Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with yet another round of warnings from the SEC at a recent compliance conference that they continue to scrutinize hybrid RIAs for whether they're using the appropriate (lowest-cost) share class for any mutual fund held in an advisory or wrap account for which the advisor is already receiving a separate fee (including now when it comes to 529 plans as well).
Also in the news this week were two proposed bills in Congress that would ban mandatory arbitration (not specifically targeted at financial services, but nonetheless potentially disrupting industry-standard mandatory arbitration clauses in brokerage and many advisory agreements), and a new succession planning program from Wells Fargo that could make it feasible for wirehouse brokers to get paid as much as an independent RIA does to sell their practice (but without needing to leave the wirehouse in order to do so)!
From there, we have several articles around practice management and employee development and retention, including a discussion of what it means to craft a good employee experience, how to more effectively make new employees feel included from day 1 (so they don't get disengaged as leaders/managers tend to take input more from existing employees who have existing relationships), the rise of in-house "universities" at larger advisory firms to both develop their talent and better attract next generation advisors, why even though toxic employees tend to be more productive than average their cost to the firm in the aggregate still exceeds their productivity benefits, the business impact of having stressed-out workers, and why, despite their popularity, advisory firm bonuses for business development often don't work (especially if their purpose is to get advisors not already doing much of any business development to try to start).
We wrap up with three interesting articles, all around the theme of how the industry itself is changing: the first looks at how, as the role of the financial advisor changes, so too is the requisite skill set to succeed as a financial advisor of the future; the second explores whether wirehouses can really be successful in launching their own RIA platforms to try to prevent their entrepreneurially-minded brokers from leaving to start their own independent RIAs; and the last raises the question of whether the real transformative opportunity in the industry is not to lift the fiduciary duty of loyalty (that advisors must act in their clients' best interest and mitigate conflicted compensation), but simply to lift up advisors' educational standards so it's more likely that when a consumer engaged a financial advisor, he/she really has the "substance" to deliver in-depth quality financial advice in the first place!
Enjoy the "light" reading!
SEC Examiners Come After Fee Abuses (Tracey Longo, Financial Advisor) - At the recent IA Watch Annual Compliance conference, SEC regulators emphasized that advisory fees - and specifically, the intersection of advisors charging advisory fees while also participating in 12b-1 fees - continues to be a red flag and focus on RIA examinations. Ironically, the primary concern is not amongst traditional standalone RIAs themselves and the fees they charge, but primarily for hybrid RIAs that may still be using mutual funds with a share class that includes 12b-1 fees on top of charging their own advisory fees (or fees for wrap accounts), which the SEC effectively views as "double-dipping" (as advisors already being paid their advisory fees are expected to select the lowest cost share class available at that point). In recent years, the SEC has tried to encourage firms to voluntarily make things right, first with its "Share Class Selection Disclosure" (SCSD) initiative that allowed advisory firms to voluntarily report share class mistakes and make investors whole but avoid additional penalties. And more recently, the SEC announced a similar 529 Plan Share Class initiative, again inviting advisory firms that failed to use the lowest cost share classes available to voluntarily disclosure their mistakes, make investors whole, and avoid further penalties. Which is significant, as the implication from the SEC that advisory firms found double-dipping into 12b-1 fees after failing to take advantage of the voluntary disclosure initiatives may be dealt with even more harshly.
Proposed Legislation Would End Mandatory Arbitration In Adviser And Broker Contracts (Mark Schoeff, Investment News) - Last week, Senator Sherrod Brown introduced the "Arbitration Fairness For Consumers Act", which would prevent firms from having binding pre-dispute arbitration agreements... and while the focus of the legislation is primarily on student loans, credit card agreements, and employment contracts, it would also impact the already-industry-standard mandatory arbitration clauses typical in brokerage firm account agreements (as well as many RIAs' advisory agreements). At the same time, Senator Richard Blumenthal, along with Representatives Jerrold Nadler and Hank Johnson, also proposed the "Forced Arbitration Injustice Repeal Act" (or "FAIR Act" for short), which would similarly limit forced arbitration (by amending the Federal Arbitration Act itself). The proposals were received positively by the Public Investors Arbitration Bar Association (PIABA), which has long criticized the closed-door nature of mandatory arbitration and advocated that consumers should at least have the option of going to courts directly when filing claims against problematic brokers or investment advisers. However, it's not clear whether the Democratic-led legislation will be able to get through the Republican-led Senate, and many expect FINRA and the SEC to defend their turf and existing practices. At the same time, even if the legislation doesn't pass, greater scrutiny on mandatory arbitration in financial services may still put newfound pressure on the SEC to explore changing the practice.
Wells Fargo Unleashes 'Category Killer' Succession Program (Janet Levaux, ThinkAdvisor) - In order to improve its retention (and likely to try to further cut down on its breakaway broker trend), Wells Fargo announced a succession program (to be known as the "Summit Program") this week that will pay retiring advisors as much as 225% of their trailing-12-month (T-12) revenue over a 10-year period. Which means a retiring Wells Fargo advisor can effectively get paid nearly as much to retire with Wells Fargo as he/she might earn by breaking away to an RIA and trying to sell the firm there for a "typical" 2X revenue. However, the caveat is that the payment of 225% of T-12 isn't guaranteed; instead, it's still ultimately up to the retiring advisor and successor to determine a valuation amount, to which Wells Fargo will merely add a 25% "loyalty award" bonus. In addition, though, the firm will also make a payment of up to 100% of the retiring advisor's T-12 to the new successor advisor to help fund the acquisition and transition of the clients being taken over... albeit with the catch that acquiring advisors will then become bound to an 8-year non-solicitation agreement in the process (5 years to cover the 100%-of-T-12 upfront, plus another 3 years under the Summit Program). Which means in the end, Wells Fargo effectively pays "only" 125% of T-12 itself to retain assets, while facilitating an internal transaction to handle the rest of the payment, which will still likely be a compelling deal for the acquiring advisor... at least if they're willing to be more bound into a non-solicit in the process. Notably, though, the Summit Program will only be available in the firm's traditional wirehouse brokerage channel, and not its quasi-independent FiNet program, or its new standalone offering for RIAs.
Advisors: Let's Talk Employee Experience (Allison Carey, SEI Practically Speaking) - While the "client experience" has increasingly been the focus of advisory firms in recent years in order to attract and retain the best clients, Carey makes the point that the employee experience is equally relevant in being able to attract and retain the best employees for an advisory firm. In this context, the "employee experience" speaks to what an employee feels and observes during their own career journey with the organization - from when they're initially being recruited (before they even become an employee!), to the onboarding process as a new employee, to their experience on the job, right up through their last day - and can impact the way they represent the employer, both to friends and family, potential clients, and peers who might be recruited to the firm as well. In essence, building a good employee experience is about focusing on three core areas: 1) how do you want your employees to feel when they come into work?; 2) what would you want that employee to say about your company or about you as a manager?; and 3) how do you want your employees to feel the day they resign (because a good employee experience means even former employees may still talk positively about your company and brand throughout their lives). Notably, though, employee experience is about more than just work/life balance; instead, it's also about helping employees find purposeful work and growth opportunities, engagement with the management team, the quality of the physical environment, the technology and other resources they have available, and trust in the company and its brand. But the benefits are substantial; a 2017 study conducted by Temkin Group found that highly engaged employees are almost 5X more likely to recommend the company's products and services, 4X more likely to do something good (yet unexpected) for the company, 3X more likely to stay late if something needs to be done, and are 5X more likely to recommend further improvements at the company to help it succeed.
How To Make Sure A New Hire Feels Included From Day One (Sabina Nawaz, Harvard Business Review) - One of the fundamental challenges when hiring new team members is that they are brought into an environment where existing employees already have a more established and deeper relationship with the manager or leader of the firm... which in turn can lead those employees to feel less engaged and less willing to speak up from the start. And the problem is often only made worse by the fact that, when new hires come in, it often frees up the time of the firm leadership to go out and grow and develop more business... further exacerbating the disengagement void with the newly hired employees. So what's the solution to ensure that new employees are better engaged and feel welcome? Nawaz provides several tips, including: remember that even "star" hires still need individual attention and support when getting started (so commit to talking to each at least once a week); remember that the introduction of a new team member essentially means there's a new team (as team dynamics shift), so recognize that a new set of team norms may need to be established; be proactive in inviting a breadth of conversation and engagement during team meetings (where there's otherwise a strong tendency for established team members to dominate and newer team members to be quieter and then become disengaged); managers and leaders should focus on trying to support and amplify the feedback and suggestions of newcomers, to help set the tone with the rest of the (existing) team that new thoughts and contributions are welcome.
In-House 'Universities' Gain Traction As The Latest RIA Perk (Jeff Benjamin, Investment News) - As advisory firms struggle more and more in the competition for talent, larger RIAs are forming in-house "universities," both as a means to develop their employees, and simply to make the firm a more compelling place to work in the first place. For instance, Bridgeworth in Alabama launched an internal university program earlier this year that has a monthly reading assignment and 90-minute discussion, which started with "The Seven Habits of Highly Effective People" by Stephen Covey in January, followed by a February class on marketing and business development (where all participants must schedule at least two coffee or lunch meetings with prospects). Another large advisory firm, Moneta Group in St Louis (with $20B of AUM and 300 employees), just launched its own Moneta University in March and includes 150 courses in eight learning categories (ranging from communication retirement and tax planning to communication and teamwork and also conflict resolution), which are available both during the workday at the firm's offices and also via virtual course and micro-learning sessions. By contrast, the Carson Group developed a Carson University program that brings employees in to annual week-long programs at its corporate headquarters (with a particular focus on next-generation advisors) and includes role-play scenarios, technology training, and sharing best practices.
Toxic Workers Are More Productive, But The Price Is High (Dave Bookbinder, TLNT) - A recent study from the Harvard Business School explored the dynamics of so-called "toxic employees," which are defined as workers who engage in behavior that is harmful to an organization (including either its property or people), and have been found to adversely impact everything from employee turnover (as other employees leave) to co-worker productivity and client/customer satisfaction. What's notable, though, is that the researchers specifically tried to quantify the effect, and compare it to the benefits of finding a "rock star" (employees in the top 1% of productivity), and found that the adverse costs from toxic employees are nearly double the positive benefits of hiring a rock star. In other words, the research suggests "bad" employees have a stronger negative effect on a firm than "good" employees provide in positive benefits, which in turn suggests that it may actually be more beneficial to focus on purging the most toxic employees than "just" hiring more good employees to lift or offset them. In addition, the adverse impact of toxic employees also suggests that even if the toxic employees are more productive - and there's some evidence to suggest that ironically is the case on average - it's still better for the business in the long run to remove toxic employees, when considering the aggregate costs on the entire business (in terms of team-member or customer morale). Of course, the challenge for many firms is that once a toxic employee is well entrenched - and a high producer - it can be especially challenging to remove them. Nonetheless, the research suggests that while it might appear to be a short-term hit to the business, ironically the toxicity of toxic employees means that their removal can more-than-make-up for their lost productivity with the increased productivity of other employees once the toxic person is no longer around!
The Hidden Costs Of Stressed-Out Workers (Jeffrey Pfeffer, Wall Street Journal) - Health insurance has become a major input cost for most businesses, to the point that Starbucks spends more on employee health benefits than coffee beans, and GM spends more on them than on steel! Yet the reality is that providing for employee well-being goes beyond "just" providing employer health insurance, and in fact the Centers for Disease Control reported in 2016 that on-site work stress is the leading workplace health problem (ahead of physical inactivity and obesity), affecting both blue- and white-collar jobs and across a wide range of incomes. Which in turn can lead to both higher turnover from employees, absenteeism, and "presenteeism" (where employees are present at work but not at their physical or psychological best, which in turn reduces their productivity). So what can firms do to better limit workplace stress and the indirect but potentially-very-costly consequences it creates? Key strategies include: have regular and limited work hours (the key point being regular, as a high volume of last-minute changes to work hours can substantially increase worker stress, though a growing volume of research suggests that longer work days aren't necessarily very productivity-enhancing either, despite the additional time at work); greater autonomy, as the more control that works have over their jobs, and the less subject to micromanagement they are, the more motivated and engaged with their work they tend to be; and more economic security, which is obviously difficult to implement (i.e., most firms can't exactly guarantee employee jobs), but even small efforts to signal the firm's commitment to employee stability (e.g., the CEO who takes a pay cut rather than laying off any workers) can repay itself in reduced employee stress and higher worker productivity.
Why Bonuses Don't Work (Philip Palaveev, Financial Advisor) - The beginning of the year is when most advisory firms pay out their prior-end-of-year bonuses, which can be an expensive proposition (averaging as much as 7% of the typical advisory firm's revenues). Yet the challenge is that it's not entirely clear such incentive compensation actually has much effect on employees' long-term behaviors, as the annual bonus is unlikely to get someone to consistently do something they are otherwise reluctant to do, and can even cause employees to become resentful towards an otherwise-undesired activity they feel "compelled" to do just to earn the bonus. Notably, though, that doesn't mean bonuses are entirely bad, as Palaveev notes they can be very good at rewarding positive behavior that is already occurring (and help to reinforce it). Still, though, because bonuses are more likely to amplify existing behaviors than change them, they can actually exacerbate perceived slights or inequality in the firm, distorting compensation (but overly focusing bonuses in certain areas) beyond the relative differences in merit alone. So what's the alternative? Palaveev suggests looking at compensation as just one "lever" alongside two other key levers of culture and management. Because the reality is that if a certain behavior or activity is already celebrated in the firm's culture, it's more likely to be sustained and repeated, regardless of compensation, simply because we all like to fit into the culture and environment (and social pressures) surrounding us. Thus from a practical perspective, firms that struggle with business development (e.g., where 12-out-of-15 advisors don't bring in new clients) won't likely be motivated by new bonuses (which instead will just give outsized rewards to those who already develop business), because the culture/perception is already that it's really OK to not develop business (thus why the majority of advisors don't!); the better approach is to form smaller teams of advisors that mix together those who succeed in business development with those who don't, putting them in a "mini-culture" group that is more focused on business development, changing from the firm's broader group norm. And recognize that simply accountability goes a long way, too; just as at the gym, people do more push-ups when someone else (anyone else) is counting, having firm managers that support measurement and accountability of key outcomes will tend to better encourage behavior change than merely trying to compensate/bonus for it alone.
The Game Has Changed (Mitch Anthony, Financial Advisor) - In his heyday, Larry Bird was recognized as the ultimate three-point shooter, personally making 82 three-pointers in his 1986 championship year, when the league average for an entire team was only 77. Yet in the 2016 season, all-star guard Stephen Curry made a whopping 402 three-pointers, and his team made over a thousand, while the league average was almost 700 three-point shots made. The key distinction is simply to recognize that over time, the game itself changes as the pace accelerates, which in turn necessitates a changing skillset just to survive and thrive in the new environment. And Anthony suggests the same is true in the changing environment of financial advice, which is similarly at a major inflection point, not just in the US but around the world. For instance, recent reforms in Australia put forth by FASEA (Financial Adviser Standards And Ethics Authority) will now require a bachelor's degree just to practice as a financial advisor, while the UK has similarly been lifting financial advisor Best Interest standards, along with South Africa that is inserting a separation between agents selling on behalf of product manufacturers and actual advisers. The significance of this shift from the advisor perspective is that, as Anthony notes, "the game has changed," and that the fundamental skills required for success in the future will be different than in the past. Anthony suggests that what will be necessary in the future, drawing on Daniel Pink's "A Whole New Mind," are "value propositions... [that] would be seated in the right side of the brain," such as: 1) better comprehension of context (e.g., by not just providing the advice, but better understanding the client's context and what it will take for them to actually follow-through and implement it); 2) learning and understanding the client's narrative (recognizing that different clients have different backgrounds with money, which means two clients may react completely differently to the same money situation based on their differing narratives); and 3) emotional connectivity (where it won't be enough to just be on "friendly terms," and instead requires really taking the time and developing the skill set to go deeper and more personal with them).
Wirehouse RIAs: The Beginning Of The End, Or A New Beginning? (Tony Sirianni, AdvisorHub) - The recent announcements of UBS and then Wells Fargo launching their own RIA channels has kicked off a broader industry debate about whether a "wirehouse RIA" model can really work, and whether doing so will really slow the pace of breakaway brokers becoming independent RIAs or not. Sirianni suggests that making the change is feasible for wirehouses, but that it will be difficult because they are so late to the game, having spent far too long convincing themselves a little breakaway activity was "acceptable dilution" and that just shifting broker compensation would be enough to retain key talent. In the meantime, the breakaway broker trend multiplied, which in turn has led to a very deep pool of existing independent RIAs and RIA support platforms, in many cases built or developed by former wirehouse managers, who have already innovated outside the wirehouse channel the independent RIA support structures that now wirehouses must figure out how to innovate internally. Such that now wirehouses are on the defensive, dropping from the Broker Protocol or adding new restrictive covenants to employment agreements, which only further undermines their previously-entrepreneurial culture. Still, though, even as the independent channel appears to be winning both the culture war (creating the most supportive environment for entrepreneurial advisors) and the legitimacy war (as wirehouses launching their own RIA platforms fully validates the independent channel), Sirianni suggests that the sheer size and scope of wirehouses means they still have the resources to survive... but only by truly adopting the key tenets that have attracted brokers to the independent model, including a focus on advisor-centrism and encouraging autonomy, wide-open investment platforms, a more flexible compliance culture not tied to the lowest common denominator, and giving their advisors a bigger say in their own marketing, budgeting, and succession planning. Which, to say the least, would be a major cultural and structural change for wirehouses themselves. Yet the fact remains that the appeal of the RIA channel isn't just about the name alone, and as Sirianni puts it, "a wire[house] that has an RIA in name only will fall flat. A wire[house] RIA energized by the best elements of the Independent movement and fueled by enormous resources will be hard to beat."
Advisor Substance (Blair DuQuesnay, The Belle Curve) - While the advisory industry has been fixated in recent years on improving the financial services industry by implementing a fiduciary standard and reforming advisor compensation (i.e., the role of commissions), DuQuesnay suggests that the real starting point is to lift the standards to become a financial advisor in the first place. After all, regardless of advisor compensation, the reality is that the bar to hold out as a financial advisor is shockingly low (despite the fact that the stakes are high when advising a client on their cumulative life savings!), and a single Series 7 exam (which is technically a license to sell products, not a license for advice, nor an industry credential) is sufficient to stamp one a "financial advisor" in the current environment. In other words, advisors don't have to have a lot of "substance" to be financial advisors, a challenge that DuQuesnay suggests is rife across America today (from the Kardashians who made millions simply by being famous, to Elizabeth Holmes who believed she could revolutionize blood tests after taking freshman chemistry at Stanford, or Billy McFarland who thought he could host 4,000 people at the Fyre Festival), a "fake it till you make it" approach that works far too often (at least, until/unless you end out facing criminal charges!). Yet the research suggests that it takes 10,000 hours to master a skill... which, working 40 hours/week with no holidays or vacation would still take almost 5 years, and arguably is low relative to the breadth of what it really takes to deliver comprehensive financial advice (in a way that clients will actually implement). Thus, DuQuesnay suggests that perhaps the best path forward towards being recognized as a profession is to go beyond just requiring a best interests standard for advisors, but actually lifting up the standards for education and credentials so the average advisor the consumer meets really does have some substance behind them?
I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!
In the meantime, if you're interested in more news and information regarding advisor technology, I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors as well.