MEDIA REVIEWS – November 1-7, 2019

The highlight of this issue of Investment Advisor is the predictions by Ron Rhoades.  Rhoades is an interesting figure in the financial planning profession: he’s a professor at Western Kentucky University, which is the best college program you may not have heard of, and also our leading voice on regulatory and legislative advocacy, particularly regarding the fiduciary standard.  But here, he offers a lot of warnings, a lot of cautions, and overall a peek into issues that you should be paying attention to as you prepare your firm for the future.

Meanwhile, the magazine’s perennial highlights are Mark Tibergien’s column (here saying that organic growth may be preferable to acquisitions in today’s market) and Angie Herbers’ column (here suggesting that client service is the core of your most effective marketing program), plus Tom Giachetti (here talking about the subtler manifestations of prohibited transactions that you might have missed) and Dan Skiles (suggesting that you get client feedback as you make technology decisions in your office).

Articles that received a “high” relevancy rating:

“It’s Time to Take ESG Investing Seriously”
by Donald Calcagni
Investment Advisor, November 2019
https://www.thinkadvisor.com/2019/10/29/its-time-to-take-esg-investing-seriously/
Relevance: high

The Business Roundtable of 200 CEOs of large companies has agreed to redefine the central purpose of the corporation, from maximizing shareholder profits at any expense to focusing on delivering value to multiple stakeholders—consumers, employees and communities.  The articles say that the companies will still seek a positive financial return.  (p. 18)

“What Lies Ahead for RIAs”
by Ron Rhoades
Investment Advisor, November 2019
https://www.thinkadvisor.com/2019/10/29/what-lies-ahead-for-rias/
Relevance: high

Buckle your seat belt for 18 predictions about future changes that will occur in the financial and investment advice profession and how they will impact advisors and their businesses.

1) The biggest firms will get bigger, and some will go public.  But small RIAs will continue to be formed and successful.

2) RIA firm margins will be reduced to 10% (on average) from 20% today.

3) Small RIAs will rely on independent consultants for investment strategy due diligence and asset selection.  The consultants will provide economic predictions and testing for the impact of severe downturns—which advisors can implement aided by ever-better portfolio management software.

4) In the future, RIAs will pay fixed annual fees for access to custodial platforms, plus per-account fees.

5) The SEC and DOL will eventually embrace strong fiduciary standards under a new administration, as continued competition emerges from states moving to impose their own fiduciary standards, and as a growing number of RIAs embrace a stricter fiduciary standard than the SEC currently requires.

6) This will drive firms and advisors toward fees and away from commissions.

7) The annual expense ratio of mutual funds and ETFs will decline, 12b-1 fees will disappear, other revenue-sharing payments will cease, and soft dollar payments to brokerage firms will either disappear by federal legislation or under pressure from fiduciary due diligence.  Sharing of securities-lending revenue with advisors and affiliates will be banned.

8) Flat annual fees (quarterly retainers or monthly subscription fees) will become more prevalent.

9) Technology will continue to lower portfolio management fees, as robos become more prevalent and tech integrations get better.

10) Portfolios of individual securities will eventually become dominant, over funds and ETFs.

11) Sales of higher-cost variable annuities and fixed-index annuities will decline under pressure from fiduciary scrutiny.  Low-cost alternatives that use similar strategies will emerge and become popular.

12) The title ‘financial planner’ will require licensure in an increasing number of states.  People who don’t meet certain minimum educational standards and testing requirements will not be able to use the term.

13) ‘Financial planning’ will become regulated as an add-on to state regulation of individual investment advisors.  Peer review structures will emerge to evaluate complaints against planners or firms.

14) Consumer trust in financial planners and demand for personal financial advice will explode.  Financial life checkups will become as routine as regular physician checkups.

15) Many financial planners will become life coaches, focusing on the quality of life of their clients that can be facilitated through financial advice and coaching.

16) Defined contribution plans will continue to dominate under a broader application of ERISA fiduciary standards.

17) The U.S. government will consolidate many types of defined contribution plans into a single standardized form that will be utilized for plan adoption—with a simplified menu of investment options.  Every employer will be required to offer these plans with payroll deductions.

18) Routine SEC and state inspections of RIA firms will become far less frequent and intrusive. 

The article also offers four threats to the profession.  One is state-run retirement plans, which might emerge if there is continued opposition to the application of fiduciary standards.  States will get tired of brokers saying that small accounts can only be serviced with high commissions, and step in and provide for those smaller accounts with a state-run, low-cost retirement option.

A second is FINRA takeover of RIA regulation.  FINRA’s market share continues to decline, as fiduciary RIAs become more common.  If FINRA succeeds, then the trend toward strict fiduciary standards could reverse itself.  Rising regulatory costs from becoming subject to FINRA would drive many smaller RIA firms to merge, and the cost of entry to the RIA space would reduce new firm formation.

Third: tax policy changes.  Congress might eliminate tax-deferred and tax-free investment vehicles and products.  It could eliminate Roth IRAs, force the annual recognition of capital gains and losses, and have them taxed as ordinary income.  Tax simplification might reduce the value proposition of some financial advisors.

Finally: monied interests might oppose or slow down many reforms—though reform efforts will continue to have backing from consumers who want clear standard for the delivery of financial advice.  (p. 24)

“To Buy or to Build”
by Mark Tibergien
Investment Advisor, November 2019
https://www.thinkadvisor.com/2019/10/29/to-buy-or-to-build/
Relevance: high

In this market, every firm you target is getting multiple offers, making each deal more of an auction than a negotiated purchase.  In many cases, the firms have aging clients and zero growth prospects.  The column focuses on one firm that evaluated the economics and decided that, for now at least, building internally was more cost-effective than buying.  This also requires an investment, of course, but you have more control over it: you need to become an employer of choice, and grow remote offices under a structure that leverages organic growth.  (p. 33)

“Marketing Myths and Facts”
by Angie Herbers
Investment Advisor, November 2019
https://www.thinkadvisor.com/2019/10/29/marketing-myths-and-facts/
Relevance: high

Many of the marketing consultants in our space are still giving advice as if advisors were transactional—and, of course, most of their money is made from brokerage firms and their reps.  Herbers says that advisory firms need to realign their thinking, recognizing that when the number of leads is falling, it isn’t a problem with their marketing.  It is a client-service problem.

Her advice: instead of redirecting resources toward more marketing, instead focus on better client service, which will generate more referrals from more engaged clients.  Review, your client service processes and delivery.  Is it being done consistently?  What training needs to be put in place.  Also: as a leader, did you get so focused on growth that you neglected employee development?  Are your advisors and staff overloaded?

The article says that owners may have a blind spot when assessing whether their staff is overworked.  Also, the good employees tend to complain least.  Keep an eye on your people first, and do what needs to be done to keep them balanced, energized and happy.  The outperforming firms spend roughly 3% of their revenues on client appreciation—things like newsletters, events, tools, helpful guides, reading and educational materials—and call it marketing.  They spend very little on advertising, seminars, brochures, etc.

The bottom line is that client appreciation makes growth happen.  (p. 37)

“Watch Out for ERISA-Prohibited Transaction Pitfalls”
by Tom Giachetti
Investment Advisor, November 2019
https://www.thinkadvisor.com/2019/10/29/watch-out-for-erisa-prohibited-transaction-pitfalls/
Relevance: high

Mainly, beware prohibited transactions.  These are transactions that are presumed to be improperly influenced due to an interested individual’s financial interest in the transaction—self-dealing when you’re supposed to be watching out for the client.  But these can happen innocently: pulling advisory fees from retirement plan assets or using ERISA fiduciary status to solicit new business.  Your business owner client offers a retirement plan to employees, and therefore cannot use the assets of his or her plan to strike a deal for reduced fees for giving personal advice.  The owner received a benefit from placing the plan’s assets in your hands.

The point: there are potentially a lot of unseen dangers.  (p. 45)

“Client Feedback Is Essential for Hitting Technology Goals”
by Dan Skiles
Investment Advisor, November 2019
https://www.thinkadvisor.com/2019/10/29/client-feedback-is-essential-for-hitting-technology-goals/
Relevance: high

Just because clients don’t ask for specific technology solutions for your firm doesn’t mean they wouldn’t like to have them once introduced—and another advisor up the street might introduce them.  A solution: study clients’ usage levels and how they interact with your firm’s digital presence.  Then ask groups of clients who are outliers on both ends of the spectrum about their technology needs.

Also: compare your firm’s technology with the experience that is currently available to the target prospects of your firm.  Also: have you done enough to train your clients on your technology platform?  (p. 46)

The rest of the articles:

“Scalia Sworn in as New Labor Secretary”
by Melanie Waddell
Investment Advisor, November 2019
https://www.thinkadvisor.com/2019/10/29/scalia-sworn-in-as-new-labor-secretary/
Relevance: moderate

Eugene Scalia, the son of the former Supreme Court justice and vigilant opponent of the DOL rule, has been sworn in as the new U.S. Secretary of Labor.  The article says he will seek advice from in-house ethics counsel on whether he should recuse himself from helping to craft a new fiduciary rule, but by now you know that he decided that he doesn’t need to recuse.  Rachel Mondi is now chief of staff at Labor, and is the point person who has been helping craft the new fiduciary rule.  The article also says that Labor’s Employee Benefits Security Administration was scheduled to be reorganized on October 1.  (p. 12)

“Changing Tide: U.S. Passive Fund Assets Now Top Their Active Counterparts”
by Bernice Napach
Investment Advisor, November 2019
https://www.thinkadvisor.com/2019/10/29/changing-tide-u-s-passive-fund-assets-now-top-their-active-counterparts/
Relevance: moderate

Assets of index funds and ETFs totaled $4.27 trillion as of August 31, surpassing $4.25 trillion in active ely managed U.S. equity funds.  Contributing to the passive growth is a variety of quant-based smart beta and thematic passive funds.  Researchers at the Federal Reserve Board warn that the shift magnifies industry concentration among asset managers, and might increase the correlation of returns and liquidity among stocks included in the same indices.  (p. 19)

“Technology, M&A in Focus at SS&C Event”
by Tim Welsh
Investment Advisor, November 2019
https://www.thinkadvisor.com/2019/10/29/technology-ma-in-focus-at-ssc-event/
Relevance: moderate

The SS&C Deliver conference is put on by the organization that owns Black Diamond and Advent. Speakers said that investors are looking beyond just investing services to a broader set of services, including financial life coaching.  Some investors don’t want to pay for all the services that advisors bundle under an AUM fee structure, and financial apps need to become easier to use.  Investors want direct feedback and guidance.

Other speakers talked about the rising number of aging advisors with no succession plan: an opportunity for larger growth-oriented firms.  (p. 20)

“Industry Mourns Passing of Envestnet CEO”
by Janet Levaux
Investment Advisor, November 2019
https://www.thinkadvisor.com/2019/10/29/industry-mourns-passing-of-envestnet-ceo-jud-bergman-remembered-as-visionary/
Relevance: moderate

Envestnet founder and CEO Judson Bergman and his wife Mary Miller died on October 3 in a car crash in San Francisco.  This article is a compilation of prominent advisors mourning his death.  (p. 30)

“SEC Presses Ahead in 12b-1 Fee Crackdown”
by Melanie Waddell
Investment Advisor, November 2019
https://www.thinkadvisor.com/2019/10/29/sec-presses-ahead-in-12b-1-fee-crackdown/
Relevance: low

The crackdown has hit 95 BD reps, who have been charged with providing inadequate disclosure or selecting the more lucrative share class for their customers when a lower-cost class was available.  Total collections: $135 million.  The Financial Services Institute says that this program is unfair, and wants the initiative halted until they have “clear and appropriate rules” to follow.  FSI, which represents broker-dealers, has asked reps to contact Congress and tell it to stop the SEC from “regulating without rules.”  (p. 35)

“Breaking the Mold”
by Jamie Green
Investment Advisor, November 2019
https://www.thinkadvisor.com/2019/10/29/breaking-the-mold/
Relevance: moderate

JB Brewer founded Envision Wealth Planning last year, and he charges subscription fees amounting to 2% of client income.  He communicates with clients using videoconferencing app Zoom.  He works with clients on “non-asset” issues like spending, cash flow and debt.  This is interesting, but it also happens to be exactly the XY Planning Network model, which is NOT breaking the mold.  (p. 39)

“Deferred Income Annuities: Latest Research on Benefits, Laws”
by Melanie Waddell and Bernice Napach
Investment Advisor, November 2019
https://www.thinkadvisor.com/2019/10/29/deferred-income-annuities-latest-research-on-benefits-laws/
Relevance: low

This is basically a sales pitch for deferred income annuities, which pay nothing until a person reaches later retirement, like age 80 or 85.  At that point, it pays a fixed amount each month or quarter.  It’s a form of longevity insurance that is relatively cheap because you only get the payouts if you live, and many policyholders will die before they reach payout age.  Their premiums support the others.

Also, the income linked to the Medicare surcharges will be linked to inflation in 2020, for the first time since 2010.  (p. 41)

“Commonwealth Execs Share Industry Views, Tech News and RIA Updates at National Event”
by Janet Levaux
Investment Advisor, November 2019
https://www.thinkadvisor.com/2019/10/29/commonwealth-execs-share-industry-views-tech-news-and-ria-updates-at-national-event/
Relevance: moderate

While the independent custodians have dropped their trading commissions to zero, Commonwealth executives, at their annual meeting, noted that those firms have a different business model from the independent BDs.  The BD value proposition is focused on the advisor-client relationship and the advice side of the business.  [The independent custodians are not focused on these things?].

The conversation turned to variable annuities sold on a commission basis, and alternatives sold on a fee basis.  Quote: “We are much further along in the percentage of our sales being fee based in these alternative spaces… and we see that continuing.”  Also, the firm sees more advisors getting the CFP designation.  The firm has integrated RightCapital into its platform, and the Advisor360 software platform is now available to the industry.  (p. 43)

“When Client Assets Include Sports Memorabilia”
by Fran O’Brien
Investment Advisor, November 2019
https://www.thinkadvisor.com/2019/10/29/when-client-assets-include-sports-memorabilia/
Relevance: low

Do your clients own rare baseball cards, autographed photos of past athletic heroes or other sports memorabilia items?  They should keep an inventory and get an appraisal for insurance purposes.  And they should buy a valuable articles insurance policy from… somebody like the author.  (p. 48)

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