Here are the highlights of the NAPFA Spring conference in Austin, TX.
If you remember the outstanding NAPFA conferences of the 1990s and early 2000s, you recall the days when the fee-only organization was thought-leading the profession to a fee-compensation revenue model, incorporating deeper life planning into advice recommendations, and advocating for more technical and fewer sales skills. There were times when the attendance numbers at the national conference exceeded the actual NAPFA membership, and the regional conferences—particularly Northeast (for technical content) and West (for all-around content and fun venues) ranked among the best conferences of the year.
I’m traveling down memory lane because NAPFA just produced a conference that was at least as good as any of those early ones that I remember so fondly. There were so many takeaways over the three days of the NAPFA Spring Conference in Austin, TX that I decided to abandon my previous editorial schedule and give you the nuggets in the lead article to this issue of Inside Information.
The theme of the keynote presentations was how to become a better professional and a better person—but unlike many sessions I’ve see on this general topic, these had real substance. The opening keynote by Dr. Suzanne Peterson, Associate Professor of Management leadership at the Thunderbird School of Global Management at Arizona State University, resonated throughout the conference.
This was one of those rare presentations where everyone in the audience was comparing their own behavior, in the office and with their families, with the standards that Peterson set out. I think for most of us it was an interesting exercise in humility.
Peterson’s most powerful takeaways can be summarized pretty quickly. The first behavior of a great leader is the willingness to make commitments and keep them. Ask yourself, Peterson said: do people have confidence that you’ll keep your promises, whether they be small or large?
The practical advice here is to watch what you say, remember when you make promises and follow through on everything. But if you want to go further, then in your interactions with clients, never leave a conversation without making a small promise—even if you have to invent something that requires a followup. And then, Peterson said, make sure you keep that promise, and act on the followup. It’s the best way to create that all-important credibility.
Second behavior of a great leader: maintain a laser focus with people in the moment. Let people have your undistracted attention. In this age of smart phones and the constant distraction of many tasks and other people clamoring for your attention, be totally present for the staff members, clients and family members that you’re engaged with.
Peterson repeated this important piece of advice: when you’re with people, give them every bit of your attention in that moment. Otherwise you’re strongly implying that this person is not terribly important to you. “Don’t be distracted. Don’t let your mind wander,” Peterson told the audience. “Make people feel like for the time you give them, that they’re the most important part of your day.”
Peterson was careful to say that this does not mean you should always be available, or have an open-door policy; that creates too many distractions from your work. She advocates efficiently scheduling time with clients and staff members (she mentioned 15 or 30 minute meetings), with followup meetings if necessary throughout the day.
As you approach the 15th or 30th minute of a scheduled meeting, be disciplined. Ask: “Is there anything else?” Peterson advised. “Make sure the person you’re meeting with understands that you absolutely want to commit to the next meeting on your schedule.
The third behavior of a great leader, Peterson described as: “I ask a lot, and I am willing to do just as much.” “Don’t be above anything you ask others to do,” Peterson said. As an example, you tell your people to have an agenda for every meeting they call or run. But do you?
You ask your people not to be looking at their phone during a meeting. Do you?
If you ask somebody to work through the weekend, are you willing to do the same when necessary?
Are you on time for meetings?
She cited the example of a manager who walked into the break room and noticed a mess, and without any fanfare cleaned it up. His staff noticed, and respected him for taking the time to do things they, themselves used to feel was beneath their dignity.
Before you make rules, Peterson said, make sure you, yourself, are willing to follow them as an example to everyone else.
You can tell whether you exhibit the fourth behavior of a great leader by answering the question: does your on-stage match your off-stage presence?
Meaning: is that the real you when you’re taking on a leadership role in front of the group?
“We all know people who are really good when they’re in front of their top client,” Peterson told the audience. “But do they show the same energy and care when working with a small client? Or with a staff person? How about when they are dealing with the wait staff at the restaurant?”
Peterson said that a hedge fund based in New York does its initial screening for new hires based on how the prospective employee interacts with the receptionist. If he/she ignores a person he/she seems to regard as inconsequential, or is rude, it’s instantly disqualifying.
The fifth behavior of a great leader is being someone who saves people. Peterson explained this to mean someone who is willing to stand up for others. You want your team to say: this person absolutely has my back. Peterson contrasted this with: are they scared of you?
Part of this aspect of leadership is to criticize in private and praise in public. Peterson offered the example of a senior investment banker who absolutely annihilated a junior banker for a mistake—in front of the team. “When somebody embarrasses you in front of your peers, you become far less likely to follow that person with loyalty,” Peterson told the audience. “When people feel unsafe around you, they will not follow you. But when you save people from their mistakes,” she added, “you have a fan for life.”
Quite a few of us followed Peterson to a subsequent breakout session, where she offered some powerful tips on how to do a better job of hiring the kind of people who will work out well at your firm. How do you avoid getting fooled in the interview process? How do you avoid that (potentially expensive) bad hire?
Most people, Peterson told the group, make the mistake of hiring based on the prospective employee’s track record, pedigree and experience. But when someone has an impressive resume, you have no way of knowing exactly what role they played in the various successes they listed, or what, exactly, their impressive job title actually required them to do.
“Take a moment and imagine that they weren’t personally responsible for their track record,” she suggested.
Another mistake to focus too early on cultural fit. Peterson called this “hiring based on your gut.” You feel comfortable with the person you’re meeting for the first time, and therefore decide he or she will fit in nicely with the firm. Peterson’s advice: “save your cultural fit assessment until the end of the recruiting process. Unless,” she added, “your immediate instinct is to say no. In that case, it’s fine to go with your gut.”
If you aren’t basing your hiring decisions on the resume, and on your interview, what’s left? Peterson recommended that you develop a “show me” test. The candidate has listed a bunch of skills, and you know what skills are needed to do the job. Give the candidate an assignment that would require those skills.
As an example, she said that a person applying for an events coordinator job would be given a proposed event and a budget. “Tell her: take three days and plan it. Let’s see what you come up with.”
An executive assistant might be asked to book travel, prepare an invoice and write a letter. This lets you look for one of the most important issues that Peterson said that every firm should be monitoring: is this person sloppy with spelling and grammar? Does this person pay attention to details?
A second test might evaluate a person’s judgment. Peterson told the audience about a firm that asked a candidate to allocate the airfare cost on a trip where the executive would be visiting consulting clients in London, New York and Miami. “She allocated the total cost equally among the three clients,” said Peterson—pointing out that this showed poor judgment. “Do you think the people in New York and Miami would have been happy about paying their share of a business class ticket to London?”
Of course, you also want to evaluate the candidate’s talent—defined as the ability to grow and adapt to the growing job responsibilities of the future. “You want to hire people who will find a way to succeed no matter what comes their way,” said Peterson. “Every role changes constantly and expands as you promote,” she added. “Will this person grow through that process? Is this person special and different from most people who might be looking for a job?”
How do you test for something like that? Peterson said that people with talent tend to exhibit excellence in two or more areas. In addition to the attributes you’re looking for, they might also be excellent at sports, or playing a musical instrument, or speak a second language.
If it’s not on the resume, ask: In addition to what you’re talking about here, where else in your life have you demonstrated excellence or shown mastery?
You should also look for evidence of a work ethic. Peterson cited studies that suggest most of us have developed our work ethic early, by age 7, and it doesn’t tend to change a lot after that. “This is a trait that is not amenable to coaching,” Peterson told the group. “You have to hire for it.”
To test it, get the candidate to make you a promise. Ask something like: what’s your favorite book? Can you send me a copy? Get prospects to make a promise and see how they follow up. Did they wait three days to do it? What was the spelling and grammar like on the followup note?
Great hires should also have passion, energy and what Peterson called a “spark” in whatever they do. They’re the ones who raise their hands when there’s a project that needs staff time and attention. “You want to look for traits that tell you this person is engaged and curious,” said Peterson. “Is this person visibly inspired and motivated?”
You can also test for this by adding to your list of hiring questions: What is the most challenging problem you’ve ever solved? “The great candidate,” said Peterson, “will give you an enthusiastic story.”
Another talent you cannot coach is emotional maturity. Peterson acknowledged that older candidates will have developed more emotional maturity than younger ones, but she believes this is an innate trait that you should hire for rather than try to develop. You want to know how they deal with conflict, feedback and the inevitable stress around the office.
How do you test for this? Give constructive feedback about their interview responses. Do they shut down, or counter-confront (“I would have done better if you hadn’t…) or become defensive? Also: ask them how they would deal with a hypothetical situation where there’s conflict with another staff member. How would they get on track with that person?
A great hire should have self-awareness; in fact, Peterson said that this is a defining trait of people who will move into leadership positions. To test for it, ask some simple questions. What’s the hardest part about working with or for you? “Somebody might say: I tend to be demanding, but I’m working on it,” said Peterson. “Or: I have a terrible time being present, and I think I give the phone too much of my attention.” You want an open, honest answer, not something canned, like: “I tend to work too hard and care too much.” If somebody says: ‘I have workaholic tendencies,’ then that shows self-awareness.
Another way to test for self-awareness is to ask “What do people say about you behind your back?” And then follow up: “Why do they say those things?”
A great hire should also have a charitable orientation. Peterson did not recommend that you explore the causes that the candidate might support, but she did say that people who focus on other issues and have a habit of giving back tend to work better on teams than those who don’t.
To test for this, add a simple question to your interview: Tell me about a time when you contributed to something else, and you were disappointed. Peterson offered a good and bad answer to the question.
Bad: I showed up, they had me stuffing envelopes for cancer, I did the walk, and never even got a ‘thank you.’
Good: I helped them stuff envelopes, did the walk, and we didn’t reach our funding goals. I’m going to work a little harder next time to ensure that the goals are met.
Your best candidates should also have intellectual curiosity. “You want people who want to grow and learn,” said Peterson. So you might ask: What was the last book that you read? If you had the time, what would you study in a learning program at college? What would you like to read if you had the time?
Finally, Peterson talked about ‘grit,’ hiring candidates who have the resilience to keep going when they run into obstacles or suffer disappointment. “Here, you want to get them to tell you a story,” she said to the audience. “Ask: Tell me a time in your life when you faced adversity, and what did you do about it? What did you learn from it? When was a time you failed, and how did you recover from it?”
Only after you’ve had a chance to evaluate these various components of a great potential candidate for the job, and feel comfortable that the candidate passes six or seven of them, should you take the next step and introduce him or her to the rest of the staff in order to evaluate the cultural fit. “Have the discipline to work through these tests,” said Peterson, “and then, if the fit isn’t there, you don’t hire them anyway.”
On to the next candidate.
Creating an attractive firm
Another NAPFA session that fit perfectly with Peterson’s second presentation came up later, when Vanessa Oligino, director of business performance solutions at TD Ameritrade Institutional, offered her advice on “building your dream team.” Her advice, boiled down to its bare essentials, started with defining the work you want to get off of your desk or the desks of your staff. Ideally, you should have defined the tasks of each role in your firm. Now look at those tasks and pull some out one by one until you’ve created a job description that you feel comfortable with.
Oligino shared a detailed staffing matrix that is up on the TD Ameritrade Institute website (there are actually several: https://www.tdainstitutional.com/tdai-en_us/resources/document/gb_BHPT_design.pdf; https://resources.tdainstitutional.com/wp-content/uploads/2018/10/Adding-the-Right-Staff_fv.pdf; and the “Design Your Organizational Structure” PDF that was sent out with the recent e-column), with a library of job descriptions and salary ranges.
But how do you attract the best candidates. Here the presentation offered suggestions about how to become an attractive firm for new hires in a competitive marketplace. “Most peoples’ perception of our industry is the Wolf of Wall Street—scammers and predators,” Oligino told the group. “Not custom relationship management and improving peoples’ lives.” So in the interview process, you might explore the candidate’s expectations of the job and career, and help this person realize that the role you’re seeking is not ripping people off or picking and charting stocks.
“When you give your pitch, you want to present a great place to work,” Oligino added, recommending that each firm create an “employee value proposition.” (She said that some firms offer subsidized meals, while others might have ping pong tables in the office to help people relieve stress.) When interviewing, focus on shared values, and whether the candidate can work as a team.
Continuity and succession
The fourth practice management-oriented session featured Tim Kochis, of Kochis Global, and Eric Hehman, of Austin Asset—co-authors of Success and Succession (https://amzn.to/2MiyG1l). The topic, of course, was succession planning, which Kochis has experienced as he developed successors at Aspiriant, and which Hehman experienced as the successor at his firm.
Kochis told the audience that doing nothing about succession qualifies as a plan, but he said it’s a bad one. It can lead to withering business value as the founder ages with no successor in sight; to deteriorating services and morale; less attention to prospective clients; and a less attractive place to work for younger advisors. “We’re all going to be replaced at one point,” Kochis said. “Accept it.”
If you’re having trouble imagining a time when you aren’t managing your firm, then Kochis suggested that you fill a cardboard box with everything on your desk and walk out to the parking lot. “How does that feel?” he said. “When you experience that, you’ll come back a bit more motivated to pass along what you know, what you are passionate about, and the value—the stock that you’ve accumulated in the firm.”
That’s the pep talk; what are the solutions? Kochis said that the key to unraveling the complexities of succession planning is to separate equity from management and control. “The owners of the company do not have to be, and often should not be, the day-to-day decision makers at the firm,” he told the audience.
Hehman then came on to tell his story, about how the founder at his firm was giving great advice to clients, but was not a strong business person. The transfer of day-to-day decisions started early. But that doesn’t mean it was an easy process; Hehman told the audience that what the founder found most difficult to let go of was his legacy. “We needed to communicate: we still need you and we will not forget you,” Hehman told the group. He and his staff went so far as to create a document that celebrated the success of the company founder, which listed all of his accomplishments on one page, and on a second page listed all the things the firm still needed his help with.
Eventually, of course, there was a transfer of ownership, to Hehman and a group of successors. The process produced that rare win-win-win. The founder won freedom and legacy; the successors won opportunity; and the clients won continuity of service and the comfort that the firm would be around more or less permanently to meet their needs.
Of course, the founder objected to many of the changes that Hehman was proposing. Hehman compared the process to renovating an old house; it can be done if the house has “good bones.” “If your business has good bones, then the successors are going to want to make changes, and it will survive the renovation,” he said. “The successors don’t want to be caretakers and curators. They want to change the walls and replace the carpets”—or in a more planning context, they want to introduce new services and create better internal processes.
In the tag-team presentation, Kochis enumerated the purpose of the ownership part of the transition. You want to reward and promote the people you have selected who are very good at what they do—those who are such big contributors that the firm would be lesser without them. Making them owners raises their commitment to the enterprise.
Kochis warned that ownership should not be automatically granted based on tenure; there should not be an artificial time criterion to become an owner and principal. And he said that the successors should be willing to have skin in the game: making a financial contribution to the firm, and be willing to participate in the setbacks as well as the growth going forward.
His primary advice was to start early, and recognize that you don’t have to give up control to give up equity. “The goal is to start to build wealth opportunities to the people who will eventually buy out the firm from you,” Kochis told the audience. “If you don’t start the equity transitions early, it may be impossible before you get around to it.”
The control transition can be more complicated. Kochis said that you want to appoint (internally or from the outside) a COO who has the necessary skills to run the firm, and also the appetite for it—you don’t want to appoint someone who is not eager to take over the role. Finally, you want someone who is young enough to have enough runway to make substantive change at the firm. And understand that the COO role is replaceable; this person can be fired from the position.
The pacing can be gradual. Kochis recommended that, internally, you build leadership qualities by giving staff members enhanced roles a bit at a time, and allow them to work their way toward important responsibilities that will test whether they can manage the firm as a whole.
Finally, Kochis made the distinction between governance and management. Governance—the key strategic decisions, like whether to bring on new owners or entertain an M&A opportunity, should be made by the ownership structure and the board. Management is below that level. “Leadership may not be an essential criterion for ownership,” he said, “but it is definitely a criterion of management.”
At the end, he brought the presentation back to one of the three “wins”—what the founder gets from the transition out of management and equity. Kochis said that one option is a well-earned life of leisure. Another is civic involvement and philanthropic engagement. “Every community needs you,” he said. “You could be busier than you’ve ever been.”
Or, finally, the founder could take on a strategic role with the firm, working as an adjunct with the most important clients, handling marketing and rainmaking chores, mentoring future leaders and providing strategic guidance to the board or new owners.
The science of improving cognition
Earlier I mentioned that NAPFA Spring included keynote sessions that were designed to help you personally. My favorite of these was a talk by Dr. Marc Milstein, a brain research specialist and biochemist. His talk was on how to keep your brain young—which not only means avoiding dementia or Alzheimer’s, but actually improving cognition and mental effectiveness.
“I want you to leave here today understanding that you are not a slave to your genetics,” Milstein told the audience. “In the vast majority of cases, when it comes to Alzheimer’s and dementia, you are not linked to your genetics, entirely. There are things you can do to lower your risk and keep your brain young.”
The human brain, we were told, is made up of about 80 billion brain cells, all talking with each other. In dementia, or a brain that is becoming functionally older, something is interfering with those communications. So the goal is to identify the sources of interference and reduce them—or even roll them back.
One key is sleep. “Tonight, when you go to sleep, something amazing is going to happen in your brain,” said Milstein. “Anything you learned today you learned in the moment. But tonight, while you sleep, your brain will find all the new connections you made today, run electrical stimulation over them, and will do what we call ‘solidify’ or ‘consolidate’ or strengthen the memory.”
The point is that if people are not sleeping well, or especially if they suffer from sleep apnea and are waking up hundreds of times a night, it can have a devastating impact on their memory. “The key take-home message,” Milstein told the group, “is: if you want to preserve your memory, you have to get a good night’s sleep.”
It turns out that sleep is also a key to preventing other sources of interference in brain cell communication. “Our 80 billion brain cells are like 80 billion factories,” Milstein told the audience. “Those 80 billion factories are creating waste, trash, garbage, and they are in the presence of toxins that we come into in our day to day life. Your three-pound brain,” Milstein added, “will make five pounds of trash a year.”
To rid itself of this garbage buildup, the sleeping brain shrinks down to about 65% of its awakened size, and literally squeezes out the trash. Meanwhile, cerebral spinal fluid comes up from your spinal cord and washes your brain. “Every single night while you sleep, you give your brain a brainwash,” said Milstein. “All that trash exits through newly-discovered vacuoles—a tunnel system in your neck—and you sweep this trash out.”
Milstein was quick to say that waking up once, twice or three times at night is perfectly normal and doesn’t interfere with this process. In fact, he said that all of us wake up that often, even if we aren’t consciously aware of it.
A good night’s sleep is one key to keeping the brain young. What else? Milstein said that the brain “squirts” a chemical called norepinephrine, which breaks up some of the trash. You can boost your norepinephrine levels with a simple trick: learning new things.
“Forcing your brain to learn something that is not familiar to you is key,” said Milstein. “It could be a sport, a language, a musical instrument; that feeling that you get when you’re struggling and it seems hard, that is norepinephrine squirting into your brain. It doesn’t have to be a brain game or an app,” he added, referring to a variety of popular brain-enhancing gimmicks that have limited effectiveness. “It just has to be something you are not familiar with, a couple of times a week, where you embrace that struggling feeling. That’s what squirts norepinephrine in your brain and breaks up some of that trash.”
Beyond that, Milstein said that untreated hearing loss can reduce your ability to learn and take in new information. But if you simply treat the hearing loss with a hearing aid, the negative effect goes away.
Related to this, you want to stay engaged socially. People who engage with other people on a regular basis tend to have younger brains.
Chronic inflammation—a heightened immune system—is another cause of brain aging. “There are little cells, called microglia, which swim around your brain and eat up the trash,” said Milstein. “But these microglia cells can get confused when you’re in a state of chronic inflammation,” he said. “Instead of just eating the trash, they start eating healthy brain cells, and that’s when we see memory loss.”
How do you treat chronic inflammation? You can get diagnosed by your doctor by asking for a CRP test, which stands for C-Reactive Protein, which determines if there is inflammation in the blood. From there, you can treat it with a healthy diet (Milstein recommended the DASH Diet: https://www.mayoclinic.org/healthy-lifestyle/nutrition-and-healthy-eating/in-depth/dash-diet/art-20048456), which, in certain studies, lowered the risk of Alzheimer’s by about 53%.
He also said to avoid processed foods with a long list of ingredients that are hard to pronounce. Those foods will tend to kill beneficial gut bacteria, and feed the bad bacteria that can cause inflammation in your gut, which can spread to your brain.
Shouldn’t you also reduce stress? Interestingly, Milstein said that certain levels of stress can actually be good for the brain, as long as there is not too much of it, and it is not too often. “We have studies that show that people who stay engaged and have stress in their lives keep their brains younger,” he told the group. “People who get stressed out at a little bit of traffic, get stressed out waiting in line, their brains look younger.”
Most of us have to control our stress to keep it from getting out of hand. Milstein said that the concept of mindfulness has moved from New Age and mystical to mainstream medicine. “Mindfulness doesn’t have to be sitting at the beach,” he said, and led the audience to mindfully take a deep, relaxing breath through the nose, and then breathe out through the mouth. Repeat several times a day when things seem to be especially stressful, and it will help control the aging of your brain.
“These are things that people in my field used to roll our eyes at,” Milstein confessed; “until we saw the studies. We saw that when people start doing things like this for several minutes a day, their brain fundamentally changes. Not only does their stress response plummet, but in about eight weeks their brain changes and becomes a different structure that is better able to handle stress—and keep emotions in check. The part of the brain that keeps your emotions in check, right here behind the forehead, grows and gets stronger. The part of your brain that emanates stress shrivels up and gets weaker.”
If you don’t want to do breathing exercises, Milstein cited studies that show that five to ten minutes of getting outside in the presence of nature—what he called ‘green time’—has the same effect. “Something happens in the brain when you see a flower bed, or a back yard,” he said. “Startlingly simple studies show that if you are looking for a stress break, get outside. Get in nature. Stress levels plummet.”
What else? Milstein said that treating depression is important to helping our memory—which can be done via medication, lifestyle changes, or cognitive therapy.
People who have inflamed thyroids—a condition that is very often unrecognized—may be highly susceptible to anxiety and depression—and therefore are especially susceptible to Alzheimer’s.
What about exercise? Milstein said that in a variety of studies, simply walking 30-40 minutes per day lowered peoples’ risk of losing their memory by a staggering 65%. “Every time you walk,” he said, “you release a growth factor in your brain called BDNF, a neurotrophic growth factor that actually is like fertilizer for your brain cells.”
Better still, try dancing—which combines exercise with learning new things and being social, a triple benefit for the price of one.
Finally, people with untreated diabetes are at high risk for cognitive decline. But Milstein said the good news is that when the diabetes is treated, peoples’ risk for Alzheimer’s actually drops below the average population. “There’s a clinical trial happening right now,” he said, “where they are taking people who don’t even have diabetes, but who have a high risk of Alzheimer’s, and putting them on these medications. We strongly believe that treating diabetes is going to help lower the overall risk of our population for developing Alzheimer’s disease.”
At the end of the talk, Milstein noted that most of us suspect that we’re losing our brain function, because we forget peoples’ names or have momentary lapses of confusion. We forget where the car is parked.
But these things are normal. Milstein explained that everything we encounter, everything we learn and experience, first goes into the hippocampus, which is the source of our short-term memory. These experiences rest there for seven seconds while the rest of your brain decides: is this information worthwhile, or should I throw it away?
“The last thing your brain wants to do is fill up with information it doesn’t need,” said Milstein. “Your brain doesn’t want to be cluttered. It wants to only take things into long-term memory that it feels are important.”
So how do you remember that phone number that someone gives you, or the name of that person you’re meeting for the first time, or where you parked your car in the giant parking lot? Milstein said that the trick is to linger on the memory for a few seconds. “Give yourself seven or more seconds to hold that information,” he said. As you get out of the car, look around and impress on yourself the location, the aisle and row. When you meet someone and they tell you their name, mentally write their name across their forehead, and don’t worry if it takes seven seconds to do it. Repeat the phone number back to the person giving it to you.
“If you take time and focus on things, you trick your brain into thinking this is important information,” said Milstein. “And it leaves the hippocampus and goes into long-term memory storage.”
Interesting. And also somewhat reassuring.
Attention: Your most important asset
Continuing the subject of maintaining focus and long-term memory, another keynote featured Curt Steinhorst, author of “Can I Have Your Attention?” Steinhorst noted that the technology that surrounds us today, including social media and smart devices, is designed to distract.
“Sales and marketing is about stealing your attention,” he said. “We live in a time of great acceleration, where the average person consumes 500% of the information of a person living in the 1990s. That means,” Steinhorst added, “that a huge cognitive load of information is stuffed into short-term memory, beyond the capacity to move it into long-term memory. The more we fight to manage, the fewer tasks we can accomplish, and more dangerously, the more we lose our ability to determine what is important.”
Later, he said that research has shown that the more interruptions in our workday, the lower the quality of work. “If availability and responsiveness are prioritized,” Steinhorst said, “then tasks are compromised, and people live in reaction. Attention is your most important asset,” he added. “If you want to succeed, you need to become someone who values your attention and helps focus it on what’s important.”
Steinhorst conceded that a zoomed-in focus comes with a cost; it requires the energy not only to focus on the information or situation at hand, but also to block out all the things that are competing for your attention. And he offered some specific strategies.
First: restore boundaries. Resist the idea that we need more access to information and faster communications. And don’t allow others unlimited access to your time. “There is a myth that to be a great leader, you have to be constantly available,” Steinhorst told the group. “But this actually works against focus.”
Your best strategy is to create specific places and times when the outside world is not available to you. Tell the staff that meetings are a no-phone zone. Set aside a space that is only for the specific purpose of getting work done—like a home office that is off-limits to the kids, or a routine where you check emails only twice or three times a day and the rest is scheduled work time. Recognize that there are people in your environment who prevent you from ever getting anything done.
Second: practice intentional inefficiency. “The best way to remember something,” Steinhorst said, “is to talk with a person about what you just learned. He noted that a firm he’s consulting with now starts every meeting on the hour, and ends 50 minutes later, so staff has at least 10 minutes to process what they’ve learned from the previous meeting before the next one begins.
Another intentional inefficiency is, when you follow up with clients, ask what time of day they plan to review the information. Then send the document by email an hour before that time, so the client doesn’t have to sort through hundreds of messages to find it.
Third: establish a habit of connection. “The best attention is shared,” Steinhorst told the group. “What you pay attention to tells your staff what’s important to you, and what matters to the company. The people who give you their attention become more like you.”
This has marketing implications. You want your clients to feel that they are part of a community that you define. A community, Steinhorst said, is defined by collective attention. You are either a valuable part of your clients’ communities, and provide meaning to their lives, or the value of your services is all about price.
Avoiding audit problems
Let me conclude with a compliance presentation which was anything but (as you might otherwise suspect) snoozy. Tom Giachetti, of the Stark & Stark law firm, told the audience that the SEC examiners are increasingly trying to find ways to require the firms they audit to pay money back to clients. “They don’t care about Johnny and Suzie’s personal securities transactions,” he said. “They care about those things that can impact a client in a disadvantageous way.”
The presentation offered concrete suggestions. One is to have a clear fee schedule for clients and not deviate from it. “You can’t charge one client X and another client Y, without any rhyme or reason to it,” Giachtetti told the audience. “You’ve got to show them there is a protocol.”
Another is to take cybersecurity seriously. “How many of you have cyber insurance?” Giachetti asked the audience. “If you don’t have it, get it,” he said. “The issue you’re insuring against is generally not paying money to clients. The issue is the legal work that needs to be done in each state after you have a data breach.”
Then he asked audience members whether, if they had an information breach at 10:00 AM, they would know about it by 10:05. “If your hand isn’t up. you don’t have anything,” Giachetti said. “You need IT consultants who are monitoring your systems 24/7—and make sure when the shit hits the fan that they are not just reporting to one person; there should be a chain of people.”
Protecting client data also means having a clean desk policy in your offices—but the words on paper won’t satisfy the SEC unless there is routine monitoring of compliance. “That means the CCO is coming in once a week, early, to check whether or not there are papers all over the place that could result in identity theft,” said Giachetti. “All of you have people who have access to your premises after hours. Have you found out how the landlord or managing agent vets them? Have they signed confidentiality agreements? Has the managing agent signed off on their behalf? That is the baseline,” he added. “If you haven’t done that, you’ve got nothing to talk about.”
Your cyberfraud policies need to include training for employees. “We all know the story where you got an email from the client’s email address, and they want money,” Giachetti said. “What do you have to do first?”
Most audience members knew the answer: Call them.
“But,” said Giachetti, “who is going to call them?” The right answer is to have a protocol where it must be somebody who knows them.”
SEC auditors are also looking at what Giachetti called “fee discrepancies,” where you’re charging clients different fees than what you’ve disclosed in the regulatory filings. “Fee discrepancies will always be construed against the advisor,” he said. “If your ADV says X, and your agreement schedule says Y, the SEC is going to make you reimburse the client based on the lower fee, and you are going to write that check, and there is no discussion.”
There may be some confusion about tiered fee schedules. “The ADV says zero to $1 million is 125 basis points. $1 million to $3 million is 100 basis points,” Giachetti told the audience. “Most firms might think that means: I get to bill 125 basis points on the first $1 million,” said Giachetti. “Not on that fee schedule,” he said. “The schedule is telling clients that a $3 million account is charged 100 basis points, period.”
Giachetti assumed that everyone in the audience who bills via AUM is automatically using each fund’s institutional share class unless there is a compelling reason to do otherwise. Those reasons may include small accounts, or an active management posture. “But you have to show the SEC that you are doing a test,” he said. “You need to have in your policies a mutual fund share class selection process.”
Then the topic turned to non-level fees. “How many of you charge a different level for fixed income vs. equities?” Giachetti asked the audience. “If you do that, it is a conflict of interest. If you have discretion, then you have a conflict of interest to allocate more money to a higher-paying asset class. If you don’t have a clear disclosure on Item 5 of the ADV on that issue, you’re going to run into trouble with the SEC audit.”
Do you have a minimum asset level for clients? Giachetti said that becomes very problematic in an audit if, in the real world, you’re making exceptions for friends and family. “What happens when you say on your Part 2A, Line 5, that your minimum level is $1 million, and they do the math on one of your accounts and it looks like $189,000?” said Giachetti. “You don’t get to create puffery on your ADV. That is called ‘fraud.’ That is all it is, is fraud.”
Giachetti said the SEC is also looking into intra-quarter fee adjustments. He posed this question: If on June 1, Mr. Smith gives you $1 million. Do you:
1) Start billing on it right away?
2) Wait to the end of the quarter and bill on it then?
3) Don’t bill on it at all; just start including it in the third quarter?
“If you either start billing on it right away or option 2, you need to make sure that if Mr. Jones took OUT $1 million, you are treating it the same way,” said Giachetti. “Or the SEC will determine that you are going to write a check back. “It is not tails I win; heads I win.”
Do you have clients who are investing on margin? If so, Giachetti asked, do you bill on the gross amount or the net amount? “If you bill on the gross amount, you’d better have some disclosure,” Giachetti told the group. “You now have an economic incentive to keep them on margin, because you’ll make a higher fee.”
Do you offer your ADV to clients? Giachetti asked why, in this age of email, you don’t simply make a policy of sending updated ADVs to clients each year. “The best defense you could ever have is to deliver it,” he said, either through your portal, on your website, or (the home run) you deliver it. You just fulfilled your delivery requirement.”
SEC examiners, Giachetti said, are looking for a diminished capacity policy. “That means: if I can’t contact you because of diminished capacity, or I can’t find you, or I believe you are subject to financial exploitation, who can I call?” he said. “And if you have a trusted contact, you should reaffirm annually—because they change. Mom and her son may have had a falling out.”
Giachetti says that advisors can get in trouble for overpromising on their websites. “I read things like: We are your chief financial officer. We treat you like family. We hug you every day. Comprehensive, state of the art, best of breed,” he said. “We meet with our clients to deliver comprehensive planning on all aspects of your financial life on a regular basis. No, you don’t,” he said. “But now you just contractually obligated yourself to facilitate insurance, estate planning, all of that.”
Advisor websites also list the firm’s rankings from magazines or obscure organizations. “I’ve seen the whole front page of the website is just these rankings,” said Giachetti. “The SEC has become very aggressive on this. You had better have some real disclosure on all the criteria for each one of those rankings. And if you can’t, you can’t use them—period.
“It’s almost fraud,” he continued. “Why? You can’t see why you were ranked this way. People just decided to put you on there for the opportunity to sell you a sponsorship. That is a material fact that you can’t omit, can you?”
Giachetti said that the SEC is also looking at inflated AUM figures. Assets where you have discretion can count toward the total. Nondiscretionary assets don’t count unless you were responsible for making the recommendation and making the transaction to buy or sell the securities in the portfolio. And of course you would have to be monitoring the portfolio on an ongoing and continuous basis.
Client assets at separate account managers don’t count unless you can hire and fire the managers.
Suppose you’re an advisor to participant-directed retirement plans? Those assets don’t count because the participant is making the transactions—except where you’re devising and managing asset allocation models that the participants are investing in. “But you can only count those assets,” Giachetti warned.
He also noted a lesser-known requirement that might trip you up. Under the rules, if you have more than $100 million of exchange-listed equities under your discretionary management, you must file a 13F form with the SEC.
But you only manage funds and ETFs, right? Giachetti noted that ETFs are exchange-listed securities.
What if clients send you text messages—is that a problem with the SEC? Giachetti’s advice is to receive and process the text messages you receive, but reply by email—and keep track of your email correspondence.
A major area in SEC audits is giving prospects and clients composite return numbers. “Unless they are GIPS-verified, forget about it,” said Giachetti. “I still see people saying: Here’s my model today, and here’s how it would have done the last 20 years. The SEC is on the warpath about things like that.”
Finally: referrals to unaffiliated professionals. “The SEC is asking about this,” said Giachetti. “You refer to unaffiliated insurance agents, CPAs and attorneys, right? What happens if you are sending business over to Suzie and Suzie is sending clients back to you? Might you have a material conflict there?” he asked. “Might you have to tell the client: please understand; I have an economic incentive to send to Suzie? You need to disclose that. It’s important. You are a fiduciary.”
Yes, this was a long article—and truth to tell, I only cherry-picked the best sessions, and then condensed down each presentation to only the nuggets I felt like were most relevant. Because of schedule conflicts, I missed sessions that others were raving about, like Cheryl Holland’s and Janet Briaud’s presentations, and I saved Susan Bradley, of the Sudden Money Institute, for a separate article.
The bottom line is that few conferences this year will offer this much information on such a variety of topics. NAPFA is back as an institutional thought-leader in the conference space.