Tag: Money Managment

How Financial Counseling Laboratories Will Change Financial Planning

How Financial Counseling Laboratories Will Change Financial Planning

Executive Summary

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

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

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

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

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

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

Subjecting The ‘Art’ Of Financial Planning To Scientific Investigation

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

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

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

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

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

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

What Is A Financial Counseling Lab?

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

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

ASPIRE Clinic at the University of Georgia

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

Iowa State University Financial Counseling Clinic

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

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

Financial Therapy Clinic at Kansas State University

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

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

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

Laboratory Research To Study The “Art” Of Financial Planning

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

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

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

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

Journal Rankings of Core Personal Financial Journals

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

Notable Research That Has Come Out Of Financial Counseling Laboratories

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

Client Stress And The Physical Office Environment

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

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

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

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

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

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

Helping Clients Actually Implement Financial Planning Recommendations

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

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

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

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

The Interventions

Video-Based Solution-Focused Brief Coaching

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

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

The specific sections of the video include:

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

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

Cashless Matching Incentive

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


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

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

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

Saving Behavior By Coaching Intervention

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

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

Brain Activity And The CFP Designation

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

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

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

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

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

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

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

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

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

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

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

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

How Financial Planners And Academics Can Better Collaborate In Laboratory Research

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

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

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

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

Provide Financial Support To Financial Counseling Labs

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

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

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

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

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

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

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

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

Navigating Compliance Oversight When Blogging As A Financial Advisor

Navigating Compliance Oversight When Blogging As A Financial Advisor

Executive Summary

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

This week we discuss blogging as a financial advisor, the compliance rules that apply to financial advisor blogging, and the issues to consider when navigating compliance oversight, both for RIAs and those operating in the broker-dealer channel!

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

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

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

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

Financial Advisor Blogging Compliance In RIAs Vs Broker-Dealers

Now, the reality is that whether you’re at an RIA or a broker-dealer, anything you do that advertises to prospective clients or solicits prospective clients to your business is going to be deemed advertising and is subject to compliance review. In the case of broker-dealers, that’s driven by FINRA Rule 2210, which scrutinizes whether any form of advertising communication is fair and balanced, and not misleading.

In the case of RIAs, it’s slightly different. It’s Rule 206(4)-1, which limits investment advisors from engaging in deceptive or manipulative advertising, particularly with respect to how investment advisors present performance, their track record of recommendations, and any kind of testimonials about their client results. Now, both channels have requirements that firms have to oversee and supervise any advertising content to ensure it’s complying with those rules. And that advertising materials have to be retained for some period of time as well, under a books and records requirement.

While there are some nuanced differences in what’s focused on in those compliance reviews of RIA versus broker-dealer environments, substantively, the key points are actually the same:

  1. Compliance should review it before it goes out to the public.
  2. It can’t be misleading about what you do and the results you provide.
  3. And it needs to be captured, recorded, and archived for later review.

So, generally speaking, any and all blog posts of an advisory firm are going to need to go through this kind of compliance review regardless of whether you’re at an RIA or a broker-dealer.

There’s actually not a big difference in that regard. Now, that being said, there is a major difference in practice in how compliance works when reviewing potential advertising materials, including blog posts, between RIAs and broker-dealers. The difference is size. Most RIAs are small (at least by broker-dealer standards). Many are solo advisors that just have themselves or a handful of staff. Even large independent RIAs often just have a couple of advisors.

There are very few that even have more than a dozen advisors in one firm. Which means the compliance process is much more straightforward. In some cases, the advisor literally is their own chief compliance officer who needs to review their own blog post, which, not surprisingly, gets done pretty quickly when you’re reviewing your own material. Even in multi-advisor firms, the chief compliance officer is often a partner who is reviewing the work of other partners, who has an interest in expediting the compliance review process, especially for a partner who’s already known and trusted, and is trying to grow your joint business.

By contrast, in a broker-dealer, there aren’t just a handful of a dozen advisors. There may be hundreds or thousands. And for wirehouses, more than 10,000, which means compliance has a lot of advertising to review constantly. Even worse, compliance departments in most broker-dealers have very little direct connection to the advisor whose content is being reviewed. In a small RIA, every advisor is probably going to know that chief compliance officer personally, maybe for years or a decade or more. In a mid to large-sized broker-dealer, not so much.

That becomes a problem because it undermines trust between the compliance department and the broker seeking compliance approval. Think about it for a moment. Put yourself in the seat of a compliance officer at a broker-dealer. So your job, your backside, is on the line every time you review advertising for your brokers. You could potentially get fired if you slip up and fail to properly oversee whatever the one dumbest, most idiotic broker in your entire firm might do that brings the whole thing down.

So, not surprisingly, if you want to keep your job as a compliance officer, this is pretty simple. You write strict, limited rules that force advisors to stay in a small box of activities. That makes it easier to oversee and reduces your risk of getting fired. Unfortunately, though, as we see in a practice, it also kind of squelches the ability of a lot of brokers to engage in blogging. Not because they can’t or that FINRA doesn’t allow it. But because the broker-dealer’s compliance department is so struggling to oversee a huge number of brokers that they don’t even necessarily know or trust, that it leaves them to write very limiting compliance rules.

Some of the more progressive broker-dealers have come up with workarounds to this. Some have special teams that review blog content, recognizing the importance of timeliness. Others just grant greater flexibility to top producers or more experienced brokers. Recognizing that compliance doesn’t quite have to be so limiting and restrictive for a subset of brokers who have long since demonstrated that they’re trustworthy, able to follow the rules, and not engaging in risky advertising behaviors.

But unfortunately, these programs have been slow to roll out. we see a lot more of the blogging amongst RIAs than we do amongst broker-dealers. Whether or how it really is at the individual firm still depends on the broker-dealer, how they choose to write their compliance rules, and how they execute their oversight process. Again, there are more progressive broker-dealers that have been willing to grant more latitude to experienced brokers (or are otherwise running some kind of pilot test to make it easier to blog), but we’re getting there slowly.

Advisor Compliance And Allowing Blog Comments

Now, a similar theme around financial advisor compliance for blogging props up when it comes to allowing comments on the blog. This was another recent question we got from Matt, who asked:

“I’m starting to blog and I’m getting pushback from my BD on allowing comments on the blog, which we both know is extremely important to engage audience. So, is this a FINRA thing? Would it be easier if I was an RIA?”

Great question, Matt. Again, this isn’t really a FINRA versus RIA thing.

The primary concern here, from the compliance perspective, is whether the comments on the blog can potentially be construed as testimonials or otherwise misleading statements about your investment results, track record, or your recommendations. Now, as we know, unless you’re literally writing about your investment performance, most blog comments are probably going to have nothing to do with clients giving testimonials about your services. They’re probably comments about actual content of the article or some other investment theme, financial planning strategy, or whatever else it is that you’re writing about.

But nonetheless, compliance officers have an oversight obligation. There’s still an expectation that they’re overseeing your blog comments, even if it’s just to prove they’re not testimonials. Now, in a small firm environment, this can be solved pretty easily. Configure your website to automatically email new comments directly to the compliance officer to review. Most blog and content management systems can do this automatically. But again, in a larger broker-dealer context, that may not be feasible.

The firm may not be built to take all those incoming comments, or you may not be configured to give your broker-dealer compliance department access to manage your blog when those comments appear, so that they can take down the inappropriate ones. Nor does the compliance department necessarily want to do the work, because it’s potentially time-intensive and a resource drain for the broker-dealer compliance department. They may feel like they have bigger fish to fry.

So, the end result is that broker-dealer compliance departments often say, “No comments.” Not because comments are banned by regulators, but because there is something for them to oversee and it makes it more time-efficient for them to just say, “No comments,” and then they don’t have to oversee it. In theory, that can be a problem for a small RIA as well. But again, in a small RIA, I’m more likely to know my compliance officer and be able to say, “Hey, work with me. This will be good to grow our firm,” and get them to do it.

In a broker-dealer, especially when the majority of advisors don’t blog right now, asking a compliance officer to oversee your blog comments just feels like more work to them. So, unfortunately, they often just say, “No.”

Setting Up A Financial Advisor Blog Separate From Your Advisory Firm Website?

I know that for some advisors, this at least starts to raise the question, “Well, then should I just do my blogging separate from my advisory firm website, so I can avoid dealing with all this compliance hassle altogether?” To which I’d answer, “Maybe”, at best, because that will not automatically solve the compliance issue.

Because the reality is that if you’re employed in our financial services industry, whether it’s an RIA or under a broker-dealer, if you’re even going to engage in blogging as an outside business activity, that still needs to be disclosed to the firm. The compliance department still gets to decide whether that’s okay or not, and whether it’s something they need to oversee further. If the focus of your blog is to solicit clients, compliance is likely going to say it’s still part of your advisory firm or broker-dealer activity, and it’s still subject to oversight, even as a separate website.

Because it’s not ultimately about whether it’s on your business website or not. It’s about whether you are engaging in an effort to make recommendations, solicit clients, or otherwise advertise for your services. In other words, what makes compliance need to oversee the blogging is not what website it’s on. It’s how it relates to you providing services or trying to get clients. Now, that being said, I do know some advisors who have launched successful blogs that are separate from their advisory firm website and have separate compliance oversight.

The key points to this approach are, first, it’s still disclosed to compliance that it’s happening. They have to approve of this as an outside activity.

Second, if you want to go down this road, the content cannot pertain in any way to recommending specific products, providing individual investment advice, or talking about your performance or track record at all. Because that immediately scoops it back up in the normal regulation of your activities as an advisor.

Third, don’t talk about investment performance at all, in any way, because again, that has to be overseen as well.

And fourth, don’t solicit clients on that blog. Because if you lead with, “Jim is a financial advisor who’s now taking clients,” at the bottom of every article, you’re soliciting clients and you’re advertising for your services, and the firm is going to need to oversee your advertising efforts. Now, if it’s, “Jim provides this educational website for free. If you want to learn more about what he does, click here,” and the Click Here goes to your separate website with your advisory firm, with all of your advertising that is compliance overseen, that’s probably not an issue for most compliance officers.

Because they don’t need to oversee education, and they don’t need to oversee material that is outside of the scope of regular financial services and financial advising. In fact, some of the best blogs are so specific to a niche that you wouldn’t be talking at all about your advisory services. It’d be about all the non-investment issues of your niche and if the people are so interested in that, they want to talk to you, you can send them to your actual financial advisor website. However, this separate blog approach just isn’t feasible for a lot of advisors.

Because their blogging is so tied to their advisory services, their investment outlook, or their investment views, that they couldn’t separate it if they wanted to. The whole point of the blog is to actually solicit clients and advertise their services. But I thought it’s worth knowing there are at least some advisors that do this separation successfully. You just have to be very clear about drawing the line, and you still need compliance on board with the decision to maintain it separately. Now, of course, if you’re going to run the blog separate from your advisory firm, you do still need some way to get them to your advisory firm.

If you don’t, you’re just giving content away for free and you’re never actually going to capture any business, which isn’t good for business either. That’s actually why I tend to recommend that most advisors put their blogs directly on their advisory firm websites. Because if you’re really trying to get clients, at the end of the day, you want clients to see the firm and you want them to be reading the content on the firm’s website. That’s how you start building awareness of your company’s brand so that you can do business with these people in the future.

But the bottom line here is just to recognize that the obligations of compliance really aren’t that substantially different between RIAs and broker-dealers. The financial service industry as a whole has stringent rules about how advisors advertise to the public and that includes blogging, and it’s true on both sides of the channels. But it is true that RIAs tend to be much smaller than mid to large-sized broker-dealers, where most brokers work.

Which means, it is often easier to work proactively with a chief compliance officer in an RIA to come up with an oversight process that works. While at large BDs, a compliance officer often has no connection to the brokers and risks being fired for whatever the one biggest idiot in the firm might do, so the compliance policies tend to be more restrictive around a lot of things, including blogging. Not because FINRA requires it, but because that’s the dynamic of executing compliance in a very large firm.

Getting Started With A Financial Advisor Blog [Time – 12:03]

For those who do want to get started, here’s my suggestion on moving forward. First, try to work proactively with your compliance department. Contact them. Tell them what you’re trying to do. Be very clear about what you want to write about. Especially if it’s not related to products, investments, or performance, tell them. It doesn’t alleviate them of your compliance burden, but it does make it easier for them. It’s kind of a nice way of saying, “I’m not a threat to your compliance job.”

Second, plan out your expected editorial calendar of content and write your first couple of articles far in advance, and send it in for compliance to review. Yeah, it helps to produce timely blog content. But the reality is that a lot of what you should produce should be long-term, evergreen content anyways, that answers common questions of your clients and prospects, and doesn’t have to be timely. So start with that. Write your first two, four, or six articles that you’re going to put out over the next couple of months. Send them all into compliance at once. You’ll have a lot of lead time. You can start working out the process and the kinks with compliance.

I suspect what you’ll find… The pattern I’ve seen with a lot of brokers who have gone down this road, is that after the first couple of months, once compliance reads a bunch of your articles and realizes that you’re probably not talking that much about investments, performance, or product recommendations (all the stuff that they’re worried about), they may even ease up a bit. I’ve heard from a lot of brokers, in particular, and broker-dealers that say, “Compliance early on was really a pain about the blogging.” But it eased up after a few months of the process once compliance realized they weren’t a threat. And particularly if you can get a dedicated compliance officer that works with you and starts to really understand the nature of your content.

Now, if you’re going to be really focused on investment issues and you want to write an investment commentary, yeah, be prepared that you’re going to have to work much more proactively and push the process a little bit harder to get things to run in a timely manner. Because now, you truly are writing timely content. But most blog content doesn’t even actually need to be that timely, unless you’re specifically trying to promote investment content.

I hope that helps a little as some food for thought around blogging as an advisor, the differences or not between broker-dealers and RIAs, and why it’s less a difference of regulation in the channels and more just a difference of the size of firms, and the challenges that large firms have trying to oversee large numbers of advisors and brokers.

So what do you think? Are actively managed funds going to see a sudden increase in performance due to the changes in broker compensation? Will brokers start pointing to fund performance rather than account performance, since the former won’t include their fees? 

Fed Balance Sheet Unwind? No Reason to Worry!

Fed Balance Sheet Unwind? No Reason to Worry!

In the wake of the Fed decision to begin reducing its balance sheet, speculation abounds. Pundits of all stripes are speculating about what this will do to interest rates, the economy, and the stock market.

The answer is easy. Nothing.

Those commenting often make two types of mistakes – omitting important data and using pop economics instead of real analysis. Let’s consider each in turn.


If we put aside the political debate and merely asked about the impact of reduced demand in a market, what would be our approach? We would take the rate of the change and compare it to the daily volume. If it was very small, we would expect little effect. In a Federal court where I was an expert witness the Fidelity Investments team opined that 1% would be small. While no one really knows, that seems reasonable. Let’s do the math.

The Fed plans to halt replacement of maturing Treasury securities at some point in 2018. We do not know the exact plan, so I’ll make a more aggressive assumption. Suppose that the Fed begins immediately—no replacement of maturing securities. Let’s do the math.

Amount of Treasury holdings expiring in the next five years: $1.4 trillion.

Dividing by five years: $280 billion per year.

Dividing by 250 (or so): $1.12 billion per day.

Total daily volume in the cash Treasury market: $500 billion or so, or about 0.2%.

And this does not count trading in futures markets, where a buyer can hold until delivery if desired.

This is a very deep and liquid market. The error made by many is to compare the size of the Fed balance sheet with net new issuance by the Treasury. Why is this comparison relevant?


The net new issuance comparison makes a common, pop econ mistake. It treats a large and complex market as if it consisted of two parties. This may be easier to understand, but so was the concept of “flat earth.” It leads people, like a top TV bond commentator, to ask, “If the Fed and other central banks quit buying new bonds, who will step in?”

In the last few years we have also witnessed assorted experts asking, “who will buy our bonds?” And then shortly thereafter, shamelessly discussing a shortage of long-term bonds. These are great stories to attract viewers and readers, but a simplistic view of the market. It ignores the millions of participants making up the deep market. This cannot be represented as two parties. A beginning economics class is all you really need. Think about supply and demand in terms of distributions of many players. Consider these simple graphs from a helpful source.

If you look at the chart on the right, you might view the Fed absence from the market as an external shift in demand. This does not affect the plans of other participants, but it does mean less demand at each price, so a shift from D2 to D1. We should expect a lower quantity and price (higher yield), but not a hugely dysfunctional market. During the QE period, I sought estimates from many macro economists about the total effect of QE. Some Fed economists also made a similar estimate – about 1% in the ten-year note.

Over a period of several years, we might expect a gradual adjustment in the ten-year note by 1% — or perhaps less, since some of the balance sheet will be maintained. It is small enough that other factors will be the main drivers.


We can now see why past scary predictions did not come to pass. If every TV pundit was required to pass a two-part test:

  1. State the size of the bond market;
  2. Draw and explain one of the charts above…..

…CNBC would have a lot of air time to fill!

DOL Rule Forces Independent Advisors To Differentiate & Adapt

DOL Rule Forces Independent Advisors To Differentiate & Adapt

In the latest Schwab Independent Advisor Outlook study, a growing number of financial advisors report feeling compelled to do more for clients, without being able to increase their fees to pay for it. A whopping 44% of advisors state they have already begun to provide more services to clients without charging for them, and 40% of advisors are spending more time on each client without increasing fees. Notably, the study does not find that advisors are cutting their fees to compete with robo-advisors and the like; instead, advisory firms are responding to competitive pressures by trying to do more to justify their existing fees in the first place (at the risk of compromising their profit margins over time).

In fact, the pressure to do more and offer a wider range of services for clients was the dominant theme of the study’s future outlook as well, as advisors themselves are increasingly suggesting that the key to differentiation in the future – especially as DoL fiduciary forces more and more competitors into the AUM model – will be offering clients a broader range of services beyond just the portfolio, from tax planning, to philanthropic advice, and health-care planning. In the meantime, as the DoL fiduciary standard itself becomes universal, only 20% of the RIAs in Schwab’s study stated that they anticipate trying to differentiate through a commitment to more stringent standards for advice. Nonetheless, 79% of advisors reported feeling confident about the future of the industry, and expect more opportunities in the next 10 years, particularly as financial planning itself continues to mature.

What The Latest Milestone Actually Means

What The Latest Milestone Actually Means

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

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

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

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