Tag: Behavioral Finance, Financial Planning

Predicting Wealth Building Behavior With DataPoints Assessment Tools

Predicting Wealth Building Behavior With DataPoints Assessment Tools

Executive Summary

The Millionaire Next Door became a NY Times Bestseller in 1996 by revealing how little we understand about millionaires, and the behaviors that help people to become millionaires. While the traditional view was that wealth comes from an inheritance, or becoming an executive in a major corporation, and that you can identify millionaires by their high-end suits, luxury cars, and large houses in affluent neighborhoods, in reality a huge swath of millionaires become such simply by living frugal lives of cheap suits, practical cars, and modest homes, which allows them to convert a substantial portion of their income into wealth over time.

Of course, having a healthy income, and willingness to take calculated risks for success, do clearly help in the wealth-building process. But the key point was that not only is affluence not necessarily correlated to outward signs of wealth, but in reality some of the greatest wealth-building behaviors come from not flaunting that wealth and being “socially indifferent” to trying to keep up with the Joneses.

Now, a company called DataPoints – founded by Sarah Stanley Fallaw, the daughter of The Millionaire Next Door author Thomas Stanley (and herself trained as an industrial psychologist) – is turning The Millionaire-Next-Door insights about wealth building behaviors into a series of assessment tools that financial advisors can use.

For advisors who are trying to expand their practices to work with “younger” wealth accumulator clients, the DataPoints assessment tools provide a unique research-based approach to actually understand which prospects are likely to be successful wealth accumulators, and which prospects should be avoided because the assessment reveals in advance they will be especially difficult to work with. And for new and existing clients, a rigorous wealth building assessment tool as a part of the discovery process can help the advisor understand where to focus their advice and efforts to help the client actually change their financial behaviors for the better.

In other words, while as financial advisors we increasingly find ourselves talking about the “behavioral” value of financial planning advice, DataPoints is actually creating tools that help to measure what a client’s wealth-building behaviors actually are. Which on the one hand makes it easier to be effective with clients – as we can get a better understanding upfront of the client’s financial tendencies – but also makes it possible to actually measure the success of the advisor-client relationship by the extent to which the advisor actually helps their client (measurably) change their financial behaviors and attitudes!

Building Wealth And The Millionaire Next Door Book

The Millionaire Next Door by Thomas Stanley and William DankoIn 1996, Thomas Stanley and William Danko released the book “The Millionaire Next Door”, which quickly became a NY Times Bestseller.

Stanley and Danko were market researchers who had initially sought – as marketers do – to better understand the tendencies, habits, attitudes, and other psychographics of the affluent (a segment of the marketplace that companies have long wanted to better understand). In fact, Stanley had already published several books on working with the affluent, including “Marketing To The Affluent,” “Selling To The Affluent,” and “Networking with the Affluent”, based on nearly a decade of prior research he had conducted through his Affluent Marketing Institute.

Yet Stanley and Danko aimed to go even deeper into understanding the millionaire mindset. Accordingly, they launched a new comprehensive survey of nearly 1,000 affluent individuals in the early 1990s, and conducted interviews with another 500 affluent individuals via focus groups. And the end result of the study revealed that the typical idea of what a millionaire looks like – living in an affluent neighborhood, driving a luxury car, and exhibiting other similar indicators of wealth – is not actually a fair characterization of a huge segment of the affluent.

Instead, it turned out that nearly one-half of millionaires don’t live in upscale neighborhoods. Nor did they commonly inherit, as (at the time) the researchers found that 80% of America’s millionaires are first-generation “rich”. A wealthy individual was simply someone who was able to earn a solid income, and exhibited certain “wealth-building” behavioral traits along the way, that made it especially likely they would be able to convert that current income into long-term wealth.

Specifically, the researchers found that “Prodigious Accumulators of Wealth” (PAWs) tended to have 7 core traits:

– They lived well below their means

– They allocated their time, energy, and money efficiently, in ways conducive to building wealth

– They believed that financial independence is more important than displaying high social status

– Their parents did not provide economic outpatient care

– Their adult children were economically self-sufficient

– They were proficient in targeting market opportunities (i.e., finding/creating wealth-building business opportunities)

– They chose the “right” occupation (one with good income-earning potential)

Of particular note at the time was the recognition of the first three points – that wealth builders tended to be frugal (i.e., live well below their means, and save 20%+ of their income every year), tended not to pursue social status symbols (i.e., are more likely to wear inexpensive suits and jewelry and drive non-luxury American-made cars), and that to the extent they did spend they tended to allocate their dollars differently (e.g., buying cars for the long-run instead of leasing them, owning homes instead of renting them). In other words, being a millionaire wasn’t about inheriting wealth or just earning the big bucks; millionaires were also a sea of frugal tightwads living in modest homes in non-affluent neighborhoods (the very antithesis of the “traditional” view of a millionaire at the time!).

In addition, though, the research did find that millionaires were more likely to proactively create opportunities for themselves – at the time, self-employed people made up less than 20% of workers in America, but accounted for 2/3rds of millionaires (either by being entrepreneurs, or self-employed professionals like doctors or accountants). And affluent accumulators did tend to have pursued above-average-income job opportunities in the first place (though not necessarily of the high-visibility variety, as the millionaires profiled included not only doctors and lawyers, but also welding contractors, paving contractors, and even owners of mobile-home parks).

To some extent, it’s perhaps not “surprising” that those who manage to find above-average job opportunities ended out creating above-average wealth. But the key recognition of the Millionaire Next Door was that above-average income alone does not necessarily lead to above-average wealth, because not everyone translates their income to wealth in the same way (or at all)! Instead, it’s the other behaviors – about being able to live within their means (even or especially when their income could afford a much higher standard of living than what they were currently enjoying), allocate dollars to things that appreciate rather than depreciate, and their “social indifference” to keeping up with the Joneses, that resulted in accumulating wealth and reaching millionaire status.

Which, again, was somewhat “surprising”, because it meant millionaires didn’t look like what most people expected millionaires to look like. They often didn’t live in millionaire-looking homes, drive millionaire-looking cars, or buy millionaire-looking jewelry. Which was actually the point. Because those were the behaviors that led them to not spend as much, and be able to accumulate wealth in the first place!

DataPoints And The Further Study Of Building Wealth

After the success of The Millionaire Next Door, Thomas Stanley went on to conduct further research on the behaviors and psychographics of the affluent, further extending the quantitative and qualitative data on wealth building under the Affluent Market Institute (AMI), and publishing “The Millionaire Mind,” “Millionaire Women Next Door,” and “Stop Acting Rich” to help consumers understand how to better adopt the behaviors and mindset of those who successfully accumulated wealth.

And to better put the research to use in application, in 2013 Thomas Stanley’s daughter Sarah Stanley Fallaw (a researcher in industrial psychology with a Ph.D. in Applied Psychology herself, who had joined AMI in 2009 as its Director of Research) founded DataPoints to begin the process of adapting the research into a series of assessment tools that can be used to evaluate someone’s wealth-building potential.

In the years since, the DataPoints researchers have found that beyond someone’s circumstantial factors that lead to wealth building (i.e., having grown up more financially independent, and having a high-income job), there are a series of distinct and consistent factors that are predictive of wealth building. They are:

– Frugality (one’s willingness and ability to spend below their means);

– Responsibility (to what extent does the person believe they have control over their financial [and other] outcomes, versus whether they are externally determined);

– Confidence (does the person have the confidence to believe they’re capable of improving their situation);

– Planning and Monitoring (can you set goals and effectively monitor your progress towards achieving them)

– Focus (do you have the discipline to avoid distractions and stay on track to your goals); and

– Social Indifference (do you feel a need to spend to display social status, or are you socially indifferent to the spending habits of others)

Combined together, these Wealth Factors help to reveal who is more or less likely to actually convert their income into wealth, which is relevant not only to individuals who may want to improve their situation (and need to understand what behaviors to change), but also to financial services firms who may want to understand who is a “good” potential wealth-building client in the first place.

After all, with the growing shift from focusing on baby boomers (who have already accumulated wealth), to Gen X and Gen Y clients (who are still in the wealth-building phase), it’s especially important to understand whether someone already has the right wealth factors in place to be able to accumulate, or whether there are key behavioral areas that the advisor will need to work and focus on in order to help the client achieve financial success.

Datapoints Engage And Advise Assessment Tools

As currently constructed, DataPoints provides a series of 4 “Engage” and 3 “Advise” modules to better understand an individual’s financial attitudes and habits.

All of the DataPoints tools have been psychometrically tested to affirm their validity and realibility, and the questions that DataPoints asks uses a “biodata” approach, where instead of asking people about their personality (e.g., “are you frugal” or “do you like to spend money on social status”) they’re instead asked about their “personal biography” and to reflect on their past behaviors to understand their traits (e.g., “I live well below my means” [agree or disagree] or “Most of the clothes I buy for myself are:” [trendy / practical / etc]).

Engage Assessments For Prospects

The DataPoints “Engage” questionnaires are a series of relatively short screening-style assessments, containing 10-13 questions and taking no more than about 2-3 minutes to complete, that prospective clients can complete. The four Engage assessments evaluate a prospect’s “Spending Patterns”, “Career Fit”, “Wealth-Building” potential, and their tendency to engage in their own “Financial Planning” and self-monitoring behavior.

The brief questionnaires can be sent as a link directly to a prospect, or even embedded on an advisor’s website, as an opportunity to both add immediate value for a prospect (who might be curious to know how their spending behaviors or wealth building potential stack up), and for an advisor who wants further insight into the client’s potential issues and concerns. The advisor might offer one or several Engage assessments for prospects to try out, depending on which one(s) are a good fit for that advisor’s particular type of target clientele

Advise Assessments For Clients

As contrasted with the Engage assessments, the Advise modules are longer (45 – 54 questions) and meant to go deeper (more likely with new or existing clients).

The first is a “Building Wealth” assessment, which directly measures the six wealth-building factors identified in DataPoints’ research (building on Stanley’s original Millionaire Next Door) behavioral habits. The second is a “Financial Perspectives” assessment, which looks deeper at a client’s financial attitudes, for instance their tendencies towards altruism, budgeting, status, spending, and (financial) independence. And the third is an “Investor Profile”, intended to be DataPoints’ take on financial risk tolerance and the client’s propensity to take financial risks (given that Stanley’s original research clearly showed that Millionaire wealth accumulators are significantly more likely to be willing to take at least calculated risks)

To some extent, the idea that “people who are frugal and don’t try to Keep Up With The Joneses” may seem intuitively obvious (especially since The Millionaire Next Door book itself came out, and also from the experiences that most financial advisors have witnessed first-hand with their clients). Yet until now, financial advisors have lacked a systematic process to make this assessment with clients (and prospects).

But with standardized assessments, it becomes possible to really understand how clients’ wealth-building behaviors compare to one another… and to potentially explore issues that may otherwise be difficult to talk about.

Sample Advise Assessment: Building Wealth

For instance, in putting myself through the Building Wealth assessment profile, it turns out that I have a very high level of confidence and personal responsibility – for better or worse, I believe that I am in control of my own destiny, and am confident in my ability to find positive financial outcomes. In addition, I am rather frugal (having long lived on far less than I make), and I have never been one to try to dress in the latest fashion trends. (Thus the Kitces Blue Shirt phenomenon!)

On the other hand, the assessment tool also correctly identified that I struggle tremendously with Focus (a lifelong battle with ADHD), and that I am not actually very strong in planning and monitoring for my own future (thus why I rely heavily on third-party tools like Mint.com to make it easy for me by automating the necessary tracking!).

Michael's DataPoints Assessment


Notably, though, my “Wealth Potential” score is still strong, despite my moderate score in planning and low Focus score… in part because the DataPoints research has shown that one’s wealth-building capabilities are not merely the additive sum of each factor. Instead, the interrelationships are more complex.

For instance, the DataPoints research notes that for more affluent individuals, an inability to focus may not be as critical, as financial management tasks can be outsourced (via professionals like financial planners, or now increasingly via technology as well). And DataPoints has also found that ironically, clients who are high in Responsibility are more likely to build wealth but also can actually be more problematic in bear markets, as their desire to exert control over their situation (which helps them create wealth) also makes it very difficult for them to sit by and do nothing in the midst of market turmoil (and instead feel a strong need to “do something”, given their tendencies, even when they shouldn’t!).

Financial Planning Applications Of Financial Behavior Assessment Tools

Ultimately, financial behavior assessment tools like the ones that DataPoints has created appear to have two primary applications to aid in the financial planning process.

Screening Prospects With Wealth Building Potential

The first is to use DataPoints’ assessment tools as a form of screening process to identify clients who are likely to be wealth accumulators in the first place.

For those advisors who are trying to work with younger clientele who don’t meet the firm’s current minimums – or in particular, are trying to identify young accumulator prospects who may not be profitable clients now but are likely to be in the future – the Building Wealth assessment tool, or even the shorter Wealth Potential engagement tool, can help give the advisor a better understanding of the client’s long-term potential. Or viewed another way, the Building Wealth assessment tools can help reveal which clients are most likely to be effective at implementing the financial advisor’s advice and recommended strategies – as opposed to those more “challenging” clients, who seem to struggle to follow through on ever implementing the advice that’s given to them

In this context, the advisor might, as a part of their initial “Get To Know You” process, send a DataPoints Building Wealth assessment to the prospective client, with a statement to the effect of “This assessment is meant to help you understand a little more about your own financial habits and tendencies. Please complete it before our first meeting, so that we can have a better understanding of whether or how we can best help you.” Or alternatively, the advisor can actually embed the DataPoints Engage asssesments directly into his/her website, and simply make it available for prospects to take themselves (and then the advisor can decide to follow-up on those who show a strong wealth-building potential, to see if they’re interested in working together).

On the other hand, though, the relevance of the DataPoints assessment tool is not merely about identifying young accumulator clients who have a good potential to actually accumulate. It would also be relevant for older and already-affluent clients, as their scores in areas like “Frugality” and “Social Indifference” can provide a valuable indicator of whether their natural tendencies are to sustain their accumulated wealth, or to dissipate it away.

And the assessment may be especially helpful for those who have had “Sudden Money” events, whether an inheritance, divorce (for the spouse who receives the settlement!), business liquidity event, or other surprise windfall… where the client did not necessarily establish their wealth through the usual accumulation-style means, and as a result it’s not always clear whether – once they achieve their wealth – they are likely to sustain it or not. A DataPoints assessment can help provide that information up front, to better understand where the likely challenges will be with the client.

And notably, DataPoints’ own research has found that not all Wealth Factors types are equally likely to engage a financial advisor in the first place. For instance, their research has found that those who already have a high propensity to accumulate wealth are the least likely to hire an investment manager (as they likely feel the Confidence and Responsibility to manage it themselves). Those who have the least propensity to accumulate wealth are the most likely to seek out a financial planner (ostensibly in recognizing that they need help, though obviously not a good fit for advisors using an AUM model!), and those who have “medium” propensity (recognizing some capabilities, but recognizing the need for some hep as well) who are the least likely to eschew a financial planner and use a robo-advisor instead! On the other hand, all the groups are equally likely to leverage personal financial management technology to help them on their path (and drawing an important distinction between the desire for technology to track finances, and the need for a financial planner about what to do about their finances!)!

Use Of Financial Services Providers By Wealth Building Likelihood

Profiling Clients For Behavioral Finance Coaching Needs

With prospects, it’s necessary to keep the assessment brief, and thus why DataPoints makes its short Engage assessments available. On the other hand, the DataPoints “Advise” tools – which are the longer and more in-depth assessments – could actually be used as a part of the advisor’s data-gathering process once the individual has already agreed to become a client, to truly understand what the client’s natural financial behaviors are, and how best to work with the client.

For instance, those who are low in Focus may need regular guidance and nudges to stay focused on their long-term goals. Those who struggle with “Planning & Monitoring” may be especially interested in the advisor’s regular updates (while those who already score high in that area probably have their own systems for tracking, and won’t care about the advisor’s quarterly reports at all!). Clients with a low social indifference will need constant reminders to focus on their own goals and not what others are doing. Those with low confidence may struggle to implement the advisor’s recommendations, because they aren’t confident in their ability to succeed, while those with high confidence and high responsibility may have trouble staying the course in a bear market and want to intervene (because they feel the situation is in their control, even if it’s not).

The process may be especially helpful for working with couples as well, where the reality is that both spouses do not necessarily align on all of these wealth building behaviors and financial attitudes. In fact, major gaps in areas like social indifference and frugality between a husband and wife may help to explain a lot of financially-related marital strife. While gaps in areas like confidence and responsibility will tend to be a guide about which spouse is likely to be the financial decision-maker in the household, and which tends to be more hands-off in the process.

A New Way To Measure Advisor Behavioral Impact “Success”?

A natural extension of how the DataPoints research might be applied is the recognition that not only do the assessments help provide an indicator of who has the behavioral tendencies and attitudes to accumulate wealth, but they can also be used to track the positive impact of the financial advisor over time, and become an alternative way to measure an advisor’s “success” and quality!

Accordingly, DataPoints has introduced a new “Performance Plan” module that monitors how the client’s financial attitudes and wealth factors change over time in working with the advisor, providing both the advisor and client guidance on particular areas to focus on for improvement, and then tracking that progress (by sending the client periodic assessment updates).

DataPoints Image Of Performance Plan

In this context, not only can the advisor avoid being judged based on whether a portfolio happens to hit benchmark returns or not, but instead moves their value proposition away from market returns and goal progress altogether (recognizing that often setbacks to goals are beyond the advisor’s control anyway, from a sudden health event, to a natural disaster, to a job loss or market decline). The focus of the advisor-client relationship instead becomes, as many advisors already espouse, a focus on “behavioral coaching”, with results that can be tracked and measured (via DataPoints), and a recognition that if the right behaviors and attitudes are in place that are conducive to wealth-building, the wealth itself is likely to come eventually (even if the path remains a bit bumpy in the short run).

Ironically, though, some advisors may be wary of going so far as to measure client’s behavioral attitudes and change over time, recognizing that in the end, we are financial planners, and not trained psychologists. And once you begin tracking a client’s financial behaviors and attitudes, you’re truly accountable – as the advisor – to helping to change them!

Nonetheless, with the rise of behavioral finance, the commoditization of financial services products, and an increasing focus on the intersection of technical financial advice and the empathy, coaching, and behavioral-change skills necessary to help clients actually implement the advice, arguably the DataPoints Performance Plan assessment provides a potential framework for whole new ways that advisors can measure their “success” and “effectiveness” in the future.

At a minimum, though, in a world where a person’s income and outward signs of affluent aren’t necessarily very good indicators of their wealth, nor their propensity to accumulate or sustain the wealth they have, DataPoints provides a new way to deepen the discovery process… whether with a new client to really understand their financial attitudes and behaviors… or to be used as a way to engage prospects and identify those whom the financial advisor is most likely able to help and work with constructively in the first place!

In the meantime, for advisors who want to check it out themselves, the DataPoints Engage and Advise assessment are available now. The Advise module (which includes the comprehensive Building Wealth assessment) is available for $59/month for up to 100 clients, the Engage lead-generation assessments costs $109/month, or a “Complete” package is available for $139/month which includes both. Further information is available on the DataPoints website, and pricing details are found here.

So what do you think? Would a solution like DataPoints be helpful to better understand which clients may be more or less effective at building wealth? Would you use DataPoints as a screening tool to understand which clients will be easiest to work with, or as an ongoing advisory tool to understand which behaviors your clients need help with? Please share your thoughts in the comments below!

Why Aren’t Checklists A Financial Planning Standard?

Why Aren’t Checklists A Financial Planning Standard?

Executive Summary

As financial planning for clients grows more and more complex, it becomes increasingly difficult for planners to recognize every planning issue, opportunity, and concern from memory alone. As a result, there is an rising risk that planners commit malpractice and make a mistake – albeit by accident – in the struggle of trying to apply everything they have learned to an incredibly wide range of client situations.

However, the reality is that this challenge is not unique to financial planning. Many professions face a similar struggle, where the sheer amount of knowledge required, and the incredible number of client/customer/patient situations make it almost impossible to remember everything that’s necessary at the exact time it’s needed, mean a rising risk of mistakes, negligence, and ineptitude.

So what’s the solution to address this challenge? As it turns out, there’s a remarkably simple one: checklists. While it may seem absurd that such a basic device could enhance client outcomes – in fact, as professionals we often bristle at the thought that a checklist could tell us something we don’t already know – it turns out that checklists may be an excellent means to deal with the simple fact that we are all fallible humans.

Unfortunately, though, few checklists currently exist in the world of financial planning, especially outside of the operational aspects of an advisory firm. Nonetheless, it is perhaps time to give checklists the recognition they deserve, as a potentially critical step to ensure that we apply the proper due diligence to each and every complex financial planning situation, and that nothing accidentally slips through the cracks.

The Checklist Manifesto by Atul GawandeThe inspiration for today’s blog post is the book “Checklist Manifesto” by Atul Gawande, a doctor who was the primary driver behind the World Health Organization’s “Safe Surgery Checklist” and who makes a compelling case that checklists should probably be adopted more broadly in all industries and professional services – including financial planning – as a way to deal with the incredible complexity that we face as practitioners.

Ignorance Vs Ineptitude

It’s important to recognize that in many situations, professionals fail simply because the task at hand was beyond saving; we may have tremendous intelligence and technology available to us, but we are not omniscient or all-powerful, and some fallibility is inevitable. However, Gawande notes research by Gorovitz and MacIntyre who find in the medical context that in situations where success or failure is within our control, there are two primary drivers that lead to failure: ignorance, and ineptitude.

Ignorance has been the driving force for failure for most of medical history. Up until just the past few decades, we simply didn’t know what the true causes were for many diseases and maladies, much less how to treat them or fix the underlying causes. For instance, Gawande notes that as recent as the 1950s, we still had no idea what actually caused heart attacks or how to treat them, and even if we’d been aware of contributing factors like high blood pressure, we wouldn’t have known how to treat that, either. If someone had a heart attack and died at the time, it was our collective ignorance of the underlying problems that led to the “failure” to save the patient.

By contrast, in today’s environment, we have developed numerous drugs to treat high blood pressure, as well as heart attacks themselves. We “know” how to fix an astonishing range of maladies. If an ineffective (or even harmful) treatment is applied now, we don’t simply let the professional off the hook on the basis of “well, we didn’t really know what to do, anyway.” In other words, our collective ignorance of how to treat a problem is often no longer an acceptable answer when there is an unfortunate outcome; instead, a failure of the professional is an “error” and a sign of ineptitude.

Of course, the caveat is that many of the professional situations today are of a highly complex nature. While we might understand far more about the body and how to treat it than in the past, it is still remarkably complex, and many “failures” of a medical practitioner still walk a fine line between ignorance, ineptitude, and a situation that was never really able to be saved in the first place. As a result, Gawande notes that we’re more likely to address such situations by encouraging more training and experience for the practitioner, rather than to punish failure, as long as outright negligence was not involved. Unfortunately, though, it’s not clear if more experience and training alone are necessarily sufficient; as our knowledge increases, so too does the complexity of applying it correctly, to the point where we may be reaching our human capacity to apply such a depth of knowledge to such a breadth of situations in a consistent manner. We are still only human ourselves, after all.

Managing Through Complexity With Checklists

So what’s the best way to manage through such an incredible depth of complexity? Gawande notes that the World Health Organization’s classification of diseases now categorizes more than 13,000 ailments, and one study of 41,000 trauma patients in Pennsylvania found that doctors had to contend with 1,224 different injury-related diagnoses in 32,261 unique combinations. To say the least, the difficulty of providing 32,261 different diagnoses in 32,261 different situations is a challenge of enormous complexity for the human brain. So what’s the solution? Checklists, to at least ensure the big things don’t slip through the cracks.

Initially, Gawande notes that the idea of checklists was soundly rejected in the medical world. Given the complexity of the problems involved, how could a single checklist or a series of them possibly have much of an impact? Yet it turns out that even relatively routine checklists can have a remarkably material effect, for the simple reason that as human beings, we don’t always remember to do every single step in a process the exact same way every time, especially when most of the time it doesn’t really matter. For instance, one early study applying a simple checklist to implant a central line (a catheter placed into a large vein to deliver important medication) to patients: 1) wash hands; 2) clean patient’s skin; 3) put sterile drapes over patient; 4) wear mask, hat, gown, and gloves; and 5) put sterile dressing over insertion site after completion – was found to drop an 11% infection rate down to nearly 0%. It turned out, the doctors were mostly consistent in executing all of the steps, but they occasionally skipped a step for any number of accidental or well-intentioned reasons; nonetheless, being accountable to a simple checklist eliminated virtually all the complications, for what was actually a very simple series of steps. That doesn’t mean patients didn’t still have complex health problems, difficult diagnoses, and adverse outcomes; nonetheless, over a two year span, the initial study estimated that in one hospital alone, the checklist had prevented 43 infections, 8 deaths, and saved $2 million dollars!

And notably, the application of checklists is already widespread in other professional contexts. They are a staple of the airline industry, ensuring that even well-trained pilots never miss a single step in the proper execution of flying the plane; notably, such checklists include important guidance about how to quickly handle a wide range of emergency situations where, even if the pilots are trained, it may be difficult to recall, unassisted, the exact proper steps to execute in the heat of a high-stress moment with adrenaline rushing. Similarly, the construction industry also relies heavily on checklists to ensure that buildings are made properly, and that crucial steps aren’t missed that could result in an utter catastrophe. In addition, Gawande points out that an important ancillary benefit of using checklists in such situations is that, when the checklist requires duties of multiple individuals – and everyone is held accountable to ensure all steps of the checklist are completed – teams end out communicating better, which prevents even more unfavorable outcomes.

Creating Your Financial Planning Checklists

Granted, in the financial planning world, the client situations that present themselves are rarely as dire as landing a plane in an emergency or determining what drugs to administer to a patient who may die in minutes or hours if not properly treated. Nonetheless, the fundamental problem remains: financial planning for individuals with a nearly infinite range of situations entails tremendous complexity, to the point where it’s not clear if anyone could really remember every possible question to ask or step to take; at least, not without the assistance of a financial planning checklist.

One version of a quasi-checklist that financial planners already use is the data gathering form, which through its wide range of blanks to fill in amongst various categories, ensures a fairly thorough review of all the client’s potential financial concerns. If you don’t think checklists can be useful, imagine how effective your financial planning process would be if you had to remember, off the top of your head, to ask every question necessary to capture every single bit of information that’s requested on a thorough data-gathering form. Even those who begin using an agenda to guide client meetings often report they help – as a form of checklist – to ensure that all the key issues are covered in the meeting, and that nothing is overlooked in the midst of a potentially complex client conversation.

Similarly, many technical areas in financial planning require not only specialized knowledge, but an awareness of rare-but-potential circumstances that may arise that provide for unique planning opportunities. For instance, with respect to Social Security alone, how often do you ask an unmarried client over the age of 62 if he/she had a former marriage that lasted at least 10 years (potential divorced spouse benefits), or ask retirees over age 62 if there are they still have any children under the age of 18 (extra retirement benefits for children), or ask if the client had a prior (or current) job where he/she did not participate in the Social Security system (future retirement benefits potentially reduced under the Windfall Elimination Provision). While none of these situations are necessarily common, they do occur from time to time – frequent enough to matter, but not frequent enough to necessarily remember to ask every time. The same is true in a wide range of other planning situations, from whether the beneficiary of an inherited IRA might be eligible for an Income In Respect Of A Decent deduction, to whether a non-qualified annuity was originally funded via a 1035 exchange (which means the cost basis is not merely the premiums paid), to whether a term insurance policy is still convertible (or ever was).

In other words, having a financial planning checklist in each of the various areas of financial planning can serve as a type of “due diligence” process, to ensure that all the important planning issues and opportunities are covered. It doesn’t make the planner smarter or more skilled, but does help to ensure that the planner maximizes the knowledge and skill he/she already has. Arguably, at some point in the future, these might even be codified into a more extensive series of Practice Standards for financial planners – as in the case of doctors, this can ultimately help to distinguish between situations where an unfavorable outcome was due to an error or “ineptitude” mistake of the planner, or was simply a situation too complex to possibly be saved. In practice, effective due diligence checklists might also be integrated into a firm’s CRM software.

Atul Gawande Checklist Manifesto

Unfortunately, though, the greatest challenge is simply that we need to build our financial planning checklists – a challenging and time-intensive process. Yet perhaps this is an opportunity for the financial planning community to band together and build something collectively. Have you built any checklists in your firm that you would be willing to share? Would you volunteer time and effort to try to help create a series of financial planning checklists for all practitioners to use? Please respond in the comments if you’re interested, and perhaps we can begin this process together. In the meantime, though, it would probably be a good idea to start building some checklists for the most common challenges that arise in your own financial planning firm!

And if you’re still not convinced of the value of a financial planning checklist (or having a series of them!), I’d strongly encourage you to read “Checklist Manifesto” yourself; if you are convinced, you may also find the book provides helpful inspiration on the kinds of checklists that may be useful in your practice and with your clients.

Advisor Platform Comparison: Wirehouse vs RIA Aggregator vs Independent RIA

Advisor Platform Comparison: Wirehouse vs RIA Aggregator vs Independent RIA

Executive Summary

The wealth management industry has evolved significantly over the years, now offering a variety of different business models and platforms for advisors, from traditional wirehouses and independent broker-dealers, to independent RIAs, and increasingly the RIA aggregator and network platforms that support them. As a result, it’s become increasingly challenging for advisors to simply figure which model and path is the best to choose!

In this guest post, Aaron Hattenbach shares his experience working as an advisor in 3 different wealth management models: Wirehouse (at Bank of America Merrill Lynch); RIA Aggregator (with HighTower Advisors); and ultimately transitioning to his own fully independent RIA (his current firm, Rapport Financial).

And so if you’ve ever wanted a comparison between working at a wirehouse, an RIA aggregator, and an independent RIA, from someone who has actually had experience in all three, Aaron’s guest post here should provide some helpful perspective – whether you’re a veteran of the industry considering whether to make a change, or a new financial advisor trying to decide where to start your career.

Conducting in depth research in advance goes a long way in sparing you the potential headaches and risks that can come with moving your practice from one firm to another… given that every time you move your practice to another firm, you run the risk of losing your valuable and hard earned client relationships! And so I hope you find today’s guest post to be informative, as you consider what may be the best potential path for you!

Aaron Hattenbach PhotoThis post was written by guest blogger Aaron Hattenbach, AIF from Kitches.com. Aaron is the Founder and Managing Member of Rapport Financial, a registered investment advisory firm headquartered in San Francisco, CA, specializing in advising technology professionals at public and private companies with stock based compensation. Aaron is also a contributor for Business Insider’s Your Money Section where he writes about stock based compensation and personal finance. In his spare time, Aaron enjoys playing competitive golf, intramural sports and serving as a volunteer leader for Congregation Emanu-El’s Young Adult Community. You can view Aaron’s LinkedIn profile or follow him on Twitter @aaronhattenbach. If you’re interested in setting up a business coaching call with Aaron, go to: Clarity.fm/aaronhattenbach.)

Submitting A Resignation Letter To Leave The Merrill Lynch PMD Program And Form An Independent RIA

It was November 30, 2016. I had been dreading this exact moment, playing out how the conversation would go, what I would say to my manager, and how he would react to the news. So, when I finally entered his office and revealed my decision to resign from Merrill Lynch, I took a deep breath, paused, sat back and awaited the barrage of questioning that I had diligently prepared for in the months prior.

Our conversation lasted give or take no more than 20 minutes, during which we talked about the financial advisor program. He asked for constructive feedback—ways to improve the Practice Management Division (PMD) program and increase the rate of success amongst participants in his branch. At the time, there was substantial negative buzz at national about the PMD program and its low rate of success, and our branch was one of the worst performers in the country.

While Merrill has yet to publish official pass rates for the PMD Program, previous participants and industry professionals posting on a number of different wealth management blogs estimate the failure/dropout rate exceeds 95%. An interesting observation I came across online from a former PMD Program Participant suggests that a 95% failure rate may even be too optimistic and is “clouded by the fact that most PMDs who graduate from the program are already on teams and pre-destined to succeed. The actual fail rate is more like 99%.” My experience working in the San Francisco (SC) Branch supports this reasoning.

During my two years at Merrill Lynch I met a total of 2 PMD Graduates! One was a former Client Associate (for over a decade) working with several multi-million dollar producing financial advisors. The other, an experienced advisor, brought over a book of business from a competing wirehouse which helped him meet the aggressive monthly hurdles. Each had special circumstances that led to their graduation. In fact, I didn’t meet, nor hear of a single PMD Program graduate who started from scratch and was able to graduate the program.

While it’s known throughout the industry that in the past, Merrill had built a revered financial advisor training program producing some of the most successful advisors in wealth management, it was failing far too many quality candidates today, and I could see why. Lack of mentorship. Limited support and resources. Aggressive monthly sales goals not aligned with building long term fee-based wealth management clientele, instead favoring transactional immediate (commission) business.

It’s easy to see why both Merrill Lynch and other firms in the mature financial services industry are struggling to attract and retain millennial talent. Stuffy corporate office environments filled with clusters of cubicles where on any given afternoon the silence was so palpable you could actually hear a pin drop! If you happened to cold call to try and generate business it felt like the entire office was listening in and critiquing your phone sales skills. How is it that firms continue to operate this way and expect to compete with the Google’s and Facebook’s of the world offering hip, fun and collaborative workplace cultures and superior compensation packages?

Which got me thinking about the wealth management industry as a whole—an industry that is being turned upside down by pricing pressure, technology, and the slow but necessary evolution from product selling to finally advising clients as a fiduciary investment professional.

With the proliferation of available business models to financial advisors today, it’s no simple task to research and select with a high degree of confidence the appropriate firm and business model most fitting for the particulars of your practice. There are literally thousands of options to choose from these days: Independent Registered Investment Advisors (RIAs), Hybrid RIA/Broker Dealers, RIA aggregators, Broker-Dealers, Wirehouses, etc. Which has given rise to an entire profession of advisor consultants, professionals hired by an advisor seeking greener pastures. These advisor consultants, including wealth management practitioners and M&A specialists in the advisory industry, have their finger on the pulse. After gaining an understanding the inner workings of an advisors practice, they can then shop the advisor around to the best suitors, evaluate platforms, culture, payouts, and signing bonuses.

Sharing My Story: The Inspiration For This Article

Over the past few months, a handful of former colleagues and friends in the advisory business have reached with questions, curious about my transition from Merrill Lynch to launching and now running an independent RIA. The questions have covered everything from the percentage payout, to the steps I took to set up the entire infrastructure of my firm, Rapport Financial.

I probably take for granted the sheer difficulty and knowledge base required to leave an institution the size and scale of Merrill Lynch, which provides just about everything an advisor needs, to building and operating an RIA from the ground up. It’s a daunting process, even for someone like me, a youthful 30-year-old with 5 years of prior experience working for fully independent RIAs and an RIA Aggregator, and 2 years at Merrill Lynch. I can’t even imagine what’s it is like for the typical wirehouse advisor, leaving a firm like Merrill Lynch after an entire career there, and embarking on the build out of the infrastructure previously provided by their predecessor firm! These are certainly unchartered waters for most wirehouse advisors.

In this article, I will walk you through the 3 business models I know intimately from having worked in them:

Then I will profile the makeup/DNA of a successful advisor, and the mentality required to succeed in each model. Many advisor consultants and coaches write generic books about how to become a million-dollar producer, how to sell to the affluent, and more tips related to running a successful wealth management practice. While the suggestions and strategies suggested work at a higher level, it’s of greater importance that an advisor understands how to best leverage the firm and model they ultimately select to operate a practice within.

Let’s get started with the Wirehouse model.

Large Wirehouse Bank: Bank Of America Merrill Lynch (BAML)

What kind of advisor thrives in the wirehouse model? The generalist rainmaker/networker. This is someone that buys into and relentlessly champions the enterprise. He or she utilizes their internal partners to cross sell clients on other services the bank can offer its clients.

Based on my experience, the “generalist” advisor who wants to be the connector that brings the widest range of solutions to clients should strongly consider operating a practice in the wirehouse ecosystem.

Two Words: Production Credits (PCs)

 This is one of the few businesses in the modern era of specialization where operating as a generalist still serves you best. As an Advisor at ML your job is to uncover opportunities and refer them to your internal specialists at the bank where you can earn referral fees (that is, if the referral is successfully converted). Your value at the firm is determined by one metric: production credits (PCs). Production credits are a fancy term for the revenue you generate for the firm.

On day 1 you are taught to “sell the enterprise.” Most of the advisor training focuses on positioning you as a strategic referral partner to the bank. BAML has 8 different lines of businesses, which means that there are a number of ways for you to make money. Maybe a friend is looking for a home loan? Or a former colleague is looking to establish a 401k for their small business. At Merrill, you have the ability to sell pretty much any financial product available in the marketplace. And you make money if they buy that product or service from you or with/through your internal partners at the bank.

Forget specializing in fee-only wealth management and financial planning at Merrill Lynch, unless you are an established advisor with $1M in annual fee based production. But even if you are a $1M producer, it doesn’t necessarily make sense to be in the wirehouse model. Think about it. You’re taking a below-industry-average 42% payout on your revenue. (NOTE: % payout assumes $1M+ annual production, and it’s actually lower at 32% – 38% for sub-1mm producers, even lower still for PMD participants with 3 payout tiers based on monthly production numbers.) And why are these payouts so low? Because you’re effectively paying the salaries of all the internal specialists listed below that are employed by BAML to maximize the ROI of your business through cross selling your wealth management clients on a variety of products and services.

 The available teams of Merrill Lynch Internal Specialists include:

  • Managed Solutions Group
  • Wealth Management Banking
  • Enterprise Specialist
  • Alternative Investments
  • Insurance Specialist
  • Structured Products
  • Annuities
  • Corporate Benefits and Advisory Services
  • Custom Lending
  • Retirement Group 401k Consultant
  • Practice Management and Team Consultant
  • Estate Planning and Trust Specialist
  • Goals Based Specialist
  • Municipal Marketing
  • Wealth Management Banker (mortgage)
  • Merrill Edge (retail platform)

 BAML is a bit more discreet about its cross-selling strategy than a competitor like Wells Fargo, which averaged an impressive 6.1 products per household. However, BAML, like its competitors, sees cross-selling as a viable method to grow revenue. And if the existing compensation incentives in the form of referral fees for cross-selling aren’t enough motivation for advisors at ML to send business to the 8 different units, back in 2016 Merrill Lynch instituted a new policy requiring its brokers to make at least two client referrals to other parts of parent Bank of America Corp in 2017 to avoid a cut in pay. Merrill and other wirehouses understand its clients are stickier and less prone to being poached by the competition when they hold several products and services with the bank. With this mandatory referral policy, you face additional penalties for refusing to refer to other business lines within the bank. Ouch!

 But why, with what we know about the current state of the wirehouse – strict compliance departments, lower payouts, a rising tide of breakaway brokers due to low employee morale, advisor silos that lead to lack of collaboration and idea sharing, and less than ideal workplace cultures… would an advisor at a firm like Merrill Lynch more often than not choose to switch to another wirehouse like Morgan Stanley or UBS instead of spinning out to become more independent?

This is a question I often struggled with prior to working at Merrill Lynch. Time and again before Merrill, I had been told by my independent advisor colleagues and friends that the wirehouse model was ridden with conflicts of interest, and wasn’t a client-friendly business model. Even with this message becoming mainstream, and the financial crisis bringing to center stage the many issues with banks, wirehouse advisors still continue to favor moving their business to a familiar wirehouse competitor, rather than go to an independent channel. But as I discovered during my time at Merrill Lynch, there’s actually a reasonable explanation for this—which I’ll go over with you.

Wirehouse Ecosystem Explained

It’s crucial to understand the way a wirehouse advisor operates. There are currently over 14k advisors at Merrill Lynch. Most aren’t running fee-only wealth management practices. From an economics standpoint, you can’t really blame them. It wouldn’t make much sense to do so. You’d be leaving money on the table. For example, say your client needs a product or service that the bank can offer. More often than not when a client needs this product, they would rather purchase it through you than a complete stranger. There’s familiarity and presumably a level of trust between the advisor and client. And “someone” is going to get paid when that internal referral happens… so why not make it you?

 A large part of a wirehouse advisor’s value proposition comes from their ability to leverage the enterprise and its breadth of products to deliver value to their clients. Value can come in different forms. However, what I saw as the most common form of value-add by an advisor in the wirehouse model was being able to offer relationship-based pricing discounts to valued (larger) clients.

For example, Merrill Lynch offers a client with $1M in assets at the bank a fairly significant discount off the stated interest rate on a home loan, saving a homeowner potentially thousands of dollars over the lifetime of the loan. After implementing the discount, a client would be hard pressed to find a similar rate at a competing financial institution. Unless of course they have a relationship with a similar size at another banking institution. We can all agree that saving a client money is a great way to demonstrate your value! But this relationship-based discount pricing model isn’t unique to Merrill. Other institutions, even those with stellar reputations and a loyal customer base, like First Republic, also use relationship based pricing programs to encourage clients to do more business with the bank. 

Wirehouses Create Advisor Dependence On The Firm…

 Unfortunately for a wirehouse advisor, while cross-selling your clients can be a lucrative and effective strategy, it also makes your business less portable when you decide to change firms. This is even more the case for a wirehouse advisor departing and hanging his or her shingle with an independent (whether an independent RIA or an independent broker-dealer).

As discussed earlier, the objective of a bank’s cross selling strategy is to create stickier clients—first for the bank, second for the advisor. Stickier clients present a significant risk to a departing advisor trying to retain his or her client relationships and bring them to their new firm. A Merrill advisor whose clients have a combination of loan management accounts (LMAs), home loans, 529s, savings and checking accounts, and credit cards to go along with taxable and retirement investment accounts that the advisor manages have now become the “ideal client” for the bank, but not for you the departing advisor. And a huge paperwork problem for the departing advisor!

Paperwork is an issue often overlooked by financial advisors that leave one institution for another. Each client has different accounts with various features that you as the advisor will need to effectively and accurately establish at your new institution. Unless the departing advisor has previous experience as a client associate (which I fortunately do!) and familiarity with the paperwork and administrative side of the business, they’ll be in for a rude awakening. You the advisor are going to meet with your clients to encourage them to move their relationship to you and your new firm, and want to come prepared with the documentation that will facilitate this transfer. This is a critical moment in the relationship, where if you show up unprepared with either the wrong or incomplete documentation, you run the risk of losing the client’s confidence and trust. Based on this interaction, the client may choose to stay with your predecessor firm. It’s really unfortunate to me that so many advisors place so little value on the paperwork and administrative component of the business. Many advisors out there underpay and churn through the support staff that ends up playing a direct role in their success, especially when making a transition to a new firm!

What can a Merrill advisor do to create the least amount of disruption, friction and client inconvenience upon leaving for a competitor so that they can retain most of their existing clientele? The answer…drum roll please… is that you go to a direct competitor with a big brand name offering the same suite of products and services! In fact, if some of your clients happen to confuse Merrill Lynch with Morgan Stanley or the other way around—even better! As long as they remember your name!

Without explicitly saying so, by moving with you, the client has made it crystal clear who they work with and value. It’s you! Not the name of the firm on the monthly statement. Which is why the vast majority of wirehouse advisors jump from one wirehouse to another. They’ve spent years, more often than not decades of their careers, building a sustainable book of business. And if the advisor isn’t already running a primarily fee-only wealth management practice, the risk/reward proposition of going independent at least economically speaking isn’t worth it.

In other words, it’s not the “wirehouse mentality” or close-mindedness to the thought of going independent that keeps a wirehouse advisor from making the leap to the independent model. Trust me, if it was just a matter of economic sense, wirehouse advisors would more often than not jump at the opportunity to spin out and become independent. And a wirehouse advisor after the great recession of 2008-09 has to operate in an environment that is far from business friendly. Compliance, often half-jokingly referred to as the “sales prevention department”, makes it highly challenging to market and grow your business. Planning on holding a seminar to explain what it is you do for your clients? Anticipate a lot of red tape and pushback. Interested in writing and distributing content to your prospective clients to explain what you believe is going on in the markets? Sadly, you’re limited to sharing the same pre-approved cookie cutter content as the other 14,000 advisors at Merrill. I recently wrote my first piece as a Contributor to Business Insider’s Your Money vertical called ‘I’m an investment advisor who helps tech employees with stock option—here’s the 5-step plan I give my clients.’ It’s safe to say I probably wouldn’t have been able to publish this while at Merrill Lynch.

Oh, and be careful with who you decide to go after as prospective clients, especially over email and LinkedIn. If this prospective client already has an established relationship with Bank of America Merrill Lynch or is in talks with someone at the bank, and you reach out to them, you run the risk of termination. To give you a sense of how powerless it can feel to operate in the wirehouse ecosystem, you’re not even able to post your previous employment history on your LinkedIn Profile! This policy may have changed since I left—but still, come on! If you’re an experienced advisor that’s decided to join Merrill Lynch from another financial institution, your LinkedIn profile would show less than a year of experience in the industry—at Merrill Lynch of course. How would this at all engender confidence with prospective clients viewing your LinkedIn profile and considering working with you? 

Independence Gives You Control Of Your Creativity And Customization

 If you’re an entrepreneurial advisor looking to grow your business and passionate about providing customized solutions to individuals and families, you’ll find it difficult to deliver this in the wirehouse ecosystem. It’s a major reason why I decided to leave and start my own independent RIA, Rapport Financial. I wanted to have the ability to offer my clients several different fee structures based on the scope of work they desired, which currently includes:

  1. Full Service Wealth Management—Asset Based Percentage Flat Fee
  2. Hourly Financial Consulting—Hourly Rate
  3. Construction of a Comprehensive Financial Plan—Fee ranges based on complexity

 If you’re a practicing advisor, you’ve likely experienced, after conversations with a number of different prospective clients, that this is absolutely not a one size fits all business. While some clients need a full-time wealth manager, others may only require a regular check-up and take a more DIY approach to their finances. Other clients may only need a financial planner to build them a personalized and holistic financial plan. Yet Options 2 and 3 weren’t available to me as an advisor at Merrill Lynch. And I struggled with the reality that most of my High Earner, Not Rich Yet (H.E.N.R.Y) peers were unable to meet the strict minimums imposed by Merrill Lynch. Friends and contemporaries were being grossly underserved, and it felt short-sighted of the firm to automatically refer small accounts not meeting the Merrill Lynch advisory minimums to the retail brokerage arm, Merrill Edge, and have them serviced by overworked call center employees – which was a great way to unfortunately ruin what could have been a great client relationship for me down the road.

But after leaving Merrill in 2016, I fully understand why the wirehouses restrict many advisor activities. During my 2 years at Merrill Lynch, most of my advisor colleagues often erred on the side of caution, placing more of an emphasis on “being compliant” at the expense of focusing on sharpening their craft, advising clients, and growing their businesses. This palpable fear was enough to make you question every email you sent and phone call you made. Imagine, being an advisor in this model. Your objective should be to focus on delivering your clients actionable and quality financial advice. In the meantime, you’re distracted and worrying about making sure that every little action taken follows detailed firm protocol, otherwise you run the risk of landing in hot water with compliance, which seems to be less tolerant post 2008-09. Forget to send an email via the secured message center? Or maybe you sent your client a small birthday present–under $100 of course–but didn’t log it and get pre-approval with compliance. There are so many small mishaps that could result in termination. It’s enough to make you second guess almost everything you do! And how does this lead to optimal advisor productivity?

Which leads me to an overview of the next wealth management business model I’ll be covering:

Large RIA Aggregator: Hightower Advisors

 Who thrives in this model: An ex-wirehouse advisor embracing the fiduciary standard and running a primarily fee-only wealth management practice. This advisor often doesn’t possess experience operating a standalone business in the independent channel, and is not quite ready to form their own Independent RIA and be fully responsible for running it.

Perhaps you’re a wirehouse advisor that generates the majority of your revenue from fee-only wealth management but aren’t quite ready to go at it completely on your own. This is your first go at running an independent practice. Not to worry–there are “RIA Aggregators,” firms like Dynasty Financial Partners, Focus Financial Partners, Commonwealth Financial Network, LPL Financial and last but not least, the firm I’m most familiar with having worked there for over 2 years, HighTower Advisors, that will buy your practice or provide you a wirehouse-like platform and infrastructure you’d otherwise have to select from third party vendors or build from scratch, and offer an attractive ongoing payout.

Below is a list of the components of an advisory practice that a firm like HighTower provides right out of the gate:

  • Operations
  • Trading
  • Compliance
  • Transition consulting
  • Research and Diligence Team(s)
  • Facilities, HR and Benefits
  • Finance and Accounting
  • Legal
  • Marketing/PR/Social Media
  • Technology

 RIA Aggregators have increasingly become a popular destination for wirehouse advisors. You may be wondering why this phenomenon is occurring? A combination of the better economics of a large platform with scale, but offering more flexibility and freedom for an advisor to run his or her practice as they see best fit. Add to this a brand name not associated with the damage caused by the great recession of 2008-09, as for many advisors the wirehouse brands that were once an asset on their business card have now become a liability.

Advisors that join HighTower have two options: Join the partnership and become shareholder owners of the parent company (the Hightower Partnership Model), or join the network for a higher payout and access to the platform without an ownership interest in the company (the HighTower Network Model).

As a partner, you have direct access to the executive team, allowing you to interface with them and make suggestions that are valued and at times implemented across the firm. This is a firm where advisors come first. At the wirehouses, advisors look at each another as direct competitors—a zero-sum game of sorts. I personally had this weird feeling in my gut that the guy in the cube across from me at Merrill was secretly rooting for me to either get fired or hit by a car so he could swoop in and take my clients (maybe I’m being paranoid)! At HighTower, this inner competition is directly addressed by the partnership structure, which aligns advisor interests in order to win as a group, thereby increasing the enterprise value of the holding company for the greater good of the advisor base. During my time at the firm, I saw advisors collaborate on best practices, help each other with investment selection, and even refer business to another advisor better suited to handle the affairs of that particular client. In an industry dominated by money, this kind of culture is a rare find!

 HighTower has both an RIA, HighTower Advisors LLC, and a broker dealer, HighTower Securities, but is a major advocate of the fiduciary standard. What grew out of the depths of the financial crisis in 2008 as a firm dedicated to the fiduciary standard and advising clients as opposed to selling to its clients, has grown into a formidable wealth management firm with more than $46 billion in assets under management and offices in 28 states. I worked directly for a HighTower partner from 2012-2014 as his “right-hand man.” Together we grew the business substantially in a little over 2 years’ time, despite the name “HighTower” not holding much brand cache back then.

 In fact, I was hired to transition an advisor from his predecessor firm to HighTower, so I’m uniquely positioned to explain the advisor experience from day 1. Back in 2012, I joined the HighTower partner in opening a new office for the firm in Los Angeles. Together we ported over his clients and readied the paperwork necessary for the transfer. About 15% ultimately didn’t end up coming, which is not uncommon for advisors leaving a firm to join a competitor. It’s part of the cost of doing business. HighTower ended up absorbing the full economic requirements for transitioning and starting-up the practice. While no advisor transition experience is 100% seamless, there’s clearly a lot at stake, so Hightower equipped us with several capable members of the HT transition planning team who were on call and ready to troubleshoot any potential issues with our custodian, Charles Schwab. I’m sure in the years that have passed they’ve made improvements to this transition process, so I can’t comment on its current efficacy. But not having to focus on compliance, and some of the other items listed above that are challenges in the wirehouse environment, allowed for us to focus our efforts on educating clients about the firm, overcoming any potential objections to moving their accounts to HighTower, and providing a white glove level of client service.

After going through the process of starting my own independent RIA, Rapport Financial, in January of this year, I have a greater appreciation for what was being taken care of behind the scenes by the corporate staff at HighTower. I had to replicate many of the actions that were taken care of by the HighTower team, which I will be covering in extensive detail later, for those that decide to go the fully independent route. Stay tuned!

There are a number of clear advantages to joining a quasi-independent firm like HighTower. Since the firm’s inception in 2008, they’ve been able to curate a sophisticated platform of technology and access to some of the industry’s top resources for its advisors. Taking a page from the playbook of their wirehouse competitors, HighTower has also used its massive size and economies of scale to negotiate enterprise pricing contracts below what you would pay going direct with pretty much every outside vendor an advisor relies on to run his or her practice. Everything from best-in-class custodial/clearing firms, to TAMPs, alternative investment research and access platforms, independent research firms, data providers, all with better pricing than what a typical RIA can negotiate on its own. This is the true value proposition offered by HighTower to its advisor base.

But this ironically is also HighTower’s biggest weakness—its dependence on outside vendors to deliver technology and solutions for its advisors. Take for example several high profile and top producing HighTower teams that have recently departed and formed their own independent RIAs, resulting in billions of client assets exiting HighTower’s gates. HighTower’s lack of meaningful IP and defensibility is proving to be a direct threat to its long-term sustainability – as ironically, HighTower succeeds in attracting independent advisors because it doesn’t run like a wirehouse, it has trouble retaining them because it doesn’t run like a wirehouse!

In other words, as described in an RIABiz article, the process an advisor would need to take towards full independence becomes relatively simple after using HighTower as a “halfway house.” And because HighTower relies so much on outside vendors, the entrepreneurial advisor retains the power and flexibility to make a(nother) switch, leave HighTower and simply contract with those third-party vendors directly. In essence, the advisor is able to gain an understanding of the independent channel after operating in the HighTower model for a few years, then makes one final transition to full independence in forming his or her own RIA firm.

Which seems like the best way to transition into a discussion on the final business model I’ll be covering for you:

Fully Independent RIA: Rapport Financial

Who thrives in the independent RIA model: An advisor embracing the fiduciary standard and running a primarily fee-only wealth management practice. Ideally the advisor also possesses the following attributes:

  1. Operating experience in the independent advisory channel.
  2. Niche specialty that allows for differentiation from the competition. After all, you won’t have a big household name backing you anymore, and have to build your own brand!
  3. A client base large enough to sustain themselves. Or alternatively, the financial flexibility to patiently grow it from scratch.
  4. Entrepreneurial attitude and willing to put in the many hours necessary to succeed.
  5. The ability to effectively multi-task and prioritize.
  6. Or an advisor study group. Or at least some professional friends that can form your “unofficial advisory board.”

Which brings me to the final business model, the one I am most excited to go over with you. This is near and dear to me, as I’m currently living, breathing, eating and sleeping this model. In January of this year, I took a huge leap of faith in leaving Merrill Lynch to launch Rapport Financial, a registered investment advisory firm specializing in stock options advisory and wealth management for technology professionals in the Bay Area.

I’m proud that just 8 months in, I have been able to grow the business to profitability, recouping the original startup costs and am now on the path to generating positive net income after accounting for ongoing costs. In designing my wealth management offering, I’ve hand selected the best attributes of each of models I’ve worked in, curating an offering that I believe is consistent, repeatable, and where I can provide meaningful value beyond simply being labeled an investment manager.

  1. Operating experience in the independent advisory channel. So, before I dive into the weeds of my current practice, technology, infrastructure and so forth, you should know that I had a head start in the independent operating model having started my career in a multi-functional role for an RIA, Concentric Capital (now Telemus Capital). We were a lean operation consisting of two full time employees, and one part time receptionist/assistant. My role was dynamic and adapted daily to the needs of the business. This was where, through sheer determination, I was able to learn how to effectively carry out all of the operational components of an Independent RIA practice. In any given day, as a boutique RIA, you’ll find yourself making changes to the content on your website, contacting your compliance firm to have amendments made to your ADV, rebalancing and tax loss harvesting for client accounts, submitting documents to your custodian, conducting research, implementing changes to client portfolios, preparing for prospective client meetings, and the list goes on.
  2. Niche specialty that allows for differentiation from the competition. When I started my career in the industry, I worked with several advisors who didn’t necessarily specialize or choose a profession or other niche to target. With their practices being located in LA, they inevitably ended up advising a number of entertainment professionals. My training at Merrill Lynch made me realize the importance of specialization at least in terms of working with a specific profession or subset of the population as an advisor. “Financial advisor” is a vague term for a financial professional. There are so many different areas we can cover for a client: investment management, retirement planning, stock options, insurance, financial planning, etc. Especially in this competitive environment, it has become increasingly important to specialize and position your clients, centers of influence, and friends to refer business. If they don’t quite understand exactly who you work with and what you do, you make it very difficult for them to recommend your services to an ideal client. Which is why, when I moved to San Francisco, I pivoted from focusing entirely on advising doctors to working with professionals in the technology industry. Shortly thereafter I even narrowed my focus to advising tech professionals with various forms of stock based compensation (options).
  3. A client base. There are so many different variables to weigh here: personal expenses, income, dependents, savings, business overhead and such. It’s difficult to set a standard for how many clients, or how much revenue you’ll need to break even, or better yet, make a living. And even more difficult to give you advice without knowledge of your particular situation.

But at a minimum, you need a plan for the “income gap” that will likely emerge between what you earned previously, and what you will earn in your new independent RIA, if you’re not already bringing with you a substantial number of clients. Now, if you’ve diligently saved and set aside enough money for a year of living expenses, then you’ve made your life much easier. Giving yourself the time necessary to scale and grow your business will allow for you to focus entirely on providing a quality offering, without the added pressure of needing to constantly sign new clients to stay afloat.

  1. Entrepreneurial and willing to put in the many hours necessary to succeed. There are times where you’ll be working a 14+ hour day and feel like it’s never enough. When you’re getting started your life will be consumed by the business. But know that the hard work will eventually pay off. You’re building YOUR business. YOU own it. And the long-term compounding of building clients and assets is VERY rewarding in the long run! Currently, I’m (somehow) trying to fit in an hour or two each day to complete the CFP modules and be eligible to sit for the CFP exam as well.
  2. The ability to effectively multi-task and prioritize. See, you have to remember that in this model, you are both an advisor and business owner. A business developer, manager, and operator. Juggling all of these responsibilities requires good time management skills as a financial advisor, an intense level of focus, and last but not least the determination to persevere no matter what is thrown your way—especially during periods of market volatility when your clients are fearful and demand more of your attention. Which is why I would highly encourage you to consider transitioning your business during a bull market like the one we’ve been in for the past 8 years.
  3. Or a study group. Or at least a group of professional friends to form your “unofficial advisory board.”

The life of a sole practitioner advisor and entrepreneur can be quite lonely and especially tough without a support system. Which is why I am so lucky to have a group of friends/professionals that I can call my “unofficial advisory board.” When I’m tasked with making difficult decisions, it’s a luxury to know that I have a group in my corner looking out for my best interests. They bring a diverse set of skills to the table: Talent Acquisition, Customer Success, PR, Digital Marketing, Operations, Legal, Accounting and more. Having this group on my team has also proven pivotal in keeping my operating costs low and manageable. While I’ve developed a diverse set of skills from my 7 years in the wealth management business, there have been times when I really needed to run things by my board of confidants for assurance and peace of mind before I ultimately made an executive decision.

Forming an unofficial board of friends and professionals isn’t easy though. People are busier than ever! Especially the successful people you want on your board of advisors. So how do you convince extremely busy and successful professionals to make time for you and serve on your advisory board? The answer—be available to them through transitions, difficult decisions, and life’s inevitable ups and downs. Or simply be there to listen when they need to confide in someone. By not keeping score and giving of yourself to others, you end up building interpersonal equity that you can eventually tap into if you happen to need it.

And there’s a way you can tie this in directly with your business pursuits. For example, connecting a family looking to protect their assets with a knowledgeable Estate and Trust Attorney. Or introducing a Tech Professional friend with stock based compensation to a CPA well versed in the taxation of stock options. There are so many ways you can be helpful to friends and people in your network. And I’ve personally found that by being active in the community, volunteering, and helping others, I’m now the happiest I’ve ever been in life. Oh, and without any expectations, and by being selfless the byproduct has resulted in business opportunities, friendships, and strong relationships.

Not surprisingly, the fully independent RIA business model, while offering one of the highest payouts among the models described, is also the path least taken. An advisor choosing to be a sole practitioner ends up assuming all of the responsibilities of running a business including:

  • CEO
  • COO
  • CIO
  • CFO
  • CMO
  • CCO
  • Head of Sales

Remember, you’re building an entire business from scratch! You call all the shots, select the vendors, and build an offering designed to attract and retain clients. While there are service vendors you can outsource some of the responsibilities of the organization to, you’re directly in charge of selecting these parties and running all of the day to day operations of your business. This is an ambitious undertaking I absolutely wouldn’t have considered without the combination of having both a book of business and the direct operating experience.

Update On Where I Am Now

I’m 8 months into running my RIA, Rapport Financial, and things are off to a great start!

When I left Merrill Lynch and started my own independent firm, I complied with the Broker Protocol and was able to retain 100% of my client relationships—which is quite rare. I’ve since added 7 new clients, equating to 1 new client relationship per month. While I’m not quite meeting my aggressive client and asset gathering goals, I’m making progress each and every day towards building a brand and business that I’m both proud of and confident will pay significant dividends in the future.

I’m enjoying the benefits of being my own boss, and having the authority to take the business in the direction that I believe best serves my clients. At Merrill Lynch, I felt forced to provide a one-size-fits-all offering, and corresponding wrap fee for investment management. Now I’m able to offer prospective clients 3 different ways they can work with me depending on their personal financial needs:

  1. Hourly Financial Consulting
  2. Flat Rate Financial Planning
  3. Full Service Wealth Management

I’m also excited to announce that I signed a contributor agreement with Business Insider to write about Stock Options and Bay Area Start-Ups for their “Your Money” vertical.

Why The Fully Independent RIA Model Works For Me

I come from an entrepreneurial family. My vision for Rapport goes beyond simply a financial planning and wealth management offering. I see Rapport eventually evolving into a financial wellness brand. Schools from K-12 and even colleges fail us in not making financial literacy and teaching good financial habits a focal point of our curriculum. As a result, too many people are drowning in student loan debt, credit cards, and other forms of debt.

Back to my decision to start an RIA. This wasn’t driven by finances. Ironically, I made more money at Merrill Lynch than I’m making now. But I’m way happier than I was at Merrill. I felt that my entrepreneurial spirits weren’t encouraged at Merrill. As time passed, I found it became increasingly more difficult for me to get excited about going into work, in what I felt was an antiquated business model, where my older advisor colleagues were holding onto their legacy brokerage clientele. I desperately wanted to build a more customized offering that wouldn’t limit me to working with individuals that met the Merrill Lynch Wealth Management asset minimum of $250,000 to establish an account.

I can understand why advisors shy away from the fully independent model, given the sacrifices necessary to make this work operationally and financially. But having operated previously in the RIA Aggregator, Wirehouse, and now fully Independent model, I’ve finally found the model that gets me out of bed each morning excited to help people meet their financial goals.

So what do you think? Have you had experience working in different wealth management models? How do you think they compare? What paths do you think are best for different types of financial advisors? Please share your thoughts in the comments below!

CFP Board Quietly Raises Certification Fees By 17% But To What End?

CFP Board Quietly Raises Certification Fees By 17% But To What End?


While the CFP Board has done a lot to justify its certification fees over recent years – from increasing the number of CFP certificants over the past 10 years by nearly 50% (despite the fact that the number of financial advisors is down over the past 10 years), to raising the status of the marks with its ongoing successful public awareness campaign – an important but little-noticed announcement was buried half way through the CFP Board’s recent monthly email update: the CFP Board will be increasing its annual certification fee from $325 per year to $355. And while this increase may seem modest, because $145 of the total certification fee is earmarked for the public awareness campaign, the reality is that this is a 17% increase on top of the $180 portion that actually goes towards operations of the CFP Board. Which raises the question: why such a large increase, and why now?

In this week’s discussion, we discuss the recently announced 17% increase in CFP Board certification fees, as well as why accountability of the CFP Board to its certificants is important, and why it is concerning that the CFP Board has given no substantive explanation for why it is pushing through such a large increase – and particularly for an organization coming off of a $1.3M surplus in 2015 and with over $20M in reserves.

Of course, fee increases aren’t unusual in the long run for any organization, as it’s essential to keep pace with rising staffing costs due to inflation. And this is still only the first increase the CFP Board has put in place since 2011… which, even then, was just tacking on the $145 surcharge to cover the public awareness campaign. It has actually been nearly 10 years since the CFP Board raised its core certification fees, relying instead on the rising number of new CFP certificants paying those fees to fund growth instead. Additionally, both the public awareness campaign and CFP Board satisfaction ratings appear to suggest the CFP Board is making some good progress.

Nonetheless, accountability is crucial, and especially since the CFP Board has been prone in recent years to taking actions without soliciting much input or holding public comment periods. In fact, while the CFP Board did put forth a recent public comment period on proposed changes to their Code of Ethics and Standards of Conduct, the reality is that their bylaws require the CFP Board to do this, and it has been over 5 years now since the CFP Board put forth a public comment period on any otherchanges to the 3 E’s (Education, Exam, and Experience) – effectively eschewing the practice ever since the CFP Board got “voted down” in negative public comments regarding increasing the number of required CFP CE credits.

Which raises the question once again of why a 17% fee increase, and why now? Especially on top of the fact that the organization is already running a substantial operating surplus of $1.3 million dollars in 2015 and has more than $20 million in net reserves available. Was there a major downturn on the CFP Board’s 2016 Form 990 that we just can’t see yet? Is the CFP Board trying to raise more revenue internally for its Center for Financial Planning initiative, even though the organization originally said it would be funded separately (especially in light of the fact that the CFP Board tried to put through a $25 fee increase last year in the form of a “voluntary donation” that certificants were going to be defaulted into)?

Unfortunately, the reality is that we just don’t know, because the CFP Board gave no substantive explanation for why it is pushing through such a large increase beyond saying that it “supports the operations of CFP Board in fulfilling its mission and strategic priorities”. And so, while it’s not necessarily a negative for an organization to raise its fees over time, the question remains: why does the CFP Board now, all of the sudden, need another $2.3 million in its operating budget for 2018? And what does it take to get some transparency and basic explanations from the CFP Board on why it is pushing through a 17% fee increase?

The fee increase will be effective for everyone who renews their CFP certification starting November 1st or later, and it also includes everyone who goes through their initial CFP certification process after November. So everybody who’s planning on taking the November exam coming up and passes the CFP exam is going to find out that once they do that and they get their CFP marks, certification fee’s will be a little more expensive than previously expected.

Now, I can’t fault any organization for periodically raising its fees. You know, it sucks from the consumer end to have to pay, but it’s an inevitable reality, especially for any sizeable organization. If you have a lot of employees who tend to want raises every year, at some point, you have to increase your prices to keep up with inflation. And in point of fact, this is actually the first change in the CFP Board Certification fees since July of 2011 when its public awareness campaign first launched. But once you consider the fact that a part of our annual certification fee is the public awareness campaign, it turns out that this fee increase is actually a much bigger deal than you might realize.

CFP Certification Fees And The Public Awareness Campaign

For those who don’t remember or who got their CFP marks since 2011, prior to the CFP Board’s public awareness campaign, the certification fee for CFP certificates was $360, payable every two years. The biannual fee structure was done that way to line up with the biannual CE certification cycle. So you need 30 hours of CFP CE credits every two years to renew and you paid a $360 certification fee every two-year renewal period. Which simply meant you affirmed your two-year CE cycle was done and then you paid your two-year recertification fee.

Now, when the CFP Board introduced their public awareness campaign, it announced two changes to the CFP certification fee at the time. The first, and kind of the big one, was that it was adding a $145 per year surcharge to the certification fee, specifically earmarked for the public awareness campaign. Now, multiplied across what at the time was about 64,000 CFP certificates, that produced about $9 million a year for the CFP Board to allocate to public awareness on top of a multi-million dollar commitment the organization made from its own reserves. The public awareness campaign was a big deal when it launched.

Now, the second change that was made at the time was to convert that biannual $360 certification fee into an annual $180 fee in steps. So they just took the $360 every two and made it $180 every one which adds up to $360 every two.

Now, paired together, that’s how we got our current $325 a year certification fee that started in July of 2011. It was $180 which was the annual certification fee, basically to cover operations of CFP Board, and then another $145 a year specifically for the public awareness campaign. So, in this context, a $30 certification fee increase is a bit more sizeable than you realize because it’s not really a $30 increase on $325.

Functionally, it’s a $30 increase on the certification fee portion, which means CFP Board is moving their fee from $180 to $210, or across their whole operating budget, that’s a 17% increase on the certification fees over what it’s been charging for the past couple of years. And multiplied across what’s now more than 78,000 CFP certificants, we’re talking about a roughly $2.3 million revenue bump for the CFP Board next year. That’s a $2.3 million increase in fees for an organization that runs its core on only about 14 million in certification fees in the first place, plus about $4 million for exam fees and CE sponsor fees.

Which raises this question, why so much of an increase now and all at once? Now, again, the increases aren’t unusual in the long run and this is the first fee increase the CFP Board has done since 2011. And again, the increase in 2011 was just adding the $145 public awareness campaign surcharge on top of the what then was $360 biannual fee or $180 a year at the time. I think it’s actually been almost 10 years since the CFP Board raised that core certification fee from $180 a year or $360 every two years.

In the meantime, it’s just been relying on the growth and the top line number of CFP certificants who pay those fees to grow the organization. So catching up for a decade’s worth of inflation adjustments is not unreasonable, but still, it’s pretty noticeable when it happens all at once like this. Especially when the CFP Board ran a $1.3 million surplus in 2015 which is the last year. Their Form 990 is publicly available.  So it’s not like they’re hurting for revenue on the operating budget right now.

Public Awareness Campaign And CFP Board Satisfaction Ratings

All this being said, I do think it’s worth recognizing the substantial progress that the CFP Board is making these days in executing on its initiatives with the certification fees that we pay. As substantial as the fee increase was for the public awareness campaign, the latest tracking study showed that even by 2015, just four years in, CFP certification had passed the CPA licenses as the designation or license that consumers most believe a financial planner should hold.

And every measure of public awareness for the CFP marks, top of mind awareness, unaided awareness, trust in CFP certification, intent to seek out a CFP certficant were all up very materially in the past several years.

CFP Public Awareness Relative To CPA

Not surprisingly, then, the CFP Board did a recent satisfaction survey amongst us – the CFP certificants – and found a mere 8% said they’re dissatisfied with the effectiveness of the public awareness campaign and only 22% believe it wasn’t worth the fee increase.

That’s a pretty big deal, it was an 80% fee increase and almost 80% of advisors are still fully on board with it. So now we’re saying what the CFP Board charges for what it does, it’s getting results and most of us actually seem to be pretty satisfied with the results as I think we should be. And at the same time, it’s crucial to recognize the success the CFP Board has had in actually growing the CFP marks themselves.

Bear in mind, if you look at data from Cerulli, the number of financial advisors in total is basically flat since 2011 and down almost 10% in the past 10 years, yet the number of CFP certificants is up 25% since 2011 and almost 50% in the past 10 years. That’s phenomenal growth to achieve for the CFP Board – to be growing the ranks of the CFPs by 50% in a time when the head count of total advisors declined by 10%.

To the extent we pay CFP certification fees to CFP Board to maintain the marks and build awareness for them, the CFP Board does appear to be doing a heck of a job at executing and getting results for the fees we pay, which is why I so strongly advocate that anyone who wants to establish their career as a financial planner today and is looking forward to their career future needs to get CFP certification. It is becoming the baseline competency standard for actually being a real financial planner beyond just being licensed as an insurance agent or a registered rep salesperson.

And likewise, that’s why even if someone has often disagreed with CFP Board about its policies over the years, I advocate submitting public comment letters. Speak out, and get involved to help shape the CFP Board’s policies. The CFP marks and the CFP Board aren’t going away, so if you don’t like what the organization is doing, don’t talk about dropping the marks, get involved and be a part of the change that you want to see.

CFP Board Accountability – Why A 17% Fee Increase Now?

Now, at the same time, I’m a supporter of the CFP marks and the CFP Board, but I do think accountability is crucial, especially since the CFP Board has been prone in recent years to taking a lot of actions without soliciting much input or even holding public comment periods. Now, it did put forth a public comment period on the recent proposed change to the Code of Ethics and Standards of Conduct, but that’s because its bylaws require the organization to do so.

Aside from that change, it’s been over five years since the CFP Board put forth a public comment period on any other change to the other three E’s – the education changes, exam changes, and experience requirement changes – all of which have experienced material changes in five years.

Ever since the CFP Board proposed to increase the number of required CFP CE credits in 2012 and got basically “voted down” in negative public comments, the organization has stopped soliciting public comments and there isn’t even a way to access the prior public comments that were submitted. They’re all supposed to be public comments, but CFP Board has failed to actually make them public.

And so, in that context, where I do think there are real concerns about CFP Board’s accountability, it’s a fair question to ask, why exactly it feels the need to take a 17% increase on certification fees for 2018? Why so much of an increase? Why now, especially if the organization is already running a substantial operating surplus of $1.3 million on an $18 million operating budget in 2015, and has more than $20 million in net reserves available?

Was there some major downturn for CFP Board in 2016 that we just can’t see on the Form 990 yet because it’s not publicly available? Or is CFP Board raising revenue in advance for some new initiative that we haven’t even been told about yet and we’re being forced to pay for it before we even know what it is? Or is CFP Board trying to raise more revenue internally for its Center for Financial Planning initiative even though they said originally that the center would be funded separately from contributed income?

Especially since CFP Board tried to put through a $25 fee increase last yearby defaulting every CFP certificant into a $25 voluntary donation to the Center for Financial Planning, which they quickly eliminated 48 hours after Kitches.com published an article about it here on Nerd’s Eye View. So it may just be a coincidence, but it’s hard to believe that the CFP Board tried and failed to put through a $25 a year donation to the Center last year, and now suddenly is pushing through a $30 increase in the certification fee this year. Is the fee increase to generate revenue from the Center that they couldn’t get last year? Unfortunately, we don’t know because the CFP Board gave no substantive explanation for why it is pushing through a 17% increase in the certification fee beyond saying it supports the operations of CFP Board in fulfilling its mission and strategic priorities.

And so again, while I’m not necessarily negative on any organization that raises its fees over time especially when it’s the first increase in such a long time, the question remains: Why does the CFP Board now, all of a sudden, need another $2.3 million in its operating budget for 2018? You don’t need $2.3 million on an already profitable $18 million operating budget just to give the whole team well-deserved salary raises.

So what initiatives is this actually earmarked towards? Is this the Center of Financial Planning already experiencing some kind of mission creep by taking a portion of CFP Board operating budget even though it was never supposed to come from operating budget dollars? What does it take to get some basic transparency and explanations with CFP Board on why it’s pushing through a 17% fee increase? This isn’t just 3% or 5% adjustment we can write off as an annual cost of living tweak. For a 17% increase and a $2 million revenue grab, we should be getting a little more substantive explanation.

So what do you think? Were you aware of the CFP Board’s 17% fee increase? Should the CFP Board be more transparent about what this fee increase is going funding? Is it possible the Center for Financial Planning is already experiencing some mission creep? Please share your thoughts in the comments below!


Which Is More Important In Your Trust Equation: Credibility, Or Authenticity?

Which Is More Important In Your Trust Equation: Credibility, Or Authenticity?


Trust. It lies at the heart of what we do as financial planners. Without a trusting relationship with clients, we cannot work constructively to advise them and help them to achieve their goals. At a broader level, if the public does not trust financial planners, they will be unwilling to work with us in the first place.

Yet at the same time, there is not necessarily a clear agreement amongst financial planners about what exactly it is that best inculcates that trust relationship. It is about establishing the credibility as an expert to become a trusted advisor for the client? Or the intimacy and authenticity necessary to ensure that the client feels safe and comfortable to share with you in the first place, and be willing to act on your recommendations?

If you had to pick one factor as the primary one leading to trustworthiness, which is more important to you: credibility, or authenticity?

The inspiration for today’s blog post is an article published by financial planner Carl Richards (also known for his BehaviorGap work) in the November 8th issue of the New York Times. In the article, “How a Financial Pro Lost His House“, Carl shared his own intimate story of how he got caught up in the real estate boom in Las Vegas, bought “too much house” and eventually had to give it up in a short sale. The article seems to have stirred a bit of controversy, in part simply because of the moral controversy surrounding short sales, but also in regards to how Carl’s story as a financial planner who made financial mistakes of his own reflects on financial planners at large.

From what I have seen, there appears to be two camps regarding the article. The first complains that the article is a blow to the credibility of financial planners with the general public. As the view goes, how can financial planners claim expertise in guiding people about financial decisions when we make such catastrophic financial decisions of our own? Accordingly, detractors suggest the article has a “do as I say, not as I do/did” tone to it that can undermine credibility in the eyes of the public. And notably, this view is also highlighted in many of the public comments to the article, which are filled with negative feedback, either suggesting that the article was just an attempt to promote Carl’s upcoming book “The Behavior Gap: Simple Ways to Stop Doing Dumb Things With Money” or that the article demonstrates the incompetence of advisors (“see, financial advisors aren’t experts and don’t deliver value; they can’t even make their own good financial decisions”).

On the other hand, there is clearly a camp that loves the article. Although not seen as loudly in the public comments, I have witnessed several discussion threads about the article that are much more upbeat, and Carl himself reports dozens and dozens of financial planners who have contacted him privately to express support and appreciation for the article. The people in this camp note that in the end, financial planners are human beings, and as human beings we too will make mistakes. We can’t avoid them; we can merely either acknowledge to and admit them, or try to hide them and pretend to be unrealistically perfect. In the end, this group applauds the intimacy and authenticity of the article most of all, and the implicit trust that it inspires.

To me, the fundamental disagreement gets to the heart of what it is that does, or does not, build trust. The detractors of the article are implicitly suggesting that credibility is at the core of our trust relationship with the public. Accordingly, things that undermine credibility – such as publicly acknowledging our faults and failures, even while professing to be the expert that can help others navigate such challenges – will undermine our public trust. On the other hand, the supporters of the article are implicitly suggesting that authenticity and intimacy are at the core of our trust relationship with the public. Accordingly, the genuineness and vulnerability that Carl reveals in the article while sharing his difficult past create an intimacy and authenticity that advance our public trust.

So which one is “right” – is it about credibility, or about authenticity? Some recent research by Charles Green at Trusted Advisor Associates suggests that in reality, both play a material factor. As he explains it, the trust equation is made up of four factors:

( Credibility + Reliability + Intimacy ) / Self-Orientation = Trustworthiness

As a formula shows, anything that increases the numerators of Credibility (can we believe what you say?), Reliability (can we depend on your actions?), or Intimacy (do we feel safe sharing information with you?) can increase trust levels, while anything that increases the denominator Self-Orientation (are you focused more on yourself than others?) will reduce trust. Thus, we maximize trust by increasing some combination of credibility, reliability, and intimacy, while reducing our self-oriented focus (i.e., by focusing more on the people we’re helping, rather than ourselves).

Accordingly, it appears that both camps are right to some extent. As the trust formula shows, losing credibility does undermine our trustworthiness; at the same time, improving intimacy through authenticity clearly increases trust, too. The question is whether the “loss” of credibility exceeds the “gain” in intimacy, or vice versa, as to whether there is a net increase or decrease in trust.

Anecdotally, it appears to me that those who themselves rely on credibility as a primary factor for trust (“The Expert” trust archetype) view the article as a negative and suggest that the credibility loss exceeds the intimacy gain, while those who rely first on intimacy as a driver of trust view the article positively (intimacy gains are worth more than any credibility losses).Green’s work shows that there are actually six different trust archetypes, depending on which two (out of four) factors are the focal point of your own trust framework. (If you’re interested, you can see which archetype fits you best by taking the Trust Quotient Quiz yourself.)

So what do you think of the Carl Richards article? Does it advance the financial planning profession with the public, or not? Does the intimacy and authenticity of the article carry the day? Or is it a blow to the credibility of the profession when “ever the experts make mistakes?” How do you evaluate trust? Does Credibility outweight Intimacy for you, or is it the other way around? Is there a difference between which factor is most important in a one-on-one client relationship, versus the profession’s relationship with the public at large?

IRS Loosens Rules For Retirement Plans To Lend Money To Hurricane Harvey Victims

IRS Loosens Rules For Retirement Plans To Lend Money To Hurricane Harvey Victims

On Wednesday, the IRS posted Announcement 2017-11, which will grant streamlined procedures for taking employer retirement plan loans and/or hardship distributions from a 401(k), 403(b), or governmental 457(b) accounts, if they live or work in disaster area localities affected by Hurricane Harvey. (In order to qualify, they must be designated for individual assistance by FEMA.) The rules also apply for those who want to use the money to help a son, daughter, parent, grandparent, or other dependent who lived or worked in the disaster area. Relief provisions include eliminating the 6-month ban on 401(k) or 403(b) contributions that normally applies to employees who take hardship distributions, eliminating any specific requirements about how the hardship distribution is used (as long as the person is part of an affected area), and plans can make such loans or distributes even if they don’t currently allow it (as long as they complete the amendment process to add such provisions by the end of the next plan year). The relief rules will apply to loans and distributions that are made from now until January 31st of 2018, and is similar to relief offered after prior disasters, including Louisiana floods, and Hurricane Matthew. Notably, though, all the other normal rules for hardship distributions and loans still apply, including the taxability and potential early withdrawal penalties for (hardship) distributions, and the loan repayment requirements for loans from a qualified plan.

The Five Points That Belong On Every Advisor’s Website

The Five Points That Belong On Every Advisor’s Website

The average consumer faces what Bob Veres calls “The Jaffe Dilemma”, after finance columnist Chuck Jaffe who once observed years ago how two advisors can both charge the same 1% AUM fee for the same portfolio and provide substantively different services (e.g., one provides comprehensive financial planning and ongoing portfolio management, and the other “just” delivers portfolio management using buy-and-hold index funds). Veres notes that across the entire financial planning profession, advisors offer as many as 13 different categories of service, from college planning to retirement planning to estate planning, cash flow and budgeting, insurance, and more… which might cumulatively add up to far more value than an advisor who “just” manages a portfolio for the same fee. Accordingly, Veres urges advisors to clarify both their costs, and their value, in their website marketing, with five key elements: 1) list your fee schedule, so people clearly understand what they’ll be paying (because like it or not, most want to know up front!); 2) list the services that you (or your firm’s advisors) provide for your compensation, so it’s clear what you do (and how much you actually do!); 3) try to give prospects an idea of the potential dollar value of the value that you provide, since the truth is that most clients have any idea what rebalancing is worth, or the true benefit of tax loss harvesting, not to mention the more complex forms of value an advisor provides; 4) share stories about clients who had been managing their own affairs, and how you are now helping them as a central hub to keep them organized and provide them ongoing advice (as while you can’t use testimonials, you can share anonymous “case study” examples to demonstrate and explain your value!); and 5) explain how clients should compare fees between what they pay to other advisors versus you (including what they may not even realize they’re paying!).