Tag: Financial Advisory

Predicting Wealth Building Behavior With DataPoints Assessment Tools

Predicting Wealth Building Behavior With DataPoints Assessment Tools

Executive Summary

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

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

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

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

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

Building Wealth And The Millionaire Next Door Book

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

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

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

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

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

– They lived well below their means

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

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

– Their parents did not provide economic outpatient care

– Their adult children were economically self-sufficient

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

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

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

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

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

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

DataPoints And The Further Study Of Building Wealth

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

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

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

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

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

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

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

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

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

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

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

Datapoints Engage And Advise Assessment Tools

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

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

Engage Assessments For Prospects

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

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

Advise Assessments For Clients

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

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

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

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

Sample Advise Assessment: Building Wealth

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

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

Michael's DataPoints Assessment


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

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

Financial Planning Applications Of Financial Behavior Assessment Tools

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

Screening Prospects With Wealth Building Potential

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

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

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

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

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

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

Use Of Financial Services Providers By Wealth Building Likelihood

Profiling Clients For Behavioral Finance Coaching Needs

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

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

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

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

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

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

DataPoints Image Of Performance Plan

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

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

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

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

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

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

Why Aren’t Checklists A Financial Planning Standard?

Why Aren’t Checklists A Financial Planning Standard?

Executive Summary

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

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

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

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

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

Ignorance Vs Ineptitude

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

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

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

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

Managing Through Complexity With Checklists

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

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

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

Creating Your Financial Planning Checklists

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

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

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

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

Atul Gawande Checklist Manifesto

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

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

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!).

OMB Approves Proposal For 18-Month Delay Of DOL Fiduciary Rule’s Second Phase

OMB Approves Proposal For 18-Month Delay Of DOL Fiduciary Rule’s Second Phase

This week, the Office of Management and Budget (OMB) to approve the Department of Labor’s request to propose an 18-month delay to the full enforcement date of its new fiduciary rule, which would push the full effective date from January 1st of 2018 out to July 1st of 2019. Notably, the OMB decision doesn’t actually mean the rule is delayed yet; it simply grants the Department of Labor permission to proceed with issuing a formal proposal to delay the rule, which is expected to be released in the coming weeks, and will be subject to a (likely short) public comment period, after which DoL must take the feedback, formulate a “final” delay rule, and re-submit it to OMB for final approval. Which means it’s still possible that overwhelmingly negative comments objecting to a rule delay – or even a lawsuit against the DoL if it is deemed to be violating the Administrative Procedures Act – could prevent the delay from occurring. Nonetheless, the DoL itself is acting as though the delay is going to happen, and according the DoL has already begun to issue guidance (in the form of Field Assistance Bulletin 2017-03) indicating that it will not enforce next year against Financial Institutions that continue to require mandatory arbitration and ban consumers from suing them in a class action lawsuit. The real question, though, is about what else might be changed in the DoL fiduciary rule during the delay period. The Department of Labor has already indicated that it is considering a new form of “streamlined exemption” – akin to the Level Fee Fiduciary exemption – for broker-dealers that use clean shares, though some are concerned that a new streamlined exemption for clean shares may be a pathway to allow Financial Institutions to retain other problematic conflicts of interest while avoiding the full-BIC requirements. And in the meantime, the SEC also announced this week that it is making several leadership changes (in particular, with Dalia Blass taking over as director of the Division of Investment Management), that are expected to be a prelude to the SEC beginning work on its own fiduciary rule during the prospective 18-month delay. Still, the DoL fiduciary rule itself remains in place and intact; the only question now is whether or how it gets altered, either with a new alternative exemption to the full Best Interests Contract and its requirements, changes to the BIC, or other adjustments to coordinate with whatever the SEC may propose as its own fiduciary rule in the coming year.

How the Fiduciary Movement Became a Global Phenomenon

How the Fiduciary Movement Became a Global Phenomenon


While the fiduciary debate has become heated in the US in recent years, from the Department of Labor’s fiduciary rule, to the potential that the SEC will take up its own fiduciary rule, and the latest proposed revisions to the CFP Board’s fiduciary Standards of Conduct, the reality is that the recent fiduciary proposals are not an isolated case. In fact, the movement to applying a fiduciary standard to financial advisors is a global phenomenon over the past decade, for which the fiduciary proposals in the US have actually been mild by comparison to many other countries that have outright banned commissions altogether!

In this week’s blog, we discuss the major fiduciary movement that is occurring globally, how fiduciary proposals have rolled out in other countries (including the U.K., Australia, India, and the Netherlands), as well as the industry shifts that commonly happen after a new fiduciary rule is implemented, and the role that technology has played in fueling this global movement.

First and foremost, though, it is important to acknowledge that the movement to apply a fiduciary duty to financial advisors is truly is a global movement. India was one of the first countries to take action, banning upfront commissions on open-ended mutual funds all the way back in 2009. Australia followed with their Future Of Financial Advice (FOFA) reforms in 2012, which ultimately led to a ban on investment commissions as well. Similarly, the United Kingdom in 2013 implemented their Retail Distribution Review (RDR), which similarly led to a ban on investment commissions in the U.K., and the Dutch implemented a commission-ban that year as well. And in most countries, regulators gave the financial services industry only 12-18 months to prepare for the reforms. Which makes the recent DoL fiduciary proposal in the US, and its extended transition period, seem “mild” by comparison!

The fact that fiduciary rules have been implemented in other countries also gives us the opportunity to see the likely fallout that occurs when financial advisor regulation changes. The common trend in most countries has been that, after adopting new fiduciary rules, the headcount of “financial advisors” appears to decline between 10% and 30%. Notably, though, the individuals who leave appear primarily to be not bona fide financial advisors, but simply those who wrote “Financial Advisor” on their business card, but acted solely as a salesperson… and simply decide they don’t want to actually be responsible for giving financial advice, once the investment commissions are no longer available! Which ironically just leaves even more opportunity for the actual financial advisors who remain behind!

With the fiduciary trend occurring on a global basis simultaneously, one might wonder what it is that has led so many countries to implement fiduciary rules in quick succession. The answer, in a world, appears to be: technology. Because around the world, the rise of the internet has made it easier and easier for consumers to access the financial products they want and need directly, without a financial advisor to sell it to them (and earn a commission)… which makes consumers begin to ask “why am I paying a financial advisor for a product I could buy online anyway?” And forcing advisors to actually begin to give bona fide advice, and not just the “advice” necessary to sell a product. In turn, the rise of financial advisors actually focusing on giving advice makes the fiduciary rulemaking a natural outcome. Because when the majority of advisors actually focus on advice, what standard could possibly apply to advice besides one that requires the advice to be in the best interests of the consumer receiving the advice!?

Ultimately, though, the key point is simply to recognize that as technology commoditizes financial products and increasingly forces advisors to focus on truly giving advice, fiduciary rules to hold that advice accountable to an appropriate standard are inevitable… and thus, the fiduciary movement has quickly become a global phenomenon. Which means our battle over the DoL fiduciary rule is not merely some esoteric isolated debate going on here in the U.S… as the fiduciary movement is impacting consumers and advisors worldwide!

The Global Fiduciary Movement

When we look in the U.S., we’ve had all this discussion and debate around the fiduciary duty and the Department of Labor’s actions, but the truth is that the fiduciary shift is not in any way at all unique to the U.S. In fact, we actually lag in this manner.

When I look at India, they were one of the first that started this process. India banned upfront commissions all the way back in 2009 on open-ended mutual funds and forced distributors to only pay ongoing trails and a and a small back end load if people liquidated their funds quickly. Australia created what they call their Future of Financial Advice (FOFA) reforms in 2012, that ultimately led to a ban on investment commissions. The United Kingdom, in 2013, had what they called their Retail Distribution Review(RDR), which ultimately led to a band of investment commissions and the rise of financial advisors in the U.K. The Netherlands did the same thing in 2013, banning investment commissions.

And so, all of these countries around the world have been putting through bans on investment commissions and implementations of fiduciary duty best interest standards. Different countries use different languages, but it has all been built around this idea that advisors who give advice shouldn’t be getting paid commissions from fund companies to distribute products, but rather should be getting paid compensation directly from their clients for their advice to create the necessary objectivity that comes when you get paid by a client (and not paid by a company to distribute their products).

The Industry Shifts That Result From Fiduciary Movements

And it’s leading to a very common set of shifts that happened in the aftermath around the world. Almost every country that implements a fiduciary policy sees a fairly immediate drop in the number of financial advisors that are there. It seems to vary by country, but often numbers like 10 to 20% or so seem to leave the business. But the interesting phenomenon I find when I talk to advisors on the ground in every single one of these countries is that the advisors who are leaving when a fiduciary rule comes and a commission ban comes is the same almost every time.

The people who leave are the ones who wrote financial advisor on their business card, but they weren’t really financial advisors they were product salespeople. All they did was sell things to as many people as they could and get paid as much in commissions as they could. It’s not a huge portion of the industry but it’s a good 10 or 20 or 30% of the industry. And as soon as commission bands come through and they say, well, you can’t get paid high commissions anymore, you can only get paid to actually do the work of giving someone advice and justifying your value based on the quality or advice. They say, “Nah, forget it. I’m going to go do something else instead. I’ll sell something in some other industry that’s easier to sell and pays me more quickly.”

And so, the shift that we really begin to see as these countries go through a transition is this recognition that, in most countries around the world, lots of people write financial advisor on their business card, but not all of them necessarily have the training, competency, education or ability to actually get paid to give advice. And so, once you eliminate commissions and you require a fiduciary duty to be put in place, it becomes very noticeable who’s actually able to give advice and not. You know, it’s kind of like the old Buffet saying, “Once the tide goes out you see who’s been swimming without their shorts on.” Very similar phenomenon seen happen as commission bans and fiduciary rules come in place around the world.

Now, one of the things I want to touch on is why this seems to be happening globally. I mean it’s a very fascinating thing to me when you recognize that in the span of less than a decade, commission bans or fiduciary rules are not only getting proposed in the U.S. but it happened in Australia, the U.K., India, the Netherlands, Canada is now working on a lightweight version called CRM2. South Africa even has been putting through a version of a fiduciary rule.

This is an incredibly global phenomenon. Virtually every country that has a well-established base of financial advisors is going through a very comparable set of reforms. And ironically, in the U.S. we actually have one of the mildest versions because we’re not banning investment commissions we’re simply elevating some of the accountability standards around fiduciary. Most other countries completely banned commissions.

Australia was interesting a couple years ago, you know, back in – I think it was 2015 – we kicked off the debate in the U.S. under FINRA aboutwhether brokers who change broker-dealers should be required to disclose to their clients the fact that they got paid money to switch platforms. In Australia, they just banned all recruiting compensation for changing platforms. I mean, like we couldn’t even decide whether it should be disclosed. Australia banned it.

So, our version of fiduciary rules has actually been relatively mild compared to what we’re seeing around the globe. But the reason why it’s happening so consistently around the globe I think is actually a kind of indirect byproduct of the rise of technology and actually the internet over the past 20 years. I still don’t think it’s been fully appreciated for how much technology completely changed the nature of being a financial advisor.

How Technology Changed The Nature Of Being A Financial Advisor

Because if I dial the clock back to the 1980s and the 1990s, if you wanted to get access to investment products, you had to go through a financial advisor that sold mutual funds within most countries around the world. There are very, very few options for direct to consumer mutual funds. A couple of companies did it as a special offering. Vanguard notably in the U.S., T. Rowe Price had a fairly hefty direct to consumer distribution, but it was a fund company strategy. You might say, “Hey, we’re going to try to work around advisors and spend tons of money going directly to consumers,” but that was the exception rather than the rule. Most fund companies around the world distributed through financial advisors, who they paid as salespeople, and paid them commissions to sell their funds.

Then the internet showed up. And by the early 2000’s, two things started happening at the same time. One, there was a huge increase number of fund companies that started going direct-to-consumer. Because they said, “Oh, this is awesome. We just make a website and the consumers can come to us directly and buy our products.” It’s much easier to do direct-to-consumer distribution.

The second phenomenon that happened was the rise of online brokerage platform. So, in the in the U.S., this would be E*TRADE, Schwab.com, the early versions of T.D. Ameritrade Online. And all the sudden consumers that wanted to buy mutual funds could just go online and buy it themselves. And since they were just buying it themselves, they bought a no-load, a no-commission version of the fund, and we started running these in parallel. Commission-based funds sold by advisors, no load funds sold directly to consumers through online brokerage platforms.

And what’s happened is over 15 years of that phenomenon, a growing number consumers just start saying, “Why would I pay you a financial advisor just to pick a mutual fund when I could look a fund up online through the Kiplinger Magazine or Money Magazine or research it on MorningStar or Yahoo Finance, you know, if you’re going to do something for me as an advisor, you’ve got to do something above and beyond just a mutual fund, like give me some actual advice about how to allocate my portfolio or how to manage on my financial life.”

And so, the shift that’s happened in almost every country around the world, as technology has essentially eliminated the need for advisors just to sell mutual funds is that advisors had to start giving advice, actually really becoming financial advisors, which was written on their business card and not just trying to sell mutual funds. But as advisors began to actually give advice, the regulatory conflicts emerged.

And I think that’s why we’re seeing this fiduciary phenomenon around the world over the past decade because it’s only the past decade that the majority of advisors who write financial advisor on their business card are actually in the business of giving advice. And as soon as advisors start actually focusing on giving advice, it quickly becomes obvious to regulators in every country around the world that it’s not a good thing when people who are supposed to give objective advice are getting compensated primarily by commissions from fund companies. Not that customers shouldn’t necessarily invest in mutual funds, if they’re good funds and valuable that’s great, but let the advisor pick them objectively after being compensated by the client, not because they were compensated directly from the fund company.

And so, this ongoing shift of advisors moving out of “I sell products” and into “I create, asset allocated portfolios, manage them and give you ongoing advice” is creating this ongoing shift of advisors actually becoming advisors and regulators saying. “Well, if you’re really going to be an advisor then we’re going to regulate you that way.” Which means a fiduciary duty starts coming up in Australia in the U.K., in India, one after the other around the world as this phenomenon shifts.

Trends We Are Likely To See Continuing To Emerge From Here

Now, the reason why this is interesting to me beyond just the nature of the global phenomenon is that I think there’s a lot of trends that we’re likely to see emerging and continuing to emerge from here. Because the problem we really have, and I think this is true in the U.S, as well as other countries around the world, is that so much of the ecosystem that supports financial advisors is still at the end of the day built primarily around what we do upfront to get a client. Because if you were paid a commission for a mutual fund, all you really care about at the end of the day was getting someone to sign into business.

Once we’re in the ongoing advice business, we have to actually get good at ongoing advice. One of the common comparisons that’s made between commissions and fees is that over the long run. It’s actually quite possible you’ll pay more in fees than you will in commissions. I think the simplified example of a 5% commission mutual fund upfront or a 1% AUM fee, after five years I will have paid five 1% fees. That adds up to the same thing as the 5% commission. And in over 10 years, I’ll actually have paid ten 1% fees, which is more than the 5% commission as long as no one else had come in and sold a new 5% commission fund to replace the first one. You buy and hold both. You may actually end up paying more in the fees than you do in the commissions.

But here’s the distinction, if I sell a 5% commission fund, I only get paid once upfront. All you’ve got to do is convince someone once to do business with me and I get paid. And it frankly doesn’t even really matter if I called them again after that. I might continue to stay in touch with them only because I want more commission opportunities, but there’s no real obligation for in-depth ongoing advice services because I already got paid.

If I’m going to get paid 1% a year over the next five years because I want to add up to the same thing as the commission, I have to justify my value, my reason for existence, what I do to earn my fees every single year on an ongoing basis. And that pressure to justify ongoing value, I think it’s creating all sorts of new pressures and challenges on us as financial advisors not only to just figure out how to explain ongoing value that we provide but to actually be able to deliver it and have the technology to help.

And so, we see all these gaps, to me, in the current landscape. One of the biggest ones that frustrates me these days is our financial planning software. It’s built so focused on doing an upfront financial plan for our client and very, very little about how to help clients on an ongoing basis thereafter, right? Why don’t we have goal tracking where we can show how a client has progressed through seven years of relations with us. “Hey, you started here…” and the financial planning software automatically tracks then you were here, then you were here, then you were here… And the client can see their sense of progression over time by working with us. Maybe even showing milestones of significant accomplishments that we’ve achieved along the way. The planning software should automate all of the monitoring.

You know, we see only a few planning software still that automate account aggregation or pull it in a financial planning software so I can just log in the software anytime, 24 hours a day, seven days a week, 365 days a year, to see what’s actually going on with my financial plan on an ongoing basis. Yet if my value is primarily what I’m going to do for my clients in years two, three, four, five, six, seven, eight, nine, ten and beyond, frankly, the bulk of what we do in our financial planning software should be what comes after the initial plan not upfront.

The Fiduciary Movement And The Shift Towards Independence

One of the other interesting phenomena that we’re seeing very much here and now I’m finding in Australia and the U.K., starting in India, and certainly, I think that we’ve actually seen the U.S., is once advisors start getting paid for advice and not necessarily getting paid by fund distributors, it starts raising questions about why am I even affiliated with this fund company broker-dealer bank, whatever the financial institution is, because it varies a little country by country, but all of them have these larger vertically integrated asset management distribution divisions. But when the advisors start just getting paid fees for their advice, they start saying, “Well, why am I associated with his big company that takes a huge portion of my compensation. Why don’t I just go independent and get paid for the advice directly myself?”

So, in the U.S. we see the rise of the RIA movement. When I was speaking India earlier this week, I was speaking for a company called iFast. For U.S. advisors, you can think of iFast as the first RIA custodian. India just created fiduciary RIAs a few years ago. iFast is the first custodian that’s building for them, doing what in the U.S. we would think as simple things, but in India’s rather new. Like iFast is the only platform in India where as an RIA, you can actually bill and sweep your fees from investment accounts. No other provider can do that yet because the RIA movement is that new in India. Over a billion people, a few hundred RIAs, one platform. Tremendous opportunity for them.

But the shift that we’re seeing from countries around the world is as advisors start getting paid fees, not necessarily commissions for investment distribution, they begin shifting more independent. And the more that they go independent, the more they demand technology to support them. And the more technology that gets created, the easier it is to be independent and the more firms there are that go independent.

One of the biggest conversations I’ve been having with a lot of companies here in Australia lately is you’d better be ready for an excess of advisors that are pushing towards independence because that’s what we see in almost every country around the world. The U.K., there’s already been a dramatic shift towards advisors going independent.

And so, be aware that these kinds of ongoing shifts are happening around the world. And for all of us that are advisors in the U.S., to just understand that the fiduciary phenomenon is not just some peculiar thing that’s cropped up in the U.S., or some esoteric debate that’s happening between broker-dealers in RIAs or between the DoL and the SEC. This is a global phenomenon driven by the fundamental fact that financial advisors around the world are shifting from primarily being the business of selling insurance investment products to actually being in the business of giving advice.

Because the technology is actually making it easier and easier for consumers to buy their products directly, which means advisors have to do something more on top. Whether that’s ongoing investment management and portfolio monitoring, asset allocated portfolios, or broader financial planning specialization niches… all of these things are what come as advisors try to demonstrate their ongoing value and differentiate themselves in a world where it’s really, really not actually about the products anymore. Not that clients don’t need to be invested and that we won’t still have a role in seeing where the dollars go, but it’s not what we’re paid for anymore, and that’s what’s driving this global fiduciary phenomenon.

I hope that’s a little bit interesting, and some food for thought about what’s happening around the world and that you’ve enjoyed a little bit of the Sydney morning sunrise going on behind me with the Opera House in the financial district here.

So what do you think? Has the fiduciary movement become a global phenomenon? Has technology played a role in this movement? What other trends might we see emerge from here? Please share your thoughts in the comments below!

Navigating Compliance Oversight When Blogging As A Financial Advisor

Navigating Compliance Oversight When Blogging As A Financial Advisor

As digital marketing for financial advisors slowly gains momentum, there is growing interest amongst financial advisors to launch their own blog as a means to showcase their expertise. Yet the challenge, for advisors at both broker-dealers and RIAs, is that any prospective advertising content to the public must first be reviewed by compliance, and the compliance oversight process can make financial advisor blogging difficult – especially for those in a large broker-dealer environment.

Because in practice blogging is more popular at this point amongst RIAs than broker-dealers, a common question is whether the compliance requirements are different between the two channels. However, the reality is that whether you’re an RIA or a broker-dealer, anything you do that advertises to prospective clients or solicits prospective clients for your business is deemed “advertising”, and is subject to compliance (pre-)review. Technically broker-dealers are covered by FINRA Rule 2210, and RIAs are covered by Rule 206(4)-1, but in the end, both have requirements that compliance should review blog content before it goes out to the public, ensure blog content isn’t misleading, and record and archive blog content for later review. Which means, the key difference between channels is not really the regulatory compliance requirements.

Instead, the key difference is actually firm size. Most RIAs are small (at least by broker-dealer standards), and operate as either solo advisors, or with just a dozen or few advisors as a large RIA. By contrast, mid-to-large-sized broker-dealers may have hundreds or even thousands or brokers. And it’s this size difference that drives major compliance differences for financial advisor blogging between channels. Because in a small (or even “large”) RIA, an advisor is either themselves the chief compliance officer, or likely knows the compliance officer very well. Which means it is easy to get buy-in from the compliance officer to take the time to review the content of a blog. By contrast, a compliance officer in a broker-dealer rarely knows the brokers who many want to blog, and the sheer magnitude of trying to oversee advertising for such a large number of brokers leads to compliance officers to adopt very strict and very limited rules that force brokers to stay inside a small box of activities!

Fortunately, there are some more progressive broker-dealers that have begun to find solutions to allow advisors to blog. But unfortunately, many of those programs have been slow to roll out. For advisors who do want to start a blog, regardless of what channel you are in, there are some things you can do to increase your odds of solving the compliance issues. First, try to work proactively with your compliance department. Explain to them what you want to write about, and, if it’s not related to products, investments, or performance, tell them, because that will make their job easier. Second, write some content well in advance, and send it to them for review. After they’ve seen your content for a while and realize it is not a compliance risk, you may find they ease up a bit.

In the end, the challenges of overseeing such a large number of advisors in the broker-dealer environment have unfortunately squelched the ability of a lot of brokers to engage in blogging, but it’s not because they can’t, or that FINRA won’t allow it. Rather, it’s because broker-dealer compliance departments are struggling to oversee a huge number of brokers that they don’t necessarily know, while the more limited span of oversight at RIAs makes it easier to expedite the process!