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MEDIA REVIEWS – June 8-15, 2023

The cover story for this month’s Investment Advisor magazine is long and generic, wide and shallow, as the saying goes, telling us what the authors believe are the general trends in the profession.  Do not expect to new surprised by any of them.

I was definitely surprised that Angie Herbers was bold enough to calculate the average return on investment of client appreciation expenditures (one referral for every $500 spent) and direct marketing (one good prospect for every $2,000 spent.  She doesn’t point out the obvious, but I will: you should probably repurpose your direct marketing budget to client appreciation and service activities.

And…  Did you know that the Federal Trade Commission is proposing to ban all noncompete agreements, altogether?  Securities/compliance attorney Tom Giachetti breaks down what the provision would look like if enacted.

Articles that received a ‘high’ relevancy rating:

“Charting a New Path”
by Jeff Berman, Michael Fischer and Melanie Waddell
Investment Advisor, June 2023
Relevance: high

The magazine’s cover story purports to tell us everything there is about how the RIA business is changing, and it’s a loooong article.  I can’t find it on the magazine’s website so the link is to the online PDF of the June issue.

The article relies on Cerulli research, telling us that the RIA ‘channel’ (Cerulli sees everybody as a sales conduit for products) is growing while the number of broker-dealers is declining.  But FINRA reports that the number of registered reps went up last year for the first  time in years.  The trend there is that the reps create their own RIA within the BD fold, and do a larger percentage of their business in advice rather than sales.  Interestingly, we are told that the number of RIA firms is declining (due to consolidation and M&A) while the RIA headcount is growing.  The center of gravity is moving toward larger entities, but there still seems to be a big gap between the largest firms and the mainstream.   Smaller firms tend to have just one independent custodial relationship, while the larger firms tend to use multiple custodians.  Larger firms get more favorable pricing and better support from their custodians.  

Only 24% of firms said they were planning to switch custodians, and only 4% actually did so in the past year; custodial relationships tend to be sticky.  We are told that there are a growing number of sales and acquisitions in the advisor space, and that private equity firms want to start buying firms earlier in their life cycles (i.e., before the founders are ready to retire).  24% of wirehouse brokers are unhappy with their jobs and their compensation, compared with 7% in the independent BD channel.

There’s a very general section on technology (it’s changing) and we are told that there may be a trend away from the AUM revenue model.  There appears to be growing demand for fiduciary advice, and advisors may add lending and tax services to their service menu.  Toward the end, we are told that RIA firms will continue to evolve in response to client needs, but there are no specifics provided.  We are told that ESG products will face increased regulatory scrutiny, but not told what that means.  We are told that investors have a growing appetite for digital assets, and that some wealth management firms are starting to take on mass affluent clients.  And watch out for cybersecurity issues.  You end the article wishing there were more specifics about any of the topics that are introduced here, but not explored in any depth.  (p. 20)

“3 Steps to Propel Your Organic Growth”
by Angie Herbers
Investment Advisor, June 2023
Relevance: high

The article says that advisory firm owners will say they have ambitious growth goals, but their spending doesn’t reflect that as a priority.  These firm leaders should drill down into their return on marketing investment.  Separate out expenses related to client appreciation (generating referrals) and direct marketing.  

The average expenditure on client appreciation required to generate a quality referral is $500.  If you spend $20,000 on client events, newsletters and other client-appreciation efforts, you should expect that to generate 40 referrals.  (For larger firms, the cost per referral goes down due to scale.)  If you aren’t achieving that return on investment, then rethink how you approach client appreciation.

Meanwhile, the average direct marketing cost to generate a good lead is $2,000.  A $100,000 marketing budget should gain 50 new prospects over 12 months; if that goal isn’t met or exceeded, there is something wrong with your marketing strategy.

Herbers also says that most advisory firms are overstaffed; they staff up based on projected growth, but the growth doesn’t match up with the goals.  (p. 33)

“Could Non-Compete Agreements Be Finished?”
by Tom Giachetti
Investment Advisor, June 2023
Relevance: high

Did you know that the Federal Trade Commission has proposed a set of rules which would severely limit the use of non-compete clauses between employers and their employees?  It would deem it unfair for an employer to enter or attempt to enter into a non-compete clause with a worker, to maintain such a clause or even represent to the worker that he/she is subject to a non-compete clause.

Currently, the applicability of noncompetes are governed by the states.  California, North Dakota and Oklahoma have statutes which render non-compete clauses void for nearly all workers.  Eleven other states severely restrict them.

The FTC’s proposed rule would permit the use of a restrictive covenant if it is included in the buyout of a staff member, if that person owned at least a 25% stake in the business entity.

This provision has not been enacted yet, and the article says that it may not survive legal challenges; does the FTC have the power to supersede state laws in this area?  (p. 40)

The rest of the articles:

“SEC Issues New Reg BI Guidance”
by Melanie Waddell
Investment Advisor, June 2023
Relevance: moderate

This is the agency’s third bulletin on Reg BI, telling BD reps and RIA advisors that they need to understand the potential risks, rewards and costs associated with the products or investment strategies they recommend.  And… they should have a reasonable understanding of the client’s investment profile, and have a reasonable basis to conclude that the recommendation or advice they provide is in the clients’ best interest.  Costs (commissions, markups, management fees and 12(b)-1 fees) are a relevant factor to consider, but should not be the only consideration.

The bulletin says that broker-dealers should always look at reasonable alternatives when determining whether a recommendation is in the best interests of the customer.  When the recommendation includes a conflict for the firm or the financial professional, they need to document the basis for a recommendation.  No mention of an actual fiduciary standard; this is still very weak ‘best interest’ regulation, and you wish that Waddell (who has shown herself to be no fan of fiduciary) would call it out.  (p. 10)

“Where do Annuities Fit in Your Clients’ Retirement Strategy?”
by Roger Wohlner
Investment Advisor, June 2023
Relevance: moderate

A panel at the Morningstar Investment conference examined how annuities can fit into a diversified retirement portfolio.  The panelists noted that annuities have traditionally been commission-based, but recently some annuities have stripped the commissions out.  Wade Pfau recommended that advisors look at income annuities as a replacement for clients’ fixed income allocation, creating a protected income floor as part of a framework for retirement planning.  Advisors should factor in Social Security income when determining how much annuity income their clients should buy.  (p. 12)

“Where Did All the Organic Growth Go?”
by Tim Welsh
Investment Advisor, June 2023
Relevance: moderate

Most of the growth in RIA revenues and profits are coming from market appreciation, which has led to complacency on the marketing front.  The largest firms appear to be experiencing the highest growth rates, and traditional wirehouses are now marketing their financial planning capabilities and acquiring net new assets.

The article recommends that smaller advisory firms learn to reinvest in marketing their businesses using the tools of today’s digital age.  Source optimal leads, nurture them with personalized content and close the business through proactive outreach.  Define your ideal target client and develop a precise marketing message for your value proposition that will resonate with prospects, like how to optimize stock options.  Create content around these topics and promote them on search engines, social channels and emails.  

The article says that you need a follow-up process to reach out to leads quickly, qualify them and close the business.  (p. 16)

“Why Sonders Shuns Stock Market Forecasts”
by Dinah Wisenberg Brin
Investment Advisor, June 2023
Relevance: moderate

Schwab’s Liz Ann Sonders says that year-end forecasts are silly, and even if they’re right, they don’t tell you anything about what will happen in between.  She also rejects cookie-cutter asset allocation recommendations.  She recommends that investors focus on high-quality investments and stocks that pay high dividends.  Avoid high-debt companies in this rising interest rate environment, and expect deteriorating earnings.  At the end she says that she is starting to see cracks in the labor market.  (p. 19)

“SEC Marketing Rule Enforcement Actions Could Be Coming Soon, Experts Say”
by Melanie Waddell
Investment Advisor, June 2023
Relevance: low

The marketing rule is one of the SEC’s 2023 exam priorities, but the SEC says that in the first four months of the year, it has found that most advisors have updated their policies and procedures and are complying with the rule.  Some deficiencies have been referred to the SEC enforcement staff, but the article doesn’t tell us what those deficiencies were.  Securities attorneys tell Waddell that advisory firms need to make a good faith effort to comply.  (Who knew?)

The article adds that anytime a firm markets its investment performance, the SEC examiners spend extra time focusing on how that was calculated.  (p. 31)

“How LPL Gives FA’s the ‘Muscle’ to Grow”
by Jeff Berman
Investment Advisor, June 2023
Relevance: low

The ‘ol broker-dealer beat lives on.  Here, the managing director of LPL’s Financial Services Group (the BD has 3,200 afflicted advisors now) provides very generic, somewhat scripted answers to questions about how the firm supports advisor growth.  The home office offers paraplanning services that can free up ‘producing’ reps, and encourages each office to have a succession plan in place.  The firm also offers outsourced marketing, accounting and even financial planning.  It provides some kind of technology consulting, but we are not told how that works.  (p. 35)

“7 No-Nos When Switching Firms”
by Mark Elzweig
Investment Advisor, June 2023
Relevance: low

This is primarily about brokers leaving one wirehouse for another.  First ‘no-no’ is discussing your upcoming move with other advisors in your branch office.  They will run and tell your branch manager and then ‘prospect your book.’  Second: talking to clients about your move in advance or taking confidential non-public information like Social Security number or account holdings.  Third is not spending enough time with the new firm’s transfer team and understand what is needed for its account opening forms.

Fourth is being overconfident that your clients will come with you.  You need a sense of urgency during the account transfer process.

Fifth (isn’t this part of the fourth?) is not staying in front of clients prior to your move.  Schedule a lot of client meetings and calls with clients right before you leave, to bolster your relationships.

Sixth: Not being able to offer a clear, succinct rational for why the move is best for your clients.  

Seventh: Dumping in-house products in advance of your move.  This will telegraph your intentions to branch management.  (p. 37)