Tag: financial adivsors

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!

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!

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!).

Overcoming Age Bias: Tips For Young Financial Advisors

Overcoming Age Bias: Tips For Young Financial Advisors


For most of the past several decades, getting started as a financial advisor meant “smiling and dialing”, reading cold-calling scripts while sitting in a cubicle, trying to convince the person on the other end of the phone to buy something. The bad news is that cold calling was a brutal numbers game full of rejection. The “good” news was that at least young advisors didn’t have to worry about age bias from their prospects, who couldn’t see them and had no idea how old they were. But as financial advisors shift to actually giving face-to-face financial advice – and with the rise of the Do Not Call list – it has become an even greater challenge for young financial advisors to get credibility with prospective clients and overcome (young advisor) age bias.

And so in this week’s blog, we look at the steps that young advisors can take to overcome the inevitable age bias they will face in meeting with prospects and clients, particularly as the advisory industry increasing focuses on Baby Boomers (who in many cases are old enough to be a new advisor’s parent or even grandparent!).

The first key to success is simply building confidence as a young financial advisor. Because if you’re not confident that you can deliver value to your (older) clients, they won’t be confident in you, either. For some, it might be enough to “fake it until you make it”. For others, it’s necessary to get certifications like the CFP marks, or even additional post-CFP designations, to really establish their credibility and find their confidence.

Second, recognize the impact of first impressions… and the ability you have to control it. How you dress, and the impression it gives, is something you can control. As is the way you communicate with clients by telephone or email before you meet with them. While you can’t eliminate the fact that you’re young, you can at least give the impression that you’re an especially competency and well put together young man or woman!

Third, consider taking classes to build your skills of active listening and empathy. Because the truth is that clients won’t really trust you, until they truly feel that they’re being heard and understood. Doing that well is a skill that takes time and effort to develop.

But the bottom line is that if you’re a young financial advisor struggling with age bias, it doesn’t have to be crippling. Find what it takes for you to be confident in yourself, and do your best to manage the first impression that prospects and clients form of you… and if necessary, ask your mentors and senior financial advisors to support you and your credibility in front of clients as well!

So what do you think? Did you struggle with age bias as a young financial advisor? How did you overcome it? Are you still facing it as a young financial advisor today? Please share your thoughts in the comments below!

How (New) Advisors Should Dress And The Dangers Of Countersignaling

How (New) Advisors Should Dress And The Dangers Of Countersignaling


A topic of increasing discussion amongst financial advisors is whether it’s truly necessary to dress up in order to attract and retain clients, and whether it might instead be better to adopt more casual attire – either because such attire makes it easier to connect with clients, or because some very experienced and successful advisors have adopted such wardrobes, seemingly with no negative impact on their success. But the reality is, just because a more casual style may work for seasoned and successful advisors, does not mean that it will work for all advisors.

In economics, signaling refers to the ways in which we try to convey information to another party under conditions in which credible communication is difficult. For instance, when meeting with a prospective client, financial advisors may need to engage in certain forms of signaling in order to demonstrate their competency (e.g., becoming a CFP professional), since all advisors trying to win over a prospect would have an incentive to claim they are competent, regardless of their true level of knowledge. By contrast, countersignaling is a strategy which refers to ways in which we may try and demonstrate an even higher level of status by not signaling (e.g., a mid-level student may eagerly attempt to answer an easy question in class, while a high-level student may not, as a signal that their knowledge surpasses the point at which they would take pride in answering such a question).

In an attempt to explain such countersignaling behavior, prior research has used game theory to demonstrate why signaling can be an effective strategy for mid-level individuals with regard to some characteristic (to demonstrate they are not low-level, and to hopefully be perceived as high-level), while countersignaling may actually be more effective for high-level individuals (as they are unlikely to be mistaken as low-level, and signaling could actually give the perception they are mid-level). And this dynamic may have direct implications for the decision to dress down as a financial advisor, as it could be the case that dressing down actually increases the status of an experienced and successful advisor, while dressing down might decrease the perceived status of a young and inexperienced advisor.

Of course, this doesn’t mean that it isn’t still wise to consider other factors, such as a particular client niche (and their typical dress/attire), when deciding whether or not to dress down. But given that many people prefer to not dress up, advisors – and particularly those who are young and inexperienced – should be careful not to skip out on opportunities to signal credibility to prospective clients, and be especially cognizant of the fact that just because seasoned advisors can dress down successfully, does not mean that young and inexperienced advisors can, too!

How we dress is an inherently personal topic. What we wear conveys messages about who we are, what we value, and who we hope to become. As a result, talking about dress and “appropriate” clothing can be a touchy subject. But it’s not a topic that financial advisors should shy away from, as our dress can have a real-world impact on our professional success.

One particular consideration is whether advisors really need to dress up in business formal attire to attract and retain clients, or whether it’s OK to “dress down” more often. In fact, some advisors believe it’s better to dress down, and see it as a way to better connect with clients by wearing attire that is more in line with what clients themselves would wear. Others have acknowledged industry shifts more broadly, and that consumers may be becoming more accommodating of less formal clothing. After all, it’s not difficult to find a lot of experienced and successful advisors who regularly dress down, and have clearly still been successful.

Yet, the caveat is that what works for a subset of experienced advisors doesn’t necessarily work for all advisors, and especially not for younger and inexperienced advisors. Often the discussion surrounding advisor dress will treat advisors as some sort of amorphous group, or at least one that is hard to classify beyond the clientele they are targeting. But the reality is, regardless of one’s target clientele, the decision to dress down can have very different implications based on an advisor’s experience and (perceived) level of success. In particular, “countersignaling” (i.e., the strategy of showing off by not showing off) can be a powerful strategy for some, but completely backfire for others!

Signaling Theory And How We Impact Perceptions By How We Dress

In economics, “signaling” refers to the ways in which one party can credibly convey information to another party under conditions of asymmetric information – for instance, how job applicants might signal the quality of their skills to an employer, when the applicants inherently know moreabout their skills than an employer possibly can, and the applicants (regardless of their true quality) have an incentive to portray themselves in as positive of a light as possible.

Nobel laureate Michael Spence’s seminal article on signaling within the job market first proposed signaling as one way for parties to overcome these problems of information asymmetry. In particular, Spence evaluated the role that education might play as a signaling mechanism in the job market. For example, while it can be hard for an applicant to credibly convey their true intelligence or work ethic when applying for a job, a Finance degree from State University at least indicates that an applicant has a combination of work ethic and intelligence that was capable of generating a particular GPA at a particular caliber of school.

A key aspect of signaling is that, in order to be credible, the signal itself must be costly to send. If the signal were free to send, everyone would send it, and, therefore, it wouldn’t convey any credible message. Additionally, there must be some condition present which otherwise prohibits credible communication, and therefore limits the ability of the party with less information to simply make the assessment effectively on their own. One such example is the inherent conflict of interest that always exists between a buyer and seller of any good or service – where the seller/provider is “always” trying to make everything seem appealing to a prospective buyer/customer/client.

For example, suppose a buyer and seller are discussing the potential sale of a piece of art. In this case, there’s no need to “signal” the current condition of the art, as the seller can simply let the buyer examine the art and determine the condition for themselves. But if the authenticity of a piece of art is an important aspect of its value, then the seller will want to have a credible way to signal the art’s authenticity to the buyer. Since merely stating that a piece of art is authentic is a costless activity (and it is exactly what both a fraudster and a genuine art dealer would claim), genuine sellers may instead pay for an appraisal by an independent and trustworthy third party to credibly signal the authenticity of the art to prospective buyers. Meanwhile, fraudsters won’t make a similar investment, as the cost will not enhance the value of fraudulent art.

(Note: The relevance of signaling within a financial advisory context is immediately apparent here, as we often have nothing tangible to show prospective clients, and must instead try to sell an invisible service.)

Another key aspect of signaling is that the costs of signaling will vary based on the true status of the underlying information that is known by one party yet hard to credibly convey to others (e.g., effectively signaling intelligence will be easier [i.e., less costly] for someone with a higher level of intelligence). This often comes up in the context of hiring decisions, and particularly in the debate over whether college education is primarily a way of building human capital or simply signaling one’s ability to employers.

From the signaling perspective, going to college might still be a valuable investment for students even if they don’t retain any skills or knowledge in the long run, as the opportunity cost of sending the signal to future employers (the time, effort, and money required to acquire a degree) is lower for students who exhibit traits that are attractive to future employers, such as higher intelligence and good work ethic.

In other words, all else equal, a student with lower levels of intelligence or work ethic is going to need to invest more in order to achieve the same degree and GPA as a student with higher levels of intelligence or work ethic. This cost may be a financial cost (e.g., paying more due to re-taking classes, tutoring services, etc.), a time cost (e.g., graduating in 5-years instead of 4, studying more, etc.), or simply a lifestyle cost (e.g., putting forth more effort and experiencing more stress to achieve the same outcome) – but the key point is that the opportunity cost is lower for a student with traits that an employer may find valuable, and therefore individuals with those traits may be more likely to invest in sending that signal.

In a financial advisory context, there’s a high degree of informational asymmetry between financial advisors and prospective clients. Assuming that nearly all financial advisors are at least more knowledgeable than the average consumer, it is then hard for financial advisors to credibly convey the true quality of their knowledge or services to consumers. In other words, it is difficult for a less knowledgeable consumer to differentiate a “merely good” advisor from an exceptionally knowledgeable, skilled, or otherwise more qualified advisor. Additionally, consumers cannot trust an advisor’s assessment of their own knowledge, as both fraudsters and competent advisors would (costlessly) claim to be knowledgeable advisors (or, similarly, claim to be fiduciaries acting in their clients’ best interests).

Of course, certifications and designations are one way that advisors can engage in signaling. A consumer can credibly know that a CFP professional has at least achieved a minimum level of education and competency. But given that consumers in many markets now have 10s if not 100s of CFPs to choose from, such signaling is increasingly just table stakes, and advisors still need to engage in other forms of signaling.

Countersignaling And Enhancing Perceived Status By Not Showing Off

An important concept related to the decision to “dress down” in an advisory context is “countersignaling”. While “signaling” refers to engaging in a costly behavior to credibly convey a message, “countersignaling” refers to avoiding a costly behavior to similarly convey a message in a credible manner, albeit in an even higher-status way.

Feltovich, Harbaugh, and To (2002) developed a model of countersignaling to examine such behavior, which was subsequently supported by their experimental research. Feltovich et al. note that contrary to prior models which implied that the highest status individuals would invest the most in signaling, it’s often those of mid-level status who are most eager to engage in signaling behavior. To support this point, they give examples such as:

  • “The nouveau rich flaunt their wealth, but the old rich scorn such gauche displays.”
  • “Mediocre students answer a teacher’s easy questions, but the best students are embarrassed to prove their knowledge of trivial points.”
  • “Acquaintances show their good intentions by politely ignoring one’s flaws, while close friends show intimacy by teasingly highlighting them.”

Using game theory, they examine why this might be. After laying out different incentives and noting how different participants might act within a “noisy” environment of imperfect information and uncertainty, they find that signaling is often a rational behavior amongst medium quality signalers, while countersignaling is often rational (and possibly even more effective) amongst high-quality signalers.

To get a better understanding of what their model is saying, imagine that we separate financial advisors into three categories: low quality, medium quality, and high quality.

(Note that quality is intentionally vague here, but think of “quality” from a consumer’s perspective, which will likely be an overly simplified, imperfect, and possibly even “wrong” conception of advisor quality, such as an advisor’s personal success in the business.)

Noting that consumers and advisors engage in a “noisy” market with lots of imperfect information and uncertainty, it’s going to be hard for consumers to precisely place advisors in any particular category. Instead, they’ll have to rely on contextual clues available to them to try and determine the quality of an advisor.

Example 1. Assume Advisor A is a CFP certificant, works for a prestigious firm, works out of premium grade office space, and has been in the business for 25 years; Advisor B is also a CFP certificant, runs their own RIA, has three support staff, works out of mid-tier office space, and has been in the business for 10 years; and Advisor C is studying to become a CFP professional, runs their own RIA, works out of a home office, and has been in the business for 3 years.

Assuming all three advisors make a favorable impression on a prospect in an initial meeting, I think it may be reasonable to suspect that a typical consumer might rank the advisors (in terms of quality, from highest to lowest) as follows: Advisor A > Advisor B > Advisor C

(Note: Of course, these may not be accurate representations of advisor success at all. The inexperienced advisor with a home office may have the most business success of the three, but in a noisy and uncertain environment, that’s not the high probability estimate a consumer is likely to make.)

Further, assume that while all three advisors would ideally prefer to be perceived as a highest-tier advisor, each believes that an impartial assessment would place them in the following categories: Advisor A (highest-tier), Advisor B (mid-tier), and Advisor C (low-tier). If this were the case, Feltovich et al.’s theory would suggest that each advisor might be more or less willing to engage in signaling behavior depending on their perceived standing.

Relative to Advisors A and B, Advisor C likely realizes that they have genuine deficiencies that inhibit their ability to signal the highest level of quality. Both advisors have far more experience and a larger client base that presumably can at least sustain a support staff or employment at a prestigious firm. As a result, signaling strategies that attempt to position Advisor C to compete on perceived status are likely to be ineffective. Not only will the relative costs of such strategies be higher, but signaling and losing out to a medium quality advisor results in a worse outcome than just not signaling at all (by wasting the time and cost of trying, instead of focusing on finding clients who won’t use such signals as evaluative criteria in the first place).

Meanwhile, Advisors A and B have different incentives. Unlike Advisor C, who may perceive the gap between their current standing and the highest tier advisor to be too large to overcome, Advisor B has stronger incentives to signal. First, Advisor B wants to distinguish themselves from lowest-tier advisors. Additionally, Advisor B would prefer if their signaling could move them into the highest-tier of advisors. This combination of incentives, both distinguishing oneself from a lower-tier and moving oneself to a higher-tier, is why Feltovich et al. find that signaling is most attractive to mid-level individuals.

By contrast, signaling may not be as attractive for Advisor A, because the contextual clues available to the consumer – some of which are themselves signals of a different sort (long tenure, premium grade office, prestigious firm, etc.) – make it unlikely that Advisor A will be perceived as a lowest-tier advisor. As a result, unlike Advisor B, Advisor A does not need to worry about distinguishing themselves from the bottom tier. Further, because mid-tier advisors have a strong incentive to signal and presumably will signal often, signaling could actually run the risk of lowering the perceived status of the high-tier advisor by making them look like a mid-tier advisor who’s just trying to appear as higher status. And this is where the power of countersignaling comes in. Under the right circumstances, countersignaling demonstrates a level of confidence that may be perceived as even higher status than signaling.

The Dangers of Countersignaling

The Important Juxtaposition Of Context And Attire In Countersignaling

When the topic of “dressing down” comes up in a financial advisory context, it is important to acknowledge the broader contextual environment. Of course, dressing down may not be dressing down at all if an advisor is still “dressing up” relative to their broader environment (as has been noted by those who dress down to match the clothing style of a specific client niche). But setting this sort of “dressing down” aside, there is risk in inexperienced advisors seeing experienced advisors successfully countersignal and reaching the wrong conclusions about the importance of attire. Because the contextual environment of an experienced advisor is fundamentally different than an inexperienced one, the impact of dressing down may not be the same.

Example 2. Going back to the prior example of Advisors A, B, and C: Assume that business formal is the standard consumer expectation amongst each advisor’s target clientele. Further, assume that all of the advisors know each other and engage regularly at local events and industry conferences. Now suppose that 12-months ago Advisor A decided to go fully business-casual in attire, and has been pleasantly surprised with the results. Advisor A shares with Advisors B and C that not only has it not appeared to hurt their business, but things seem to be getting even better.

In this situation, there is a danger in Advisors B or C concluding that they too would not be negatively impacted if they bucked the norms and expectations of consumers and decided to dress down. Yet countersignaling, given the full context of Advisors B and C’s situations, may not come off as confident and status-raising. Instead, it may just make them look less professional, lowering their perceived status and ability to attract and retain clients.

It is true that seeing someone dress business casual within an environment where most are dressed business professional stands out, and possibly in a good way if pulled off well. But seeing someone dressed business casual in an environment where everyone else dresses business casual (e.g., a mid-tier office complex), just doesn’t have the same effect. Adding in the additional factors that fill out the full contextual evaluation that consumers are likely to make, the reality is that Advisor A has likely built both the social and human capital that might allow them to pull off countersignaling, whereas Advisors B and C have not.

Career Stage Matters In Choosing Proper Attire As A Financial Advisor

Simply put, it may be risky for inexperienced advisors to look towards experienced advisors for guidance on how to dress, and particularly if they are picking up countersignaling behavior that may not apply within their own individual context. While there’s certainly a lot that younger advisors can learn from their more experienced colleagues (and it’s great that many experienced and successful advisors are willing to help give advice and guidance to younger advisors), it’s crucial to remember that – as with any financial planning advice – it must be appropriate to the individual’s own circumstances.

And the reality is, even most of those experienced and successful advisors themselves rose up through more “traditional” ranks, and achieved a certain level of success before going in a different direction. Dressing down with an existing client base – where many clients already know and trust an advisor – is not necessarily the same as dressing down when growing a practice from scratch. Similarly, growing a practice where you have to meet new clients and get to know them from scratch is different than growing a practice by generating referrals from existing clients – where there is likely a higher degree of social capital coming into the referrals relationship, which can either reduce negative perceptions related to dressing down or enhance the countersignaling effect.

Of course, dress is just one of many factors, and surely there are examples of advisors who have launched and grown successful practices eschewing formal attire at all stages of their career. But it is still worth contemplating what impact, if any, dressing down might have on success. Particularly given that many young advisors (myself included) don’t seem to love formal business attire, it can be easy to engage in some motivated reasoning that leads us to the conclusions that we want to reach – ignoring the real-world psychology from a client’s perspective.

Or viewed another way… if you’ve ever had the frustration of losing a prospect to some slick-but-clueless salesperson, recognize that this is a quintessential example of how hard it really is for a typical prospect to understand who is and isn’t a credible advisor. It may not feel “fair” that consumers often rely on intangibles like how an advisor dresses to select an advisor, but in the face of a difficult decision with few “clues” to go on, any potential signal about the credibility of the advisor matters. So beware of skipping out on the signaling opportunities that are implied in how you dress as an advisor… at least, unless you’re really certain you can pull off a countersignaling strategy successfully! (But remember, the fact that other experienced advisors can do it still doesn’t mean you can, too!)

So what do you think? Can dressing down have different effects based on the experience and perceived status of an advisor? Should inexperienced advisors fight the urge to dress down? Are there other ways advisors can signal or countersignal with their dress? Please share your thoughts in the comments below!