MEDIA REVIEWS – October 8-15, 2019

I’m not sure anybody would read Investment Advisor magazine if it were to tragically lose its core columnists: Mark Tibergien, Angie Herbers, Tom Giachetti and Dan Skiles.  Here, Tibergien offers an example of a badly-constructed succession plan that will cripple the company financially in the future.  Herbers, on the same topic, says that succession plans fail whenever the founder can’t ever quite give up the reins to the successors.  Giachetti is surprisingly positive about the Form CRS (ADV Part 3) initiative, which is part of the whole Reg BI mess, and Skiles advises you to be careful where you get your technology advice.

In addition, Melanie Waddell offers a quick look at the lawsuits challenging Reg BI and a profile of the new leader of the North American Securities Administrators Association—and the key thing to know is that he’s a fan of the fiduciary standard.

Articles that received a “high” relevance rating:

“SEC’s Regulation Best Interest Comes Under Attack”
by Melanie Waddell
Investment Advisor, October 2019
https://www.thinkadvisor.com/2019/09/24/secs-regulation-best-interest-comes-under-attack/
Relevance: high

Two separate lawsuits are challenging Reg. BI.  Seven states plus the District of Columbia filed suit in the Southern District of New York on September 10, and XY Planning Network filed a lawsuit with different allegations: challenging broker-dealers’ ability to deliver comprehensive financial planning services under the rule.  This latter suit seeks to have the SEC modify the rule to state that financial planning advice is investment advice that is not solely incidental, which means all brokers who provide financial planning advice would have to register with the SEC.  Michael Kitces, an XYPN co-founder, says that brokers and dual-registrants should not be able to use titles that connote that they are in the business of providing fiduciary advice unless they do so at all times.”

Barbara Roper, of the Consumer Federation of America, says the SEC ignored clear Congressional intent in instituting Reg BI, and says the rule will need to be scrapped to provide investors the protections they need and deserve.  (p. 12)

“Searching for Alpha”
by Michael Finke
Investment Advisor, October 2019
https://www.thinkadvisor.com/2019/09/24/searching-for-alpha/
Relevance: high

The so-called “evidence-based” investment philosophy says that most of a portfolio’s return is generated from exposure to the various markets, which is normally called “beta.”  But is it possible to buy beta exposure so astutely that it adds alpha to a client portfolio?  The article calls this “smart beta.”

The answer is yes, with some cautionary footnotes.  Value and small cap investing have produced alpha over simple broad market exposure, but you have to be patient, particularly now, when growth has generated excess returns for a long period of time.  Or you can diversify factors, using multi-factor ETFs.  In addition to value and small cap, consider less volatile (lower beta) stocks, which have produced equal performance to stocks with a higher beta, but with less standard deviation. 

Some multi-factor ETFs do something that looks suspiciously like timing the market; they determine which markets certain factors tend to thrive in, and which are unfavorable, and then weight their holdings accordingly.  The article notes that if you can buy multi-factor ETFs that shift their holdings, why does the client need an advisor.  The answer: this is an opportunity for advisors to demonstrate value outside the portfolio.  The institutions pursue alpha and the planner does planning.  (p. 25)

“The Parenthood Trap”
by Mark Tibergien
Investment Advisor, October 2019
https://www.thinkadvisor.com/2019/09/24/the-parenthood-trap/
Relevance: high

This is an interesting analysis of a succession plan that makes no sense.  You should probably read the whole column, but the gist of it is that a father decided to sell his planning business (generating roughly $4 million in annual revenues) to his son and another successor.  They agreed to pay the founder 50% of the total fees generated for the next 20 years.

They agreed to what?  Tibergien had four of his key staff people (Lisa Crafford, Tom Kindle, Barbara Novak and Adam Verchinski) do an analysis of the terms as best they understand them.  The bottom line is that the father will receive $2 million a year (rising as the firm takes on more clients), leaving $2 million for the successors to cover their compensation, pay overhead and generate a profit.  Tibergien and his team estimate that the two will split $600,000 a year, pre-tax, and meanwhile handle 150 client relationships—each.  The business is being valued at $40 million, or a 33x price-to-earnings ratio.

The point here is that the successors apparently asked for a no-down-payment arrangement, where the purchase would be funded entirely through cash flow.  Focusing on just that one factor in the deal doesn’t make sense.  (p. 33)

“New Leader at NASAA”
by Melanie Waddell
Investment Advisor, October 2019
https://www.thinkadvisor.com/2019/09/24/new-leader-at-nasaa/
Relevance: high

The new president of the North American Securities Association is interesting: Christopher Gerold, the New Jersey Bureau of Securities chief who helped craft the state’s fiduciary rule.  He will serve a one-year term, and supports a uniform standard for financial professionals that would seem to be fiduciary in nature.  In a speech to state regulators, he told the story of a couple who had been defrauded by a broker—and then revealed that the couple was actually his parents.

NASAA reported that state securities regulators conducted 5,320 investigations in 2018 and took 2,067 enforcement actions, leading to $558 million in restitution to investors and $490 million in fines.  (p. 35)

“How to Pass the Torch”
by Angie Herbers
Investment Advisor, October 2019
https://www.thinkadvisor.com/2019/09/24/how-to-pass-the-torch/
Relevance: high

Herbers says that many succession plans fail because the owner wants to control how the successor manages his or her firm—rather than letting the new owner take the reins.  Sometimes this comes in the form of pro format that lay out what the future growth of the firm will look like—which lock out the successor from taking on realistic initiatives that could be successful.  Trust breaks down between the owner and successor, and the firm is eventually sold to outside buyers.

The solution is to transition from being a boss to a leader, and provide the successors with whatever they need to become leaders and managers themselves—guiding them, letting them make mistakes, and eventually focusing on having a good post-transition relationship where the former owner doesn’t control but supports.  It boils down to creating a solid relationship between owner and successor and preparing the successor for leadership without control.  (p. 37)

“IRS Weighs In on RMDs, Fees”
by Melanie Waddell
Investment Advisor, October 2019
https://www.thinkadvisor.com/2019/09/24/irs-weighs-in-on-rmds-fees/
Relevance: high

The IRS has ruled that uncashed distribution checks from qualified plans are still taxable.  Clients should recognize that checks issued at the end of the year, even if cashed in the next year, will apply to the prior year.  The article speculates that this may apply to IRA required minimum distributions as well. 

In addition, in private-letter rulings, the IRS has allowed Nationwide and Lincoln Financial to treat the payment of an advisory fee from a variable, fixed indexed or hybrid non qualified annuity as a nontaxable distribution.  Advisors can deduct their advisory fees from annuities—though they may not want to.  This brings annuities on a par with IRAs and 401(k)s, where fee payments count as nontaxable distributions.  The article notes that Nationwide Advisory Solutions has a technology platform that gives advisors an automated solution to receive their fees directly from the annuity.  But the fees cannot exceed 1.5% of the cash value of the annuity.  (p. 41)

“Maybe, Just Maybe, the SEC is Onto Something: Form CRS”
by Tom Giachetti
Investment Advisor, October 2019
https://www.thinkadvisor.com/2019/09/24/maybe-just-maybe-the-sec-is-onto-%C2%ADsomething-form-crs/
Relevance: high

Form CRS, also known as ADV Part 3, is another regulatory filing to worry about.  The goal is to provide succinct information about the services the firm offers to retail investors, fees and costs that retail investors will pay, conflicts of interest, standards of conduct and disciplinary history.  It may be more succinct that the difficult-to-decipher ADV Part 2A, which means more investors will read it.  All registered firms will be required to file the initial form CRS by June 30, 2020, but the article recommends that you start drafting yours now.  (p. 45)

“Are You Really Getting the ‘Best’ Technology Advice?”
by Dan Skiles
Investment Advisor, October 2019
https://www.thinkadvisor.com/2019/09/24/are-you-really-getting-the-best-technology-advice/
Relevance: high

The gist of this column is that too many advisors take advice (or not) from their colleagues based on a comparison of the size of the firm.  They should also take into account a variety of other variables, including whether the firm is planning- or investment-focused, and the culture of the firm.  Skiles says it is important not to ask “what should I buy,” but to hear the experience with products and processes that didn’t work, as well as tech successes—remembering that a failure at one firm might be a success at yours.  (p. 46)

“How to Win Amidst the Hiring Frenzy”
by Caleb Brown
Investment Advisor, October 2019
https://www.thinkadvisor.com/2019/09/24/how-to-win-amidst-the-hiring-frenzy/
Relevance: high

There are dos and don’ts here.  Make candidates a solid first offer (the article says that an entry-level planner position, with no experience, will equate to $46,000 to $65,000 plus bonus/incentive compensation equal to 10-20% of the base salary, plus health insurance and a retirement plan.  Inform new hires that you had other finalists, but in the end, they won out.  This can reinforce loyalty and give candidates a shot of confidence. 

Expect candidates to negotiate.  The most desirable candidates will pick up the phone and ask to discuss their offer, vs. trying to negotiate over email.  Don’t take the negotiations personally.  The new planner is seeking the best deal possible, and as long as it is done in a professional and respectful manner, it is part of the process.  (p. 48)

The rest of the articles:

“How to Size Up ETFs for Client Investing”
by Ryan Nauman
Investment Advisor, October 2019
https://www.thinkadvisor.com/2019/09/24/how-to-size-up-etfs-for-client-investing/
Relevance: low

First piece of advice: decide whether to use all ETFs or a mixture of ETFs and funds.  Profound, no?  Then filter and screen for the best ETFs that will follow their mandate.  (Bet you never thought of that.)  Consider the manager’s tracking error.  (Didn’t the article already say that?)  (p. 16)

“Can Affordable Housing Help Build a Stronger Portfolio?”
by Jonathan Needell
Investment Advisor, October 2019
https://www.thinkadvisor.com/2019/09/24/can-affordable-housing-help-build-a-%C2%ADstronger-portfolio/
Relevance: low

Affordable housing can provide the low income housing tax credit, and can produce market rate returns—plus fit clients’ ESG preferences.  A growing number of renters are finding housing increasingly unaffordable, creating higher occupancy rates for low-income buildings.  The only problem with this bullish article on affordable housing is that it was written by the president of a real estate company that invests in affordable housing units.  Does the magazine not recognize the conflict of interest, or did Mr. Needell pay for the opportunity to tout his asset class?  (p. 18)

“Are Investors Putting FOMO Before Long-Term Goals?”
by Josh Vail
Investment Advisor, October 2019
https://www.thinkadvisor.com/2019/09/24/are-investors-putting-fomo-before-%C2%ADlong-term-goals/
Relevance: low

This is a terrible thing: so many investors are asking why they need alts, and their shabby recent track record, in their portfolios.  This is causing advisors to have to justify the inclusion of alternatives in client portfolios.  We are told that humans have biases, and advisors should urge clients to recognize that a meaningful long-term allocation to alts can provide downside protection.  We all know that the president of an alts company can write these words with total impartiality.  (p. 19)

“Advisors, Tech in Focus at New Conference”
by Janet Levaux
Investment Advisor, October 2019
https://www.thinkadvisor.com/2019/09/24/advisors-tech-in-focus-at-new-conference/
Relevance: moderate

This is about the first-ever Wealth/Stack Conference, organized by Ritholtz Wealth Management and Inside ETFs.  Orion Advisor Solutions CEO Eric Clarke said that technology is a catalyst for measurable growth, and that advisors need a well-defined value proposition, incredible client experience, operational efficiency and the ability to execute its growth strategy.  Orion is rolling out a pilot marketing and prospecting service to help advisory firms build business.

David Grau of FP Transitions says there are many buyers of advisor firms who have bank financing.  But he says buyers should focus on the terms, the transition plan to move clients and the sustainability of the acquired firm.

Dani Fava, TD Ameritrade’s head of innovation, says that AI is the key to future client experiences.  AI can help prioritize and predict clients and prospects, communicate around clients’ top concerns, and help advisors know how, when and where to meet with clients.  (p. 20)

“RIA Business Is Changing in a Big Way”
by Bernice Napach
Investment Advisor, October 2019
https://www.thinkadvisor.com/2019/09/24/ria-business-is-changing-in-a-big-way/
Relevance: low

A recent report co-produced by the Investment Adviser Association and National Regulatory Services shows that SEC-registered advisory firms experienced 3.3% growth last years while the number of broker-dealers fell 2.8%. The number of RIA clients has reached 43 million, and regulatory assets under management has grown to $83.7 trillion, almost four times the 2001 figure.  (The dollar figure is an overstatement, since the methodology allows RIAs and sub advisors to claim the same assets.)  Just over 95% of individual advisors were compensated on a percentage of AUM.  But 29.6% also collect hourly fees.  (p. 22)

“Can Alternative Assets Reduce Retirement Income Worry?”

by Justin Fay

Investment Advisor, October 2019

https://www.thinkadvisor.com/2019/09/24/can-alternative-assets-reduce-retirement-income-worry/

Relevance: low

With all the attention that Investment Advisor’s pages are paying to alts, you might wonder if they’re trolling for a cadre of new advertisers.  This article falsely claims that advisors are turning to alts, that “the need for new strategies… is increasingly critical,” and this is “a good time for advisors to introduce alternative investments.”  We are told there “is increasing interest in the benefits alternative investments provide,” but again, where is the evidence that advisors are swayed by complex, expensive investment strategies when they could just be lightening up on their equity exposure? 

And here’s the kicker: the article says that “non-traded REITs, in particular, have proven adept at delivering alternative sources of retirement income, as have hedge funds and private equity.”  Non-traded REITs??!?

There’s more gushing praise of non-traded REITs, and then the article turns to hedge funds, and now (goody!) “there are platforms that exist to help customize the experience with reporting and manager due diligence tools while providing access across a suite of different products.

And finally, private equity is really keen as well, and “can even increase median retirement income by 6% or higher for certain investors.”  If that claim were put into marketing materials, the promoters would be sent to jail.  But it’s all right to print it in the pages of a magazine?  This article is an embarrassment.  (p. 30)

“Walking the Talk on Multi-Gen Planning”
by Jamie Green
Investment Advisor, October 2019
https://www.thinkadvisor.com/2019/09/24/walking-the-talk-on-multi-gen-planning/
Relevance: moderate

Intercontinential Wealth in San Antonio (with satellite offices in Miami and Mexico City) has three father-son pairings among its 20 employees.  Founder Charles Lutz and son Howard Lutz, and co-founder Isidoro Korngold and Kenneth Korngold, are included in this statistic.  The multi-gen planning theme comes in where the children of the senior planners work with the children of the larger clients, and the firm solicits the opinions of the children when creating a plan for the family.  The kids become more interested in the services the firm provides.  The next generation (children of the founders) at the firm also have a say in how the firm is run.  (p. 39)

“Raymond James Hosts 25th Women’s Event”
by Janet Levaux
Investment Advisor, October 2019
https://www.thinkadvisor.com/2019/09/24/raymond-james-hosts-25th-womens-event/
Relevance: moderate

Raymond James hosted 420 female advisors and 300 other guests for an event sponsored by the firm’s Network for Women Advisors, Advisor Pride Network and Black Financial Advisors Network.  Membership in the group now tops 1,100.

The article says that women currently make up 15% of advisors industry-wide, and at Raymond James that figure is 16%.  (p. 43)