MEDIA REVIEWS – April 8-15, 2019

This issue of Investment Advisor magazine profiles Larry Swedroe.  If you don’t know who he is, you should; he’s a leading researcher and theorist in the investment space, m director of research for the BAM Alliance of RIAs.  Of course, the highlight of the magazine, once again, are the Mark Tibergien and Angie Herbers columns, Tibergien looking at what could be a major obstacle to growing your firm, and Herbers recommending organic growth over acquisitions as a cheaper, better, more sustainable path forward.

Toward the end, Dan Skiles is sure to make some advisors uncomfortable by asking whether you’re running old software on an old server, a holdover that you’ve been reluctant to replace because, well, it works.  The question is: for how long?

Articles that received a “high” relevance rating:

“Taking an Executive “Spring Break” to Learn About the Future of the Business”
by Tim Welsh
Investment Advisor, April 2019
https://www.thinkadvisor.com/2019/03/26/taking-an-executive-spring-break-to-learn-about-the-future-of-the-business/
Relevance: high

The author attended SS&C Advent’s Black Diamond Executive Forum and the Pershing Elite Advisor Summit.  One insight: consumers are becoming accustomed to an increasingly digital experience, and robos are commoditizing investing.  Dani Fava, director of innovation at TD Ameritrade Institutional, talked about gesture-based computing, holograms and personalized advertising based on facial and optical recognition.  Gen Z consumers will demand video interactions vs. face-to-face meetings.  Keyboards and computer monitors could become obsolete—as well as steering wheels and garages, as autonomous vehicles and ride sharing become pervasive. 

Mark Tibergien, of Pershing Advisor Solutions, talked about attracting top talent by becoming “an employer of choice.”  That means creating career paths and new staff roles that can provide professional development and increasing responsibilities.  Rianka Dorsainville, who runs the virtual practice Your Greatest Contribution, offers virtual advice by meeting clients via video and charging an annual retainer fee.  (p. 14)

“The Risk Warrior”
by Janet Levaux
Investment Advisor, April 2019
https://www.thinkadvisor.com/2019/03/26/the-risk-warrior/
Relevance: high

You probably know of Larry Swedroe, director of research for St. Louis, MO-based Buckingham Strategic Wealth and the BAM Alliance of RIAs.  His latest book is “Your Complete Guide to a Successful & Secure Retirement.”  He explains portfolio diversification with a domestic equity portfolio, then add bonds, then international, small and value—and you don’t need much more than that.  He tries to avoid The Four Horsemen of the Retirement Apocalypse: historically high equity valuations and low bond yields, along with longevity and the need for long-term care.  People are living longer, so they need a bigger pot of money.  People are underestimating the need and cost of long-term care. 

Swedroe guesses that equities will deliver 4-5% annual returns for today’s retirees, and should consider deferred annuities.  You might be able to generate higher returns by having more money in small cap value stocks, and Swedroe likes interval funds that invest in less-liquid investments.  They tend to be tax-inefficient, so hold them in a client’s IRA, and they’re illiquid, but they do offer lower correlations to equities.  Other low-correlation investments: alternative lending (pools of consumer and student loans); reinsurance, puts and calls and long-short exposure to value and momentum across a mix of asset classes.  (p. 22)

“The Growth Dilemma”
by Mark Tibergien
Investment Advisor, April 2019
https://www.thinkadvisor.com/2019/03/26/the-growth-dilemma/
Relevance: high

When you factor out market performance, the average financial planning firm saw assets not growing at all.  Small businesses should anticipate growing revenue 9.1% a year on average.  The question becomes: is your firm growing fast enough to add new partners without diluting the economic interests of existing partners? 

Tibergien recommends that you evaluate your growth relative to your cost structure, the need for more profits to fund future needs and the demand for higher compensation by you and you staff.  What are the impediments to growth?  They could include a lack of capacity (an advisor can handle only so many clients); positioning (are you standing out from the crowd or blending in?), and an over-reliance on referrals.

Ideally, you want to build the business development skills of your entire professional staff, and identify communities of clients where you can achieve some level of market dominance.  You want to effectively use social media to attract and engage clients.  Identify your best clients and try to create messaging that will attract more people like them, and strengthen your marketing and business plan.  (p. 33)

“Why Organic Growth Is the Right Path for Many Advisory Firms”
by Angie Herbers
Investment Advisor, April 2019
(Not posted on the magazine’s website)
Relevance: high

Organic growth is growth that comes form inside the firm, vs. inorganic growth that comes from acquisitions and buying books of business.  Herbers says that organic growth is usually less costly and carries better chances of success.  It’s about running your business better by using your existing client base to uncover opportunities.  Ask yourself: what do you really want your business to be, and what are you truly trying to accomplish?  A lot more clients with relatively low fees?  Fewer clients with higher average fees?  What services can you truly master?

The goal is to create a core business and stick to it.  If you don’t yet know what the is, look at the services that are generating your highest revenues.  Your job is to make this area better, rather than add more services you haven’t mastered.

What if your core service is not what you want your business to be built on?  Gradually transition your focus to the business you want to grow.  Make sure your clients and staff are making the transition in a timely manner.  You want to have the capacity to take on new clients, and you want to have the people you need to be productive and help the company grow.  Focus on having the right people in the right places, rather than trying a new compensation structure.  Make sure you are available for your employees when your input is needed.

At the end, Herbers says that internal communication really needs to focus on just one thing: what can be done better, not what more needs to be done.  Rather than building a new website, how can you make the existing one better.  How can you use your existing technology better and more efficiently?  With a clear focus on your core business and the right people, you will grow organically even without a marketing budget and strategy.  (p. 37)

“A Teacher Turned Advisor and Guide”
by Jamie Green
Investment Advisor, April 2019
https://www.thinkadvisor.com/2019/03/26/a-teacher-turned-advisor-and-guide/
Relevance: high

This is a profile of Jennifer Lazarus, who practices in Durham, NC.  She began her workalike as a high school teacher, then intoned at a planner’s practice before starting her own firm in 2005.  She is now “100% SRI,” only accepting clients who are committed to that approach to investing.  She offers comprehensive financial planning and charges a fee based on their total assets, and invests in active SRI managers wo engage in shareholder advocacy—including the Ariel Funds.  (p. 39)

“Don’t Let Your Cybersecurity Policy Slip”
by Tom Giachetti
Investment Advisor, April 2019
https://www.thinkadvisor.com/2019/03/26/dont-let-your-cybersecurity-policy-slip/
Relevance: high

Every advisory firm should have a written cybersecurity policy, because the SEC’s examiners are going to look for whether your firm is assessing cybersecurity risks, has an infrastructure in place and implementing basic control over client data.  Is the advisory firm doing due diligence on its vendors, and reviewing contract terms?  Offering training in how to prevent data breaches?  Implementing policies to address possible data breaches?  (p. 45)

“Is Your Firm’s Legacy Technology a Ticking Bomb?”
by Dan Skiles
Investment Advisor, April 2019
https://www.thinkadvisor.com/2019/03/26/is-your-firms-legacy-technology-a-ticking-bomb/
Relevance: high

Do you have an old server running old software?  Or a legacy computer, server or other device being used for a specific purpose.  You need to review how these systems fit into your existing technology stack, and look at the connections and dependencies of the legacy technology with the rest of your systems.  How hard would it be to replace the legacy tech, and give up years of familiarity with the product. 

Skiles says that if the technology is no longer supported by the developer or manufacturer, then you are on borrowed time.  How long will you receive regular maintenance updates?  The basic advice is to address your legacy systems now, before it becomes a problem down the road.  (p. 46)

The rest of the articles:

“Roundup: SEC 12b-1 Settlements, Wells in Hot Seat, and Treasury Regs Housecleaning”
by Melanie Waddell
Investment Advisor, April 2019
https://www.thinkadvisor.com/2019/03/26/roundup-sec-12b-1-settlements-wells-in-hot-seat-and-treasury-regs-housecleaning/
Relevance: moderate

Wells Fargo Advisors Financial Network, Wells Fargo Clearing, Deutsche Bank, Cambridge Investment Research, Kestra Advisory Services, LPL Financial and Next Financial were among 79 investment advisors that have to return $125 million to their customers as part of an SEC settlement for improper receipt of 12b-1 fees.  They recommended the higher share class fees when the SEC said they had a fiduciary duty to act in their customers’ best interests.  But lest you celebrate, we are told that the SEC is requiring “better disclosures” going forward—and the article makes no comment that this hardly solves the problem of brokers and reps acting in their own best interests.

Of course, Wells Fargo is coming under fire from the House Financial Services Committee; Maxine Waters believes that with all the fines and sanctions, the company still hasn’t changed its behavior.  And the Treasury Department repealed 296 tax regulations that were deemed regulatory “deadwood” as part of an executive order signed by President Trump.  (p. 11)

“Why ESG is Too Nuanced for Index Investing”
by Frances Tuite
Investment Advisor, April 2019
https://www.thinkadvisor.com/2019/03/26/why-esg-is-too-nuanced-for-index-investing/
Relevance: low

The problem, we are told, is that a passive ESG fund will add a positive or negative ESG screen without regard to valuation or fundamental research.  And there may be anomalies; Vanguard’s ESG U.S. Stock ETF holds position in Facebook and Amazon, while Amazon failsESG screens for treatment of its workforce and Facebook has data issues.  Active managers, we are told, can sell a position when company management is not performing up to its ESG standards—but can’t a passive fund do the same thing?  Active managers can engage with company managements and boards, while passive managers have little or no engagement. 

You will not be surprised to learn that the author of this article is the portfolio manager of the ESG Equity Strategy for an active fund management firm.  Doesn’t the magazine care about these conflicts of interest?  Or understand them?  (p. 16)

“Expect ETF Disruption, More Advisor Input and Increased Number of Active Products”
by Janet Levaux and Bernice Napach
Investment Advisor, April 2019
https://www.thinkadvisor.com/2019/03/26/expect-etf-disruption-more-advisor-input-and-increased-number-of-active-products/
Relevance: low

This is a writeup of the Inside ETFs conference, where speakers talked about direct indexing and the fact that mutual funds are declining in favor of ETFs.  ETFs are primed for disruption, and direct indexing means customized portfolios with a customized tax overlay. 

Others say that as ETFs become more complex (think: leveraged funds), consumers will need the help of advisors.  Actively-managed ETFs are coming to market, but they threaten to cannibalize the funds that fund managers already market.  You read this and think: either the writers are not very perceptive about the “buzz” and deep thinking at this conference, or the conference itself is more about self-promotion than about education.  (p. 17)

“Volatility Brings a Rude Awakening”
by Josh Vail
Investment Advisor, April 2019
https://www.thinkadvisor.com/2019/03/26/volatility-brings-a-rude-awakening/
Relevance: low

After a relatively tranquil period, the markets are experiencing more volatility.  The author proposes that many investors have been lulled to believe that this volatility is an anomaly.  The author, president of an alternatives shop, is “encouraged” that advisors are moving more funds into alts as a way to mitigate volatility, and says they should include “strategies that focus on downside protection.”

The magazine seems not to be aware that this article is a huge conflict of interest.  Or not care.  (p. 20)

“Is Corporate Social Responsibility Just a Potemkin Village?”
by Patrick Drum and Stephanie Ashton
Investment Advisor, April 2019
https://www.thinkadvisor.com/2019/03/26/is-corporate-social-responsibility-reporting-just-a-potemkin-village/
Relevance: moderate

Companies are now issuing CSR reports, also known as sustainability reports.  These reports are supposed to include an organization’s values and governance policies and demonstrate its commitment to a sustainable global economy.

The CSR report is voluntary in the U.S., and the author says that CSR reports currently more closely resemble marketing materials than impact statements.  Better to look at litigation trends and pending lawsuits.  The article lists various sustainability scores for large and community banks, and then total litigation claims between 2015 and 2018—and how those claims compare to annual revenues.  (p. 28)

“Reg BI Readiness Questioned on All Fronts: SEC Commissioners, Trade Groups, Legislators”
by Melanie Waddell
Investment Advisor, April 2019
https://www.thinkadvisor.com/2019/03/26/reg-bi-readiness-questioned-on-all-fronts-sec-commissioners-trade-groups-legislators/
Relevance: moderate

Two SEC Commissioners recently made candid comments about the Reg BI proposal.  Commissioner Robert Jackson, a Democrat, said that he cannot support passage due to a subpar cost-benefit analysis.  Commissioner Hester Peirce, a Republican, urged states to stop their fiduciary rules and let Reg BI “play out.”  She said that if you read it closely enough, Reg BI is actually a “strong standard.”

Various House members say that the Reg BI bill is not a fiduciary standard and relies too much on disclosure.  Barbara Roper, of the Consumer Federation of America, says that Reg BI can be fixed—by making the best-interest standard actually meaningful, going beyond FINRA’s suitability standard. 

The Financial Services Institute has come out against the Maryland fiduciary provision, saying it would “drive up compliance costs” for independent BDs.  Nevada’s fiduciary rulemaking, meanwhile, has NASAA’s blessing, saying that it does not violate securities laws.    (p. 35)

“Advisor Exam Rate May Fall in 2019, Says SEC; New Services Planned for Emerging Firms”
by Melanie Waddell, Michael Fisher and Janet Levaux
Investment Advisor, April 2019
https://www.thinkadvisor.com/2019/03/26/advisor-exam-rate-may-fall-in-2019-says-sec-new-services-planned-for-emerging-firms/
Relevance: low

The government shutdown set back the SEC’s schedule of advisor examinations, so don’t expect another year of 17% of advisor offices being inspected.  Meanwhile, the Office of Compliance Inspections and Examinations (SCIE) is working on risk alerts, including on Regulation SP (data security), the treatment of senior investors, and closely watching digital assets (think: bitcoin). 

TD Ameritrade has created an emerging advisor accelerator group to provide services to advisory firms with less than $100 million in AUM, with a series of courses on technology, running a growing business, and TDAI’s research and benchmarking.

Dynasty Financial Partners is relocating its home office from New York City to St. Petersburg, FL.  (p. 41)

“Wells Fargo Launches New Succession Plan; Kestra Finds Buyer; & Moore Leaves Cetera”
by Janet Levaux
Investment Advisor, April 2019
https://www.thinkadvisor.com/2019/03/26/wells-fargo-launches-new-succession-plan-kestra-finds-buyer-moore-leaves-cetera/
Relevance: low

The monthly “broker-dealer beat” column tells us what the commission folks are up to.  Wells Fargo is paying retiring advisors 225% of their trailing 12-month commissions to be paid out over a 10-year period.  The advisor taking over the retiring rep’s book will be eligible for a new book acquisition award of up to 100% of the retiring advisor’s 12-month commissions.  (Aren’t you excited to know this?) 

Independent BD Kestra Financial is being purchased by Warburg Pincus, from Stone Point Capital.  The firm has 2,000 reps.  Price is estimated at between $600 and $800 million, 8-10 times earnings before interest, taxes, depreciation and appreciation.  The new owners plan to improve Kestra’s tech platform.  (p. 43)

“How Car Accidents Can Wreck Retirement Accounts”
by Fran O’Brien
Investment Advisor, April 2019
https://www.thinkadvisor.com/2019/03/26/how-car-accidents-can-wreck-retirement-accounts/
Relevance: low

The article recommends that you make sure all your clients get a comprehensive auto insurance policy, and make sure you have a relationship with a knowledgeable property and casualty insurance agent.  (p. 48)