MEDIA REVIEWS – June 16-23, 2019

Wait; all the articles except one in this issue of Financial Planning magazine get a “high” relevance rating?  (Well, I didn’t actually rate my own column, but I was kind of proud of this one.)

This is the broker-dealer survey issue of Financial Planning magazine, and they went into such depth with the graphs and charts (FAR more than the other magazines) that it kind of crowded out the nonessential stuff, and made the whole magazine relevant.  In the BD rankings, my eye turns to the average payout per rep, the commission product revenue table (which tells you how much of each BD’s revenue comes from the sales of which products) and the breakdown between fee and commission revenues overall.  But you can also see that there’s almost uniform double-digit revenue growth in the BD world; they are benefiting from being a safe halfway house between the brokerage environment and fee-only, and some of them are also now serving fee-only offices that they would have lost in the past.  It’s by far the most interesting take on the broker-dealer business that you’ll see this year.

Michael Kitces talks about profitability at large and small advisory firms, and Ed Slott offers up some potential trip-ups to taking early distributions from IRAs and qualified plans.  Plus my own ravings…

Articles that received a “high” relevance rating:

“Not Just Yet”
by Tobias Salinger
Financial Planning, June 2019
Relevance: high

The headline refers to whether it’s time for the BD community to celebrate its double-digit revenue growth last year.  The headwinds (the reason for the “not yet”) are that at the number of BDs is falling (there are now 819), and so too are rep headcounts (an estimated 86,779).  Bottom lines are still in the black, but technology costs are rising, and so are compliance issues.  The traditional reliance on product commissions and payment from asset manages is diminishing.  As a result, some firms are offering services to fee-only offices—mostly offices that they were affiliated with on the commission side before.

There are a lot of charts and graphs here, more than in any of the other BD surveys at other magazines.  There’s the usual total revenue ranking, topped by LPL Financial, Ameriprise Financial, Raymond James Financial Services, Commonwealth Financial Network, Northwestern Mutual Investment Services, MML Investors Services, AXA Advisors, Cambridge Investment Research, Securities America and Lincoln Financial Network.  (The list, alas, stoops at 51).  Like the other surveys, you have commission, fee and “other” revenue broken out, but here you get % change, so you can see who’s growing (pretty much everybody).  Another chart shows the payout grids for the different BDs for mutual funds, stocks, bonds, annuities, insurance, alts and managed accounts.  (Interestingly, many of the survey participants declined to give their payout information for all categories.)  A “production” chart shows the average payout per rep, which is different from the gross dealer concessions figure that other magazines published; it’s lower because it factors out the cut that the BD is taking.

There are a variety of “top 10” lists that the reader is invited to explore on his/her own, and a big table on “commission product revenue,” which tells you that the BDs, despite their protests to the contrary, are very much in the sales business.  Interestingly, annuities revenue is generally up, while non-traded REIT revenues have fallen off the table.  (p. 18)

“Does Growth Really Boost the Bottom Line?”
by Michael Kitces
Financial Planning, June 2019
Relevance: high

I think this column could have been a lot shorter and still gotten the essential points across.  Basically, Kitces is responding to someone whose firm manages $60 million in client assets, and overhead makes up 65% of the firm’s top-line revenues.  So he’s wondering if he should grow larger and get out of the low-profitability conundrum.

Kitces acknowledges that this is lower than average profitability, but he says that growth is not always the answer; after all, industry studies show that highly-leveraged solo advisors make about as much as the founders of billion-dollar firms.  (Of course, this doesn’t account for the growing equity value in those larger firms, but that issue is not mentioned.)

Kitces notes, correctly, that advisory firms that grow larger hit growth barriers where their investment in the firm exceeds their revenues for a period of time, and recommends that you avoid those growth barriers altogether by simply focusing on profitability.  Are you offering premium service at a discounted price?  That means you’re undercharging for your value.  You don’t go to Four Seasons and expect a discount.  Are you servicing smaller unprofitable accounts?  The recommend is to “graduate” them out to another advisor.  Are you custom-creating each client portfolio?  Other firms do just fine with model portfolios.  Change your model, not the size of your firm.  (p. 38)

“Avoid Withdrawal Disasters”
by Ed Slott
Financial Planning, June 2019
Relevance: high

You’ve been contributing to your company plan and/or traditional IRA.  But what if you need the money in an emergency?  Slott tells us there ARE provisions, safe harbors where the withdrawals can be made without the 10% tax penalty, even if the person is under age 59 1/2.  But there are different rules for different types of plans.  If you take out money to pay for higher eduction expenses from a company plan, you don’t get the exemption; you have to roll the money into an IRA first.  Same with buying your first home or paying health insurance if you’re unemployed.

IRA plan funds can be tapped for a medical emergency to the extent that the expenses exceed 10% of adjusted gross income.  But watch out for taking distributions, which increase AGI, which raises the threshold, which causes the client to have to pay a penalty on some of the withdrawals.  (p. 42)

“Going Business Casual”
by Brett Bernstein
Financial Planning, June 2019
Relevance: high

The CEO and co-founder of XML Financial Group used to work at Merrill Lynch, which had a rigid dress code for advisors: dark suits, starched white shirts and solid ties.  It communicated, in the author’s mind, a certain conformity of thinking.

Responding to several employee surveys, he gradually introduced increasingly casual attire in his office, and noticed improvements in employee morale and service.  Clients responded well to it also; the more relaxed the advisors and staff were, the more relaxed they were.  The author was nervous about the change at first, but gradually grew to embrace it.  (p. 56)


“Step Aside, Boomer!”
by Bob Veres
Financial Planning, June 2019
Relevance: unrated

The baby boomer generation took financial planning from a sales activity to a largely fee-compensated investment model, but the real progress will come from the Gen X/Y cohort, who are already decimating the traditional insurance distribution system (who wants a career as a life insurance salesperson?), and are pioneering the necessary service models and fee structures to serve younger and less-wealthy clients.  Broker-dealers are morphing their service models to serve fee-only offices, and younger advisors and consumers are moving from tricky investment strategies to financial planning as the center of gravity for the core professional service.  These changes are all happening now, and they’re absolutely necessary if financial planning is to become a real profession.  (p. 15)

The rest of the articles (in this unusual case, just one):

“How is My Portfolio Doing?”
by Craig Israelsen
Financial Planning, June 2019
Relevance: low

This is about benchmarks or performance measurements that you can compare your client portfolio returns to.  Of course, the author includes his patented 7-Asset Portfolio among his benchmarks, because he includes this in every column.  He also includes the consumer price index and a 60/40 portfolio.  Various individual asset classes are included as well.  He looks at performance over three years, 5, 10, 15 all the way up to 49-year returns, for some reason…  He also looks at the number of years with a negative return over the past 49 years, and the worst 3-year loss.  There are rolling time periods, and at some point you fail to recall what the point of the column was to begin with.  (p. 50)