Weekend Reading for Financial Planners (Jan 12-13)

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Read all of Michael’s articles here.

Weekend reading for January 12th/13th:

Four More Years? - In this article, Knut Rostad of the Institute for the Fiduciary Standard takes an interesting look at the current state of fiduciary rulemaking, suggesting that the momentum and support for the fiduciary standard is worse off now than it was when President Obama first took office, which is surprising given the Administration's professed focus on curbing Wall Street excesses and its early efforts to prioritize advancing fiduciary duties as a part of financial reform. Rostad notes that rulemaking at both the Department of Labor and the SEC have been stalled under opposition, and the outlook for both is uncertain at this point, buckling under arguments ranging from the value of just providing more effective disclosures, the concern of costs that may be tied to the fiduciary standard (and the difficult in quantifying them), and outright attempts to redefine what "fiduciary" would mean into an outcome that wouldn't really be consistent with the history of what the fiduciary standard is supposed to mean. So what can be done? Rostad suggests that the primary problem is that specious and dubious claims and objections to fiduciary have taken hold because they were not effectively rebutted, and therefore were allowed to drive much of the discussion, so the key to moving forward is to redirect the discussion away from brokers and how "they" do business and instead to the fundamental principles of fiduciary and why it matters in the first place, to get away from advocacy against suitability and instead reset the discussion on fiduciary itself, to more effectively rebut dubious claims, and to urge the profession to take an even more active role in leading itself.

Who Would You Recommend? - In the Journal of Financial Planning, Dan Moisand provides an interesting look at how difficult it can still be for the public to find a good financial planner, by relaying his own recent experience trying to help a friend find a financial planner in the friend's geographic region. Moisand started by using the search functions on some of the major advisor organization websites, including the CFP Board, FPA, NAPFA, and the SFSP, and constraining the search to CFP certificants (not because there aren't good non-CFPs too, but because if he's going to recommend a friend to a stranger, some minimum criterion is improtant). Yet once Moisand had an initial list of candidates and went to their websites, he was quickly frustrated - often the site didn't really say anything about the advisor's practice, skills, and specialty, or worse was just a cheap template that looked... cheap. In addition, saying "We will help you reach your goals" says nothing about whether you are a better fit for a prospective client than the next advisor and his/her website, and as Moisand also notes, "no one believes you have a high level of expertise when your list of 'specialties' is 20 items long." At a broader level, Moisand also found frustration in the fact that it's hard to tell, both from advisor websites and our regulatory structure, which people are genuinely focused on delivering financial planning, and which solely use it superficially as a path to sell products or provide investment management services. In addition, it's also difficult to evaluate the ethics of advisors, and Moisand notes that while he believes both fee-only and commission-based practitioners can be ethical, there's little guidance out there to understand how to determine if a particular one is. Ultimately, Moisand suggests that the best path through this mess is to eventually provide true licensing specifically for financial planners, so the public knows how to easily identify practitioners who have an adequate level of financial planning knowledge and are expected to put that knowledge to use toward serving their clients' best interests, and so that bad practitioners can be held accountable.

A Call For Ethics In ETF Advertising - This article from Rick Ferri's blog provides a good warning for advisors considering ETF products. Ferri points out that many ETFs have found a "creative" strategy to try to provide historical performance information on their funds - in a world where the fund can't show history from a time period when the fund didn't exist, instead the fund is declared as "tracking an index" and the fund provider then creates a hypothetical historical index, effectively creating out of thin air an apparent performance history that didn't really exist in real time. The problem is then exacerbated by the fact that the provider also picks a second index as a benchmark to compare the ETF (or really, the underlying index the ETF is going to track), effectively manufacturing both a historical performance track record and historical comparisons of relative outperformance. Of course, since the fund provider picks the manufactured index, and the comparison index, and does it all working with known history after the fact, it's a virtual guarantee that every fund will be shown in a favorable, albeit questionable, light. The good news is that all of this is detailed in disclosures that accompany the sales material; the bad news is that it's still just a disclosure, and Ferri justifiably questions whether the approach is really all that ethical (regardless of the fact that it is technically legal with disclosure) in the first place.

Northern Lights ETF Trust Opens Doors To Industry - This article highlights the Northern Lights ETF Trust - what's notable about this ETF is that it's actually part of a platform offered by Gemini Fund Services that would allow advisors to create their own ETFs. This might be appropriate for an advisor who has his/her own particular investment process or style, with a desire to have it made available to clients in the form of a consolidated single fund offering, but building on the Gemini platform would ostensibly be much cheaper for getting started. Notably, Gemini points out that over time ETFs are likely to grow the most for holding static long-only funds, and that mutual funds will increasingly become the domain of more tactical or hedged strategies, which ironically means an advisor's unique investment process might be better suited to a mutual fund than an ETF (although Gemini helps with mutual funds too). Nonetheless, the use of ETFs in various active management techniques is on the rise as well, and to me the most notable thing about this story is simply the fundamental point that advisors are going to have some cheaper and easier ways going forward to create their own ETF as well.

Could inStream Be The Next Big Thing In RIA Technology? - This RIABiz article discusses inStream, an interesting new kind of financial planning software that, by being internet-based, tries to draw on the constantly available stream of information out there to help a client's financial plan stay more relevant; for instance, the software might not only stay updated with the latest account balances automatically, but even send a notification to the advisor when mortgage interest rates dip down low enough that it's time to call a client about refinancing and doing daily monitoring for a wide range of other potential "alerts" to send to the advisor. Beyond the innovative ideas within the software itself, there are two other notable things about inStream: that it is attracting some very big names in the financial services industry to drive its technology strategies and implementation, and the fact that it is free to advisors to use. Instead of charging a software fee, the goal is to have solutions recommended directly through the software as client needs arise, and inStream will get paid by product vendors for any business they help to generate; the upshot is this means the software can help advisors not only identify planning opportunities but also help them to implement, but the downside is that it risks compromising inStream's integrity on what the software recommends. On the other hand, the reality is that advisors aren't tied to the software recommendations - they're just helpful suggestions - and inStream indicates that will not just plug one particular product to fit a particular planning need, but instead their goal is to offer a wide range of implementation choices and may even help an advisor's marketplace due diligence process. Overall, there are about 1,300 advisors on inStream already, and the software is functional and ready, although many of the marketplace tools are not yet implemented and the financial planing software core is not as advanced yet as competitors like MoneyGuidePro; nonetheless, with an interesting new approach to planning issues, and some hefty recent talent recruiting, it looks like inStream may be a company to watch for 2013.

Facebook FAQs for Financial Advisors - From the Wired Advisor blog, Steph Sammons provides a nice explanation of Facebook for financial advisors, including an important highlight of the difference between having a personal page for yourself, and a business page for your advisory firm. Personal pages are about personally connecting with people, not necessarily business, although Sammons points out that since one of the things that truly differentiates you from others is your personality, then having a personal page - which showcases your personality - is still something to consider. If you're concerned about who will see this, remember you can control the privacy options on the page (although it's still important to remember to maintain your professionalism as well). A business page, on the other hand, is part of the "digital reputation" of your business; it helps your website rank better in search engines, can showcase your brand/articles/content/ideas, and maintain a presence on the most used social network in the world. Sammons suggests thinking of your Facebook Business page as a "mini website" where you accumulate fans (i.e., people who Like your business) so they can see the information you post (which essentially becomes drip marketing over time). You can grow your community by sending email invitations, putting a Facebook fan box on the pages of your main website, providing content that people will hopefully want to share, and more. Notably, though, Sammons emphasizes at the end that you should not ditch your website or blog in favor of Facebook, both because your website is something your really own (where Facebook is more like a space you "rent"), and because as Facebook keeps changing its rules and algorithms, you never quite know where you're going to stand for the long run. Nonetheless, the network is too big to ignore, and Facebook is particularly effective at supporting firms that are trying to grow their digital presence.

Social Security Expands Online Services - In a brief but notable announcement this week, the Social Security Administration has expanded the services available for those who have set up their online account. Clients can now receive instant benefit verification letters (useful for those who need it as income verification for a loan), a history of payments that have been received, and see their entire earnings record online, in addition to completing useful administrative tasks like changing their address of record or starting/changing their direct deposit information. If your clients aren't already using the online Social Security website, you might consider taking your clients through the online sign-up process yourself, which can be done easily in the planner's office in just a few minutes.

Annuitizing Assets: Now or Later - On his blog, Wade Pfau shares some thoughts about the factors that would impact whether a client who has decided on partial annuitization should do so sooner or later. Factors in favor of waiting include the fact that the payout rate itself increases with age (which means it takes fewer dollars to generate the same target income), and that as the payouts grow larger, so too does the mortality credit upside for a client who outlives life expectancy (even if just by a few years). Of course, delaying also maintains flexibility of assets themselves, and reduces how long the annuitant is exposed to the credit risk of the annuity provider. Factors that favor buying sooner include a simplification of the retirement income process, hedging against a future risk of cognitive decline, and reducing market exposure and ongoing sequence risk. Notably, Pfau points out that waiting for interest rates to rise may not be as helpful as many think, in part because, as noted previously on this blog as well, rising rates may cause losses in the rest of the portfolio, which means even if the annuity pays out more in the future with higher rates the client may have less money to invest!

Tax Deal a Game Changer for Estate Planning - This article by Martin Shenkman on the Financial Planning magazine website makes the point that the fiscal cliff legislation may be more of a game changer than we've acknowledged, especially in the area of the estate tax. In a world where there's now a permanent $5 million exemption, and it's indexed for inflation, and it's portable, the landscape for estate planning in the future is drastically different. And it's not just about the new estate tax rules; for instance, the higher income tax rates mean the income tax ramifications of estate planning may take on a greater role. Trusts that were created in 2012 to handle gifting strategies (in anticipation of a potential lapse of the exemption back to $1M) will also complicate the matter for many going forward, both for estate tax consequences, and also in terms of portfolio income and harvesting capital gains or losses, given that many such trusts were structured as grantor trusts. Charitable remainder trusts may become more popular as a capital gains deferral strategy, given higher top capital gains tax rates. The use of life insurance may also shift; for instance, Shenkman notes that life insurance inside retirement plans has income tax deferrals but estate tax disadvantages, but may now become more popular as the estate tax is off the table for so many clients. From the direct estate planning perspective, it's also notable that splitting title to assets to equalize estates is no longer necessary for most clients (due to portability), and bypass trusts are far less relevant for all but the wealthiest of clients. The bottom line - the estate planning landscape is going to undergo a big shift going forward, and it might not be a bad idea to review existing estate planning documents for clients, either.

Book Smart - This article by Scott MacKillop in Financial Advisor magazine takes an interesting look at the investment landscape, particularly the active/passive debate, making the point that what we see in a lot of the research from academia might best be characterized as "book smart" but that doesn't mean it's necessarily street-smart advice to apply in the real world. For instance, MacKillop notes that most of the academic research about why active manager value can't/shouldn't exist is because markets are "efficient" yet in the real world of bubbles and stock run-ups from technology stocks to the housing market, it's difficult to see how the markets can really be all that efficient. In addition, the big caveat of the efficient markets hypothesis is that it assumes all investors are similarly situated with identical motivations - an assumption that financial planners are easily poised to see is not true as needs, circumstances, and goals vary from one client to the next. MacKillop also takes issue with the claim that "good" active managers are just lucky, pointing out that while it's true that enough monkeys and typewriters could randomly produce Hamlet, it would be easy to discover by sitting down with the monkey and with Shakespeare and discover who was the real deal and who was literally just lucky. Similarly, MacKillop points out that while it's mathematically true that the average manager might not outperform, the point is to look for good managers, not active ones; after all, the average sports game will always have a winner and a loser and average out to a zero sum, but that certainly doesn't keep us from taking an interest in trying to figure out who the winner is going to be or recognizing that winners can exist and persist even if on average all the teams cannot be winners. The article wraps up by pointing out that academics may also be having trouble finding active manager skill because it is hard to measure, and the research may be measuring it wrong; for instance, the best managers seek opportunity wherever they can find it, and restricting a manager to comparison against a single index benchmark constrains or eliminates proper evaluation (or worse, provides the manager a disincentive to do his/her best work). 

Coins Aganst Crazies - This op-ed from Paul Krugman in the NY Times provides a nice overview and summary of the recent discussions that have emerged recalled the so-called "Trillion-Dollar [Platinum] Coin" as a resolution to the debt ceiling (albeit with a bit of Krugman's Democratic tilt on the issue). The basic concept is pretty simple. The Federal government is spending more than it takes in, causing it to issue debt, but it has a maximum ceiling of debt it's allowed to issue, that requires an act of Congress to increase. So if the people in Congress (read: House Republicans) aren't willing to raise the debt ceiling (which they've threatened to do to extract concessions from Democrats regarding spending), then instead the Treasury can avoid the problem by simply printing its own money. While there are restrictions on the Treasury to just print money at will, there is an exception: the Treasury is allowed to print platinum coins in any amount it wishes. The original purpose of the law was to allow the Treasury to print various forms of commemorative platinum coins, in theory the rule can also be used to make a giant trillion-dollar platinum coin - which can then be deposited at the Federal Reserve and used to either pay down the government's debt (providing additional room to issue new debt without breaching the debt ceiling), or just used as a cash deposit outright to fund Federal expenditures. The Fed can then offset the change to "sterilize" the transaction so it doesn't trigger inflation. Of course, this "solution" is certainly an extreme one, few seem to actually wantto do it, there are debates about its constitutionality, and there are already proposals in Congress to just change the rules and close the potential for this loophole entirely; nonetheless, as President Obama continues to indicate that he doesn't want to negotiate on the debt ceiling, and House Republicans continue to indicate that they won't approve any increases without negotiations, Krugman suggests that the Treasury should "Be Ready To Mint That Coin" if necessary. (Note: for a brief alternative scenario about how all this might play out, in a slightly more sane fashion but still with coin-printing, see this article.)

Where’s Your Niche? - This blog article from financial advisor consultant Tony Vidler takes a fresh look at the importance of advisors serving in a niche, which Vidler frames as the intersection of what you love to do, what you're good at, and what someone will pay you to do. Vidler notes that many advisors (and people overall, really) fall into the trap of doing what others are doing, because it looks successful, even though it might not actually be all that effective, and/or might not really line up with what success means to us personally. In addition to poor definitions of success, Vidler notes that often it also takes us time (read: years, or even decades) to truly understand what we "love to do" in the first place, and even worse we often just spend so much time trying to sell ourselves (our value, our qualifications, our technical skills and knowledge, our solutions, etc.) that we forget to take a step back and really stop to think about what we can uniquely do that people would really value. Vidler suggests that breaking through this starts with stopping and thinking about what it is you really LOVE doing - recognizing that what we love doing virtually always centers in some way on people and not just our technical ability - and then consider how you can build your own niche around that. To me, the most striking - albeit unstated - aspect of Vidler's article is that while many planners would probably recognize this as a best practice approach to help clients find meaningful work in their own lives, it's remarkably how little time and effort we spend applying the exercise to ourselves.

I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!