Fidelity's Custodial Report on RIA Fees December 18th 2017

Good morning

Fidelity just released a report this morning from their Clearing & Custody Solutions division on what they are seeing as it pertains to RIA Pricing, aka fee compression, in 2017.

Several interesting facts. First below the headline before the article starts is the line below stating that advisers are unbundling fees for financial planning. This has long been a basic tenet of PFGC philosophy. As fees compress we will want a transparent pricing model so we can charge for wealth management services.  If this is true then Designations and Centers of Expertise will have to be an important part of our business model.

The impact of robo-advice is driving more advisers to unbundle fees to highlight the value of planning

Next with markets at all time highs and the biggest and longest bull market in history the average revenue per RIA dropped 4%. This can not be a good sign. 

Meanwhile, annual revenue per adviser dropped to $538,00, down from $561,000 a year earlier.

PFGC believes that our fees will decline but that we are far more valuable than a robo if we can change our investment process, scale it and most importantly articulate it. 

"The unbundling is driven by the robos providing asset management for a very low fee, and that makes it apparent to clients that the asset management is the lowest value provided to them," 

PFGC has had a target of 50 to 60 basis points for our fees in the next 5 years. The Fidelity Research, below, shows we are well on our way. If we are going to be charging a fee of 60 bips for an average account than I think we can assume larger accounts are going to be lower, maybe 25 to 30 bips.

The research found a median fee gap between stated and actual fees of 21 basis points, with actual fees charged across all clients averaging around 64 basis points.

PFGC believes in connecting the dots. 

• If our fees goes down we will need to manage a lot more assets to maintain our lifestyles
• To manage a lot more, think a billion, then we will have to employ a standardized investment process, think models, so we can efficiently and effectively manage our client's assets
• If you are going to build a model PFGC believes the model will have to be low cost and tax efficient with much better performance than we have delivered in the past.
• If you run a standard model then Metrics will be incredibly important
• If we are paid less, asset management as a low valued offering, then we will have to incorporate wealth management into business model. REAL WEALTH MANAGEMENT!
• Charging a fee for Wealth Management means that we can add value and clients will want to know why they should pay us for Wealth Management advice.
• That means designations will be critical for our ability to charge for wealth management advice
• To deliver a wealth management offering we first must know all the needs and goals of our clients so developing an in depth Discovery Process is essential.
• If we do the Discovery and understand our client's needs and goals we will be forced to incorporate Centers of Expertise into our business model so we can meet the needs and goals of our clients.
• If we want to incorporate multiple Centers of Expertise, SO WE CAN GET PAID, then we need to standardized our interaction with Centers of Expertise.
• Finally we must move to a business model that that has a standardized Business Development Process.  The main business driver to grow our businesses is new relationships not performance.

As a Financial Advisor we must become "the tip of the spear". This means all our functions, teaming, strategic partnering, affiliations must be designed to get us in front of new prospects.

                  All assets are good assets, any relationship is better than all assets. 

https://www.fa-mag.com/news/ria-fees-and-revenues-down--fidelity-says-36223.html

http://www.investmentnews.com/article/20171218/FREE/171219933/fidelity-report-says-rias-are-cutting-fees-working-harder

Danny

"One left-footed step per day"

Disruption of our Business Model

Michael Kitces email today addresses what PFGC has maintained for several years, our business model is being disrupted as the fees for AUM is declining. PFGC believes that fee compression is accelerating as the adoption rate for ETFS is accelerating. Kitces speaks of several different possible outcomes including that we give away for free managing investments while charging for wealth management advice. What Kitces fails to mention is that wealth management is a spotty proposition in that I doubt we could charge a fee every year as we do for AUM. Just saying we service your wealth management needs for fee and give you AUM advice for free doesn't feel like it would hold up to scrutiny. 

https://www.kitces.com/blog/cross-subsidy-industry-disruption-financial-advisors-bps-custody-indexing-2-0/?utm_source=rss&utm_medium=rss&utm_campaign=cross-subsidy-industry-disruption-financial-advisors-bps-custody-indexing-2-0&utm_source=Nerd%E2%80%99s+Eye+View+%7C+Kitces.com&utm_campaign=76c679cec8-NEV_MAILCHIMP_LIST&utm_medium=email&utm_term=0_4c81298299-76c679cec8-57148589

PFGC doesn't believe in an either or world or future. ETFs are simple, diversified and low cost but as PFGC points out in the Retention/Attrition Strategies webinar  we can still, will and do add value. Link is below.

https://attendee.gotowebinar.com/recording/611154028166285059

What PFGC has great clarity on is that whatever the outcome our fees will be lower, much lower. So a standardization of all our business processes is necessity so we can manage a lot more assets as we move to add wealth management to our offering.

I realize a lot of us consider ourselves wealth managers but the litmus test for PFGC is are we willing to move to a model like CPAs and Estate Lawyers where we are paid by the hour for our advice? I think not. We could do it but I doubt we would be paid at the same level we are today. Yes we do offer some aspects of wealth management but I believe we are many iterations of our business model away from not only claiming to be wealth managers but are licensed, certified and trained to deliver that offering.

Whatever the end game we will not leap to the conclusion. We need to concentrate on next steps in both managing AUM and adding wealth management capabilities and not worry about the ultimate endgame. Don't worry what you can't control/influence but concentrate on what we can change.

"one left-footed step per day" is PFGC's attempt to focus on the art of the possible and not on the impossible.

Danny

Value Proposition and Pricing

Good morning

As we enter the fourth quarter of 2017 it is becoming more evident to me that FAs are thinking through their business model and specifically their Value Proposition and how they price their business. There are no easy or pat answers and at this time we have many more questions than we have definitive answers. 

But I believe we do realize one thing for sure, what we did in the past and up until now will not be what we offer clients in the future. We will move from a financial advisor to a holistic wealth manager even though that will be about a 10 year journey and we will have to adapt our basic value proposition in how we manage and charge for investment management. 

We are value added partners. Let me say it again, We are value added partners. But in the new world we need to rethink on how we speak to our clients and how we manage their money to assist them in meeting their needs and goals. Change is here, pick your path.

Below are three items.

1) A link to a webinar on how to build a investment process that is value added and how to communicate to prospects/clients.

2) A link to a study on pricing and where we are today so we can understand where we may be going.

3) An attachment on an article from FT on the CEO of Eaton Vance and their Parametrics, direct indexing, offering.  Please read carefully as Mr. Faust has an view of the world that is relevant to us.

https://attendee.gotowebinar.com/recording/611154028166285059 https://www.kitces.com/blog/independent-financial-advisor-fees-comparison-typical-aum-wealth-management-fee/?utm_campaign=coschedule&utm_source=twitter&utm_medium=MichaelKitces&utm_content=Financial%20Advisor%20Fees%20Comparison%20%E2%80%93%20All-In%20Costs%20For%20The%20Typical%20Financial%20Advisor%3F

Designations

The link below to an article on Bloomberg today is no new news. People are concerned about fees. I'm shocked! The information on what people are charging is interesting but what caught my attention were that last four paragraphs. 

PFGC has always focused on what is our business model today and tomorrow? One of the basic tenets of PFGC is that our pricing model will eventually change because it is not transparent. What we mean by that is we charge for money under management and then our value-add is any other services we can provide. Some FAs are trained and have the proper designations to deliver wealth management services as part of their model. It is all inclusive. Some FAs (most) do not have the ability deliver a wealth management offering. The end of the Bloomberg article asks some very important questions. 

First, "there is no clear consensus on how to value wealth management services effectively". This is an issue as the article goes on to state that clients are questioning on how we deliver our financial advice. Some FAs are moving to hourly rates and retainer fees. 

Second, the article questions that we charge by the amount of assets under management than by the actual work we do. This is my greatest fear; flat fee pricing.

Third and finally the article ends with that "there's going to a need to be a tighter match between what you charge and the service you provide".

What does this all mean to us? Nothing changes overnight, it's a process but the other side of the coin is we also don't change overnight, it is also a process. If our offering is going to be teased apart over the next 5 years or so Designations will become critically important. 

So we have time but designations take time. Take a left-footed step today and look into what designation will be the most helpful to you in maintaining your business and lifestyle.

https://www.bloomberg.com/news/articles/2017-08-09/your-financial-adviser-may-be-charging-way-too-much

Danny

"One left-footed step per day"

Happy 4th of July

As we head into the long weekend to kick off the summer I thought I would reflect back over the last three years since Process for Growth Consulting was launched in June of 2014. PFGC has always been predicated on the fact that fee pressure would force us to manage a lot more assets efficiently and effectively if we wanted to maintain our lifestyles.  

The last three years has not only reinforced this view but if fact the landscape is demanding far more from us than just managing more assets. Clients have told us through studies that they want us to address all their needs and goals and not just investments. 

So clients now are questioning our basic value proposition (how much they pay us in fees) in how we manage their assets and they also want us to be wealth managers in the truest sense of the phrase. The problem is very few of us have a CFP designation and even fewer of us employ a business model that incorporates basic principles of wealth management. 

If we want to be compensated as a value-added partner our basic business model must change on how we function on a daily basis. There are two basic functions we must address in building our new business model.

First to become a valued partner the way we articulate our investment philosophy and then execute it should entail us having an open, honest, transparent and professional discussion on why and how we build a portfolio based upon our client's risk profile by actively managing low cost investment vehicles in a dynamic market to attain after tax risk-adjusted returns based on metrics to assist our clients in meeting their needs and goals.

Second we need to standardized our processes so we can affiliate with multiple centers of expertise so we can deliver all wealth management services our client's desire.

And while you are working to change your business model we must pay attention to improving ourselves through designations. The future is cloudy but one thing is clear. If we want people to pay us for our expertise then we must have the requisite designations to prove our worth. CFP for wealth management and CPM to manage money.

No small thing.

This first link is to PGFC's Retention/Attrition Strategies on how to become a valued partner in managing our client's assets.

https://attendee.gotowebinar.com/recording/1773846889891524866

This next link discusses in detail the way FAs are adopting to the new world. It is very rare where I agree so much with someone's point of view of investing but this article some of my client's think was plagiarized from me. It's not and it's a great article.

Kitces on the disintermediation of mutual funds and the rise of the Financial Advisor portfolio manager

https://www.kitces.com/blog/passive-investing-mirage-financial-advisor-etfs-disintermediate-mutual-fund-managers/

Investment News on fees and account demographics

http://www.investmentnews.com/article/20170628/FREE/170629927/wealth-management-firms-struggle-with-lower-fees-fewer-new-clients

Finally PFGC will be raising it's prices as of August 1st 2017. PFGC has come a long way since June of 2014 and now with highly competent standardized groups running successful affiliation models PFGC has proven to be a valued-added partner. 

So pricing as of August 1st will be:

Teams will go to a one time fee of $5,000.00 from $3,500.00

Individuals FAs will go to a one time fee of $3,500.00 from $2,500.00

Babies (less than 6 months in the business) remain at $500.00

A new product will be available to Branch Managers soon:

Structuring a Complex in an Organic Growth Environment which has a one time fee of $10,000.00

The life blood of my business is referrals and if there is someone you believe that will benefit from PFGC's coaching I will treat them with the same professionalism and courtesy I treat you.

Speaking of partners PFGC welcomes a new partner in SS&C Inc. We are all very excited about this partnership and look to bring to PFGC clients new meaningful learning opportunities to drive our new business models. Look for PFGC to sign several new partnerships in the near future so we can continue to bring unique solutions to our clients.

So it has been a crazy three years but like the changes in our industry the changes at PFGC are accelerating to keep pace with all the challenges we face. PFGC believes we can control our future, that we are not at the mercy of the vagaries of the business and that we and we alone are responsible for our own success.

"Between the small things we will not do and the great things we can not do, the danger is that we do nothing". Adolph Monod

Take one left-footed step today!  

Danny

"One left-footed step per day"

Friday Comedy Moment: Do I really need a designation?

Good morning

The most important thing to everyone is our health and the second most important thing is the health of our money. Clients entrusting their assets to us so we can assist them in meeting their needs and goals brings a level of responsibility to us to be competently trained and certified in several areas.

First, wealth management. The CFP, Certified Financial Planning, designation does not ensure that we can deliver all the relevant wealth planning advice to our clients but it certainly gives us a level of competency in many areas such as trusts, estate planning, succession planning, retirement planning and insurance planning. Everyone's skill set will vary but at least we can say we know the basics.

Second, asset management. The CPM, Certified Portfolio Manager, designation does not ensure that we can outperform the markets or that we will never lose money but that we trained ourselves to understand basic modeling concepts, portfolio construction and metrics that allow us to design risk-adjusted tax-efficient portfolios to assist our clients in meeting their needs and goals. We have for too long "customized" our solutions for clients instead of conceiving, designing and implementing an Investment Philosophy that allows us to build a standard solution that is customized for each client.

We are all busy people. Some of us have had great success in our chosen field without attaining any designations. Designations are time consuming and not easy to get and some actually take several years to accomplish and most importantly they cost money. Yet we are in a period of transition, a time of disruptive innovation of unprecedented scale, and if we are to maintain our lifestyles we are going to have to up our game.

There are many ways to approach designations. It is not practical that everyone gets every designation or even one. If you are a team decide which person gets a designation and which one. That also may not be a possibility so consider recruiting relevant designations and integrating into your business model. Your offering has two main drivers; wealth management and asset management. What can you tell/show clients that you are trained to deliver these two expertises?

The link below is by John Oliver who succinctly and somewhat profanely explains his team's experience in setting up their own 401K. We have been YouTubed. 

https://www.youtube.com/watch?v=gvZSpET11ZY

Have a couple of laughs at our expense and definitely have a great weekend?

Danny

"One left-footed step per day"

Disruptive Innovation

Hoping you are having a great Sunday! Love the weather here in Northeast!

A couple of articles caught my attention and I thought I would share. First, Price Waterhouse Cooper (PwC) had an article on their Disruptor Profiler (see link). The Profiler, 15 questions available at the bottom of the article, says that there are five aspects that can disrupt your business. You need only one but here are the five.

- Regulation

- Customer Behavior

- Competitors

- Production Technology and Models

- Distribution

Seems to me that we don't have one, we have ALL five! The retail financial industry is being disruptive on a massive scale and no one can predict how this is going to end with any certainty. But we do have some clarity about what we actions need to take so we can maintain our lifestyles.

Now this leads to the second article (link) by in Strategy and Business on disruptive innovation. Professor Howard Hu says we need to refresh our thinking on disruptive innovation because the speed of change has accelerated to "an unprecedented speed". 

"If we’re looking at the S&P 500, a company’s average life span on that index dropped from 67 years in the 1920s to 15 years today, and the average tenure of a CEO in corporate America has also shrunk over the last 20 or 30 years." Wow! Amazing.

We are the CEOs of our own businesses and we do not want to disrupted or that our company dies prematurely. What insights and/or solutions do the two articles talk about?

First PwC shows that customers are the number one disruptive force that we face. The third link below is the PFGC Retention/Attrition Strategies which discusses how our customers are choosing new investment vehicles that are disrupting our business and the Asset Management Business. Bottom line you ignore the actions of your customers at your own peril. What we did before doesn't mean we can continue to do in the future. We need to watch our clients to understand how we fit into the new world. What is the old saying? The customer is always right.

Second, Professor Hu points out that the incumbent "usually" loses out for a variety of legacy issues around costs and organizational inertia. Organizational inertia to us is our inability to change, adapt to a new business model. Professor Hu says that the incumbents should employ a hybrid model of business continuity while developing a growth component. 

What kind of growth should we focus on? Revenues, velocity of trading or assets? Which one helps us build a sustainable business model that protects us against disruptive innovation?

PFGC believes that we need to change how we function everyday so we can grow our assets dramatically. Yes the word is dramatically. Look at the asset managers. Ten years ago you were a big global player with $500 billion in assets. Today our new competitors are raising twice as much new assets in a year. We need to think about that $100 million in assets is now the ante to stay in our business where ten years ago it guaranteed our success. 

Managing more assets mean standardized investment portfolios based on metrics and risk adjusted returns so we can manage them in an efficient and effective manner.  Training ourselves as portfolio managers based on a process that is definable, repeatable and scalable so we can concentrate on adding wealth solutions to our business model. 

With great clarity I believe we need to fail forward, fail fast and then fix fast as we build a flexible, adaptable, standardized wealth management business that we can sustain our lifestyles.

Have a great Sunday night! Go Cavs!!!

https://www.pwc.com/gx/en/ceo-agenda/pulse/the-disruptors.html

https://www.strategy-business.com/article/Howard-Yu-Disrupts-Disruptive-Innovation

https://attendee.gotowebinar.com/recording/1773846889891524866

Danny

"One left-footed step per day"

The Fiduciary Standard and your business

Good morning

This article on Bloomberg (see link) is pretty powerful and covers a lot of different issues. Ths issues on "bad" brokers do not apply to the people on this mailing list but we all are painted with the same brush when it comes to advice.

Once an issue comes to the forefront the discussion takes on a life of it's own and we lose control of the narrative. This is evident by the many articles in the press and by the advertisements of our new competitors. Many firm's have stated that they "in principle" agree with a fiduciary standard but unless forced to adopt by law will continue with the Best Interest Contract (BIC). But we are not powerless to set our own standards as we have tools at our disposal.

First if you are a CFP you have already adopted the Fiduciary Standard and you can tell clients/prospects this fact. But if the investment platform you have chosen for your clients falls under the BIC standard then a lot of the Fiduciary Standard can be rendered a moot point. You can further align your business as a fiduciary by using the discretionary platforms that are at all the firms which by definition are fiduciary platforms. Now your advice and investment platform are aligned with our client's desire to work with us as a fiduciary. There are many other "corporate" issues but those issues are out of our control. I believe we do what we can and learn how to inform our clients of our decisions when it comes to advice, platform and the fiduciary standard.

As PFGC clients know I have been of the opinion that the fiduciary issue was not going away but in fact would intensify on many levels. The SEC is now going to take up the fiduciary issue for all accounts. Will it look like the DOL or the BIC? I don't know but I suspect t will be a lot closer to the DOL than the BIC.

The Cerulli Report I sent out last week showed that 82% of investors want to have a Fiduciary relationship and 6% want a Best Interests Contract (See attached Page 7). As our clients/prospects become more educated to the nuances of the different standards it will be necessary for us to be able to articulate and show our clients that we are aligned with them.

PFGC clients have already told me that clients/prospects are asking them to answer Tony Robbin's 7 Questions to ask a Financial Advisor (see link).  It doesn't matter what your opinion is of Mr. Robbins what we do know is that Unshakable is the #1 best seller on Amazon. People follow him.

http://www.businessinsider.com/questions-for-financial-adviser-tony-robbins-2017-3

https://www.bloomberg.com/news/features/2017-06-07/fiduciary-rule-fight-brews-while-bad-financial-advisers-multiply

It is your business and it is in our best interests to run it as a fiduciary.

Danny

"One left-footed step per day"