MEDIA REVIEWS – December 1-7, 2018

I’ve been arguing for years that many fee-only advisors who boast about having the lowest fees in town are selling themselves short for no reason.  Mark Tibergien does a great job of articulating the same point.  And Angie Herbers articulates exactly why so many firms fail at installing a new CEO to run the company.

Articles that received a “high” relevance rating:

“Are You Negotiating Against Yourself?”
by Mark Tibergien
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/are-you-negotiating-against-yourself/
Relevance: high

Profession-wide, basis points on assets under management have declined slightly, in part because, as the size of client portfolios increases, firms hit break points in the schedule.  Clients’ total fees go up, but basis points go down.

The column says that firms that raised their fees in the past year are demonstrating confidence in their value proposition, and many of them are enriching their offering to be more relevant to their optimal clients.  Firms that rely solely on investment performance will suffer when clients compare their annual returns with the general market indices.

Are you reducing your fees?  That may mean you are negotiating against yourself.  Are you extrapolating from a few clients who demand a fee reduction, rather than taking into account how your overall client base perceives you?  Are you trying to be the discount price leader in order to grab market share?  Do you believe you aren’t worth of the prices you charge?  Do the constant headlines about pricing pressure cause you to think your fees are too high?

The column recommends you step back and divide your total cost of doing business by your number of clients—a crude measure of your cost per client.  Create a target gross profit margin (revenue minus direct expenses)—the column recommends that you aim for 60%.  Don’t reduce fees without evidence of real pressure from your clients or the marketplace.  (p. 39)

“Bringing in a CEO Means Putting Rules in Place”
by Angie Herbers
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/bringing-in-a-ceo-means-putting-rules-in-place/
Relevance: high

As advisory firms grow larger and internal management becomes more complex, many are introducing a new CEO to manage the business.  The CEO may have control but no real power; the power would reside with the majority stock holders.  The owners can countermand any steps that the CEO proposes, mitigating the value of the new hire.

Herbers recommends that the founder be clear about what decisions and actions the CEO has authority to make, and what will stay within the owner’s control.  The CEO has conflicting fiduciary duties: to the clients of the RIA firm, and to the shareholders.  Balancing those conflicts can be very difficult.

The CEO can be aided by the shareholders mapping out a “vision strategy” that explains where the founder and CEO want to take the firm.  This detailed document describes what the CEO wants the firm to be, how he/she will make these changes, and who is responsible for making them happen.

Herbers also recommends that the owner take profit out of the CEO’s compensation structure.  She says that compensation based on profits sends the message that financial success is more important than acting in the best interests of clients—which is how large brokerage and private equity firms are managed.  The CEO’s compensation could instead be tied to operating income and revenue, which encourages the CEO to pursue growth, and also improve client service.  (p. 43)

“Technology Change at Fiduciary Speed”
by Tim Welsh
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/technology-change-at-fiduciary-speed/
Relevance: high

The T3 Enterprise conference in Las Vegas addressed some regulatory changes, in a session with securities attorney Brian Hamburger and newsletter publisher Bob Veres.  Hamburger said that regulators have been chasing headlines with their rule-making; they never worried about custody rules until Madoff, or about business continuity until after 9/11.  Veres believes that robo technology will help advisors deliver advice to lower-asset thresholds.

Meanwhile, Orion has launched Orion Enterprise, jointly developed with its newest acquisition (and turnkey asset management program) FTJ Fundchoice.  Vestmark, an outsourced investment platform, has integrated with Oranj, a client service and investment portal, and with Adhesion, which is a competitor of Envestnet.  And Pershing is building out an integration portal that will allow tech developers to better integrate their offerings with NetX360.

Dani Fava, of TD Ameritrade, says that the next innovation for advisor-client communication might involve holograms so that advisors can be in multiple locations at the same time.  And digital assistants like Alexa and Google’s Duplex will take on scheduling, ordering and client service tasks.  (p. 46)

“What’s Inside the SEC’s Best Execution Alert”
by Tom Giachetti
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/inside-the-secs-best-execution-risk-alert/
Relevance: high

The 1940Act doesn’t define best execution and the SEC has offered limited guidance.  In July, the SEC’s Office of Compliance Inspections and Examinations published a Risk Alert saying that advisors, as fiduciaries, must seek “best execution” of client transactions—taking into account total client costs and the quality of broker-dealer services.  They are not required to seek the lowest possible commission cost, but whether the transaction represents the best qualitative execution for the managed account.

What to do?  Create best execution policies and procedures, which means evaluate your BDs in comparison to the quality or cost of services available from other BDs.  Advisors must accurately describe their best execution practices in Form ADV, and then oversee brokerage and custodial services received in a manner consistent with this disclosure.  Advisors should review historic trading activity to affirm that prices received were favorable under prevailing market conditions.

As a practical matter, this means obtaining and reviewing various best execution quality reports made available by your custodian, and requesting similar information from your executing brokers.  (p. 51)

“2018 Year-End Action List”
by Dan Skiles
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/2018-year-end-action-list/
Relevance: high

Make sure your software provides quick access to reports that detail which clients have and have not taken their required minimum distributions.  Also: the completion of Roth conversions.  Also: does your software help you know what options are available to clients who want to donate securities to a charitable organization?  It should show you which lots have the greatest gains.

The end of the year is a good time to review the access permissions for all your systems.  People who have left your firm should have had their access rights removed from your systems.  If positions or responsibilities have changed in your staff, make adjustments to their access rights.  Check your backup procedures and make sure they’re working properly.  And, since the last business day of 2018 is a Monday, be ready to receive last-minute client requests from the prior weekend.  (p. 53)

The rest of the articles:

“FINRA’s Havlik Explains the Consolidated Exam Process”
by Melanie Waddell
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/finras-havlik-outlines-consolidated-exam-progress/
Relevance: low

The broker-dealer self-regulator has combined its three exam programs (business conduct, financial and trading compliance), and Finra exam chief Bari Havlik aims to “tailor those examinations to the risks associated with the business model of the firms.”  A clearing firm’s procedures will be different from a firm that works with independent contractors (an independent BD).  (p. 10)

“The Double Threat Technology Gives Socially Responsible Investing”
by Claire Veuthey
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/the-double-threat-technology-gives-socially-respon/
Relevance: low

New tech solutions will allow advisors to more finely customize portfolios to each client’s needs, and that will make it easier for them to incorporate SRI screens.  But that broad statement is about all you learn here.  (p. 14)

“Tech—No Matter Name—Still Key for Long-Term Holdings”
by Bernice Napach and Emily Zulz
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/tech-no-matter-name-still-key-for-long-term-holdin/
Relevance: low

The head of iShares Investment Strategy says that “tech is pervasive across industries,” and then the article touts iShares ETFs that are tech-heavy.  Rick Edelman says “Technology is underlying everything.”  Are these useful insights when you create client portfolios?  (p. 16)

“Capitalizing on Recent Volatility Requires Delicate Balancing Act”
by Josh Vail
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/capitalizing-on-recent-volatility-requires-delicat/
Relevance: low

The president of an alternatives investment firm aims to show us “the understated role alternatives can play in bringing portfolio risk back in balance.”  He explains risk budgeting, and then tells us that long/short funds and managed futures have similar return profiles to U.S. equity but achieve those returns with less volatility.  Replace equities with alts, and your risk budget suddenly improves—that is, the risk goes down.  This is a sales pitch.  (p. 18)

“IRS Ups IRA Contributions as Concerns Rise”
by Marlene Satter
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/irs-ups-contributions-as-concerns-rise/
Relevance: moderate

IRA contributions, not raised since 2013, will go up to $6,000, with a $1,000 catchup allotment for people over age 50.  401(k), 403(b) and most 457 plan contributions will go up form $18,500 to $19,000.

A study by BMO Wealth Management says that many Americans approach retirement with financial and health fears.  46% fear a decline in their quality of life as they age, 45% fear burdening their families with their care and 44% worry about running out of money during retirement.

Nationwide Retirement conducted its own study, and found that many retirees lack an understanding about the effect of taxes on their retirement income—which sounds like a great way to make the case for buying variable annuities.

The Employee Benefit Research Institute’s most recent study found that a couple age 65 with median prescription drug expenses will need $296,000 in savings to have a 50% chance of covering future health care expenses; it would take $400,000 in savings to reach 90% odds.  The higher costs factor in expenses not covered by Medicare, including projected premiums for comprehensive Medigap plans, premiums for Medicare Parts B and D and other out-of-pocket spending.  (p. 19)

“Hybrid RIAs Enjoying Stellar Growth: Report”
by Jamie Green, Emily Zulz and Marlene Satter
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/hybrid-rias-enjoying-stellar-growth-report/
Relevance: moderate

Cerulli says that hybrid RIAs now make up 8.8% of the advisor head count, and these firms have been growing their assets under management faster than their peers.  67% of these hybrid firms, it found, sell variable annuities.   The study concluded that the broker-dealers need to do a great job of servicing breakaway brokers who are looking at fee-only independence.

Meanwhile, Pershing Advisor Solutions’ annual study of pricing and profitability found median revenue growth for all RIAs was up 12% last year, and operating profit margins were 25%.  But much of the growth was due to market performance—and the study failed to find meaningful productivity gains from new hires.  (p. 24)

“Giving and Getting Back: Advisor Group, American Portfolios”
by Ginger Szala and Janet Levaux
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/giving-back-getting-back-advisor-group-and-america/
Relevance: low

This series of articles is about how different broker-dealers and their reps are donating their time to their communities—which is nice, but I don’t see how this is relevant to most advisory practices.  Anyway, Derek Burke, president of FSC Securities, has supported the Cerebral Palsy of New Jersey nonprofit.  Joseph Curatolo, president of Georgetown Capital Group (affiliated with Royal Alliance) has fundraised for Roswell Park Comprehensive Cancer Center in Buffalo, NY.  American Portfolios CEO Lon Dolber has been involved with the World T.E.A.M., which has assisted adaptive athletes to climb Mount Kilimanjaro, and is funding Assistive Technology Laboratory.  William Donahue, an advisor affiliated with American Portfolios, is a board member of Honor Flight of Long Island, a local chapter of a nonprofit organization that escorts U.S. veterans to Washington, D.C. war memorials.  (p. ?)

“Giving and Getting Back: Ameriprise, Cambridge, Commonwealth”
by Ginger Szala and Janet Levaux
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/giving-getting-back-ameriprise-cambridge/
Relevance: low

Brian Mora, affiliated with Ameriprise Financial, runs marathons that raises money for the KMAK Sandy Hook Memorial Foundation.  Kelly Fox, an Ameriprise private wealth advisor, supports the Greater Attleboro Area council for Children and chairs Christmas for Kids, a nonprofit that focuses on children in need.

Jeff Vivacqua, SR. VP of marketing at Cambridge Investment Research, sits on the board of the Invest in Others charitable foundation, recognizing individuals and firms in the advice industry that are donating time and money to causes that matter to them.  Mark Anselmo, also affiliated with Cambridge, supports the Our Nicholas Foundation, following his son Nicholas’ diagnosis of autism.

Jeffrey Scales, affiliated with Commonwealth, supports many nonprofits, and is personally active in Rotary International.  He is also a co-founder of the Mid-Hudson Chapter of the Alzheimer’s Association and is a member of the Forum for Sustainable and Responsible Investment.  (p. 26)

“Giving and Getting Back: Raymond James, Securities America, Sigma/Parkland”
by Ginger Szala and Janet Levaux
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/giving-getting-back-raymond-james-securities-ameri/
Relevance: low

H.D. Vest president Scott Rawlins is on the committee of Young Life Grapevine Colleyville, which is a ministry that brings younger people “closer to Christ.”  Steve Plain, an HD Vest Advisor, is involved in a Boys & Girls Club of America in Wallkill, NY. 

Investacorp CEO Patrick Farrell is involved with Feeding South Florida, which delivers supplies and food to victims of natural disasters.  Paul Vladem, an advisor affiliated with Investacorp, has participated in the Mercedes Benz Corporate Run in Ft. Lauderdale, FL on behalf of the United Way.

Douglas Wright, chief compliance officer at The Investment Center, serves on his local volunteer fire department, and financial advisors Bill Logue and Matthew Filik donate to the Community Food Bank of New Jersey.  (p. 26)

“Giving and Getting Back: Kestra, Lion Street, Prospera”
by Ginger Szala and Janet Levaux
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/giving-getting-back-kestra-lion-street-prospera/
Relevance: low

John Vanderheyden, executive VP of Kestra Financial, has worked with Tanzania Life Project, raising funds to build deep water well systems in central Tanzania’s remote villages.  Joe Vaartanian, who is affiliated with Kestra, launched Now What?—an advocacy group for widows in Guilford County, NC.   

Melvin Pope, III, affiliated with Lion Street, has volunteered time to the American Red Cross serving North Florida. 

Tarah Carlow, SR VP of marketing at Prospera Financial, supports the Children’s Hospital of Richmond, VA.  Doug Charny, an advisor affiliated with Prospera, has raised money for cancer research at Johns Hopkins.  (p. 26)

“Giving and Getting Back: Raymond James, Securities America, Sigma/Parkland”
by Ginger Szala and Janet Levaux
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/giving-getting-back-raymond-james-securities-ameri/
Relevance: low

Jodi Perry, president of the Independent Contractors Division of Raymond James Financial Services, contributes to the St. Petersburg Free Clinic through donation drives and monetary donations.  Tyson Ray, affiliated with Raymond James, launched the Children’s World Impact fund, which aims to break the poverty cycle for widows and children around the world.  Todd Sanford has worked with Western Michigan University’s Sanford Center for Financial Planning and Wellness.

Janine Wertheim, president of Securities America Advisors, is involved in a Christian ministry called Fresh Start for All Nations, in Omaha, NE.  Kimberly Kropp, affiliated with Securities America, has advocated for the Iowa School for the Deaf.  (p. 26)

“Using Practical Skills to do Good”
by Ginger Szala
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/giving-getting-back-using-practical-skills-to-do-g/
Relevance: moderate

Yusuf Abugideiri, a senior financial planner for Yeske Buie in Vienna, VA, helped a family whose breadwinner has been diagnosed with cancer.  He is one of 1,500 pro bono advisors who are part of a pro bono outreach program organized by the Foundation for Financial Planning.  Each of them must take a free training course about working with at-risk populations.  Abugideiri, we are told, gathered financial statements, bank records and employ benefits documents, spoke with the family by phone, and looked for ways to help them through the situation.  The key was cash flow and budgeting advice—but we aren’t told much about the specific advice offered.  (p. 38)

“Plans for Advice Standards Come Into Sharper View”
by Melanie Waddell
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/plans-for-advice-standards-come-into-sharper-view/
Relevance: moderate

The SEC has “regulation best interest” on its short-term agenda, and Chairperson Clayton says the staff is looking at comment letters and will amend Reg BI and the proposed Customer Relationship Summary form.  The Labor Department is also planning to unveil a revised final fiduciary rule package next September, to replace the one vacated this past spring.  There is evidence that the SEC and DOL are coordinating their efforts.

The RAND organization field tested the SEC’s proposed Form CRS, and found that more than half the respondents found the form to be too long.  Conflicts of Interest and Fees and Costs were the sections most likely to have reported difficulty.  Meanwhile, the SEC’s Investor Advisory Committee asked the SEC to define what the “best interest” standard for brokerage firms actually means. (p. 41)

“Ryan Kelly’s ‘Three Wins’ Mandate to Advisor M&A”
by Jamie Green
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/ryan-kellys-three-wins-mandate-to-advisor-ma/
Relevance: moderate

The CEO of Spectrum Asset Management, which has acquired three other RIA firms, recommends that you ask a firm you intend to acquire: “If we’re talking three years from today, looking back over that time, what do you want to have accomplished, both personally and professionally?”  (This is basically Dan Sullivan’s R-Factor question.). The answer helps him determine if the acquired firm’s principal wants to remain an advisor.

The key is that client service improves in addition to firm profits; you want everybody to “win” through the merger.  (p. 45)

“Commonwealth Financial Highlights RIA Focus, Tech and ‘Grit’ at Event”
by Janet Levaux
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/commonwealth-financial-highlights-its-ria-focus-te/
Relevance: moderate

The company’s annual conference in Austin, TX offered insight into BD trends.  A growing number of advisors (75 firms so far) have dropped their FINRA licenses and embraced the fee-only model, and are being serviced through a 22-employee team.  The firm has partnered with RightCapital to bring financial planning tools to advisors, and Client360 will show clients’ goals in synch with RightCapital software.  (p. 48)

“How Advisors Can Build a Toolkit for Success”
by Janet Levaux
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/how-to-build-a-life-skills-toolkit/
Relevance: moderate

This is an interview with Commonwealth founder Joe Deitch, author of Elevate: An Essential Guide to Life.  Ditch tells the story of how he came to write the book, as he “became fascinated with the fundamental framework to wisdom and shortcuts and fast lanes to innovation.”  The key is to be attuned to the flow of energy in everything we do.  He recommends that people ask and receive, listen and learn, motivate and get what they want, leverage and lead, appreciate and make every moment a miracle.  (p. 49)

“Beware of Hidden Insurance Risks for Small Business Clients”
by Fran O’Brien
Investment Advisor, December 2018
https://www.thinkadvisor.com/2018/11/28/under-the-radar-risk-for-small-business-clients/
Relevance: low

A small business owner had a fire in his kitchen—and didn’t have sufficient homeowner’s insurance to cover the cost.  Check to make sure your clients have adequate homeowners protection and an umbrella policy.  (p. 56)