Tag: Financial Consulting’

How Financial Counseling Laboratories Will Change Financial Planning

How Financial Counseling Laboratories Will Change Financial Planning

Executive Summary

It is widely acknowledged that there is both an ‘art’ and a ‘science’ to financial planning. Technical knowledge – the “science” – is crucial to delivering the technically accurate advice to clients. But the best advice in the world is meaningless if the financial advisor can’t master the “art” of delivering it in a skillful manner – leading a client to actually take action and improve their financial well-being. Yet despite its label as “art”, the reality is that how best to deliver financial advice advice can itself be subjected to scientific scrutiny. Which is beginning to happen, with the emergence of several “financial counseling laboratories” in educational institutions across the country.

In this guest post, Derek Tharp – our new Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – examines what a financial counseling laboratory is, and how researchers are using financial counseling laboratories to subject the ‘art’ of financial planning to scientific investigation.

A financial counseling laboratory is an environment in which financial planning, counseling, or therapy research can be conducted. The space itself is akin to the kind of office with tables and chairs that financial advisors might use to meet with their clients. However, the key feature of a financial counseling lab is that it contains some unobtrusive means of observation, such as one-way mirrors or cameras, allowing the interactions between a financial advisor and their client to be scientifically measured and tested (and sometimes also monitored by students who may be gaining practical observational training, or even engage in the supervised practice of their financial planning skills).

The existence of financial counseling laboratories is important given how conducive they are to conducting highly relevant research for practitioners about how to actually be better financial planners, and get clients to engage their financial advice. In fact, some of this research is already beginning to emerge, delving into topics such as how the physical office environment influences client stress, how coaching techniques can help clients save more, and how measurements of brain activity suggest receiving counseling from an advisor with a CFP designation (relative to a non-credentialed advisor) may actually reduce stress during market declines! In essence, laboratory research – in a financial setting, examining questions relevant to advisors – may soon begin to shape the future of how financial planners interact with their clients!

Advisors who are interested in supporting or assistance with the research process have several options, from getting involved with organizations like the Financial Therapy Association (where many of the Financial Counseling laboratory researchers are engaged), collaborating with researchers themselves on future projects, contributing financially to organizations such as the CFP Board’s Center for Financial Planning, or contributing directly to the handful of universities which already have permanent on-campus financial counseling laboratories.

But the bottom line is that, for the first time ever, the “art” of financial planning itself is beginning to be subjected to scientific scrutiny, with the potential to yield important insights into the practice of financial planning, and how advisors can better get clients to actually adopt their advice!

Subjecting The ‘Art’ Of Financial Planning To Scientific Investigation

It is widely accepted that there is both an ‘art’ and a ‘science’ to financial planning. Technical knowledge – the “science” – is crucial to delivering the right advice to clients. But the best advice in the world is meaningless if the financial advisor can’t master the “art” of delivering it in a skillful manner – leading a client to actually take action and improve their financial well-being.

This dynamic is not unique to financial planning. It is exemplified well in the modern Hippocratic Oath, which states, “I will remember that there is art to medicine as well as science, and that warmth, sympathy, and understanding may outweigh the surgeon’s knife or the chemist’s drug.”

And though it is known that the art and science of financial planning are both important, we actually know surprisingly little about either. This too is not unique to the financial planning profession. Even the field of medicine, which is perceived to be far more ‘scientific’ than financial planning, has had less evidence-based support for both the art and the science of the profession than we likely wish to believe. In a 2016 Freakonomics podcast on “Bad Medicine”, Vinay Prasad, an assistant professor of medicine at Oregon Health & Science University, said:

The reality was that what we were practicing was something called eminence-based medicine. It was where the preponderance of medical practice was driven by really charismatic and thoughtful, probably, to some degree, leaders in medicine. And you know, medical practice was based on bits and scraps of evidence, anecdotes, bias, preconceived notions, and probably a lot psychological traps that we fall into. And largely from the time of Hippocrates and the Romans until maybe even the late Renaissance, medicine was unchanged. It was the same for 1,000 years. Then something remarkable happened which was the first use of controlled clinical trials in medicine.

Particularly when we look at the art of financial planning, “bits and scraps of evidence, anecdotes, bias, preconceived notions, and probably a lot of psychological traps we fall into” likely describes a lot of how we practice as financial planners.

That’s not to disparage financial planners – most of us are just doing our best with the training and information we have available – but the underlying evidence is limited, and therein lies the promise of financial counseling laboratories to radically change our profession for the better. Instead of continuing to rely on dogma and tradition to inform the art of financial planning, controlled clinical trials can subject the art of financial planning to scientific investigation.

What Is A Financial Counseling Lab?

A financial counseling laboratory is an environment in which financial planning, counseling, or therapy research can be conducted – allowing the interactions between a financial advisor and their client to be scientifically measured and tested.

The word “laboratory” typically conjures up images of sterile environments where people in lab coats conduct experiments, but a financial counseling lab typically looks much different. Financial counseling labs tend to be comfortable environments that would be suitable for meeting with a client and giving them financial advice. However, relative to the average financial advisor’s office, a financial counseling lab is probably going to have more of an intimate feel to it. Think more of a therapist’s office rather than a typical financial advisor’s office, perhaps with a small round table or some comfortable chairs for discussion. The image below is an example from the ASPIRE Clinic at the University of Georgia:

ASPIRE Clinic at the University of Georgia

A key feature of a financial counseling lab is that it contains some unobtrusive means of observation, such as one-way mirrors or cameras. Fundamentally, this is what distinguishes a financial counseling lab from just any other room. Unobtrusive observation is important for not just conducting research and observing participants, but also for monitoring students who may be gaining practical experiencing by giving advice to others within a monitored environment. Here is an example of the Financial Counseling Clinic at Iowa State University:

Iowa State University Financial Counseling Clinic

In the image above, you can see that observation is available through the use of a one-way mirror and microphones. The researcher or instructor can observe the meeting in a manner that is less obtrusive than having someone sitting in the room and taking notes. Additionally, if a student should need help or lose control of a meeting, a professional is available to step in.

Another method of observation is the use of cameras. The image below shows one such setup at the Financial Therapy Clinic at Kansas State University:

Financial Therapy Clinic at Kansas State University

Observation at this facility is provided via cameras, which record where the advisor and client are but can be watched in another room. Additionally, recordings can be generated (with client permission, of course!), so that researchers or students can go back and watch the recording in order to gather data or improve their performance.

Biometric data, including measurements of both physiological characteristics (e.g., EEG measurements of brain activity, skin conductance sensors attached to fingers or other parts of the body) and behavioral characteristics (e.g., how we move, speak, or behave), can also be gathered in a laboratory setting.

It is also worth noting that while there are advantages to having a permanent on-campus laboratory, the current state of audio/video technology arguably allows for almost any setting to be turned into an observational laboratory. Further, laboratory style research that doesn’t require recording or live observation (e.g., research based on pre- and post-assessments, without any need to observe or record the intervention being investigated) can be conducted without a permanent laboratory. For instance, while Texas Tech does not have a permanent financial counseling laboratory, they do have an excellent peer financial counseling program called Red to Black, which can get permission from clients to conduct videotaped sessions that can then be reviewed by student coaches for training purposes.

Laboratory Research To Study The “Art” Of Financial Planning

Much of the research currently conducted in financial planning programs at universities is quantitative research based on the use of secondary data sets. For instance, researchers may use data sets to study things such as the relationships between financial knowledge and financial behavior, the characteristics of those who do (or don’t) use financial planners, or associations between things such as financial knowledge and the use of alternative financial services.

While this type of research is incredibly important, from a financial advisor’s perspective, it won’t necessarily provide insights with immediate applications for your business. For instance, while it is important to understand the associations between financial sophistication and financial satisfaction, from a business perspective, there’s not much an advisor can necessarily do with this.

Laboratory research, on the other hand, is conducted in an environment similar to how advisors actually work with clients. Further, laboratory research often examines questions with very practical implications. For instance, researchers may be looking issues such as: how different communication strategies or office environments influence client decision making; how different client segments prefer to interact with an advisor; or what presentation techniques help clients best learn and retain information. For this reason, studies that will likely have the largest impact on the actual practice of financial planning will be coming from laboratories.

That said, there are some significant challenges to conducting laboratory research. First, relative to many other types of labs on a college campus, financial counseling labs simply don’t have the same levels of funding. Second, even when the funding (or professor/grad student labor) is available, it can be really hard to get laboratory research published, particularly given the small sample sizes that are common in laboratory research. Among the core personal finance journals, only the Journal of Financial Therapy is typically interested in publishing studies with small sample sizes and/or experimental designs. Given the amount of work that goes into setting up, conducting, and then writing up the results of an experimental laboratory study, researchers may choose to prioritize their efforts elsewhere if there is limited potential for publication or other professional benefit associated with a project.

Journal Rankings of Core Personal Financial Journals

While the interest in laboratory research among existing journals has been limited, the CFP Board Center for Financial Planning will be launching a new academic journal later this year which will be open to clinical and experimental studies. Given the Center for Financial Planning’s focus on ensuring that their journal will meet academic criteria for university faculty to achieve tenure and promotion at top business schools, this new journal will create further opportunities and incentives for the production of high quality experimental and clinical research.

Notable Research That Has Come Out Of Financial Counseling Laboratories

While the bulk of existing financial planning research has been on more technical planning topics or has utilized secondary data sets, it’s notable that there are already several financial counseling laboratories in operation today, and many have already published research with relevance for financial advisors.

Client Stress And The Physical Office Environment

One of the most well-known studies to come out of a financial counseling laboratory is a study on client stress and the physical environment of an office (Britt & Grable, 2010).

Based on research conducted at the Financial Therapy Clinic at Kansas State University, researchers found that meeting with clients in a room with a couch and an arm-chair creates less stress than a more typical environment of sitting at chairs around a table.

Given that prior research has found that client stress can reduce the ability to build trust with a client, interfere with client willingness to consider long-term implications of their behavior, and result in overall negative outcomes for a client-advisor relationship, the practicality of such physical office environment studies should be obvious.

In their 2010 article in the AFCPE publication The Standard, Britt and Grable also suggest that other stress reducing modifications that can be made to an office environment may include:

  • Add naturalistic features to the office environment, such as plants
  • Use neutral wall colors
  • Play soft, non-lyrical music in the waiting room
  • Minimize physical “barriers” (such as a table) between the client and advisor

Their article also stresses the importance of being observant of client cues of stress (e.g., cold hands can be a direct indication of stress), as well as advisor stress. Stress transference (when a client consciously or unconsciously perceives and experiences an advisor’s stress) can be detrimental to a client-advisor relationship as well. Meditation, deep breathing, walks outside, and reduced caffeine intake prior to a meeting are all steps an advisor can take to reduce the amount of stress they may personally introduce into an office environment.

Helping Clients Actually Implement Financial Planning Recommendations

As most any advisor can attest, knowing what advice to give a client is one thing, but knowing how to get them to actually take that advice can be the real challenge.

In a 2016 study published in the Journal of Financial Therapy, Lance Palmer, a clinical faculty supervisor for the ASPIRE Clinic at the University of Georgia, along with his coauthors Teri Pichot of the Denver Center for Solution-Focused Brief Therapy and Irna Kunovskaya of The Financial Literacy Group, examined how savings could be promoted through the use of solution-focused brief coaching techniques.

In short, solution-focused brief coaching is a collaborative form of coaching that is focused on the future and setting goals to make a client’s situation better, rather than focusing on the past and where the client is struggling. Solution-focused brief coaching utilizes many techniques of solution-focused brief therapy, though with more emphasis on the coaching aspect of the relationship than therapy.

To examine how solution-focused brief coaching techniques can promote savings behavior, participants receiving tax preparation services at a Volunteer Income Tax Assistance (VITA) location were randomly assigned to one of four groups: 1) a group receiving video-based solution-focused brief coaching; 2) a group receiving a discount card incentive; 3) a group receiving both video-based solution-focused brief coaching and a discount card incentive; or 4) a control group. Each client then had an opportunity to save part of their refund, if they had one.

The Interventions

Video-Based Solution-Focused Brief Coaching

The video-based solution-focused brief coaching intervention consisted of a professional therapist serving as a “video coach” to walk the client through a coaching exercise. The video itself was roughly 10 minutes, though the total length of the intervention depended on how long participants took to complete some self-reflection tasks.

The video coaching questions included asking the client the miracle (or fast-forward) question (a question commonly used in SFBT to get the client envisioning a world without a current problem they are facing), scaling questions (questions which are used to assess commitment, confidence, and motivation to change behavior [Archuleta et al., 2015]), next step questions, coping questions, and relationship questions. Participants followed along with a worksheet and the video would pause to allow clients to answer each question, only restarting once the client confirmed they were ready to continue. You can watch the video below:

The specific sections of the video include:

  • Welcome and introduction
  • Introduction of the video coach as a life coach
  • Invitation to think about their desired financial future
  • Explain why the video may be helpful
  • Provide an analogy the emphasizes the importance of planning for the future
  • Fast-forward exercise (worksheet activity)
  • Explore current exceptions (worksheet activity)
  • Provide a ladder analogy to explain scaling
  • Create a clear vision of how things would improve in their desired state
  • Explore possible next steps to reach their desired state (worksheet activity)
  • Invite the client to discuss their goals and next steps with the tax preparer

The uniformity provided by the video presentation of the therapy session was an advantage of this study. While there certainly other advantages to having a real life therapist provide the intervention, video presentation allows the researchers to be more confident the intervention was more consistent for clients.

Cashless Matching Incentive

The second intervention was referred to as “The 10% Club”. Clients who saved at least 10% of their tax refund into a long-term savings account (e.g., US savings bond, IRAs, or CDs) were offered a discount card to local business as part of a cashless matching incentive. The card providing varying discounts to local businesses (e.g., 10% off, buy one get one free, etc.).


At the end of their session, each client was asked the following questions:

  • Did you save part of your refund today?
  • How did you save part of your refund today?
  • How much of your refund did you save today?

The results strongly supported the efficacy of solution-focused brief-coaching, finding a statistically significant difference in both whether a client saved and how much they saved:

Saving Behavior By Coaching Intervention

The results for the discount card did not fare as well. Interestingly, the combination of both the discount card and the SFBC was the worst outcome. The researchers suggest this may be the result of student tax preparers not seeing themselves as coaches, and therefore feeling uncomfortable with that intervention and steering participants towards the discount card. Another possibility is that the participants experienced choice overload and were more inclined to do nothing. It is also possible the combination of the discount card and the video created the impression the clients were participating in some type of sales presentation, and therefore experienced greater resistance to both options.

Palmer et al. (2016) suggest that perhaps the most significant result of their study was the fact that coaching that led to higher levels of saving was found to be scalable in the sense that the coaching services do not need to be delivered by a flesh and blood human coach, but instead, can be delivered through a recording. Given that a reported 60 million tax returns were filed in 2012 using H&R Block and TurboTax alone, the power of a scalable solution to help people save more should not be underestimated. And while human financial planners may be essential for some types of coaching and financial behavior change, it doesn’t mean that technology and recordings of humans can’t play a role, too!

Brain Activity And The CFP Designation

Another well-known line of financial planning research conducted in a laboratory is Russell James’ research utilizing fMRI, which is a neuroimaging technique which measures brain activity based on changes in blood flow within the brain. James has examined a number of topics related to neuroscience and financial planning, including brain activation when engaging in charitable bequest decision making, brain activations when choosing and changing financial advisors, and how neuroscience can be applied to a financial planning practice.

In a 2013 study in the Journal of Financial Planning, James utilized fMRI to measure brain activity and found that counseling from an individual with the CFP designation can help calm investors relative to similar counseling from a non-credentialed financial advisor.

The study engaged individuals in a stock market game employing four different investment strategies. After being placed in the fMRI scanner looking at a video screen, participants were given the following prompt:

Next you will play a stock-market game. The participant who accumulates the most money in this game will be paid $250. Instead of picking stocks, you will select among four financial planning firms. These advisers will invest in stocks for you based on one of four strategies. You may change firms at any time, as many times as you like. There is no cost to change firms. The four financial planning firms are (A) The Able Firm, (B) The Baker Firm, (C) The Clark Firm, and (D) The Davis Firm.

The Able Firm follows a TRENDS strategy immediately selling stocks that are falling and buying stocks that are rising. The Baker Firm follows a GROWTH strategy buying stocks in companies that are growing. The Clark Firm follows a VALUE strategy buying “cheap” stocks in companies with a lot of assets but low stock price. All advisers in the Clark firm are Certified Financial Planners. A CFP [certificant] must have years of experience, a college degree with investment coursework, must pass a series of rigorous exams and continually complete ongoing education in investing. The Davis Firm follows an INCOME strategy buying stocks in companies that pay high dividends (income). All advisers in the Davis firm are Certified Financial Planners.

After each round you will see your percentage return (gain or loss) for that round and the overall market return for that round. You may change advisers at any point by clicking on the relevant button: left button/left hand for Able; right button/left hand for Baker; left button/right hand for Clark; right button/right hand for Davis .…

Choose your initial adviser now. You may change at any point by pressing the appropriate button.

Participants went through a series of 36 “market reports” which reported how much the market was up in a given round as well as their specific investments. After the 36th market report, participants received the following message:

For the second half of the game, the adviser firms are (A) The Adams Firm, (B) The Brown Firm, (C) The Cook Firm, and (D) the Dale Firm. All firm strategies are as described previously for TRENDS, GROWTH, VALUE, and INCOME. All advisers in the Adams Firm and the Brown Firm are Certified Financial Planners. Choose your initial adviser now.

This continued for 36 more market reports, at which point the game came to an end. In the first round, all participants were given “flat” market returns for the first 12 reports (0.5% – 3.0%), high for the next 12 reports (10% – 20%), and low for the final 12 reports (-10% to -20%). A similar structure was used for the second half of the game, except returns were presented as high, low, and then flat. The selection of an advisor did not impact returns, and all advisors either did better or worse than the market by 1% – 5% based on a pre-determined sequence.

On average, participants selected CFP advisors 62.5% percent of the time, and that rate was similar during both periods of market under- and over-performance. Advisor switching was more common during periods of poor performance (nearly 75% of all switches occurred during poor performance).

Statistically significant brain activations were found when using a non-CFP versus a CFP during an under-performing market. Russell notes that activation within the anterior cingulate cortex is particularly notable given that it is a region that has been found to be associated with error detection, and particularly error detection within another person. In other words, the fMRI results when a non-CFP experiences under-performance are consistent with the type of brain activity that occurs when we question the errors of others, suggesting that participants may be more questioning of non-CFPs than CFPs during times of poor market performance.

How Financial Planners And Academics Can Better Collaborate In Laboratory Research

The New CFP Board Journal And The Financial Therapy Association (FTA)

Laboratory research will continue to yield important insights on the practice of financial planning. However, as noted previously, there are some challenges related to both funding and getting laboratory research published. While there isn’t much advisors can do to help out with the publishing issue (though contributing to the Center for Financial Planning’s to support its new journal is certainly an option), one way advisors can get more involved is joining and engaging with the Financial Therapy Association.

In practice, the Financial Therapy Association has become the central organization bringing together those conducting research in financial counseling laboratories. Participation gives advisors the opportunity to help generate new research ideas, give feedback to researchers on their studies (as most will gladly welcome feedback to make their research more practical!), and help ensure academics aren’t too isolated from the needs of practitioners (the classic “academics in their ivory towers” concern). And for interested advisors, there may even be opportunities to collaborate on research as well, such as sharing (anonymized) client data or even permitting researchers to do “field work” in the advisor’s real financial planning environment (though still subject to Institutional Review Board [IRB] requirements!).

In addition to opportunities for collaboration, advisors who join the FTA also receive access to the Journal of Financial Therapy (which is the journal most open to clinical and experimental studies that relate to everyday financial planning practice). And, of course, joining also helps provide financial support, which in turn helps the organization grow and continue to build its reach.

Provide Financial Support To Financial Counseling Labs

Another meaningful way to help out with research is through funding. In fact, given the relative youth of financial planning as an academic discipline, a little bit of funding can actually go a very long way. Advisors would likely be surprised how far even a few thousand dollars can go towards funding research that literally shapes the future of the profession.

For advisors who are interested in funding research, the best place to start would be by seeking out labs or clinics that are conducting quality research, and then contacting a lab/program director to begin the conversation. A starting list of programs with on-campus financial counseling labs include:

While not an exhaustive list, other programs which may not have a permanent financial counseling laboratories but do have strong financial planning programs and research faculty include Texas Tech University, The American College, Ohio State University, University of Alabama, and Utah Valley University.

Ultimately, laboratory research will continue to be an important source of new insight into the financial planning profession – allowing us to subject the “art” of financial planning to scientific investigation. Practitioners have a big role to play in the continuing development of financial planning research, and there are many opportunities to get involved. Whether it is by engaging in the literature and applying it in your practice (thereby helping to build the culture of an evidence-based profession), actually getting involved in the research and collaborating with researchers, or providing funding that can lead to new insights and the development of research agendas – both practitioners and researchers have a unique opportunity to continue shaping the future of the financial planning profession going forward.

CFP Board Proposes Tightening Fiduciary Requirements: ‘Huge Step’ or ‘Double Standard’?

CFP Board Proposes Tightening Fiduciary Requirements: ‘Huge Step’ or ‘Double Standard’?

At the end of 2015, the CFP Board announced that it was forming a new Commission on Standards… a 12-person committee, with a diverse representation across the industry, that was tasked with updating the CFP Board’s current Standards on Professional Conduct, which hadn’t been changed since the last update went effective in 2008. This week, the Commission on Standards released the first draft of its new Proposed Code of Ethics and Standards of Conduct, which expands the scope of when a CFP professional must act as a fiduciary on behalf of clients to include not just when delivering financial planning or material elements of financial planning, but anytime the advisor provides “financial advice”, which is broadly defined to include any time the CFP professional suggests that the client “take or refrain from taking a particular course of action” (which could include even a single product recommendation).

Notably, though, the CFP Board will still allow CFP professionals to earn commissions – akin to the Department of Labor’s fiduciary rule – as long as the advisor otherwise meets his/her fiduciary obligations with respect to the advice itself. And as a result, some critics are still raising the concern of whether the CFP Board’s new standards will still leave open too many loopholes for broker-dealers offering particularly high-commission products. On the other hand, with the Department of Labor’s fiduciary rule forcing substantial reform amongst broker-dealers anyway, including the rise of less conflicts T shares and clean shares, in practice efforts to comply with the DoL’s fiduciary rule could reduce the conflicts that CFP professionals are exposed to, anyway. In the meantime, the CFP Board will be conducting a series of 8 open Town Halls for feedback on the proposed standards, and the release of the standards on June 20th marks the start of a 60-day public comment period, which will end on Monday August 21st, during which anyone can submit a comment on the proposed standards via the CFP Board’s website here.

What The Latest Milestone Actually Means

What The Latest Milestone Actually Means

Today, marks the applicability date of the Impartial Conduct Standards under the Department of Labor’s fiduciary rule, a process that was almost 6 years in the making (although technically the rule doesn’t take effect until 11:59PM tonight!). Notably, though, the primary part of the fiduciary rule that is taking effect is just the Impartial Conduct Standards that financial advisors must act as fiduciaries (at least regarding retirement accounts); the additional fiduciary agreements, policies and procedures requirements, and (website) disclosure rules, won’t kick in until January 1st of 2018.

However, financial institutions have already begun to send out information to clients about various changes that may be occurring under the fiduciary rule, as many firms have already been implementing changes just to ensure they comply with the Impartial Conduct Standards (and some have been making announcements today). In the meantime, though, the fiduciary rule is still not a done deal, even though the Impartial Conduct Standards are applicable today, as House Republicans just included a proposal to repeal of the DoL fiduciary rule in the new Financial Choice Act (though it doesn’t appear to stand much chance of passing the Senate as-is), a similar piece of legislation was just proposed in the Senate (though it too is still subject to a Democratic filibuster), and OMB just posted a notice that the Labor Department will soon be soliciting public comments about potential modifications to the rule.

Still, the odds of a full repeal seem low, though there is much discussion about whether the rule might at least be changed, particularly with respect to the controversial class action lawsuit provision (which some claim will raises costs, and others suggest are an essential point of accountability to ensure financial institutions take the rules seriously), though some have also warned that the disclosure requirements may still be problematic for some advisory firms (e.g., RIAs that do not qualify for the level-fee fiduciary streamlined exemption).

Nonetheless, the fact remains that the fiduciary rule is now official and on the books, and even though the Department of Labor itself has indicated it will not be aggressively enforcing through the end of the year as long as firms try to comply in good faith, the rule is already driving substantial positive changes in the industry, from simplification in mutual fund share classes with the rise of “T shares and clean shares” to new product filings that should expand the accessibility of various no-load insurance and annuity products to fee-based financial advisors. And all financial advisors should be certain that going forward, they have clear documentation in their client files, for every IRA rollover, that analyzes the costs and performance of the old plan against what the advisor proposed, to substantiate that the rollover really was the appropriate recommendation for the retirement investor!

Monte Carlo Investment Guesses For  Your Retirement Planning Projections

Monte Carlo Investment Guesses For Your Retirement Planning Projections

Monte Carlo analysis is a better way to a retirement planning approach to the standard “straight-line” retirement projection, because it s considerate not only average returns, but a range of probable volatile returns, allowing the prospective retiree to understand how the retirement plan might fare in many situations. However, with the additional capability illustrates many volatile returns – potentially across multiple investments or asset classes – comes a greater burden to craft appropriate investments assumptions for the Monte Carlo analysis. Otherwise, there’s a risk that the Monte Carlo analysis could mis-state the risks of various retirement portfolios.

The key issue is that when selecting investment assumptions for a Monte Carlo analysis, there are three core points of data that are necessary for each investment: expected return, volatility, and correlation. And correlations are much more challenging assumptions, because an assumption is needed for the relationship between each investment and every single other investment paired to it! And a rising number of investments necessitates dramatically more correlation pairs – as a result, 3 investments requires 3 correlations, but 5 investments requires 10 correlations, and 10 investments requires assumptions for a whopping 45 correlation relationships!

And the reality is, given the underlying math of a Monte Carlo analysis, even making no correlation assumption is a guess. It’s just an implicit assumption of zero correlation… which is actually a very dangerous assumption, because, in the real world most investments don’t have zero correlation. Yet by assuming zero correlation when the correlation is actually higher, the projection ends out overstating the benefits of diversification, and therefore understating the risk to the retiree and overstating their probability of success in retirement!

In the end, this doesn’t mean it’s bad to have a diversified portfolio, but it’s crucial to recognize that adding more investments to a Monte Carlo analysis doesn’t necessarily make it more “accurate”,  and in fact will decrease the accuracy of the projection unless the entire correlation matrix is properly included (with appropriate assumptions). As a result, a better practical approach for many advisors may be to utilize simpler two-asset-class portfolios of stocks and bonds for Monte Carlo purposes… as while this may slightly understate the benefits of having a fully diversified portfolio, at least it won’t overstate the benefits, and it is far easier to help a client adjust to a retirement that is going better than expected, than to adapt to one that is going worse!

Summer Reading List of “Best Books” For Financial Advisors In 2017

Summer Reading List of “Best Books” For Financial Advisors In 2017

As an avid reader myself, I’m always eager to hear suggestions from others of great books to read, whether it’s something new that’s just come out, or an “old classic” that I should go back and read (again or for the first time!).

Here are my suggestions on books your financial advisory firm can read to become a professional in the 21st century.

The Pursuit of Absolute EngagementThe Pursuit Of Absolute Engagement (Julie Littlechild) – Burnout is a common challenge in many client-oriented professions, where the ongoing grind and demands of serving clients can lead to a level of chronic stress that takes a mental (and sometimes even physical) toll. The added complication in the context of being a financial advisor is that successfully engaging with clients usually brings more of them, which grows the business larger and necessitates the hiring of more staff, and in turn can just accelerate the burnout stress for an advisory firm founder who is now mired in both the service demands of clients and the demands of running the business itself. Until eventually, the advisor doesn’t even feel in control of their life and their business; instead, the business controls them, and it’s a beast that must be fed, given the even-more-adverse financial ramifications of having the business fail. So what’s the way out for advisors who find themselves stuck in this trap? Littlechild believes that it starts with taking an intentional pause and step back to look at the business itself, your role as the advisor (particularly if you’re the founder/owner), and to begin setting a proactive vision of what you want the business to look like, and what you want your role to be. Because it turns out that advisor’s who engage in their business the way they want to be engaged – doing the tasks that give them energy, instead of draining them – end out being more financially successful anyway, in addition to feeling happier and less stressed (and even taking more vacation!). Of course, in the real world, it’s usually not feasible to just drop everything and redirect (yourself or your business), but Littlechild emphasizes that just as it was a series of incremental changes and steps in the evolution of the business that may have gotten to this (not-so-happy) point, making a (deliberate) set of incremental changes from here can start to redirect you on a better path of engagement.

Algorithms To Live By by Brian Christian and Tom GriffithsAlgorithms To Live By (Brian Christian & Tom Griffiths) – Author Brian Christian and cognitive scientist Tom Griffiths team up to examine how computer algorithms and insights from computer science can be applied to decision making in our own everyday lives. Like the machines that play such a large role in our lives, we too are constrained to a finite amount of time and resources, which we must manage on a daily basis. Christian and Griffiths find there are some interesting insights into how we search, sort, schedule, predict, deal with others, and even forget information, that can be enhanced or justified based on insights from computer science. In fact, the authors also note how seemingly irrational and inefficient behavior may be more rational than we realize – once we properly account for the limited time and resources we are operating with. For instance, a simple pile of papers on a desk is actually one of the most well-designed and efficient caching structures we can devise. What looks to outsiders as an unorganized mess is actually a highly-efficient “self-organizing mess” which can hardly be improved upon without knowing the future. Of course, that doesn’t mean you want to actually use this method if you meet with clients in your office, but the key point is that we can modify our messy desk in a way that maintains the benefits of a simple pile of papers better than the ways we often think we ought to “organize” information. The authors cover a wide range of real-world applications – from dating and finding an apartment, to hiring employees and making other business decisions – which can all be more effectively navigated through the use of some simple decision rules.

The Enduring Advisory Firm by Mark Tibergien and Kim DellaroccaThe Enduring Advisory Firm (Mark Tibergien & Kim Dellarocca) – Mark Tibergien is one of thebest known practice management consultants for financial advisors, and has written several seminal books on the topic, including “Practice Made (More) Perfect” with Rebecca Pomering on growing an advisory firm, and “How to Value, Buy, or Sell a Financial Advisory Practice” with Owen Dahl. In his latest book, co-authored with Kim Dellarocca (head of Practice Management for Pershing), Tibergien delves into what it takes to build an “enduring” advisory firm – in other words, a business that lasts, beyond its founder. And in his usual style, Tibergien debunks practice management myths – in today’s environment, that advisors are reducing their fees to compete with robos, and that the Millennial generation lacks the work ethic to build the firms of the future – and then delves into the real challenges advisory firm owners must consider, including margin compression (which is the real impact and threat from robo-advisors), the challenges of growing a more mature firm, and ongoing industry consolidation and when/whether it makes sense for an advisory firm owner to sell or merge (or not). The bulk of the book, though, is about looking across the generations, and the different ways that Gen X and Millennial clients seek out and engage financial advice. The fundamental point: if you really want to build an enduring advisory business beyond just a founding (typically baby boomer) owner, it needs to figure out how to serve clients beyond the founder’s (typically baby boomer) generation, and make itself relevant to the future generations of financial planning consumers. The Enduring Advisory Firm serves as a primer for advisors to start thinking about how their services and value proposition may need to be reshaped to serve those future generations (for the advisory firms that wish to pursue them).

Buying, Selling, and Valuing Financial Practices by David GrauBuying, Selling, And Valuing Financial Practices(David Grau, Sr.) – As the founder of FP Transitions nearly 20 years ago, there’s arguably no one who has seen and consulted on more advisory firm transactions than David Grau and his team. And in this book, Grau shares his perspective on the way that advisory firms are valued in the real world – not the theory of business valuation, but the hard math of how buyers and sellers actually come together to agree on a price, and the relevant factors that impact the agreed-upon value, from client transition risk and the “quality” of the cash flow, to the terms of the deal that impact the tax structure (and valuation itself) for the buyer and seller. And what’s unique about Grau’s book is that it’s clearly written with the seller in mind, who as Grau notes is often at a disadvantage in the typical advisory firm transaction, as despite the fact that it’s a “seller’s market” (with an estimated 50 interested buyers for every seller), the caveat is that many/most buyers are serial buyers (who have already done numerous deals), while virtually all sellers will only ever go through the process once, which means there’s a substantial imbalance of knowledge and experience in conducting the transactions. Accordingly, Grau provides valuable insight into what sellers should expect and demand in particular, and why sellers often get the short end of the stick from both buyers (if they don’t retain adequate outside counsel) and from their own custodians and broker-dealers (who are often more interested in retaining the advisor’s client assets than actually helping to ensure the selling advisor maximizes the deal). In the end, the book is not exclusively for sellers – it’s quite relevant for buyers wishing to understand the mechanics of advisory firm valuations and purchase deals as well – but is arguably a “must read” for any advisor who is seriously considering whether to sell their firm, and wants to be certain to make good decisions with the one and only chance they get to sell the business they spent a lifetime building.

Scaling Up by Verne HarnishScaling Up (Verne Harnish) – Most large advisory firms reached that point by growing slowly and steadily for a long period of time;early on, adding just one or two clients per month can take years just to achieve a livable income, but steady new business development eventually leads to the hiring of a paraplanner, and then another financial advisor, and then another, and then some staff infrastructure… and suddenly, the advisory firm has grown beyond a founder-centric “practice” into a bona fide “business”. Yet the challenge is that while there is a growing volume of “practice management” advice for financial advisors, there is still almost nothing out there about how to grow and run a bona fide business, with all the challenges of hiring, developing, and retaining people, aligning them to execute strategic objectives of the firm, and truly managing the growth over time. In this context, “Scaling Up” is a true “business management” books, about how to manage a “small business” that is trying to scale up to become 10X its current size and grow beyond $10 million (or from $10 million to $100 million) of revenue. The book is built around the idea of mastering the “Rockefeller Habits” (the title and subject of Harnish’s first edition of the book), a series of principles and “business habits” that the legendary John D. Rockefeller used to build his business empire. Key points about how to truly run an effective (and especially a rapidly-growing) business include the ability to truly set business priorities and align the whole team to deliver on them, effectively collect and evaluate and leverage the quantitative and qualitative data that is crucial to actually manage a business, and setting “meeting rhythms” of daily check-ins, weekly team meetings, monthly objectives, quarterly big goals, and annual strategic initiatives. So if you’ve ever felt frustrated as the advisor of a growing advisory business that no one teaches us how to actually truly run a business, you should find Scaling Up incredibly helpful, as its author Verne Harnish is an active consultant to entrepreneurs, and the tactics recommended are not just business management theories, but tried-and-true tools that Harnish has actually executed with the business owners he works with.

Ask by Ryan LevesqueAsk (Ryan Levesque) – The essence of most marketing is to figure out what consumers want, and then position and communicate that your product or service can deliver it to them. The caveat, however, is that the standard approach inherently assumes that most people actually knowwhat they want, and can articulate it – or at least recognize it when they see it. Levesque suggests that in reality, this approach fails, precisely because most people don’t actually know what they want, particularly if they might be buying something that they’ve never used, seen, or experienced before. (As the famous Henry Ford quote goes, “If I had asked them what they wanted, they would have said faster horses.”) Instead, then, if you want to understand what your customers or clients really want, you must start by asking them what they don’t want (which most can articulate more clearly) as well as what they’ve done in the past (which again we can articulate clearly, because we actually did it). What follows is Levesque’s own story of how he discovered and refined this process in his own business, and the structured way that he asks survey questions to prospective customers/clients to refine the marketing and services of various businesses. While the process is ultimately rather focused on digital marketing – which isn’t how most financial advisors market today – “Ask” nonetheless makes interesting points about how an advisory firm might try to refine the targeting of who it serves, what it does for them, and how it reaches them, and could be especially relevant forthose trying to refine their business focus on a particular niche. At a minimum, it will certainly challenge you to think very differently about marketing than what we’re typically taught in the financial planning world!

No Longer Awkward by Amy FlorianNo Longer Awkward (Amy Florian) – For most financial advisors, there are few situations more awkward and uncomfortable than a grieving recently widowed client who starts crying in your conference room. For most, it’s not a situation that we have much worldly experience with, nor one that anyone has trained us to handle. Which is why few of us would know that offering the crying client a box of tissues is actually not the appropriate way to handle the situation – as it’s a subtle but direct signal to the client that it’s time to stop the crying and move on, even if they aren’t ready to do so. (For those who are wondering, the correct approach is to leave a box of tissues within reach of the client, and let him/her reach out and take them whenever they’re ready to go so.) In her book, Florian details this and numerous other insights into the proper ways to handle and respond to grieving clients, in an effort to make literally make it “no longer [so] awkward” for financial advisors who may be unfamiliar with how to handle such situations. And the book include not only guidance about how to handle a wide range of such client-in-grieving situations, and what to say and do (and what not to say and do!), but even includes templates that advisors can use or adapt for everything from condolence cards to follow-up letters that might be sent later.

Suggestible You by Erik VanceSuggestible You (Erik Vance) – It has long been recognized that as human beings, we are highly “suggestible”, a trait that is helpful as a social animal to get along with the “herd” of other human beings, but can also lead to such phenomena as placebo effects, hypnosis, and false memories. Journalist Erik Vance explores this research, and the “inner pharmacy” of chemicals that our bodies unconsciously release – including opioids, cannabinoids, serotonin, and dopamine – all of which impact our behavior, including the way that professionals relate to (and provide advice and guidance to) their clients. For instance, in the medical field, our ability to be suggestible is what allows doctors to influence and change our behavior for the better, but has also supported the growth of several less respected fields (e.g., alternative medicine, miracle pills, and even witch doctors). Yet the medical profession had long resisted the study of placebos, and is only now beginning to become more interested in the science, from new findings related to who is susceptible to placebos, to how they work, and how we might be able to better invoke or control them… which has profound implications for medicine (and potentially other industries) going forward. More generally, though, the science of suggestibility has many potential impacts for financial advisors, as research in the medical context implies that we need to be careful in considering everything from the way we dress, to the office environment where we meet clients, and even think about how a client’s own beliefs (right or wrong) that can influence their well-being and willingness to accept and act on an advisor’s advice.

Humans Are Underrated by Geoff ColvinHumans Are Underrated (Geoff Colvin) – With the ongoing rise of exponential technology, it’s become increasingly popular to suggest that most/all human jobs will soon be replaced by robots. Yet Colvin suggests that there are unique values that only humans themselves can bring to the table, that are being ignored in the ongoing discussions. Specifically, while it may be true that a lot of technical, classroom-taught, “left-brained” skills may no longer be as relevant in the future (because computers will do them faster and better), the fact that we are “social animals” – hard-wired to react to other human beings in ways that computers cannot evoke – simply means that the human value proposition of the future will increasingly be focused on so-called “right-brain” skills of sensing the thoughts and feelings of others, working productively in groups, and building relationships to problems together. In essence,empathy will be the key skill for success in the future, as computers replace the value of knowledge workers and force us to be “relationship workers” instead. In other words, “Humans Are Underrated” at performing the tasks that truly are uniquely human, which are built around the social interactions of connecting with other human beings. Which, notably, actually presents an optimistic and upbeat path about the future relevance of human financial planners… albeit one where our value proposition in the future will not be defined by our technical knowledge, but our ability to use our social interaction and relationship skills to help better define the problem and goals in the first place – given that for most people, they are ever-changing – and then communicate a solution (that may well be analyzed and calculated by a computer) in a manner that connects with other human beings, to help them actually implement it. Because it’s not about what computers can or cannot do, but what we as humans feel compelled to get (and are hard-wired to get) from other human beings.

Financial Planning 3.0 by Richard WagnerFinancial Planning 3.0 (Dick Wagner) – The late Dick Wagner was one of the great thinkers of financial planning, author of the seminal article “To Think… Like A CFP”, and a tireless advocate for the (future) recognition of financial planning as a profession… in fact, he claimed that financial planning would become the most important authentic profession of the 21st century, as our entire culture and society increasingly shift away from the ancient days of barter and reliance on communities for support, to a world where money becomes a primary means of human interaction. An “Age of Money” that our brains are not well wired for, for which the professional financial planner will become the key professional to help people navigate the varying and powerful forces that money exerts in our lives. In fact, Wagner suggests that ultimately, the financial planning “garden of knowledge” (a term he preferred to “body of knowledge”) will formulate its own liberal arts category, which he dubbed “Finology” – just as Sociology describes how large numbers of people behave, and Economics describes their financial behaviors en masse, Wagner predicted that Psychology (which describes how individuals behave) will be complemented by Finology (financial behaviors and our relationship with money, at the individual rather than societal level). Ultimately, Wagner’s book itself – which fortunately was released less than a year before his untimely accidental death from a fall – is a collection of his thoughts and essays on these dynamics of Finology, the Age of Money, andthe emerging role of financial planning as a 21st century recognized profession (separate and distinct from the broader financial services industry). If you read the book, be prepared to “think big” beyond your advisory firm and what you do with clients on a day-to-day basis, and into the higher purpose of what role the financial planning profession and financial planners should play in society at large in the future.

What You May Not Know About Cambria ETFs

What You May Not Know About Cambria ETFs

The ETF world is full of articles touting the advantages of mega-firms like Vanguard, BlackRock, and State Street.  These companies have set the bar high for delivering exceptionally transparent, diversified, low-cost, and liquid vehicles to every American investor.

Nevertheless, many ETF shareholders have yet to identify with the broad array of smaller firms that are pushing the envelope in terms of their innovative funds.  These companies often escape notice because of their smaller regional size that is dwarfed by the industry titans.  I’m talking about issuers such as Alpha Architect, Davis, Elkhorn, O’Shares, Reality Shares, and the focus of today’s article: Cambria Investment Management.

The one thing each of these firms has in common is they seek out sound investment strategies backed by evidence-based research or a proven index methodology.  Their funds may also offer closer identification with investors that are looking for sound tactical exposure or differentiation in the form of a reliable ETF wrapper.

Without further preamble, here is my take on one of the smaller firms that is doing it right…

Cambria was co-founded by Mebane Faber and Eric Richardson, who develop and manage the individual ETF strategies produced by the firm.  The company has nine ETFs currently available for trading with a host of others that are currently in registration.  According to data from ETF.com, the firm has $417 million in total assets spread amongst its suite of funds.

The flagship strategy is the Cambria Shareholder Yield ETF (SYLD), which I have mentioned on the blog before.  SYLD is classified as an actively managed ETF that owns a basket of 100 U.S. stocks demonstrating the characteristics of paying cash dividends, repurchasing shares, or paying down debt on their balance sheets.  These stocks are actively trying to return profits to shareholders in the form of sound financial management (shareholder yield) rather than just focusing on a single factor like high dividend payouts or share buybacks.

SYLD is on the cusp of celebrating its fourth anniversary and has delivered sound results to-date.  The returns since inception are similar to that of a broad-market benchmark such as the SPDR S&P 500 ETF (SPY).

In my opinion, this ETF has a great deal of potential as a long-term equity strategy with the potential for outperformance over varying market cycles.  It’s also worth noting that SYLD has an international brother in the Cambria Foreign Shareholder Yield ETF(FYLD).  As you can imagine, the strategy is roughly the same with the exception that it’s focused on developed markets outside the United States.  Both funds charge an annual expense ratio of 0.59%.

One of the core tenets of the Cambria family is a focus not just on a home country bias, but also diversifying around the globe.  One example of that thesis is the Cambria Global Asset Allocation ETF (GAA).  This “fund of funds” style ETF owns a basket of other underlying ETFs spread across domestic and international stocks, bonds, real estate, and commodities.  Think of it as owning the entire global public investment market in a single vehicle.

It’s also the first ETF to not charge a management fee or expense ratio.  The only on-going costs are the underlying expenses of the ETFs that GAA owns, which are around 0.25%.  That’s rock bottom pricing for a solid and extremely diverse mix of assets.

In a similar structure, the Cambria Global Momentum ETF (GMOM) seeks to own a basket of underlying assets in stocks, bonds, commodities, or currencies showing top measures of momentum.  This actively managed fund shifts its holdings to target the top one-third of a universe of 50 potential ETFs to try and capture the funds demonstrating the strongest trends in the current environment.  The strategy is based on research conducted by Mebane Faber demonstrating that quantitative analysis of momentum and trend can lead to outperformance.

Lastly, I will note the popular Cambria Global Value ETF (GVAL) is an index-based approach to screening for over 120 stocks (both foreign and domestic) that are showing intrinsic value characteristics.  This global equity portfolio dives deep into several developed and emerging market nations that have potentially underperformed in the past and may be ripe for a deeper appreciation based on their fundamental qualities.

The Bottom Line

It’s difficult to highlight the benefits of every single ETF in the Cambria fund family in such a short forum.  However, I would urge investors who believe in evidence-based investment management with an emphasis on global strategies to investigate their offerings.

They continue to push the bar based on their wide body of research and even originate investment ideas from leading social or emerging investment trends.  The greatest evidence of which may be a fledgling ETF (currently in SEC registration) based on medical marijuana stocks.

As the ETF world becomes more congested, I would urge investors to look to smaller companies like Cambria who are differentiating themselves from the herd.  Depending on the strategy, these types of funds can augment traditional core index exposureor allow for greater diversification across a wide range of assets.