the advisor and prospective and current clients alike. Sections of an advisor’s website that can show prospective clients who they would be working with (such as an “About” or “Our Team” page) are a must, as are pages that talk about the niches or types of clients the advisor serves (since prospects are more likely to stick around on an advisor’s website if they know the advisor’s services are people “just like them”). Additionally, the site can be an opportunity for the advisor to showcase their own expertise by including a blog or resource page to educate (and build trust with) current or prospective clients. Finally, it’s important not to overlook the ability for a website to show not only the “Who” and “What” of financial planning, but also the “How”: Because prospective clients may actually care less about the financial plan itself (which, after all, any advisor could provide) than how the advisor will implement the plan and work with the client to realize their goals. Similarly, a “Client Experience” page or a sample financial plan can help the advisor communicate their value by highlighting their process (which may ultimately be what sets the advisor apart from all of the other advisors who are advertising their financial planning services on their own websites).

Google Reviews Are The New Client Referrals (Jeff Berman, ThinkAdvisor) – Client referrals have long been considered the Holy Grail of financial advisor marketing. By having clients refer the advisor to their friends, family, and coworkers (so the thinking goes), the advisor can have a far more trustworthy and effective marketing channel than paid advertising – all with essentially zero financial cost or time commitment for the advisor themselves beyond what they’re already doing to connect with their clients. In reality, however, referrals are less effective as a marketing strategy than many advisors would like to think. This is because, in practice, referrals don’t scale: Clients generally do not make referrals proactively on their own without a “prompt” from the advisor, so it is usually incumbent on the advisor to constantly remind their clients to make referrals (a conversation that many advisors are reluctant to have in the first place, let alone repeatedly!). So for many advisors, referrals may not really be the ideal source of new business. In a recent LinkedIn post, advisor marketing expert Samantha Russell described why it is time for advisors to stop focusing on generating client referrals and start focusing on Google Reviews instead. After the adoption of the SEC’s new testimonial and marketing rule (prior to which third-party sites like Google Reviews could not be used in advisor marketing materials), Russell points out that Google Reviews can now help advisors scale up the referral process: Whereas traditional referral marketing often relied on the client making multiple introductions to the advisor within their network, Google Reviews enables clients to write a review once, which can then be potentially seen by thousands of prospective clients on the advisor’s Google page, website, and social media. Furthermore, asking clients to write a Google Review can be much more frictionless than asking for a referral. After claiming and optimizing their Google My Business page, advisors can start to generate reviews with something as simple as including a link to the page in their email signature or on their website footer. If the advisor wants to become more proactive, they can send out an email request (though as Russell notes, it’s important to remember to make the request to all clients, to avoid the appearance of cherry-picking positive reviews in the event of an examination). Ultimately, regardless of whether or not an advisor is currently pursuing client referrals, Google Reviews can be a simple and effective way to build trust and generate “social proof”, without relying on clients to do the majority of the “leg work” on their own.

How To Make Training Effective In 2022 (Beverly Flaxington, Advisor Perspectives) – For much of the history of the financial advice industry, new advisors were hired for (and usually survived their early careers based on) their ability to generate sales and new business. It was not until more recently that many firms began to hire newer advisors primarily in support advisor or paraplanner roles that (at least initially) have no business development responsibilities. Eventually, however, as those in support roles gain experience and progress in their careers, they often begin to take on more “lead advisor” functions – which, for most firms, includes the responsibility for generating new business. But this new paradigm can present challenges for the people responsible for managing and training newer advisors to improve their business development skills, because unlike in the past – when the vast majority of advisors were good at sales simply because they needed to be in order to keep their jobs – many newer advisors today, whose roles do not depend on generating sales, may be less interested (or at least less naturally talented) in business development than the more technical aspects of financial planning. Nevertheless, to advance in their careers, most financial advisors inevitably need to learn the skills of developing and leading client relationships. Firms that provide training in these skills do a service to themselves and their advisors… with the caveat that there is no “one-size-fits-all” approach to training. Many pre-packaged training programs – some quite expensive – exist inside and outside of the financial industry that will happily get paid to provide a sales training session, but unless that training is relevant, interesting, and useful to the advisors’ day-to-day work, it will most likely turn out to be a waste of time and money. Alternatively, taking the time to understand the advisors on the team and giving training based on their unique needs (for example, by tailoring the training to the personality types of each advisor) is more likely to produce results. Ultimately, however, for firms that expect their advisors to take on more business development responsibilities as their careers progress, it may be best to enshrine those expectations in the form of an advisory career track, ensuring that their advisors understand what will be expected of them at the beginning of their careers… and be more likely to be on board with training that will help them advance to the next stage.

Hands-Off Is Never A Helpful Leadership Style (Achim Nowak) – Many financial advisors take on leadership roles at their firm as they progress in their careers, which can comprise anything from hiring, training, and managing employees to running organizational departments to creating and fostering a firmwide culture. But developing an effective leadership style can be challenging, particularly for someone new to a leadership role. Very few aspire to become the dreaded micromanager who hovers and hassles their employees out the door, but going too far in the other direction – i.e., taking a completely hands-off approach – can prove disastrous in difficult situations when more hands-on leadership is needed (as the reality is that even the best employees will still inevitably have some situation where they struggle or get stuck… leaving them floundering with a hands-off manager). So striking a balance – being involved when necessary, without being omnipresent or overbearing – is a key skill for any leader to learn. An article in Harvard Business Review explores in depth three ways in which managers can be the “right” amount of hands-on. First, they can time their involvement so they can be helpful when needed – but without trying to preemptively solve every problem, which can easily be taken by team members as alarmist and meddlesome. Second, leaders can make it clear that their reason for being involved is to help their team members, rather than to judge or punish them (which can often be the impression when a manager swoops in to take over a project without carefully explaining their reason for doing so). Finally, managers can take the time to fully understand their individual team members’ needs, personalities, and preferences, in order to align their involvement – including how frequently and how actively they get involved – with what will be most beneficial for their employees. Ultimately, though, since many financial advisors are motivated by the desire to help others, carrying that instinct over from working with clients (and developing the skill of knowing how much help to offer and when) can help advisors become effective leaders within their firms.

The Real Work Of Advisory Firm Leaders (Walter Booker, Wealth Management) – Executives at financial advisory firms often tend to be people who once were (and often, still are) advisors themselves. Perhaps they showed interest and talent in management at firms in which they were employees, or were founders of firms that grew to a size where full-time management was necessary. But whatever the reason, many advisory firms lack “professional” management in the sense of having highly trained managers who devote all of their working time to leading, guiding, and growing their firms. And though it’s not necessarily a requirement to earn an MBA in order to effectively lead an advisory firm, many firms could benefit (particularly in their ability to grow and achieve scale) from professionalizing their management – or put another way, to have leaders who spend more time working “on” the firm than “in” it. This starts with having a clear vision for the firm’s direction and a strategy for getting there. Equally important is communicating that vision and strategy with the firm’s employees (and how those employees’ roles relate to the direction of the firm and how they will evolve along with it). After articulating this vision, it’s time to ask what the firm is doing to actually achieve it, and how the firm needs to evolve in order to reach its future ambitions. Notably, these questions are equally relevant for the smallest of firms as they are for the biggest – for any business owner who wants to grow and improve, having a vision and a plan for reaching that goal makes them much more likely to actually do so. And so for most firms, no matter their size, moving in a more successful direction requires having someone who does the real work of professional leadership… and while some advisors may want to take on that work themselves, others might be happier in the long run by hiring or training managers to fill that role and become the firm’s (professional) leaders.

My Personal Evolution Of New Year Resolutions (Jeremy Walter, Calibrating Capital) January brings the opportunity (or specter?) of creating New Year’s Resolutions for many individuals. But research showing that only about half of individuals succeed in following through with these resolutions after a year suggests that a different approach might be worthwhile. Similarly, Walter, owner of the financial advisory firm Fident Financial, went through an evolution over the years from creating New Year’s resolutions to making Specific, Measurable, Attainable, Realistic, and Time-bound (SMART) annual goals, and finally to creating habits. Inspired by the book Atomic Habits by James Clear, Walter has redirected his focus away from outcome-oriented goals (many of which were out of his control) to input-oriented habits within his control. He found that many of his top accomplishments during 2021 – including launching an online course about the One-Page Financial plan and discussing it during the Kitces Financial Planning Value Summit – were not listed as goals at the start of the year, but rather developed as a result of his habits, including doing work in public, networking, and being uncomfortably transparent. And so for 2022, Walter is again focusing on his habits, including reading, writing, and moving for at least 30 minutes each day. Ultimately, while outcome-based resolutions or goals (e.g., revenue or client targets) might be appealing to advisors, the habits they commit to for the year could be the real drivers of their biggest achievements (which could be unpredictable at the start of the year)!

How To Make Your Financial Life Happier In 2022 (Anne Tergesen, The Wall Street Journal) – When people think about how well they are doing financially, they often think in terms of dollars and cents, whether it is their income, net worth, or another money-related metric. Yet, because having a certain amount of income or wealth does not guarantee happiness, an alternative approach to focusing on hard metrics is to instead consider how to improve one’s relationship (or a client’s relationship!) with their finances. One step is for individuals to assess their financial situation in terms of what really matters to them, rather than comparing themselves to how others are doing financially. Another potential way to increase financial happiness in the new year is to find ways to simplify one’s financial life, such as by consolidating accounts or by creating a budget that allows more freedom in spending. Similarly, getting on the same page financially with a spouse can be a boost to happiness, and allowing each spouse to have an independent ‘fun money’ budget can further prevent conflicts over spending. Finally, focusing on smaller financial goals and achievements can help build momentum towards larger ones and lead to greater satisfaction. In the end, the key point is that financial happiness is not just determined by the hard numbers, and advisors can not only support clients in improving their relationship with money, but also discover how to improve their advisory service by assessing their own financial life!

Why It’s Great To Fail Your New Year’s Resolutions (Dan Mikulskis, Real Returns) – Those who are making New Year’s Resolutions for 2022 are almost certainly doing so with the hope that they will be able to follow through and achieve them. Whether it’s doing some exercise each day, or reading a certain number of books during the year, not achieving these goals would be seen as a failure. However, Mikulskis argues that failing at some New Year’s goals can actually be productive. For one, if all goals are being met, this suggests that the goals are not being set high enough. For example, someone who achieves a goal of spending 10 minutes per day with their kids might have actually been able to do so for 30 minutes per day (but stop after they “succeeded” at the 10-minute goal). Of course, an individual or organization will want to achieve some of their goals, and achieving 50%-75% of the goals could show both that some were accomplished and that others were sufficiently lofty that they were not met. A second reason why failing at goals can be good is that doing so can show what works and what doesn’t for a given individual pursuing a goal. For example, some might do better at big projects but fail at goals related to more incremental progress. In addition, failing can encourage a goal-setter to create more specific goals . For example, if a person previously failed at a vague goal such as ‘reading more’, they could set a new goal of reading 50 books during the year. This not only gives the individual a set target, but even if they fail by a little bit (e.g., by only reading 45 books), they still likely achieved their more vague intention (reading more). The key point is not that failing goals is a good thing in itself, but rather that how one learns from these goals (including setting them and failing to achieve them), which sets a foundation of improving upon them in the future that can lead to even greater success!

We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in a future column!

In the meantime, if you’re interested in more news and information regarding advisor technology, we’d highly recommend checking out Craig Iskowitz’s “Wealth Management Today” blog, as well as Gavin Spitzner’s “Wealth Management Weekly” blog.

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