MEDIA REVIEWS - July 16-31, 2023
If you're looking for something to worry about, Dan Solin provides a peek into the new Schwab retail service model that looks like it directly competes with financial advisors, and Allan Roth offers a preview of what might be a perfect financial storm brewing as you read this. You also might find yourself nodding your head as an advisor outlines what he calls his 'dream annuity.'
The most interesting article in the Nerd's Eye View pantheon is an advisor's description of the various services she provides to people who are divorcing--and the many credentials that she now believes are necessary to provide the appropriate services.
Advisor Perspectives articles:
“Recent Updates to CFP Board Procedural Rules”
by David Hartman and Alexander Middlemiss
Advisor Perspectives, July 17, 2023
Relevance: high
Two young attorneys with the law firm Bressler, Amery & Ross dissect the changes in procedures for investigating misconduct instituted by the CFP Board on May 16, 2023. The Board modified the Duty of Cooperation so that a Respondent does not commit a violation if his or her firm controls the documents the Board asks him/her to produce, and if the firm does not consent to the production of the documents. The deadlines for filing documents, witness notifications and stipulations were modified to 60 days before the first (projected) day of the hearing. The deadline for a party to request recusal of a potential member of the Hearing Panel, Settlement Review Panel and/or the Appeals Commission was extended from 7 to 14 days.
All of this goes into effect on September 1. Interested parties can see the Procedural Rules here: http://www.cfp.net/-/media/files/cfp-board/standards-and-ethics/enforcement/2023/cfp-revised-procedural-rules-september-2023.pdf?_zs=ceFce1&_zl=x5619.
“The Threat from Schwab’s ‘Free’ Advisory Service”
by Dan Solin
Advisor Perspectives, July 19, 2023
Relevance: high
Solin noted a Schwab press release dated July 10 that announced that “retail clients with more than $1 million in assets at Schwab will be automatically enrolled in Schwab Private Client Services,” and anyone with over $10 million in assets held at Schwab will be automatically enrolled in Schwab Private Wealth Services.
Basically, free advice. Right? Solin followed up and was told that this means a dedicated Schwab consultant who will help retail customers choose the right level or services they need, create a personalized financial plan and connect them to a range of Schwab’s wealth management specialists. But the emphasis seems to be on that last service; the consultant will be steering people to the non-free specialist services, basically serving as a salesperson for various internal departments, which provide investment planning, tax and estate planning, insurance and banking. Those financial consultants, he was told, will NOT be fiduciaries. And he was told that they will NOT provide investment advice.
Solin says that the custodians are going to be using their leverage to dominate the financial planning space. “You now,” he says, “have a formidable competitor.”
“The Six Employee Wellness Trends of 2023”
by Jennifer Goldman
Advisor Perspectives, July 19, 2023
Relevance: high
Goldman says that nurturing employee wellness has become a strategic imperative for long-term business success, not just in the planning world but across the entire business landscape. That can include mindfulness training, nutrition counseling and access to mental health resources. And flexible work arrangements, such as remote work and flexible hours. She says that companies are buying or accessing wellness apps that monitor sleep patterns and provide personalized workout routines. Goldman recommends mental health support and providing access to counseling services and training programs to promote a supportive culture.
Also: employee assistance programs, which provide employees with confidential counseling, financial advice, legal assistance and stress management tools. Finally, create channels for employees to provide feedback.
“My Dream Annuity”
by Nathan Dutzmann
Advisor Perspectives, July 20, 2023
Relevance: high
This is actually pretty simple: Dutzmann says that fee-only advisors would jump at the chance to recommend an annuity that would pay a guaranteed CPI-adjusted income stream for the lifetime of the annuitant(s). It could be turned on now or keep a cash value so that the income stream could be turned on at any future date. It would not include a death benefit or other add-ons that would reduce income.
The article notes that an annuity is a hedge against longevity, but without the CPI adjustments, people who live longer lives are increasingly subject to inflation eroding the value of the income stream—reducing the guaranteed protection factor. And being able to turn on the income stream whenever it is needed—age 80, 85, 90—and have the appropriate annuity credits available (higher income if income is turned on at later ages) is especially valuable for retirement income planning flexibility. Dutzmann notes that the CPI adjustment should be happening each year, whether or not the income is turned on.
The cash value part of the annuity is complicated; Dutzmann wants the annuity to have a cash value so advisors can charge an AUM fee on those assets. But he admits that he doesn’t know exactly how this would work.
“The Opportunity in CLO Investments”
by Larry Swedroe
Advisor Perspectives, July 24, 2023
Relevance: high
CLOs are collateralized loan obligations, invested in floating-rate, senior secured term loans with maturities between 5-7 years. Some might remember, these securities are what triggered the global financial crisis of 2007-9. They’re back, but apparently they haven’t been defaulting. A chart shows that BBB-rated and above CLOs have experienced negligible default rates. And the market is growing; S&P found that two-thirds of leveraged loan issuance has been funded by CLOs.
Cash flows from the collateral pool are distributed to various tranches according to a priority structure; interest received is first used to pay administrative expenses and senior management fees. Then the senior (AAA) tranches are paid, and then the mezzanine trances, and then the junior tranches.
But the article also notes that the debt tranches tend to have higher credit ratings than the underlying collateral—and isn’t that how they got in trouble in that earlier iteration? Anyway… the article says that CLO equity offers the potential for mid-teens returns with a low correlation to other asset classes. Individual clients can invest though the Flat Rock Opportunity Fund and the Flat Rock Enhanced Income Fund. Both restrict capital outflows. A report concluded that CLO equity exhibited resilience to market volatility, even during the pandemic, but investors have to accept the illiquidity risk.
“Will Commercial Property Unravel Our Economy?”
by Allan Roth
Advisor Perspectives, July 24, 2023
Relevance: high
This is kind of scary; Roth outlines a perfect storm of financial calamities that might be converging as you read this. The first is the devastation of the office real estate market post-pandemic, when many employees were reluctant to return to the office, causing office vacancy rates upwards of 50% in major U.S. cities.
Then you have the interest rate surge, raising the cap rates of those aforementioned office buildings, and lowering their present value and market price. Owners holding variable loans or loans that will come due soon will be paying much higher debt service costs on properties that are generating half or less of their pre-pandemic income.
On to the third part of the perfect storm: much of the debt on these commercial buildings, which might default, is owned by smaller local and regional banks. Roth calls this a debt bomb, and notes that many regional banks would be underwater if they had to mark down the value of those commercial property loans.
We may be in that perfect storm now. In the year ending June 29, 2023, the office REIT sector as a whole lost nearly 29% of its value. Roth wonders if companies will be successful in getting employees to return to the workplace; 34% of Americans work from home now. But he concludes that, regardless of what happens, capitalism will survive. Good to know.
“Enhanced Questioning Skills for Next-Gen Advisors”
by Michelle Donovan
Advisor Perspectives, July 26, 2023
Relevance: high
Apparently this is common: advisors aren’t sure what to do when the prospect has answered their question and stopped talking. Some are using scripts, but what happens when the conversation goes off-script?
Donovan says that the first question asked of the prospect should not be the only question that needs to be posed. Follow-up questions show interest, and follow a natural sense of curiosity. The article proposes some questions to insert, grouped as who? (Who do you trust to help you make these decisions? Who needs to know what plans we are making? Who can I help you meet?); what? (What happened next? What more can you tell me? What did you learn from that?); where? (Where have you experienced this before? Where do you see yourself living in retirement? Where do you see opportunities?); when? (When did you get concerned? When are you planning to make a decision? When did that happen?); why? (Why did you make that decision? Why are you concerned about this now? Why did you do it that way?); and how? (How have things changed for you? How can I help you? How did that make you feel?)
“Welcome to the Engagement Economy”
by John Prendergast
Advisor Perspectives, July 26, 2023
Relevance: high
The author proposes that you create an ‘engagement loop’ with clients, who now expect engagement with every service they access. This means supplementing in-person or phone (or Zoom) meetings with virtual engagement; you went to design a client portal or website that is engaging and self-explanatory immediately. You want to send out frequent personally relevant content across multiple channels.
The loop starts when a client sees an email which triggers a trip to the web, or a mobile alert connects them to content on their phone.
“Jeremy Siegel: The Fed’s Rate Hike is Good for Stocks”
by Bob Huebscher
Advisor Perspectives, July 2023
Relevance: high
Siegel famously wrote Stocks for the Long Run, and here he repeats the message, though more specifically. He says that earnings have been good and value stocks are trading at moderate PE levels (17), and he puts the chances of a recession at 25%. He declares that the inflation battle is over, but expects the extra spending provided to Americans during the pandemic will be gone by early fall, when higher mortgage rates will also eat into discretionary spending.
Nerd’s Eye View articles:
“Scaling to $1M of Financial Planning Fee Revenue by Specializing in the Divorce Niche, With Nancy Hetrick”
by Michael Kitces
Nerd’s Eye View, July 18, 2023
Relevance: high
Hetrick is founder and CEO of Smarter Divorce Solutions in Phoenix, AZ. She talks about the Certified Divorce Financial Analyst credential, and how she became a Master Analyst in Financial Forensics with a Matrimonial Specialty—basically a forensic accountant credential that divorce attorneys seek out for their tougher cases. The latter credential helped her with tracing and fraud work, analysis of stock options and various kinds of executive compensation. Later, she added the Certified Divorce Coach credential, which helps her deal with the emotions that come up with her divorcing clients. She works as a mediator for couples, primarily serving pre-retirees who don’t want to waste a lot of money on attorneys for no reason. She left her broker-dealer because all of her divorce-related fees would have been subject to the BD’s grid, and subject to FINRA marketing and compliance rules.
Within a year, Hetrick was averaging 3-5 cases a month, generating $100,000 a year in divorce-related revenue, and getting 30 qualified prospects that were potential wealth management clients. Many of them were spouse females married to a corporate executive who had delegated their finances to their spouse, and now that a divorce was coming up, they were horrified that they didn’t know what they had. Her elevator pitch is: ‘I provide individuals and couples with a kinder, gentler, much more affordable divorce.’
Hetrick says that the normal divorce process is fraught with problems, not least of which that the code of ethics for divorce attorneys requires them, not to get a fair settlement, but to get their client the best possible settlement—which means attorneys are always in an adversarial position and there is always conflict if the divorce involves lawyers and courts. She says that she will consult with a person considering divorce, but that person might be two years away from making that final decision. She will have a relationship with that person as she (normally a ‘she’) mentally prepares to take that step.
Of course, there is a financial planning component to divorce planning; Hetrick says she will look at every document and statement, trying to evaluate the couples’ full financial picture. Then she will propose possible resolutions, and some of them might be things that would never fly in a courtroom: she says she has a lot of couples that are continuing to own a home together, because refinancing at today’s rates makes no sense.
She is compensated by retainers, typically a 10-hour retainer up-front, and fees range from $200 to $600 an hour, depending on complexity. But Hetrick says she will also do flat fee work if she can get through the process quickly. She currently earns $250,000 a year on her divorce work.
“Academic Research vs. Industry Experience: Evaluating the Value of Practice Management Advice”
by Derek Tharp
Nerd’s Eye View, July 24, 2023
Relevance: high
There is a very long and not particularly apt analogy at the start of this article about bodybuilding; the gist of it is that actual bodybuilders think that for best results, they should have less rest between sets of lifting than what the academic research would suggest.
So? Tharp says that there are a lot more variables in advisor marketing than in weight lifting, which means academics have a lot more work to do in order to define best practices. And advisors who have been successful may have a limited understanding of what led to their success. So if you’re taking advice, ask: did the person carrying out the research actually do it in the real world? Is there a significant sample to draw conclusions from? Is the research applicable to your clientele?
“The Evolution of Super-OSJ Platforms to Support Independent Advisors, with Rita Robbins”
by Michael Kitces
Nerd’s Eye View, July 2023
Relevance: high
Kitces is interviewing the founder and president of Affiliated Advisors, which is described as a ‘super OSJ’ with Royal Alliance; it supports 90 financial advisors who manage $2.5 billion in client assets. The firm has been around 29 years, and supports advisors who want help building a business, who want to spend their time with clients and not with office management. Here she talks about some of the history of the business, working at wirehouses in the old days when a trade was sent down to the floor on a paper ticket, and people would clip coupons off of their bond investments and cash them monthly. She was around when Nathan & Lewis started one of the first independent broker-dealers.
Then she worked for Lord Abbett, a fund shop, wholesaling to advisor offices, before helping start a new broker-dealer and insurance brokerage firm, taking a small override on the business that the advisors she recruited did. She became successful at recruiting. Eventually, she took a bunch of her recruited advisors over to Royal Alliance and founded Advisor Group, and provided them with tech advice and compliance help—and eventually succession planning and marketing. Her firm gradually began taking over middle- and back-office chores, hired an operations specialist and a client service specialist, then a general administrator.
Compensation? She says that her firm lives and dies by the grid; a small override on the business done by the advisors under her OSJ jurisdiction. Seventy percent of the revenues are generated by AUM, and 30% by sales and transactions.
Toward the end, Robbins says that during the pandemic, when they were working from home, brokers began to realize that they were paying a lot, through their low payout, for conveniences they weren’t using or didn’t need, and that clients were less concerned with who they worked for than their own personal relationship. They also realize that they are not building transferable value within the wirehouse structure. They can get better technology on the open market. This may be her recruiting pitch, but it also suggests that there might be more movement from wirehouse to independence, and Affiliated Advisors is one of many resources that ease the transition. At the end, Robbins says that she defines her own success from watching other people succeed.
“The Growth of Collaborative Planning—and Decline of the (Written Financial) Plan”
by Adam Van Deusen
Nerd’s Eye View, July 26, 2023
Relevance: high
The article tells us that financial plans are no longer used to justify the sale of investment and insurance products; today’s software programs, plus a shift to virtual meetings, has led advisors to work collaboratively with clients on their financial plans. Planning has become the centerpiece of fee-only advisors’ value proposition, and the plans have become increasingly comprehensive.
But you know all this. The article says that most financial planning programs are still generating lengthy documents, which all look kind of the same, making it harder for any one advisor to stand out. From there, we get a lot of Kitces Research charts and graphs, which basically say that a growing number of advisors are creating financial plans collaboratively with clients, and in some cases this saves them time in the production and presentation. Advisors who produce plans collaboratively, according to the data, tend to have more revenue and income.
We are told that eMoney and MoneyGuidePro are the market leaders, followed by RightCapital (you probably knew this too), with Holistiplan being the most popular tax planning solution.
“Sustaining a Profitable Advisory Business that Allows You to Explore New Endeavors”
by Carl Richards and Michael Kitces
Nerd’s Eye View, July 27, 2023
Relevance: high
The discussion revolves around an advisor who has three key staff people, and he wants to scale back so he can pursue other interests. But, he says, do the other staff people want to take that pause in their careers? Will they stay with a firm where they never get a promotion, never get new responsibilities, and have no additional challenges in their career growth? How does the advisor owner scale back and still grow the firm the way they might want to?
Kitces pivots to the idea that the profession is bifurcating marketing from planning; that is, good planners no longer need to be good marketers to survive in this business. But Richards says that if this advisor has 100 clients, then by referrals the firm will grow eventually to 200, whether the primary advisor is marketing or not. So there WILL be challenges for the key staff members, and growth. And he says that this could work if the staff people are really, really good and the advisor owner pays them really, really well.
There is no conclusion to this; Richards and Kitces decide to ask the audience if they have ever built a firm that simply sustains itself.