John Lefferts' Blog

Tuesday, July 28, 2015

Two Words...Financial Planning

In the movie "The Graduate", there is a famous scene where Dustin Hoffman’s character Benjamin comes home from college to a party celebrating his graduation at his parents house. Mr McGuire, a friend of his parents pulls him aside to give some career advice:
Mr McGuire: I just want to say one word to you. Just one word.
Benjamin: Yes, sir.
Mr McGuire: Are you listening?
Benjamin: Yes, I am.
Mr McGuire: Plastics.
Benjamin: Exactly how do you mean?
Mr. McGuire: There's a great future in plastics. Think about it. Will you think about it?
Benjamin: Yes I will
In a sense, I feel like Mr. McGuire writing this post, but instead of one word, I have two words where I see a great future…Financial Planning.
The transformation taking place in the financial services business today is striking. And as we all know, when swift change like this occurs, there will be some winners and as many losers. Observing these changes, there are multiple factors lining up that point to a renewal in financial planning. Unfortunately, in too many cases, our industry has watered down the term "Financial Planning" to slapping a 1% fee on a managed account and moving on to gather the next pile of assets. The kind of financial planning I'm referring to is collecting a complete inventory of all assets, insurance policies, employee benefits, retirement plans, cash flow, tax returns, etc, identifying client goals, creating and implementing a plan complete with monthly budget while monitoring it to stay on track. Here are just a few observations that cause me to see a resurgence in financial planning:
  1.  AUM Fee Margin compression: Fees charged as a % for assets under management have drifted downwards over the past several decades recently settling in at about the 1% mark. Whether robo’s continue to gain traction or not, they are redefining investment management from a value added service into a commodity. Their current pricing ranges from free to 50 bps. Any charge above the robo's will in time be viewed as overcharging unless additional value above and beyond asset allocation is provided. planning.  
  2. Fiduciary as the standard: The issue of fiduciary versus suitability has been debated for decades. But today as the business mix of former commission based advisors has drifted towards fees while social and mainstream media are educating the public about "best interests", it’s hardly an argument any more. Whether the SEC and/or DoL make it the law of the land or not, a fiduciary standard has de facto won the argument. Charging fees was once unique and a differentiator...not anymore. Simply charging a fee for constructing a portfolio will not be enough value added to justify above market fees in the future. What will? planning.
  3. Compensation mismatch: While many advisors claim they offer financial planning as part of their AUM fees, there is evidence that in many cases it’s not entirely true. This article cites a study where 83% of advisors claim that financial planning is core to their practice where 28% of affluent investors say they have a plan created by their advisor. In my observation, many advisors who once did planning have since dropped the service in part because it’s a lot of work but more impacting, they aren’t being paid to do it. If you’re being paid to capture more AUM then that’s what you do. And if you’re not being paid to do financial planning, then that’s what you don’t do. Follow the money. This compensation mismatch will become more evident in time forcing advisors to better demonstrate the value added beyond the commoditized service of investment management. Again, two planning. 
  4. Compensation transparency: Now more than ever, there is a focus on dissecting all forms of compensation. And again, whether the SEC/DoL get a uniform standard done or not, I do expect further compensation disclosure requirements exposing this issue further. Advisors go to great lengths to hide the fact that they are getting paid, how much and for what service. And this happens whether they're charging fees, commissions, trails, renewals or a combination of them all. With complete and clear disclosure of compensation, it points to further movement away from commissions towards fees in addition to an "a la carte" approach to charging for services. I see portfolio construction/allocation remaining as a % fee for AUM but at a rate closer to where the robo's set it. For any further value added service it only makes sense to separate that out from the AUM and charge for what it's worth as an hourly, flat or retainer fee. The most likely value add an advisor can provide is modular or guessed planning.
  5.  Advances in Financial Planning software: Years ago, I headed a financial planning initiative where we built a $30 million financial planning center with huge mainframe computers. Advisors collected the data from the client, entered it into the software which was then electronically transmitted to the center in Alpharetta, Georgia. CFP’s in this center would review the plan for accuracy, print out a big book for "thud" value and overnighted it back to the advisor for delivery. We charged a fee up front for the planning separate from the products recommended afterwards. We thought it was pretty high tech at the time, but times have changed. Today, the mainframes are extinct, all the software has gone to the cloud and it’s no longer necessary to plunk down a big binder of data since it can be pulled up in real time on line integrated with current values. Michael Kitces does a great job discussing current and future planning software here. Today's technology has taken much of the complexity and clunkiness out of the process opening up new opportunities planning. 
  6. Succession planning: Career shops that recruit, train and develop inexperienced candidates are becoming fewer while the demand for financial planning is on the increase. This along with more advisors leaving the business than entering, needless to say we have a succession problem in the business. Financial planning is detailed, tedious and process driven work which is why so many have stepped away from it. But guess who will do the detailed work?...newbies. In my experience, I've had better results hiring young inexperienced talent and training them to do planning than by converting one who has since stepped away from it or never done it at all. The best way to successfully recruit, induct, develop and retain new talent into the business is through a career path in financial planning. I also believe that the time has come for large independent firms (IBD's and RIA's) to invest in this career path to protect the future value of their franchise from evaporating. A qualified farm team of financial planners would be developed and could then be deployed to join more mature firms to planning.
There is every indication that we're at a tipping point in the evolution of our business where it's a case of "change or be changed". With a shift towards fees and pressure to lower them, a desire for compensation alignment and the relative ease new technology has made the once tedious process, all signs point to financial planning as being positioned as the differentiator advisors need to survive and thrive in the marketplace. 
There's a great future in financial planning....think about it...will you think about it?
"Unless you are prepared to give up something valuable you will never be able to truly change at all, because you'll be forever in the control of things you can't give up.”  -Andy Law

Sunday, July 5, 2015

The Path of Least Resistance

"The path of least resistance leads to crooked rivers and crooked men"

-Henry David Thoreau

This quote is harsh, but it is a reminder that as humans, our behavior is often driven by the avoidance of difficulty yielding instead to what appears easy. As an industry, the financial services business is at a crossroads of sorts on this path of least resistance. Regulatory changes, robo technology and a shift in consumer preferences are just a few of the drivers that have led us to this juncture. In a column for Financial Planning Magazine, Bob Veres wrote about a couple questions he asked a “fee-only” group of advisors saying this: “At a recent NAPFA conference, I asked everyone in the audience to raise their hands if they were charging their clients based on assets under management. Virtually every hand went up…. Then I asked how many of them were considering a switch to retainers or other fixed compensation at some point in the next couple of years. Once again, virtually every hand went up” This dichotomy illustrates the hard decisions to make. Being paid solely on AUM for all services an advisor provides has worked for some time. But it is becoming increasingly apparent that continuing to do so places your practice at risk for overcharging when compared to the automated investment services (avoiding saying the word “Robo” too much). Additionally, the greatest value add human advisors provide their clients is through comprehensive financial planning and truth be told, many have stopped providing that service. Why? It’s hard! It’s hard to engage a client, convince them to pay a fee, collect all the data, coordinate with other professionals, help get the financial house in order and monitor the plan. Why go through all that work when you’re getting paid entirely by attracting more AUM. There are many firms that still do comprehensive planning, but of the hands Veres saw go up on his questions, I bet many have moved their practice almost entirely to investment management because…that’s what they’re getting paid to do. It’s the path of least resistance.
The RIA tribe of the financial services nation is not the only one at this crossroad. With wires and independent B/D’s moving almost completely to fees for AUM, they’ve got the same issue to deal with. And it doesn’t stop there. Those in the career insurance models have drifted away from their roots of selling predominantly life insurance towards annuities and AUM investments largely due to the massive 401(k) and pension rollout business (a market the proposed DOL regs could crush for many). Why? Selling life insurance is hard and rolling over a large chunk of money is much easier. Whether you’re a fee only advisor earning revenues on AUM, a life agent making a commission on sales or a hybrid broker earning a combination of both, we are all at a crossroads to align our compensation with the value we provide or risk becoming obsolete. And that value must be something other than a product sale or investment allocation, both of which clients will increasingly bypass you to get it faster and cheaper online.
So how do we get off the path of being paid for something entirely different than for the primary value we provide? And can it really be done?  I’ve had an experience that tells me, yes, it can be done. Back 15 years ago I headed up an initiative at AXA Advisors to convert commission based series 6 career life producers (perceptively the low end of the Financial Services food chain) into fee for advice Series 7/65 Investment Advisor Representatives. (Article about it here: Even back then, this was thought to be a way to place a focus on the value of the planning relationship while capturing more “share of wallet” after the plan was completed. Early on it was successful, but not easy. We started with a pilot in the state of Texas as somewhat of a test tube. The McKinsey folks working with me called it “proof of concept”. We had to change licensing, training, products, compensation, recognition…basically everything. And we had to do this while continuing to run a business as we knew it. We used to joke that it was like changing the tires while driving 60 MPH. Needless to say, it was the “turn on your head” kind of change that was unsettling. But our results were very interesting. Over the year where we made this seismic shift from essentially a product push methodology to a process driven fiduciary relationship, overall sales revenue increased by 30%. Naturally using a financial planning process and charging a fee for the advice, investment product sales increased 73% while non-proprietary sales in general increased 57%. But the proprietary sales revenues also rose 25%. It was a case where a high tide raised all ships. A win for the better served client, a win for the advisor who increased his/her income and a win for the company which increased all sales, including proprietary sales.
 Financial Planning magazine did an article on the initiative and made a statement at the end, “if AXA can develop such a strategy, it could transform not only its career agents, but the entire financial services industry” (FP Mag article here: A pretty bold statement and probably true…but it didn’t happen. The fee for advice strategy was rolled out nationally with some success, but nowhere near the level that the Texas test tube experienced. Unfortunately, change requires leadership and while I had the vision, passion and commitment to make it work in Texas, the same level of leadership was not shared throughout the enterprise nationwide. When the market slid post 9/11 and expense cutting became the front and center strategy, the entire initiative was cut and the focus of the firm went back to the product push of old. The path of least resistance.
 So, CAN advisors, planners, agents, brokers, etc. change gears and be paid a fee directly for providing advice, yes. But WILL they change their strategy? Only time will tell. The path of least resistance is to keep on doing what we’ve always done.15 years ago my team made an attempt to get off that path with the planning initiative but ultimately it failed when we tried to force change nationwide. It was more painful to change than keep the status quo. But somehow today given the massive changes in the industry, I think most of us are sensing that maintaining the status quo may be more painful in the end. The path of least resistance has reached a fork and it's time to decide which one to choose.  
"Pain is inevitable, suffering is optional"