Tag: Financial Planning

The Latest Advisory Industry & FinTech Trends From #SchwabIMPACT

The Latest Advisory Industry & FinTech Trends From #SchwabIMPACT


While it is becoming increasingly clear that “robo-advisors” are not disrupting human financial advisors, the adoption of robo technology by financial advisors themselves is beginning to shift the competitive landscape… both amongst financial advisors themselves, and the technology vendors who serve them, as the very role and value proposition of financial advisors themselves begins to get re-defined.

In this week’s discussion, will discuss the latest advisory industry and FinTech trends – including the Robo 2.0 trend currently rolling through the industry, why Robo 2.0 will spur the rebirth of next generation financial planning software, and why it’s the rise of better “small data”, rather than “big data”, that is likely to be most important to advisory firms in the coming decade.

One of the biggest trends rolling through the advisory industry right now is rise of “Robo 2.0”. Robo-Advisor 1.0 was all about companies like Betterment and Wealthfront, which made convenient and easy-to-use tech tools for opening accounts, investing those accounts, and managing them over time, and offered directly to consumers. However, we’ve learned that only a small subset of consumers actually want to buy these solutions directly, while there is a large base of financial advisors who want to use these same tools within their own businesses. As a result, Robo 2.0 tools are focused on facilitating the ability of financial advisors to quickly and easily open investment accounts, get the dollars actually transferred, invested, allocated in reasonable models, and model management tools to make it very easy to allocate and rebalance models along the way. The good news for advisors is that these trends drive efficiencies and lower business costs. But the challenge going forward is that now that all of this can be done with a click of a button, advisors need to find new ways to add value for their clients.

Looking forward a bit further, the biggest change we’re likely to see in the industry 5 to 10 years from now isn’t actually the adoption of Robo 2.0 tools, but instead, the rebirth of next-generation financial planning software as investment management receives less attention. As advisors are forced to focus on other areas of financial planning – everything from HSAs and healthcare conversations, to debt management issues, and cash flow planning more generally – advisors are going to need better financial planning software tools to help clients with these issues. Which presents a huge opportunity for those who are interested in building tools oriented towards financial planning, and advisors who want to focus more on financial planning… while for those still mostly focused on investments, the next decade is going to present more of a competitive business challenge.

Another trend that many have predicted will influence the next decade is artificial intelligence, machine learning, and big data. But I’m very skeptical about the discussion of these technologies coming into advisory businesses. Because the reality is that so many of the challenges in what we do for clients are not big data problems. Instead, it’s small data – i.e., the uniqueness of every advisory firm and the clients they serve – where better insights are needed. So while there will certainly be some applications for large firms to leverage big data and bring insights on the entire industry, at the advisor level, the most exciting advancements are in the small data areas that are directly relevant to firm owners and their clients. For instance, automated business management and benchmarking data that makes it easier to track the components of business growth and performance, and tools that automate the many business management reporting processes that advisors are manually doing today.

The bottom line, though, is simply to recognize that we’re in the midst of some big FinTech trends within the advisory industry right now. So if you are an advisor who wants to stay relevant and continue to add value to your clients in the future (or a tech provider who wants to make the tools to help advisors do so!), it is important to understand how these trends will shape financial planning in the future!

Financial Planning Research Highlights From The 2017 Academy of Financial Services Annual Meeting

Financial Planning Research Highlights From The 2017 Academy of Financial Services Annual Meeting


From October 1st through October 3rd, the Academy of Financial Services’ annual meeting was  in Nashville, TN – partially overlapping with the FPA’s BE Annual Conference. The event brought together many academics and practitioners to share and discuss research, with the intention of increasing academic-practitioner engagement by holding two of the largest conferences for both researchers and practitioners in conjunction.

In this guest post, Derek Tharp – our Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – provides a recap of the 2017 Academy of Financial Services Annual Meeting, and highlights a few particularly studies with practical takeaways for financial planners.

The 2017 Academy of Financial Services (AFS) Annual Meeting showcased research from scholars at a wide range of institutions – with first author affiliation on paper and poster sessions representing roughly 40 institutions. As expected, the core financial planning programs had a strong presence, with scholars from just seven of those institutions serving as lead authors for more than 50% of all research presentations and poster sessions.

The AFS annual meeting featured research on a number of different topics. Some notable sessions for practitioners ranged from topics such as whether having resources from friends and family reduces a household’s willingness to establish an emergency fund (not as much as you might expect!), how bull and bear markets impact the subjective assessments of portfolio risk, the links between certain types of personality traits and likelihood of financial stress, and quantifying the financial advisor’s value when it comes to making efficient investment decisions (and how that value varies depending on the investor’s existing capabilities in the first place).

Overall, holding the AFS Annual Conference and FPA BE Conference in conjunction appeared to be successful in creating greater engagement between practitioners and researchers (with some research presentations filling large rooms at standing room only capacity!). As both the AFS Annual Conference and CFP Board’s Academic Research Colloquium strive to create more robust platforms for sharing and engaging in academic research, the future appears bright for financial planning researchers (and research that can really be used by financial planning practitioners)!

2017 Academy of Financial Services Annual Meeting

Though perhaps lesser known among many financial planning practitioners, the Academy of Financial Services has a long history of promoting academic research within the area of financial services. Dating back to 1985, the AFS has aimed to promote interaction between practitioners and academics. One way the AFS pursues this objective is by publishing an academic journal, the Financial Services Review (FSR). In recent years, AFS began to publish FSR in collaboration with the Financial Planning Association, and as a result, FPA members receive digital access to the current volume/issue of the journal.

Another way the AFS encourages interaction between practitioners and academics is through holding their annual meeting. This objective was given even greater focus in 2017 as the AFS held its Annual Meeting in conjunction with the FPA BE Annual Conference, conducted as a “pre-conference” event of its own but with one day of overlap to the main FPA conference agenda (which allows practitioners to come early and participate in the AFS event, and for academic researchers to stay beyond the AFS meeting and participate in the FPA annual conference as well).

Academic Representation At The 2017 AFS Annual Meeting

The 2017 AFS Annual Meeting drew researchers from a number of academic and professional institutions. In total, roughly 40 institutions were represented as first authors on research presented in either poster or oral sessions.

For those who haven’t attended an academic conference before, academics generally present their research at conferences in one of two ways. The first is the poster session, which is a more informal presentation where a researcher stands in front of a large poster summarizing their findings. The second are oral sessions, where researchers deliver a more formal research presentation to an audience. Researchers must submit their sessions in advance for consideration to be selected for presentation.

Several of the well-known financial planning programs had a strong showing at the 2017 AFS Annual Meeting. Texas Tech led the way with scholars serving as first author on 9 oral session and 2 poster sessions. Kansas State ranked second with scholars serving as first author on 5 oral sessions and 2 poster sessions. Other schools with a strong presence included The American College, University of New Orleans, University of Georgia, Ohio State University, and the University of Alabama. In total, these 7 schools accounted for 54% of the first authors of research selected for oral or poster sessions.

Portfolio Gamma Framework By Investor Type

As is indicated in the chart above, Blanchett and Kaplan conclude that different levels of financial advisor value are experienced by different types of investors. And of course, different levels of value are delivered by different types of advisors, as not all financial advisors are going to fully deliver gamma in each category.

Specifically, their results suggest that when consumers receive average or high levels of benefit from working with a financial advisor (and when the advisor can actually deliver the value), the gamma that can be added from efficient investment strategy selection is significant enough to justify a typical AUM fee. However, when consumers receive low levels of benefit from working with an advisor (e.g., because they are already capable of self-implementing a long-term diversified portfolio), it may be hard to justify a typical AUM fee based on investment gamma alone.

And while this insight may seem somewhat self-evident, Blanchett and Kaplan provide some concrete estimates of the value that may actually be received by various types of consumers. Further, evaluating the different categories can help advisors see where they can generally add the most relative value. For instance, while asset class selection is important, helping clients to decide to save and invest in the first place is relatively more important for each type of consumer.

Blanchett and Kaplan’s study is a big step forward in terms of addressing the “compared to what” problem and many of the limitations of prior studies attempting to quantify the value of advice. By providing a framework that spans multiple dimensions of potential value-add, their quantification of value becomes much more meaningful. If a particular investor is “low” on questions 1-3, “average” on 4-6, and “low” on 7, a customized value-add unique to their circumstances can be calculated. While it may not be perfect, the benchmark in this study is beginning to look much more like a real person.

Example 1. John is a consumer who has a very good understanding of the importance of investing, appropriate risk levels, asset allocation considerations, and how the risk of his retirement goal affects a portfolio allocation, but he only has an average knowledge of what types of accounts to use, what investments to implement with, and when he should revisit his portfolio. Therefore, assuming John’s prospective financial advisor is of high competence in all areas, John’s benefit of working with an advisor (or developing the skills and knowledge on his own) could be estimated as 1.4% per year.

 Of course, this study doesn’t even attempt to quantify the value of financial planning gamma(meaning the true potential value-add would be even higher), but Blanchett and Kaplan have provided a solid foundation for beginning to more precisely quantify the value-add of an efficient portfolio.


While the importance of maintaining an emergency fund is no secret amongst financial planners, understanding the relationships between household characteristics and emergency fund preparedness can help financial planners identify situations in which extra precaution should be taken to ensure client households are prepared to face financial adversity.

Unmarried parents with children—i.e., “fragile families”—are one group that is particularly at risk of needing to rely on an emergency fund. Because non-married households are more prone to breaking apart than married households—a process which can create a shock to income while simultaneously increasing expenses (e.g., needing to make two rent/mortgage payments instead of one)—an emergency fund is even more important for fragile families.

The Two-Income Trap by Elizabeth Warren and Amelia Warren TyagiAs Elizabeth Warren and Amelia Warren Tyagi have noted in their book, The Two-Income Trap, these dynamics are not unique to low-income households. In fact, in some respects, fragility can be even higher for young, affluent, dual-income households, as an unexpected drop in income may result in larger month-to-month deficits with fewer options to offset that decline (e.g., public support or a non-working spouse entering the labor force).

In an effort to examine emergency fund preparedness among fragile families, Abed Rabbani, an Assistant Professor at the University of Missouri, and Zheying Yao, a Ph.D. student at the University of Missouri, analyzed data from the Fragile Families and Child Wellbeing Study.

In an SSRN article, Rabbani and Yao report their findings. While not all of their findings are particularly surprising—e.g., higher income, saving behavior, and homeownership were all found to increase the likelihood of having an emergency fund (defined as two months’ income in savings)—the authors also examined whether the likelihood of having an emergency fund was impacted by the gender of the individual who controls household spending, or whether the family could obtain financial support from other friends or family members.

The authors expected that financial reliance would be negatively associated with having an emergency fund (as having an emergency fund may be less crucial when households can access resources elsewhere) and that households where a female has financial control would be more likely to have emergency funds. However, the authors found that neither exhibited a statistically significant relationship with the likelihood of having an emergency fund after controlling for factors such as debt, saving, income, employment, and homeownership.

In a practical context, this study can provide a few different insights—particularly for advisors who may specialize in working with younger, non-traditional families. First, some objective factors that we would expect to be correlated with the likelihood of having an emergency fund were found to be. While this finding isn’t groundbreaking, it is good to check that professional intuitions align with empirical findings. Second, the findings suggest that neither gender of the financial decision maker, nor the availability of family/friend financial support, were significant predictors of the likelihood of having an emergency fund.

In the case of the latter, this may suggest that merely having access to funds through friends and family does not sufficiently disincentivize creating an emergency fund for one’s own household. This is actually an encouraging finding, as it may suggest that households are looking to be self-sufficient even when other friends-and-family resources may be available as a last resort. This may be particularly relevant for financial planners given that our clientele—even in the case of non-traditional clientele served through retainers and other business models—does tend to be more affluent, and likely has more affluent social networks as well. Additionally, this finding may lessen the concern of parents that serving as a financial backstop could undermine their children’s willingness to develop their own emergency funds and fiscal responsibility.


Misalignment between perceived and actual risk is a genuine threat to sticking with a financial plan, as it means that even if a client does have the “right” portfolio consistent with their risk tolerance, if they misperceive the risk of their own portfolio, they may try to make inappropriate portfolio changes anyway.

Xianwu Zhang, a Ph.D. student at Texas Tech University, explores whether subjective risk perceptions influence portfolio choices, in his paper, Do Investors’ Subjective Risk Perceptions Influence Their Portfolio Choices? A Household Bargaining Perspective.

In general, Zhang finds that investors perceive the stock market to be riskier than objective measures suggest it is. However, what is particularly interesting about Zhang’s research is his examination of the role that household bargaining plays in portfolio selection.

Traditional models of households assumed that all members of a household act as a team—altruistically putting the interests of the family ahead of their own. However, household bargaining models acknowledge various individuals within a group have different preferences, and, as a result, conflicts of interest arise within the household. Thus, households can act either cooperatively or competitively as individual members seek to maximize their own satisfaction.

When analyzing the different ways in which families can act cooperatively or competitively, bargaining power is an important concept to acknowledge. In the context of household portfolio selection, disproportionate bargaining power can mean that one spouse dominates decision making.

Zhang utilizes several proxies of bargaining power—such as gender, education, income, and hours worked—to see how risk perceptions (measured as perceived likelihood that a mutual fund invested in blue-chip stocks would experience a 20% decline over the next 12-months) of a spouse with more bargaining power may influence the percentage of risky assets in a household’s portfolio. Utilizing data from the HRS, Zhang finds that, all else equal, the subjective risk assessments of females, spouses with more education, and spouses with lower income have a greater influence on risky asset investment.

One interesting aspect of Zhang’s findings is that it is not always the household member who is assumed to have more bargaining power whose subjective risk assessment seems to influence portfolio holdings. For instance, spouses with more income are assumed to have greater bargaining power, though Zhang finds it is those with less income whose subjective risk perceptions have a greater influence on portfolio allocation. Zhang notes that this may be because the higher earning spouses may have higher opportunity costs, and thus delegate this decision making to a lower earning spouse.

Zhang does note some important limitations to this study (e.g., it is only based on one point in time rather than evaluating behavior over time), but it is certainly a fascinating and important topic.

From a practical perspective, these findings reiterate the importance of engaging both spouses in the financial planning process. And this is particularly true in light of our industry’s historical neglect of the female members of households, as even if it is the case that a higher-earning male possesses more bargaining power within a particular household, it may actually be the lower-income female’s risk assessment which is driving portfolio risky asset investment decisions of the household!

Further, this type of analysis raises all sorts of important questions. How do couples delegate portfolio decision making between themselves? How do they delegate portfolio decision making when an advisor is involved? If an advisor is struggling to get buy-in from a couple, who should they try and influence and how should they do so? It’s unlikely that any of these questions have simple answers, but they are the types of research questions that fiduciary advisors who want to help their clients fulfill their goals must consider.


In another paper examining risk preferences, David Blanchett of Morningstar, Michael Finke of The American College, and Michael Guillemette of Texas Tech University examine the effect of advanced age and equity values on risk preferences.

Utilizing a unique data set of risk tolerance questionnaire (RTQ) responses from participants in a defined contribution managed account solution offered by Morningstar Associates, the researchers are able to analyze how RTQ responses from January 2006 to October 2012 were associated with age and equity values after controlling for other factors such as account balance, annual salary, and savings rate.

The researchers find that as the S&P 500 increases, workers become less risk averse, and vice-versa. Additionally, participants who were older, had lower income, and had lower account balances were found to have higher levels of risk aversion.

Blanchett et al. note that the higher levels of risk aversion among older participants provides justification beyond time-horizon considerations for reducing equity allocations with age. Further, these findings suggest that annuitization should be more common than it is, though the authors note that several factors may decrease the attractiveness of annuitization, including mortality salience and framing effects.

The authors also note that an interaction found between age and S&P 500 levels suggests that risk preference assessment of older individuals may be influenced by stock market valuations. Specifically, if risk preferences were assessed when market values are high, respondents exhibited more desire to take on risk. But, of course, investing more in stocks because they’re up only makes investors more at risk of losing money in the next bear market! Fortunately, target date funds and other strategies can take the rebalancing responsibility out of the investors hands, which may help shield the investor form losses due to changes in shifting risk preferences.

From a practical perspective, financial planners should consider that risk tolerance assessment should not just be a one-time occurrence. A growing body of research suggests that investors exhibit time-varying risk aversion. Of course, this too raises questions.

If risk aversion is not stable, then how should it be used in practice? Does behavior change as stated risk preferences change, or are people were changing the way they answer questions related to risk preference (perhaps driven by risk perception instead)? Does a one-dimensional measure of risk aversion even tell us much in the first place? And to what extent should retirement strategies be designed differently if there’s an anticipation up front that retiree risk tolerance will decline in their later years?


As financial planners shift from simply thinking about the quantitative aspects of financial planning to helping clients achieve more holistic financial health, understanding measures of financial stress and well-being will be increasingly important.

In their presentation, Multidimensional Financial Stress: Scale Development and Relationship with Personality TraitsWookjae Heo of South Dakota State University, Soo Hyun Cho of California State University Long Beach, and Phil Seok Lee of South Dakota State University, presented their work in developing a multidimensional measure of financial stress.

In an SSRN paper covering a similar topic, the researchers provide a glimpse into some of the topics which are important in developing a more comprehensive measure of financial stress. The authors note that there are affective (i.e., how people feel), psychological (i.e., cognitive and behavioral), and physiological (i.e., bodily responses) dimensions to stress. As a result, they aim to bring these different dimensions together into a single scale that can be used to assess financial stress.

Further, the researchers used this measure in a survey of 1,162 respondents to examine its potential use and possible relationships between Big Five personality traits and financial stress. Those who exhibited the highest level of financial stress were moderately extraverted, were low in agreeableness, low in conscientiousness, high in neuroticism, and high in openness. Conversely, those who exhibited the lowest levels of financial stress were highly extraverted, highly agreeable, highly conscientious, low in neuroticism, and highly open to experience.

From a practical perspective, gaining a better understanding of what types of clients are more or less likely to experience higher levels of stress can help advisors manage client comfort and look out for various behavioral tendencies. Research in this area still has a long way to go before advisors can use such findings with confidence, but this is one area where the importance of basic research is highlighted—even if the immediate applications are limited. If we don’t even truly understand what financial stress is, we will struggle to effectively help our clients alleviate it (or identify the clients most prone to financial stress in the first place)!

Overall, the 2017 AFS Annual Meeting was successful in bringing together a wide range of scholars to share their research in personal financial planning. And hosting the conference in conjunction with FPA BE provided an excellent opportunity to increase the interaction between practitioners and academics as well.

The AFS Annual Meeting will be held in conjunction with the FPA Annual Conference in 2018—again providing an opportunity for greater engagement between financial planners and researchers. So, if you would like to stay on top of some of the latest ideas in academic research, would like to consider possibly getting involved in research yourself, or simply just want to experience an academic conference first hand, attending the AFS Annual Meeting and FPA Annual Conference in 2018 may be a convenient opportunity to do so!

So what do you think? Did you attend the 2017 AFS Annual Meeting? Do you have plans to attend in the future? What else can be done to help further engagement between practitioners and academics? Please share your thoughts in the comments below!

2017 Financial Advisor Compensation Trends And The Emerging Shortage Of Financial Planning Talent

2017 Financial Advisor Compensation Trends And The Emerging Shortage Of Financial Planning Talent


After years of tepid increases in the average compensation of financial advisors, the latest bi-annual industry benchmarking studies from both Investment News and FA Insight reveal that the industry’s long-forecasted talent shortage appears to be taking hold.

According to the latest data, the average Paraplanner with 4 years of experience is earning total compensation of $65,000/year (with a nearly $60,000 salary base and 10% bonus potential), an experienced financial planner responsible for client relationships is earning $94,000/year with 8 years of experience, and Lead advisors who are skilled at developing new business are earning an average of $165,000/year, with the top quartile earning more than $250,000/year, and the top practicing partners earning nearly $500,000/year in a combination of salary, bonus incentives, and partnership profit distributions!

Of course, even within those numbers, there can be substantial regional variability. But still, financial advisor compensation across the board was up nearly 6.5%/year for the past two years – from paraplanners to lead advisors – with base salaries for financial advisors growing even faster, especially amongst the largest independent advisory firms that are both winning the bulk of new clients, and the most likely to be working with affluent clients (which generate the most revenue, and therefore allow their advisors to earn above-average compensation). And the demand for talent is leading to a rise in advisory firms attempting to poach advisors from other firms, a growing focus of large firms to build talent pipelines with colleges and universities, increasing use of third-party recruiting firms to hire even young financial planning talent, and a rise in the average time to hire a financial advisor to a whopping 4-6 months.

The trends may not be entirely surprising given that the overall financial advisory industry continues to see the total headcount of financial advisors decline a mere 1% to 2% per year. Yet with the number of CFPcertificants actually up by nearly 50% in the past decade, perhaps the real challenge may not merely be a shortage of financial planning talent, per se, but the industry finally discovering that as investment management is increasingly commoditized and firms seek to add value through financial planning and wealth management as the “anti-commoditizer”, that the number of true financial planners was never enough to meet consumer demand in the first place?

The Latest Data On How Much Financial Advisors Make?

Every two years, the leading industry benchmarking studies – the “Investment News Advisor Compensation and Staffing Study” and the “FA Insight Study Of Advisory Firms: People And Pay” – release their bi-annual latest on the latest compensation trends for financial advisors.

Each study surveys 300+ advisory firms, with a concentration amongst independent RIAs, but including some registered representatives of broker-dealers and hybrid RIA/B-D advisors as well, and gathers detailed data on what advisory firms are paying all the possible roles within an advisory firm, from the investment team to the operations and administrative staff, and of course the financial advisors themselves.

When it comes to the financial advisor data in particular, the industry standard is to break up financial advisors into three core categories:

Paraplanners (or “Support Advisors”) – Provides support to more senior advisors in the firm, and is typically responsible for data gathering, financial planning software input, analyzing data and modeling various scenarios, and supporting the development of the financial plan. Paraplanners may also sit in on client meetings, typically to take notes and handle follow-up items, but are not responsible for actually delivering financial advice.

Service Advisors (or “Associate Advisors”) – Responsible for managing and retaining ongoing client relationships, either independently (for “smaller” clients) or in a co-advisor role with a lead advisor (for “larger” clients). While Service Advisors are expected to manage and retain relationships, they typically do not have responsibility for new business development.

Lead Advisors (or “Senior Advisors”) – Responsible for both managing and retainer ongoing client relationships (typically the “larger”, more complex, and most valuable clients of the firm), as well as developing new business for the firm. May lead a team that involves additional Service and/or Paraplanner support advisors as well, and often has an obligation/expectation to mentor and help develop those advisors as well.

According to the latest data, the “typical” paraplanner or Support Advisor has 4 years of experience, and now receives a total compensation of about $65,000, including 10% incentive compensation. Anecdotally, we find atNew Planner Recruiting that starting salaries for Paraplanners appear to be approaching $50,000/year (albeit with adjustments for geographic location and cost of living).

Associate or Service advisors, given their higher level of responsibility for managing client relationships, have an average of 8 years of experience, and earn $94,000/year, of which about 12% is incentive compensation and bonuses.

And Lead financial advisors, given both their client relationship management and business development responsibilities, have an average of 18 years of experience, and earn an average of $165,000/year, of which nearly 20% of incentive/bonus compensation.

Notably, across the board, compensation is typically 80% to 90% in the form of a base salary, and only about 10% to 20% bonus or incentive compensation. Though there are a smaller subset of firms that pay their advisors primarily based on incentive compensation, and not based on a salary – primarily when it comes to Lead Advisors. For those advisors, average total compensation was substantially higher, at more than $200,000/year. With the caveat that if the market declines or growth slows down, that advisor may take a substantial income hit.

In fact, the most common forms of incentive compensation – both for incentive-heavy firms, and the ones that rely primarily on base salary and a more modest bonus structure – are typically tied to either total revenue managed, new revenue brought in, or firmwide bonus pools (typically again tied to total and new revenue). About 1/6th of firms base these bonuses on AUM rather than revenue, but most simply target revenue.

Of course, at firms where the Lead Advisors are also partners, they may take home substantial additional income for both their additional management responsibilities, and their share of partnership profits. According to the Investment News data, median income of a practicing partner was $247,000/year (including 22% of incentive compensation), and total compensation was $334,000/year including profit distributions, with a median of 20 years of experience.

Financial Advisor Roles, Responsibilities, and Compensation

Notwithstanding the broad industry averages, it’s also important to recognize that there is also a substantial skew in advisor compensation towards larger advisory firms. In part, this may simply be because larger firms tend to be located in metropolitan areas that have a higher cost of living (and the FA Insight authors explicitly emphasize that compensation levels should be adjusted based on local cost of living). In addition, larger advisory firms also tend to serve more affluent clients who pay more revenue per client, thus allowing Service and especially Lead advisors at larger firms to get paid more for the higher levels of revenue they manage.

Nonetheless, both the FA Insight and Investment News studies found that Lead advisor base salaries, in particular, are as much as 20%-30% higher in the largest advisory firms (with more than $8M of revenue) compared to “smaller” firms with just a few million in revenue. Though the difference is more slight for Service advisors, and not evident at all for Support advisors.

Gaining Experience And The Income Trajectory Of The Financial Advisor Career Track

As the financial advisory industry continues to formalize its career tracks, a standard progression is emerging in how advisors can climb the career – and income – ladder.

As noted above, the starting point is the Paraplanner, who must learn the technical competency to master the job of supporting the financial planning process. Then in order to move up and become a full Financial Planner (Service Advisor) who delivers advice directly to client relationships that he/she manages, it’s necessary to learn the empathy and relationship management skills. From there, moving up to the next tier of being a Senior or Lead Advisor is all about learning the skill of new business development. And those who want to move to the very top of the pyramid as a partner must eventually master the skills of leadership and management to execute the business.

Skills Progression For The Financial Advisor Career Track

Thus, as the financial advisor gains experience in each of the four domainsover time, income rises with improving skills, and then jumps further as the advisor masters the skills necessary to move up to the next tier. Accordingly, even the top paid (75thpercentile) paraplanners with 8 years of experience only earn $72,000/year in compensation, while a full Associate Advisor with similar experience (but full responsibility for managing client relationships) typically makes more than $90,000/year.

On the other hand, it’s notable that once advisors are “fully” compensated for managing client relationships, increasing compensation further – above and beyond just raises for additional years of experience and a growing base of client revenue, that also tends to generate at least some moderate flow of new business through existing client referrals – is more and more reliant on “bonus” incentive compensation for going above-and-beyond when it comes to new business development (the essential skill to become a senior advisor). Accordingly, the typical compensation for Service or Lead advisors with 12 years of experience is around $116,000/year. But overall, the top tier of Lead Advisors earn a whopping $250,000 or more, with a heavy component of incentive compensation. (And as noted earlier, those who become practicing partners unlock even higher tiers of compensation.)

Which means that as years of experience increase, the range of compensation for financial advisors also widens dramatically, dictated primarily by the size of the advisor’s clients (and total revenue he/she is responsible for), and the advisor’s ability to develop business. Accordingly, while top-quartile Service advisors “only” earn about $25,000 more than the typical Service advisor, top-quartile Lead advisors earn almost $100,000 more than the typical lead advisor, and top-quartile Practicing Partners earn more than double a top-quartile Lead advisor (including both salary, incentive compensation, and partnership profit distributions) in the long run.

Profit Bonus By Years Of Experience By Advisor Type

Nonetheless, the reality is that the income trajectory of paraplanners starting with total compensation around $50,000/year and averaging $68,000/year after 4 years is equivalent to an 8%/year raise. Similarly, being able to grow from $68,000/year to $97,000/year as the advisor moves from a paraplanner role with 4 years of experience to a Service advisor with 8 years is another 9%/year in income growth. And even in the progression to a lead advisor with 17 years of experience is associated with average annual growth rate in income of 6%/year, with upside potential for far, far more for those who can unlock their business development prowess.

Of course, these raises aren’t “automatic” for advisors who gain experience, as they are ultimately contingent on the ability of the advisor to master each skill domain and move up the career track ladder. Nonetheless, there are few industries with job opportunities that have a steady path of 6% – 9%/year raises that can continue unabated for a 20+ year career, and accelerate even faster if the key final skills – of business development and firm management/leadership – can be mastered! In fact, the upwardly mobile financial advisor who quickly climbs the career track has the potential to move from a $50,000 starting salary to a $250,000/year total income in 10 years, by mastering the successive skill domains that it takes to move up the line!

Though notably, advisors who do not continue to move up do eventually stagnate… as support advisors at 10 years of experience (who haven’t moved up to service and lead advisors) make less than those at 5 years of experience, and service and lead advisors at 15 years of experience (who fail to master business development and become partners) make less than those at 10 years of experience!

The Emerging Talent Shortage For Financial Advisors

In recent years, there has been extensive discussion in the industry about the looming wave of retiring financial advisors, and the prospective talent shortage that it would create.

But notwithstanding these fears, the 2015 editions of both the Investment News and FA Insight compensation studies had shown only very modest increases in advisor compensation. Median compensation for Lead advisors had been up only 3.4% over the prior 2 years according to Investment News data, and up just 2.6%/year over the prior 6 years in the FA Insight study. Similarly, median compensation for Service advisors was rising at only 1.4% – 2% per year, and Support advisor compensation had been rising at barely 1%/year for the preceding 6 years!

However, the latest benchmarking data shows a substantial shift is underway. Between the Investment News and FA Insight data, the median compensation of Support Advisors leaped by almost 6.5%/year for the past 2 years since the 2015 versions of the studies! Service Advisor compensation rose by a similar 6.5%/year on average. And in the Investment News study, Lead Advisor compensation was also up by 6.7%/year, with salaries up by 11%/year as lead advisors were able to command a higher guaranteed base (albeit in exchange for less incentive compensation).

Notably, in the FA Insight study, the typical compensation for lead advisors actually declined since the 2015 study, but only because the average age and experience level of lead advisors declined as well (even though all the original advisors in the sample are 2 years older now!). Which suggests that firms are only paying “less” to Lead Advisors because the talent shortage is so severe they’re being forced to promote even younger lead advisors with fewer years of experience just to fill the void (but are able to pay them less thanks to the lower levels of experience). Accordingly, even in the FA Insight study, lead advisor compensation also shifted from 73% to 77% base salary, suggesting that advisors still have more pricing power than ever to demand a higher base compensation guarantee.

What all of this suggests is that after years of warnings, the talent shortage of financial advisors may finally be starting to play out. In prior years, lead advisor compensation was growing the fastest, likely on the back of both what was already a shortage of experienced advisors willing to switch firms, and a multi-year bull market that was lifting up lead advisors the most (since their compensation tends to have the most revenue-based incentive bonuses).

But now, the growth rate of Support and Service advisor compensation have leaped from a 6-year average of just 1% to 2%/year from 2009 to 2015, to a whopping 6.5%/year for the past two years. The trend appears to be driven by a subset of the largest independent advisory firms, that areexperiencing accelerating growth as they scale their marketing efforts, and are rapidly hiring Support and Service advisors as quickly as they can.

Accordingly, the Investment News data shows that 73% of “Super Ensemble” firms (those with $10M+ in annual revenue) were hiring for new advisor positions last year, and 24% still have unfilled positions. And the FA Insight data reveals that, after a slight pause in 2015, advisory firms are now seeking in full force to hire away from competing advisory firms, whether it’s wirehouses, independent broker-dealers, or especially other RIAs (though the most rapidly growing firms are also still the ones most likely to be targeting recent college graduates as well).

Advisory Firm Source Of New Hires 2011 - 2017

Of course, successful experienced financial advisors still have little incentive to make a move. In most cases, they’re either already working with an established client base they don’t want to leave, may be on a partnership track or succession planning path already, or if they don’t want to remain in their current firm, have the confidence and experience to simply go out and launch their own advisory firm and leverage the resources of an advisor support network (a path we commonly see at XY Planning Network).

Thus, Investment News reports that despite the hiring demand, advisory firms are still only seeing turnover of only 8.4% amongst Service advisors, 6% amongst Lead advisors, and just 2.1% amongst practicing partners, as the more experienced the advisor gets, the more likely they are to be established in their current firm! (Though as the earlier data showed, advisory firms are clearly feeling the pressure to give healthy annual raises to retain those advisors, too!)

The bottom line, though, is this means if you’re a “below-average-age advisor” – which at this point, still means any Gen X or Gen Y advisor under the age of 50(!) – the future prospects of advisor compensation are very bright, and we find through New Planner Recruiting that even college graduates are now seeing rapidly rising entry-level salaries as the competition for talent comes all the way down to paraplanners.

On the other hand, for advisory firms, the fight for talent in the midst of a substantial shortage will put even more pressure on advisory firm margins, and will be especially challenging for smaller firms that don’t have the depth to hire multiple young advisors in the hopes that at least one or two successfully develop into lead advisors down the road.

Or viewed another way, despite the fact that there are still about 300,000 “financial advisors” in the industry, the fact that barely 25% of them are CFP certificants suggests that, as investment management is increasingly commoditized and firms switch more and more to financial planning and holistic wealth management services as the “anti-commoditizer”, we’re just now discovering how much of a true financial planning talent shortage there really is!

In the meantime, any financial advisors who are interested in checking out the full benchmarking studies can go directly to the companies’ respective websites to purchase their copies of the “Investment News Advisor Compensation and Staffing Study” and the “FA Insight Study Of Advisory Firms: People And Pay”!

So what do you think? Is there really a talent shortage for financial planners? Will advisor compensation continue to increase at 6%+/year in the future? Is the shift being caused by the growing number of advisors who are retiring, or the rise of financial planning as technology commoditizes investment management? Please share your thoughts on the comments below!

How To Find The Best Financial Advisor Companies To Work For

How To Find The Best Financial Advisor Companies To Work For


With the number of different financial advisor business models and firm types that are in existence, prospective financial advisors have a lot of options when it comes to finding “real” financial planning jobs – the kind that don’t have sales requirements, and are really focused on (learning to give) financial advice. And the reality is that not all financial advisory firms are equally great to work for. But the good news is that the best financial advisor companies to work for do share a number of common traits, that can make them easier to identify.

In this week’s discussion, we talk how to find the best financial advisor companies to work for, and why those companies tend to be larger companies with recurring revenue and a healthy growth rate.

Perhaps not surprisingly, if you want to find the best financial advisor companies to work for that won’t just make you a salesperson working on commission, the first secret is… to find companies that don’t work primarily on commission. It sounds intuitively obvious – if you don’t want to work on commission, don’t go to a company that pays its advisors on commission – but the real reason this matters is more nuanced. Because the fundamental challenge for any financial advisor who is paid on commission is that, no matter how successful you were last year, when you wake up on January 1st, your income is zero (or close to zero with some small commission trails). Which is crucially important, because it means commission-based advisors can’t afford to reinvest into staff and create entry-level very many financial planning jobs. As a result, these firms tend to only hire salespeople who can go get more clients (and perhaps some administrative staff), but not real financial planning positions focused on financial advice itself.

The Best Financial Advisor Jobs Are At Firms With A Recurring Revenue Model

As it turns out, the reality is that if you really want to find the best financial advisor companies to work for that won’t make you just a salesperson working on commission, the secret is to find companies that don’t work primarily on commission. I know that sort of sounds intuitively obvious, if you don’t want to work on commission, go to a company that doesn’t pay its advisors on commission… but the real reason actually why this matters is much more nuanced.

Because the fundamental challenge for any financial advisor who is paid on commission is that no matter how successful you were last year (or all your prior years), when you wake up on January 1st, your income is zero. You won’t make any money this year until you go and find new clients to do business with. Now, to be fair, commission-based advisors usually have at least a small amount of commission trails from prior years. So income isn’t usually quite, like, literally zero. But the point here is that almost all of your income for the year as a commission-based advisor comes from the new clients you get this year.

And here’s why that matters: It means commission-based advisors generally can’t afford to reinvest and create entry-level financial planning jobs to serve their existing clients. Because it’s terrifying as a financial advisor to hire and commit to staff and their ongoing salaries when you wake up every January 1st with zero income.

So what happens instead, the firm says, “Sure, we’ll give you a job as a financial advisor. You can use our platform to go get clients,” which is really just a nuanced way of saying, “Actually, we don’t have any financial planning jobs here. All we have is positions for salespeople who want to go get their clients to sell to because the firm can’t actually afford to hire financial planning staff. All they can afford to do is hire salespeople that bring in more clients because that’s what generates the new revenue.” And what that means is, it’s really not a financial advisor job. It’s a sales job.

By contrast, when advisory firms work for fees, or really any kind of recurring revenue, that can be actually just levelized commissions like C shares paying 12b-1 fees, or that could be generating assets under management fees (AUM fees), or that could be ongoing retainer fees, once the firm has acquired clients on a recurring revenue model (as long as those people stay clients and they continue to pay as clients). Which means an advisory firm owner who operates a recurring revenue model, when that person wakes up on January 1st, the business has income. Often a good chunk of it. And to earn that income for a year, all they need to do is give clients great service, great financial planning advice that makes the clients want to stick around.

And what that means is now the firm has a real incentive to hire for real financial planning jobs to do real financial planning advice for clients. Because the firm doesn’t necessarily need salespeople selling products or services to bring in revenue. They simply need to service existing clients with financial advice, and that’s where the jobs tend to be that are actually focused on financial planning and not sales.

And that’s why I tell new advisors that if you want to find the best company to work for, especially getting started as a financial advisor, ask them in the interview process how much of their revenue is recurring revenue – AUM fees, 12b-1 fees, commission trails – as a percentage of their total revenue. I find when firms have 75% plus in recurring revenue, or in the case of most RIAs, 95% to 100% as recurring revenue, they tend to have the best financial planning jobs.

If their recurring revenue is less than 75%, maybe the firm is transitioning from commissions to fees and creating more stable jobs. But if the recurring revenue is less than 50%, it’s a virtual guarantee that there will only be two types of jobs in that firm: base admin staff with moderate income and no financial planning upside, and salespeople that bring in business. Because that’s all you can afford to do when most of your income is zero at the start of every year.

The Top Financial Planning Firms To Work For Are (Rapidly) Growing Companies

That was the lesson I had to learn for myself the hard way when I started in the industry. My first job said “Financial Advisor” on the business card, but it was a commission-based firm and I was a salesperson, not a financial advisor. And even though the firm said it had great training and they sold me on their training, I didn’t get trained in how to be a financial advisor. I got trained in how to sell products. And it was only when I changed to a firm where the majority of the revenue was recurring that I finally had the opportunity to really start doing financial planning work. Which actually brings me to the second key for finding a good company to work for as a financial advisor.

You need a firm that’s growing. At a minimum, a firm that’s growing at 10% a year. Ideally, you want one that’s growing at 15% to 25% a year. And here’s why. The simple math of growth means that a firm that’s growing at 15% a year will double its size in about 5 years with compounding. That means, in five years, twice as much revenue, typically twice as many clients. And since a financial advisor can only serve so many clients at a time, twice as many clients in five years means twice as many financial advisor jobs in five years. Which means there will be opportunities to move up in the firm, to have clients you can work with that the firm gives you, because the firm is doing the sales and you are being the financial advisor.

This growth requirement is actually the problem that I ended up having at the second company I worked for as a financial advisor. It was a good job. I got paid reasonably well. I got to learn and really do financial planning. I had a chance to start earning my professional designations. But the firm wasn’t growing. They served clients well and I had a good financial planning job.

But because they weren’t growing, the job I had was the only job they had for me. And when I personally outgrew the job, there was nowhere for me to go, because they weren’t growing and adding enough clients to give me any clients. They could only move me up if I went to get my own clients, which didn’t work for me because the whole reason I took the job was that I failed at my last job because I wasn’t good at prospecting and getting my own clients at the time. And so I had to leave and go to another firm and find one that was growing and would create more opportunities for me.

That was actually the path for how I landed at Pinnacle Advisory Group, which is where I still am today because the firm was growing. It was actually growing so well that the business nearly quadrupled in my first six years at the firm, which gave me incredible opportunities to move up and grow and advance my career at the firm. I went from a director of a department of me to two, to three, to four, to five, and training junior advisors and overseeing senior advisors. And the growth is ultimately how I was even able to craft the admittedly relatively unique position that I have with the company now.

Because when the business doubles in size every few years, there are lots of new jobs getting created. And good companies work with their good people to craft job opportunities that are mutually beneficial to the individual and the firm. And that’s what I was able to achieve with my firm because the firm was growing enough to create those opportunities.

The Best Financial Advisor Companies To Work For Are The Biggest

Which leads us to the third and final factor that helps determine which are the best financial advisor companies to work for. Simply put, the best companies to work for tend to be the biggest ones. Now, this is actually a somewhat controversial thing to say, and I’m sure a few of my advisor friends and colleagues that are listening that are at smaller advisory firms are going to strenuously object to this idea that the best jobs are at the large firms. But hear me out. The reason why working for the biggest companies matters so much is because the biggest companies are the ones that are actually growing the fastest in the industry right now.

I’ve called it this unique form of marketing inequality, that has actually emerged in the financial advisor landscape over the past few years. The largest firms are figuring out how to reinvest and scale their marketing in a manner that’s causing them to gobble up an ever larger portion of the total new growth opportunities of the whole industry.

Now, it’s hard to see, because if you look at industry benchmarking studies, you’ll see things like large, multi-billion dollar RIAs grew organically at about 7% last year, and smaller, independent advisory firms grew at about 6% last year. And 7% for large firms versus 6% for small firms doesn’t sound like a lot, but think of it in terms of actual dollars. When a $5 billion RIA grows at 7%, it adds $350 million of new client assets. At a typical advisory fee of 1%, that’s $3.5 million of new revenue. For most advisory firms, that’s about 10 to 12 new jobs, maybe more.

By contrast, when a smaller advisory firm with $50 million under management grows at, say, 6%, it adds $3 million of new assets. At a 1% advisory fee, that’s $30,000 of revenue. That means they can afford to hire an intern this year, as long as it’s a part-time intern. And that’s why the best financial advisor companies to work for with the best job opportunities tend to be the largest advisory firms. They work with the most affluent clients, they tend to actually pay slightly above average wages because they work with more affluent clients. They’re willing to pay up a little for top talent. And they’re the ones creating the most job opportunities.

In fact, if you look at the recent 2017 Schwab RIA Benchmarking survey, 96% of large advisory firms over $1 billion of AUM are hiring for financial planning opportunities right now, compared to only 60% of smaller independent firms, and even smaller percentage as you get to the really small solo advisory firms.

Which means, simply put, if you contact a large and growing advisory firm, they will likely have several financial planning jobs or opportunities open right now. And if they don’t, they will very soon. If you contact a small firm, they might have one job opportunity in the next year or two, maybe, if you’re lucky and you time it right. Now, I don’t want to be entirely negative about smaller advisory firms. If you want to be someone’s succession plan and take over the firm and become the owner in the next few years, it’s a lot easier to do that in a smaller firm. And you can find some great mentoring opportunities in small firms.

Yet, candidly, we see a lot of advisors joining XY Planning Network these days because they initially worked for a small firm to be the succession plan and get some mentoring. And then five to seven years later, realize that the firm owner had no intention of retiring after all, and the succession plan was never actually going to happen, and so the advisor leaves and either then joins a large firm that maybe they should have gone to in the first place or decides that they’re actually ready to be an advisory firm owner. And since they can’t be a succession plan advisory firm owner, they just go create their own and be the owner.

It’s worth noting the largest advisory firms are still kind of a relative opportunity. Big is kind of a strange thing in our industry. This doesn’t necessarily mean you have to work for a large, mega national brand, although some of the biggest, including Vanguard’s Personal Advisor Services and Schwab’s Portfolio Consulting and Intelligent Advisory teams are actually creating a lot of great financial planning job opportunities right now for entry-level CFP professionals and career changers coming in.

But, you know, the biggest firms could be independent RIAs, your large firms in our space like United Capital, Edelman Financial, Wealth Enhancement Group, Colony Group, Savant Capital, Aspiriant, or even a large independent broker-dealer office or a big team at a wirehouse. As long as they’re focused on financial planning, have a recurring revenue business model, are growing, the odds are good that you’re going to find a pretty good opportunity. Ideally, that’s probably a firm with about $3 billion of assets under management or about $25 million of revenue, or at a minimum, probably a firm with about a half million dollars of assets under management or $5 million of revenue that’s growing fast and has a strategy to sustain its growth so it’ll be more job opportunities in the future.

That’s where we tend to see the best and the deepest job opportunities right now. Now, perhaps some of the biggest caveats to this approach is just that more and more advisors are actually figuring out these are the best opportunities to work for. And as a result, we actually see in our New Planner Recruiting businesses that these jobs tend to be very competitive, with the most candidates applying and the most competition. So, if you want to get a job at one of the best companies, you better bring your A game to the table in the application process.

But the bottom line is just to recognize that the best financial advisor companies to work for where you can really do financial advising and not just a sales job have three key traits: recurring revenue business model, a healthy growth rate, and some size and scale to have a deep bench of new opportunities, training capabilities, and room for growth.

And as a financial advisor trying to find a good job, you need to be ready toask the right questions during the interview process, to suss out whether this really is a good company to work for and a good opportunity. But again, it doesn’t necessarily have to be a large national firm. It can be a large local firm or regional firm that’s growing rapidly, but it needs to be growing, with recurring revenue and have the size to create more opportunities.

So I hope this was helpful with some food for thought in figuring out what are the best financial advisor companies to work for, at least based on some of my own life lessons learned. Ultimately, you may want to go out on your own, but I do not recommend that for advisors getting started. Work in a great company, learn your financial planning profession, and you can decide what to do in your own career trajectory five to seven years out. This is Office Hours with Michael Kitces. We’re normally 1 p.m. East Coast time on Tuesdays but I was traveling for this FPA national conference, so thanks for joining us, everyone, and have a great day!

So what do you think? Where are the best jobs for financial advisors? Is recurring revenue essential to a firm being able to offer true planning jobs? Are the best opportunities with the largest firms? Please share your thoughts in the comments below!




































Why Is it So Hard to Ask For Referrals As A Financial Advisor?

Why Is it So Hard to Ask For Referrals As A Financial Advisor?


Growing a client base and acquiring more ideal clients is a challenge all advisors face, regardless of how successful they currently are. And although almost everyone in the industry has heard that asking for referrals is an important way to grow a business, many advisors struggle with this. Which raises the question, as recently posed by Ron Carson at a recent keynote presentation: “Why don’t more advisors ask for referrals? Are advisors afraid to ask for referrals because they’re not proud of their own services?”

In this week’s discussion, we talk about why it is so hard to ask for referrals as a financial advisor, and how the many barriers – including our pride (or lack thereof) in the company or products we represent, our confidence in our own value, or even shame about the industry we are in – can make it hard to ask for referrals.

Of course, when financial advisors get started, it isn’t feasible to ask for referrals, because you don’t have any clients yet to refer you; instead, the only choice is cold calling, “cold knocking” (walking the streets and knocking on the doors of small businesses), or some other cold prospecting strategy. In fact, arguably for newer advisors, the whole appeal of being able to ask for referrals to generate new business is the opportunity to get away from cold calling and other types of prospecting!

Yet the caveat is that it’s difficult to ask for referrals, if you’re not actually proud of your company and its products. Because if you know, deep down, that your solutions aren’t really the best for your clients, you’ll likely self-sabotage your own behavior – as I experienced myself when starting out as a life insurance agent, struggling to prospect and ask for referrals because I was embarrassed about the sales tactics my company was using at the time!

Of course, ultimately becoming a real financial advisor is not about getting paid for your company’s products, but getting paid for your own advice, knowledge, and wisdom. But that still means it’s hard to ask for referrals until you’re actually confident in yourself, and your own knowledge. And here, too, many struggle, because if we don’t actually know anything about financial planning, and we know that we don’t, then we can’t confidently convey our value. Which is why professional designations like the CFP marks are so helpful… because often it’s only after completing a designation that many will really start to feel confident that they can bring value to the table, and ask for referrals.

Although even once advisors have expertise and can truly add value as a financial advisor, it can still be hard to have confidence to ask for referrals, when telling people “I’m a financial advisor” risks making you a social pariah because so many consumers have had bad prior experiences with advisors! That’s the challenge of trying to do business in a low trust industry. When metrics like the Edelman Trust Barometer finds that fewer than 50% of all consumers trust financial services companies, it’s literally an odds-on bet that if you say “I’m a financial advisor” and ask for referrals, that the person’s first and immediate impression of you will be negative!

The bottom line, though, is just to recognize that there really are a lot of barriers that make it hard for us to ask for referrals, all of which are built around our own fears and discomfort in what we do, the value we provide, or the company/industry we represent. Our fears hold us back. And often our fears are quite well-founded. It really is uncomfortable asking for referrals when you’re not proud of the company and products you represent. Or you’re not confident in your own value. Or you’re ashamed of the industry you’re in. So, if you find yourself at one of these blocking points, figure what do you have to do to grow past it – whether it’s leaving your company, reinvesting in yourself and your education, or differentiating yourself from the rest of the industry – or you won’t have the confidence you need to ask for referrals!

Asking For Referrals To Sell Investment And Insurance Products

As most of you know, I started my career in financial services, working in a life insurance company, straight out of college, into a life insurance agency. It was the year 2000, so the hot product at the time was variable universal life insurance. Buy life insurance. Invest the cash value in the stock market.

Now, back then, the only way you could get started was you had to go out and prospect. You could do cold-calling, or you could walk the streets and cold-knock on the doors of small businesses. There were some long-term career life insurance agents in that office who built their whole careers knocking on the doors of people’s homes, like, literally selling insurance door-to-door, cold-knocking, back in the 1960s and 1970s.

But ideally the goal for most advisors is to get away from that as quickly as possible, by getting some clients and then asking those clients for referrals to new clients and prospecting your way forward from there. It’s basically the…Asking for referrals was the pathway from cold-calling and cold-knocking.

Frankly, compared to cold-calling and cold-knocking, proactively asking for referrals seems like a pretty good deal. But here was the thing. I couldn’t do it. I just couldn’t do it. I couldn’t bring myself to ask clients and prospects I was talking to if they knew anyone else who might benefit from our company’s products and services. It was what I was trained to say, and I couldn’t do it.

Deep down, I think the reason why is exactly what Ron said. I wasn’t proud of the company and the products that I represented. Because at the time at least, it really felt like the company was solely focused on one product, a variable universal life, at least in our branch, where it was all the managing partner wanted us to talk about with every prospect we met.

Even as a novice agent at the time, I knew deep down that not everybody on the planet needed a VUL policy. What’s worse I knew we didn’t even have the best VUL policy on the market, because we got trained in how to overcome objections, including the objection of outselling competing products that illustrated better than ours.

So I was in a position where the company was pushing me to sell a knowingly inferior product to a wide range of people, who often didn’t even need the product. Lo and behold, I didn’t want to ask for referrals. I just couldn’t do it.

To be honest, it…Well, I guess as Ron’s question suggested, it wasn’t that I was afraid, per se. It was frankly that I was kind of ashamed of what I was selling, what I was doing. Ultimately there’s only one good way you ever really deal with that. You have to leave, and that’s what I ended up doing. It basically becomes a self-fulfilling prophecy. I wasn’t proud of my company’s tactics and the product I represented. So I didn’t ask for referrals, and I didn’t get much business, which meant I couldn’t qualify my contract, which means the discomfort with the company and its products eventually meant that I no longer had a job selling that company’s products. Funny how these things work out.

But I think it’s a good reminder for all of us that you can’t stay at a company where you aren’t proud of what they do and their solutions that they provide. As Ron had put it, if you wouldn’t knowingly, willingly, and happily recommend your mother and your grandmother to the company that you’re working for, you need to find a different company. You need to go somewhere else because, otherwise, it will become a self-fulfilling prophecy. You won’t be comfortable asking people to do business. You won’t be comfortable asking for referrals, which means you will self-sabotage your own success, and it’s not going to work out anyways.

So save yourself some time and extended, but inevitable, demise. If you aren’t able to ask for referrals because deep down you’re ashamed of the company or products you represent, find a new company to represent, and get over this hurdle.

Asking For Referrals Requires Confidence In Your Own Value [Time – 4:50]

Now that being said, the truth is that even if you want to ultimately become a financial advisor, where your primary job is actually not selling the company’s products, but selling your own advice and knowledge and wisdom, then what you really need to become proud of, so that you can represent confidently, is yourself and your knowledge.

Here too, I’ll admit that this was actually a huge struggle for me in the early years, even after I left the insurance company. I switched to working in a much more financial planning-oriented independent broker-dealer, but I still had to struggle. I didn’t really know anything about financial planning. I was about 23 years old, with a bachelor’s degree in psychology, and I knew I didn’t know much of anything about financial planning. It’s hard to confidently ask people to work with you and pay you for your advice, when you know you don’t actually bring much value to the table and give very good advice.

For me, that was the primary motivator to go out and get my CFP marks and ultimately continue on with a lot of additional post-CFP designationsfrom there, because I couldn’t confidently convey my value and ask for their business until I knew, for me personally, that I had the knowledge and value to convey in the first place.

So for me, it was only after completing some of those designations that I felt confident enough that I knew my stuff and felt I really brought value to the table, that I finally started to get comfortable asking prospects for their business, asking for referrals and introductions, and actually started doing business development. And that was a good 8 to 10 years into my career, because it’s a lot easier to ask for referrals when you’re truly confident you actually add value and help people. I mean why would you not ask for referrals at that point? You have the knowledge. It helps people. Why do you not want to help more people by telling them what you do?

In fact, I find that’s one of the key differences between advisors, not product salespeople, but actual advisors who are good at business development and asking for referrals, versus those that aren’t, is that the ones who are good at it mostly just comes from their confidence in their own value. They feel it’s only natural to share their expertise with more people, to help more people. Why wouldn’t you if you have the expertise?

Asking For Referrals In A Low Trust Industry [Time – 6:59]

Now, really, there actually is one reason why you probably wouldn’t, even if you have the expertise. It’s because even if you have the expertise to add value as a financial advisor, it’s still hard to actually tell people you’re a financial advisor, because so many consumers have had bad experiences with advisors. I’m sure all of you who are advisors listening to this, you have experienced this. Right? You’re at a social event, and someone asks you what you do, and you say, “I’m a financial advisor,” and they say, “Oh, yeah. I have a financial advisor. He helped us with our life insurance a few years ago,” because they think comprehensive financial planning is getting a life insurance policy.

Or you say, “I’m a financial advisor,” and they take a step back and start looking for someone else across the room to talk to, “Oh, hey, Johnny,” because they’ve clearly had some bad experience with a financial advisor or salesperson in the past, and now they’re assuming that when you say, “financial advisor,” you’re just there to sell them something, and they didn’t feel like buying anything today. It makes it really hard to ask for people’s business and ask for referrals as a financial advisor, when so many people have been stung by a bad financial advisor in the past. It feels like you’re not telling people about this great service you deliver. You’re confessing you’re a financial advisor and hoping it doesn’t make you a social pariah.

This is the challenge of doing business in a low-trust industry, with low barriers to entry. The Edelman Trust Barometer, which is kind of the leading global survey that measures consumer trust, finds the financial service industry as the least trusted industry there is. We are dead last. Fewer than 50% of all consumers actually trust financial service companies, which means it’s literally an odds-on bet that when you say, “I’m a financial advisor,” and ask for referrals, that the person’s immediate first response of you will be negative, because fewer than 50% of consumers trust financial services in the first place.

Like it or not, as financial advisors, even as we try to become our own profession, we’re still representatives of the financial services industry. I think that makes it harder for all of us to ask for referrals. When you know the odds are that bad, it’s hard to want to be productive. It’s easy to be afraid that the reaction when you’re going to ask for referrals will be negative. So you just don’t want to do it at all.

Frankly, I think this is one of the main reasons, as financial advisors in the past couple of years, we’ve been evolving our titles and labels. You know? Financial advisor is associated with financial services industry, but wealth manager feels more aspirational, as though we’re trying to separate ourselves out. I’ll admit it at least, I’m often ashamed of the industry I represent, even as someone that’s trying to help improve it, because I also know the bad stuff that happens in our industry.

Asking For Referrals When Clients Don’t Know Who To Refer [Time – 9:29]

Of course, even when you do actually ask for a referral, there’s still the awkward reality that, often, when you ask someone for referrals, the person responds, “Um. Can’t think of anyone offhand.” Now it feels even worse to ask for referrals. What are you supposed to do at this point? Drill deeper? “Are you really sure you don’t know anyone who might want to work with me?” Because that doesn’t sound desperate.

Indirectly, I think this is one of the many reasons why having some kind of niche or specialization is so important. Think of it in the context of another profession. Imagine you’re an orthopedic surgeon. Most doctors get their business by referrals. They get business from patients who refer them. They get business from other doctors who refer them, but you don’t see a lot of orthopedic surgeons going to networking meetings saying, “Do you know anyone who’s blown out their knee lately?” because they don’t have to. They’re an orthopedic surgeon. If you have knee problems, you already know you need an orthopedic surgeon. If I have a friend who has a knee injury, then I refer him to an orthopedic surgeon I saw a couple years ago, because I’m trying to be helpful.

In other words, when you have a niche or a specialization, you don’t have to go out and ask for referrals. You establish your expertise and become known for what you do, and people refer the business to you. Think about it from the other end. If you had a friend who was having knee problems, and you knew a great orthopedic surgeon, why wouldn’t you make the referral to help your friend? It doesn’t matter whether the surgeon asks for referrals or gives me a pen and paper to write down the names of three knee-injury people I know. Frankly, it wouldn’t even help, because if none of my friends just had a knee injury, I wouldn’t know anyone to refer.

I’m not going to make that referral until I actually connect with the friend who just had a knee injury, and then I’m going to make the referral, which means what really matters isn’t that the surgeon asked me for referrals at all. It’s that I know his specialization is orthopedic surgery and that he fixes knee injuries. Then he just has to wait because the next time I meet someone with a knee injury, my brain is probably instantly going to make the connection because that’s what our brains do all by themselves. Oh, you tore your ACL? I know a surgeon who does great work on ACL injuries. Let me introduce you.

What Does It Take For You To Ask For Referrals?

But the bottom line here is just to recognize that I think there are a lot of barriers that make it hard for us to ask for referrals, as financial advisors. I think Ron Carson was right here. It’s our fears that hold us back, but they’re well-founded fears a lot of the time. It really is uncomfortable asking for referrals when you’re not proud of the company and the products you represent, or you’re not really confident in your own business value, or you’re ashamed of the industry that you’re in, or your clients never seem to come up with a name when you do ask for referrals. So what’s the point? You just stop asking.
So if one of these are your blocking point, what do you have to do to grow past it? Do you need to change the company you’re representing, to one where you’re actually proud to ask for referrals because you believe you bring a good solution to the table? Do you need to reinvest in yourself with CFP certification or some other post-CFP designation? So that you’re confident enough in your own value to proudly ask for referrals, because you just want to help more people with the expertise you have.

Do you need to find a way to market and position yourself so the value is unique enough that you’re clearly differentiated from the rest of the bad people in the industry? Or do you need to refine your specialization or niche some way, to make you so referable that you don’t need to ask for referralsbecause people naturally think of you when they’ve got a particular problem or challenge, where you have the niche expertise to solve it, and they say, “Oh, I know a person that can help you.” So what’s holding you back from asking for referrals?

So what do you think? Why is it so hard to ask for referrals as a financial advisor? Is it due to the companies we work for? The industry? Our lack of confidence in ourselves? How have you overcome the barrier to asking for referrals? Please share your thoughts in the comments below!

Risk Composure: The Real Predictor Of Who Can Stick To Their Investment Plan

Risk Composure: The Real Predictor Of Who Can Stick To Their Investment Plan

Executive Summary

Regulators around the world require financial advisors to assess their clients’ risk tolerance to determine if an investment is suitable for them before recommending it. For the obvious reason that taking more risk than one can tolerant will potentially lead to untenable losses. And even if the investment bounces back, an investor who loses more money than he/she can tolerate in the near term may sell in a panic at the market bottom, and miss out on that subsequent recovery.

Yet the reality is that many investors end out owning portfolios that are inconsistent with their risk tolerance, and it’s only in bear markets that they seem to “realize” the problem (which unfortunately leads to problem-selling). Which raises the question: why is it that investors don’t mind owning mis-aligned and overly risky portfolios until the moment of market decline?

The key is to recognize that investors do not always properly perceive the risks of their own investments. And it’s not until the investor’s perceived risk exceeds his/her risk tolerance that there’s a compulsion to make a (potentially ill-timed) investment change.

Yet the fact that investors may dissociate their perceptions of risk from the portfolio’s actual risk also means there’s a danger than the investor will misperceive the portfolio risk and want to sell (or buy more) even if the portfolio is appropriately aligned to his/her risk tolerance. In other words, it’s not enough to just ensure that the investors have portfolios consistent with their risk tolerance (and risk capacity); it’s also necessary to determine whether they’re properly perceiving the amount of risk they’re taking.

And as any experienced advisor has likely noticed, not all investors are equally good at understanding and properly perceiving the risks they’re taking. Some are quite good at perceiving risk and maintaining their composure through market ups and downs. But others have poor “risk composure”, and are highly prone to misperceiving risks (and thus tend to make frequently-ill-timed portfolio changes!).

Which means in the end, it’s necessary to not only assess a client’s risk tolerance, but also to determine their risk composure. Unfortunately, at this point no tools exist to measure risk composure – beyond recognizing that clients whose risk perceptions vary wildly over time will likely experience challenges staying the course in the future. But perhaps it’s time to broaden our understanding – and assessment – of risk composure, as in the end it’s the investor’s ability to maintain their composure that really determines whether they are able to effectively stay the course!

Risk Perception And Portfolio Changes

It is a requirement of financial advisors around the world to assess a client’s risk tolerance before investing their assets, based on the fundamental recognition that not everyone wants to take the same level of risk with their investments. Which is important, because a mismatch – where the investor takes more risk than he/she is willing to take – creates the danger that the investor will lose more money than they are willing to lose in the event of a bear market. And even if the market recovers, there’s a risk that the investor will sell at the market bottom in a panic along the way.

Of course, if all investors were always astutely aware of their own risk tolerance, and the amount of risk being taken in the portfolio, the need to assess risk tolerance would be a moot point, as investors could simply “self-regulate” their own portfolio and behaviors. The caveat, though, is that not all investors are necessarily cognizant of their own risk tolerance comfort level, and/or face the risk that they will misjudge the amount of risk in their portfolio, and not realize the problem until it is too late.

Thus why the key problem is that investors often sell at the market bottom. Because it’s the moment the investor realizes that they were taking more risk than they were comfortable with, and decides to bail out. Not during the bull market that may have preceded it, because when markets are going up, investors don’t necessarily perceive the risks along the way. In other words, it often takes a bear market (or at least a severe “market correction”) to align perception with reality (as until that moment, ignorance is bliss).

The reason why this matters is that it really means it’s not the mere fact that an investor is allocated “too aggressively” that creates behavioral problems like selling out at the market bottom. Instead, the problem occurs at the moment the investor perceives that reality – e.g., during a bear market decline – and then feels compelled to act. Which is unfortunate, because in practice that’s usually the worst time to do something.

Nonetheless, the key point remains that it’s not actually “investing too risky” that creates the problem for the conservative client. It’s the moment of perceiving and realizing that the portfolio is too risky that actually causes a behavioral response (to sell at a potentially-ill-timed moment).

The Risk Of Misperceiving Risk

The fact that conservative investors don’t sell risky portfolios until they actually perceive the risk they’re taking to be beyond their comfort level is important for two reasons.

The first is that it reveals the key issue isn’t actually gaps between the investor’s portfolio and his/her risk tolerance, per se, but the gap between the perceived risk of the investor’s portfolio and his/her risk tolerance. Again, it’s not merely “investing too aggressively” that’s the problem, but the moment of realizing that you’re invested too aggressively that triggers a behavioral (and often problematic) response.

The second is that it also implies investors could make bad investment decisions even with appropriate portfolios, if they misperceive the risk they’re taking!

For instance, imagine a client who is very, very conservative, and doesn’t like to take much investment risk at all. But it’s 1999, and he’s just seen tech stocks go up, and up, and up. Every year, tech stocks beat cash and bonds like clockwork, to a very large degree. And it’s happened so many months and years in a row, that the client is convinced there’s “no risk” to investing in tech stocks – since as he’s seen, they only ever go up, and never go down!

In this context, if you were a very conservative (bond) investor, and became convinced that tech stocks were going to beat cash every year and it was a “sure bet”, what would you do as a very conservative investor? You’d put all your money in tech stocks!

Of course, once tech stocks finally crash the following year, and it becomes clear they’re not a superior-guaranteed-return-alternative to cash, the conservative investor will likely sell, and potentially for a substantial loss.

But the key point is that the investor didn’t suddenly become more tolerant of risk in 1999, and intolerant a year later when the tech crash began. It’s because the investor misperceived the risk in 1999 (causing him to buy), and then adjusted his perceptions to reality when the bear market showed up in 2000 (causing him to sell). It’s the same pattern that played out with housing in 2006, and tulips in 1636. In other words, it’s not risk tolerance that’s unstable, but risk (mis)perceptions.

Similarly, imagine a client who is extremely tolerant of risk. She’s a successful serial entrepreneur, who has repeatedly taken calculated high risks, and profited from them. Her portfolio is (appropriate to her tolerance) invested 90% in equities.

But suddenly, a major market event occurs, akin to the 2008 financial crisis, and she becomes convinced that the whole financial system is going to collapse.

As a highly risk-tolerant investor, what would the appropriate action be if you were very tolerant of risk, but convinced the market was going to zero in a financial collapse? You’d sell all your stocks. Even as a highly risk tolerant investor.

Not because you aren’t comfortable with the risk of all those stocks. But because even if you’re tolerant of risk, no risk-tolerant investor wants to own an investment they’re convinced is going to zero!

But the key point again is that the investor’s risk tolerance isn’t changing in bull and bear markets. She remains highly tolerant of risk. The problem is that her perceptions are changing… and that it’s her mis-perception that a bear market decline means stocks are going to zero (not just declining before a recovery) that actually causes the “problem behavior”. Because it leads the client to want to sell out of a portfolio that was actually appropriately aligned to her risk tolerance in the first place!

Risk Composure – The Stability Of Risk Perception

Every experienced advisor is aware of a small subset of his/her clients who are especially prone to making rash investment decisions. They’re the ones who send emails asking whether they should be buying more stocks every time the market has a multi-month bull market streak. And they’re the ones who call and want to sell stocks whenever there’s a market pullback and the scary headlines hit CNBC and the newspapers.

In other words, some clients have especially unstable perceptions of risk. The cycles of fear and greed mean that most investors swing back and forth in their views of risk at least to some degree. But while the risk perception of some clients swings like a slow metronome, for others it’s more like a seismograph.

Or viewed another way, it’s those latter clients who seem to be especially prone to the kinds of behavioral biases that cause us to misperceive risk. They are especially impacted by the recency bias, where we tend to extrapolate the near-term past into the indefinite future (i.e., what went up recently will go up forever, and what went down recently is going all the way to zero!). They may also be prone to confirmation bias, which leads us to selectively “see” and focus on information that reaffirms our existing (recency) bias. And for many, there’s also an overconfidence bias that leads us to think we will know what the outcome will be, and therefore want to take action in the portfolio to “control” the result.

In essence, some clients appear to be far more likely to be influenced by various behavioral biases. Others are better at maintaining their “risk composure”, and not having their perceptions constantly fluctuate with the latest news nor becoming flustered by external events and stimuli.

Which is important, because means that it’s the clients with low risk composure who are actually most prone to exhibit problem behaviors… regardless of whether they’re conservative or aggressive investors!

After all, an aggressive client with good risk composure may see a market decline as just a temporary setback likely to recover (given market history), while an aggressive client with bad risk composure may see a market decline and suddenly expect it’s just going to keep declining all the way to zero.

In this case, both are aggressive. For both, the “right” portfolio is an aggressive one, given their risk tolerance (and presuming it aligns with their risk capacity). But the client with bad risk composure will need extra hand-holding to stay the course, because he/she is especially prone to misperceiving risk based on recent events, and thinking the portfolio is no longer appropriate (even if it is).

How Low Risk Composure Makes Tolerable Portfolios Seem Scary

Similarly, if two clients are very conservative but have different risk composures, the one with high risk composure should be able to easily stay the course with a conservative portfolio and not chase returns, recognizing that even if the market is going up now, it may well experience market declines and volatility later. While the conservative client with bad risk composure is the one most likely to misperceive risk, leading to rapid buying and selling behavior, as he/she becomes convinced that a bull market in stocks must be a “permanent” phenomenon of guaranteed-higher-returns and overinvests in risk… only to come crashing back to reality (and selling) when the market declines.

The key point here is that both conservative and aggressive clients can have challenges staying the course in bull and bear markets. Even if their risk tolerance remains stable. Because some people have more of an ability to maintain their risk composure through market cycles, while others do not. And it’s those low risk composure investors, who are more likely to misperceive risks – to the upside or the downside – that tend to trigger potentially ill-timed buying and selling activity. As they’re the ones most like to perceive that their portfolio is misaligned with what they can comfortably tolerate (due to that tendency to rapidly misperceive risk in either direction!).

Can We Measure Risk Perception And Risk Composure?

From the proactive perspective, the reason that all of this matters is that if we can figure out how to accurately measure risk perception and risk composure, we can identify which investors are most likely to experience challenges in sticking to their investment plan in the future.

Recognizing that it’s not merely about the investor’s risk tolerance and whether he/she is conservative or aggressive with a properly aligned portfolio in the first place… but how likely he/she is to recognize the risks in the portfolio, and that that portfolio is the properly aligned one! And the potential that the investor will misperceive the risk in their portfolio and think they need to buy more or sell out, even if the portfolio is the right one, because the investor has low risk composure and is constantly misperceiving the risk in the portfolio!

Notably, this is also why it’s so crucial to start out by using a psychometrically validated risk tolerance assessment tools in the first place (though unfortunately, few of today’s risk tolerance questionnaires are even suited for the task!).

For instance, imagine two prospective clients come into your office. Both have aggressive portfolios, and say they’re very comfortable with the risk they’re taking. How do you know if the investors are truly risk tolerant, or if they’re actually conservative investors who have misjudged the risk in their portfolios?

The answer: give them both a high-quality risk tolerance questionnaire, and see if their portfolios actually do align with their risk tolerance.

The key here is not to just ask them about what kinds of investment risks they want to take. Because we already know that if they’re misperceiving investment risk, their answers will be biased towards taking more risk, not because they want to, but because they’ve become blind to it!

In this context, the more “pure” the risk tolerance questionnaire (RTQ), and not connected to investment decisions and market trade-offs, the easier it will be to identify who is actually tolerant of risk, and who might simply be misperceiving (and underestimating) investment risks.

Thus, if the RTQ process is completed, and investor A scores very aggressive, and investor B scores very conservative, it becomes clear that investor A is accurately assessing risk and has the appropriate portfolio, while investor B has become risk-blind and needs a different portfolio (and an education on how much risk he/she is actually taking!)

Of course, the caveat is that a gap between a new client’s risk tolerance and their current portfolio provides an indicator of a current misperception, and helps to determine whether the new client should actually have that aggressive portfolio, or not. And the client who so significantly misperceived risk in the first place ostensibly has poor risk composure – after all, if he/she could misperceive risk so much the first time, there’s clearly an elevated risk it may happen again.

But that doesn’t necessarily provide any indicator of who is most likely to be prone to risk misperceptions and have poor risk composure in the future, if they weren’t already exhibiting those problems.

Accordingly, perhaps it’s time for not only a tool to measure risk tolerance, but also one that either measures risk composure, or at least provides an ongoing measure of risk perception. (As a client where the measured risk perception varies wildly over time is by definition one with poor risk composure, and most likely to need hand-holding in future bull and bear markets to keep their portfolio on target.)

For instance, clients might be regularly asked what their expectations are for market returns. The expected return itself (and especially an inappropriately high or low return) is an express sign of risk misperception, and those whose expected returns for stocks and bonds fluctuate wildly over time would be scored as having low risk composure as well.

Alternatively, perhaps there is a way to ask clients more generally questions that assess ongoing risk perceptions, or simply assess risk composure up front. This might include a biodata approach of asking them whether historically they’ve tended to make portfolio adjustments in bull and bear markets (which at least would work for experienced investors), or whether they like to take in current news and information to make portfolio changes, or other similar behavior patterns that suggest they are more actively changing risk perceptions with new information and therefore have low composure.

The bottom line, though, is simply to recognize and understand that in times of market volatility, what’s fluctuating is not risk tolerance itself but risk perception, and moreover that risk tolerance alone may actually be a poor indicator of who will likely need hand-holding in times of market volatility. After all, if it was “just” about risk tolerance, then any investor whose portfolio was in fact aligned with their tolerance should be “fine” in staying the course. But in reality many clients aren’t, not because their portfolio is inappropriate for their tolerance, but because they misperceive the risk they’re taking, causing them to either want to buy more (in a bull market that seems like a sure bet), or sell in a bear market (because who wants to own an investment you believe is going to zero, regardless of your risk tolerance).

Of course, a portfolio that is not aligned to the investor’s risk tolerance will clearly be a problem. But the missing link is that even for those with proper allocations, those with low risk composure will still struggle with their investment decisions and behaviors! And to the extent we can figure out how to identify clients who risk perceptions are misaligned with reality, and who have low risk composure and are prone to such misperceptions, the better we can identify who will actually be most likely to need help (via a financial advisor, or other interventions) to stay the course!

So what do you think? Is the real problem that some investors are risk tolerant and others are not? Or that some investors are better at maintaining their risk composure, while others are more likely to have their risk perceptions swing wildly with the volatility of the markets? Would it be helpful to have a tool that measures not just risk tolerance, but risk composure? Please share your thoughts in the comments below!