More On Legal & Compliancefrom The Advisor's Professional Library
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
Kent Smetters may have achieved the Holy Grail for advisors who care about clients: a service called Veritat that provides personalized advice to a broad swath of underserved clients using an effective technology platform that boasts a Wharton pedigree for the investing sleeve of this fiduciary advice model. Oh, and the advisor can get paid for providing advice.
The financial planning process can leave a lot of people cold, investors and their financial advisors among them. Clients may not be receiving appropriate planning advice and their expenses may seem too high. Advisors have the challenge of offering proper investment guidance while managing a business and earning a living. Brokerage firms, to stay profitable, must see to it that their advisors are sufficiently productive while ensuring that clients are happy and that all regulations are complied with.
These conflicting concerns are not always easy to harmonize, and Wall Street is littered with attempts to build a better mousetrap. Yet attempts to lower costs by automating financial planning and providing it online can be problematic since studies have shown that the relationship with the advisor may be the most critical element in helping investors stay the course to achieve their goals.
Along comes the aforementioned Mr. Smetters, a Wharton Professor of Business who has devised a unique advisory model that aims to greatly change the way advisors do business, solving all these problems, and pleasing advisors and investors alike. Smetters proposes to enable financial advisors to do the kind of work that motivated many to get into the business in the first place–that is, help clients properly plan their finances–while helping advisors earn a good living and ridding them of the headaches of running a business.
“A growing number of advisors hope to adopt a fiduciary standard but usually face substantial overhead for getting their job done. So we recently opened up Veritat to allow independent advisors to directly join our RIA,” said Smetters (left) in an interview with AdvisorOne. The new advisory firm whose Latin name means “truth,” has been operating in stealth mode since 2009, but marks its fully built-out platform with the launch on Monday of its new advisor-facing website. The Veritat network currently has several dozen advisors either in its network or at some point in the firm’s evaluation process. With its revamped site, the firm aims to recruit 25-35 financial advisors per month onto its fully automated, advisor-friendly platform.
“Veritat handles all the heavy lifting. We even do the scheduling, collection of client information, creation of the personalized plans and the portfolio management,” Smetters says. “So our advisors increase their book straight away and focus on what they tell us they enjoy most–building personal relationships and offering advice.”
To make the headaches go away and enable advisors to enjoy financial planning bliss, Veritat takes what Smetters calls a “Turbo Tax approach” to financial planning.
“The advisor ... can look at it and see if they want to make changes. The advisor has some dial control” Smetters says. “They can say ‘Maybe I want to take a little more risk.’
“Over 90% of the time they agree with our plan,” he adds. “We don’t let them dial up like crazy.”
Veritat also seeks to help clients on the marketing side and says it is different from other models like Garrett Planning Network that are uninvolved with the execution or substance of the financial advice offered.
“We’re not just an association. We really are an RIA and a full platform for actually executing,” Smetters says. “Our advisors get access to the entire platform. We gather all the client information. All the advisors get their own website … we create a community.”
Smetters says the online platform makes it convenient for advisors–including wirehouse and independent advisors–to focus on building their book and minimize their costs, even operating out of their homes if they wish. Working mothers in particular should find this model appealing, he says.
“Of the 65,000 CFPs, 25% are females raising families,” Smetters says. “They essentially exit the workforce. They can use the webinar format to meet with clients.”
And younger advisors looking to get started amid the high hurdles of forming an RIA and doing paper-based work with heavy compliance burdens may find Veritat, which prefers its advisors to have a CFP or other planning credential, an easy entrée into financial planning.
“For the younger people, if they are CFP designees, but don’t have the three years’ experience [Veritat wants of its advisors], they get paired with a senior advisor,” Smetters says. “After a couple of years the senior advisor rolls off and the junior advisor inherits the client. The only thing that changes is the revenue-sharing agreement. It’s kind of like an apprentice program but it allows them to build their book immediately and see how advice is given.”
At Veritat, advice is given more in tune with principles of academic finance than with Wall Street notions of aggressive equity investing whose wild swings time is supposed to smooth out. “Retirement–you don’t gamble with that,” Smetters said. The planning approach is based on “goal-based investing,” the Wharton professor says. “You should be matching investing to make sure a given goal has an appropriate investment.”
Goal-based investing is a concept that Boston University professor Zvi Bodie has written about, and indeed Bodie serves on Veritat’s Board of Advisors, along with Barra co-founder Andrew Rudd and Rodney Sullivan of the CFA Institute.
Smetters dismisses Wall Street notions of “risk tolerance” for what he calls “risk security,” saying “people’s willingness to take risk is not about the person but is [connected] to that specific goal.” So one should be more cautious with funds needed to pay rent during retirement than with funds set aside for vacations.
Veritat’s planning mandate goes far beyond investments to encompass the kind of comprehensive planning many advisors would like to do but find hard to do in a product-oriented brokerage firm. Advisors help clients pay down debt, set aside emergency reserves, obtain the right amount of life insurance, plan for college and set up wills and plan estates. The firm has worked out arrangement with product and service providers in which Veritat derives no economic benefit.
“We are using Scottrade as our main custodian,” Smetters says. “We use no transaction cost, no commission ETFs. We don’t get any form of commission or kickback. Most of the trades don’t even create ticket charges; Scottrade gets some of the expense ratio [as owner of Focus Morningstar ETFs].
“In terms of insurance, we use a broker that works with fee-only advisors. We tell the broker that here is the amount of insurance this person needs; they’re not allowed to upsell the client. They will go out and solicit policies from major insurance policies that are highly rated. These policies are typically cheaper. The broker will get a much smaller load; we get no commissions or loads from the insurance company."
For wills and trusts, Veritat has a relationship with Legal Zoom, which can provide the four documents Smetters says most clients who are not ultra-high-net-worth need. And if they do need a fancy estate plan, Veritat refers them to an appropriate provider.
The cost to clients for comprehensive financial planning is remarkably affordable, yet Veritat has found a way for advisors to earn a decent living through relationships with clients who value ongoing advice and portfolio management. Clients pay a $250 initial planning fee, and if they want regular access to a personal financial advisor, a single client pays $25 a month, a family pays $40 a month and a retiree pays $35 a month.
Clients seeking a hands-off approach with the advisor managing their ETF portfolios pay a 0.7% asset management fee. Smetters says that in Veritat’s experience so far, initial planning engagements generally lead to more comprehensive advisor services.
“Our ideal advisor is relationship driven; they focus on gathering clients and giving advice, but they are client-focused,” Smetters says.
Perhaps the greatest benefit to advisors and clients alike of Veritat’s system is that the advisor has but two tasks to perform: gathering clients and giving advice. Veritat handles all execution, customer support, technology, marketing, compliance and business operations–a value to the advisor which Veritat estimates exceeds $100,000.
“Our best advisors are very much about the relationship,” Smetters says. “They have to understand how to explain the plans and why they do what they do.” But they are not knee-deep in the headaches of running a business, he says.