Weekend Reading for Financial Planners (Jan 30-31)

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 30th/31st:

DOL Fiduciary Rule Lands at OMB for Review (Melanie Waddell, ThinkAdvisor) - As expected, this week the Department of Labor sent its "Conflict Of Interest Rule - Investment Advice" fiduciary proposal to the Office of Management and Budget (OMB) for its mandatory final review. Typically OMB takes 90 days to review a rule before it is finalized, though it is expected that OMB will put this proposal through an "expedited" review, which means the final rule could be issued by April if affirmed by OMB. At that time, Congress will have 60 legislative days to adopt a joint resolution to block it, though it remains unclear if sufficient votes can be obtained in Congress, and President Obama is expected to veto any such resolution anyway, if it occurs. Nonetheless, the broker-dealer lobbying organization Financial Services Institute, which coincidentally had its "OneVoice" annual conference this week, still maintains that it intends to continue fighting the proposed rule, possibly even including a future challenge in court. Failing any challenge, the rule is still expected to have a delayed implementation period; it was 8 months in the original proposal though recent rumors suggest it could be expanded to a 2-3 year transition period to allow the industry time to adapt. In the meantime, though, broker-dealers are already beginning to adapt to the coming future reality, with Ameriprise announcing that it is making preparations for the fiduciary rule, LPL also announcing it is gearing up for a fiduciary future, and AIG this week sold off its broker-dealer division and cited the looming fiduciary rule as a reason for it to exit the business.

Dear Breakaway Broker: Know Your Employment Agreement(s) (Chris Stanley, ThinkAdvisor) - Whether you're an advisor employed within a broker-dealer (or even an RIA), or an advisory firm owner who has employees, it's important to understand the key provisions of an employment contract. The provision that most employees are acutely aware of is a "Non-Compete" requirement, typically stipulating that the employee cannot go work for any other (competing) firm in its industry. However, Stanley notes that while many employment contracts include a non-compete agreement, they are often not actually enforceable - some states (e.g., California) virtually always ignore non-competes (unless they arise specifically as part of a sale or dissolution of a business), while other states are somewhat more permissive but still only when the non-compete is limited in scope and duration (i.e., a non-compete that unduly restricts someone's livelihood probably won't be enforced anywhere), and at a minimum it's necessary to really find out how your state handles the issue. Separate from non-compete provisions, many employment agreements also have non-solicit requirements, that restrict a departing employee from soliciting the former employer's clients (or other employees), and while non-solicits also may be unenforceable if overly broad, they too can be enforced in many states if 'reasonable' in scope. Other provisions to be aware of in an employment agreement include confidentiality/trade secrets (again a matter of state law and handled on a case-by-case basis, but generally not as controversial and more enforceable, so beware about taking information with you), and non-disparagement clauses (don't say or publish anything nasty about your former employer after you've parted ways). Because of the state-specific and context-specific issues that arise, Stanley suggests that this is one of the few areas where it really does pay to have competent legal counsel to help you evaluate a sticky employment agreement situation.

Vestorly Makes Play For RIA Browsers With $4.1M Of VC Funding (Brooke Southall, RIABiz) - This week, advisor FinTech solution Vestorly announced a $4.1M round of venture capital funding from Sigma Prime Ventures to ramp up its digital and content marketing platform solution for advisors. The basic content of the platform is that it sifts through a wide range of news stories (both within the financial services industry and beyond) to identify and "curate" a list of relevant articles for clients and prospects, which are then sent out automatically on a weekly or monthly basis - giving advisors a way to produce high-quality "drip marketing" email newsletters. Notably, though, this is what Vestorly already does; its new round of venture capital is intended to hire additional engineers to take the process to the next level, which would track the articles that clients read (from the advisor and even beyond, ostensibly by putting a tracking cookie in their browser) and then serve up even more relevant content for prospects and clients based on that information. Of course, the caveat is that it's not entirely clear whether or how much clients will be willing to permit this browsing information to be accessed and shared, and Vestorly will be under pressure to create effective algorithms that identify relevant content but don't accidentally serve up irrelevant or accidentally offensive content. Nonetheless, the reality is that tracking online consumer behavior has become the norm in many industries, and Vestorly makes the case that it can be applied appropriately in financial services, just as it has elsewhere.

How to Make Owner-Advisors' Lives Less Lonely at the Top (Angie Herbers, ThinkAdvisor) - Last month, Mark Tibergien raised the question of whether the woes of the advisory industry's talent shortage is less a problem of attracting Millennial advisors, and more a lack of effective managers in advisory firms to oversee them. Herbers suggests that Tibergien may not only be right, but that the problem has actually amplified in recent years, as advisory firms grow larger and larger which makes the consequences of a management shortage more acute. Particularly since most advisory firm owners started out as rainmakers and working with clients, and may have little or no actual training or experience in management functions, even as they increasingly find themselves in the role of advisory firm CEO as the business grows. In fact, Herbers suggests that many advisor-owners are really struggling with their newfound position, transitioning from being "The Man" to a new job of supporting "the men and women" of the firm who are now responsible for managing and growing its revenue. In other words, the advisor-founder's role in the firm shifts from being the person who directly drives the success of the firm, to the person that must increase the success of their employees to have the firm succeed as well, which requires a new skillset of setting vision, crafting compensation, training, providing management feedback, and really listening to subordinates and what they need to succeed. The bottom line - for advisors who want to grow their firms beyond themselves, it becomes an inevitable requirement for the founder to shift from being the 'star player' of the firm, to its leading coach and mentor.

The Research on Crisis Counseling for Panicked Clients (Dan Solin, Advisor Perspectives) - When the markets are in free-fall and clients are panicking, Solin makes the case that the situation is akin to crisis counseling, which is an important distinction because in crisis counseling the primary issue is not actually the crisis itself but how the client is responding to the adverse event. So what does the research show is the best way to respond to and help clients through a crisis? The first step is to recognize that clients need to talk through the situation - which means not just sending them emails or newsletters, but calling or meeting with them. The second is to again recognize that because the problem isn't actually the crisis, but how they're reacting to and handling the crisis, your goal is not to offer immediate advice to 'solve' the issue but simply to ask questions that help clients talk through their anxiety, anger, or other feelings. And in the process of talking to them, it's important to be supportive, and not to trivialize their feelings and concerns - which means affirming that you understand why they're upset, rather than just telling them not to (or that they "shouldn't be") worrying. If (and only if) clients express concerns about not understanding the dynamics of what's going on, then you can try to educate (such as putting the current market decline in perspective), but it must be the client who leads the conversation there. Once the situation has calmed, you can then explore coping strategies to help clients deal with the stress and crisis response going forward, which might include suggesting that they dial back on their news consumption, delegate responsibility of worrying about the portfolio to you, or even other stress-reduction techniques from listening to classical music to meditation and exercise. Solin also suggests reading "The Upward Spiral" by Korb and Siegel for further ideas on how to help clients change their emotional state (for the better).

Talking To Angry Clients In Turbulent Market Times (Amy Florian, Corgenius) - As market volatility rises, more and more clients begin to call their advisors, and while most are simply nervous or concerned, some may be outright angry as emotions boil over in the face in a portfolio decline. The standard approach for most advisors is to try to "talk clients down" and calm them, explaining the reasons why they should not be angry (or at least, not angry at the advisor for markets beyond the advisor's control). Yet Florian suggests that response may not be as effective as we think, because often the loss of money can literally trigger a grieving process for clients, as they perceive they are experiencing the loss of whatever that money represented - e.g., security, success, or self-worth. In other words, the anger is not actually an anger about the market volatility itself, but anger as a response to the grieving process of what the lost money represents. So what should advisors do? Florian says the trick is to allow clients to vent their emotions to you, while trying to gently steer them so you're not the person directly blamed for the situation. And if you're going to help clients vent their emotions, you shouldn't talk them out of being angry, you should encourage them to talk through being angry, with statements like "I can see that you feel very angry about this, and I can see why. Tell me more." Or alternatively, "Yes, it is scary not knowing when the slide will stop. What are you most worried about?" These statements are intended to authenticate and validate the client's emotions, and then invite them into further conversation - but in the context of working through the issue as partners (use the word "we" frequently!), rather than defensively as a conflict. Once the anger subsists - having talked through it - then you can begin to discuss with clients what to do next, whether it's making portfolio changes, shifting assets, or simply agreeing to check in again in a week or two.

Death and Ruin (Dirk Cotton, The Retirement Cafe) - In many ways, the research on the longevity/survival rate of a portfolio is similar to the research on survival rates in the medical industry, a key factor in assessing the benefits of various potential drugs. The difference, however, is that tools the medical industry uses are far more sophisticated at evaluating potential trade-offs and their implications, so Cotton is exploring what happens when you use those tools in the retirement context. One popular (medical) approach is called a Kaplan-Meier analysis, where patients are divided into time intervals and for each interval the survival probability is calculated (based on the number of patients still at risk, divided into the number of patients still surviving). The distinction, relative to traditional retirement analysis (including the standard Monte Carlo analysis), is that since some patients (or retirees) will die (of natural/unrelated causes), they should be removed from consideration in later time periods. In the context of retirement, a Kaplan-Meier analysis reveals that almost any 'reasonable' retirement strategy and spending rate (e.g., 3%, 4%, or 5%) has no real risk for anyone who lives into their 70s or 80s, and it's really only those who live into their 90s and beyond where the risk gets worse - but in those scenarios, higher spending is dramatically worse, because for those who have lived so long their risk of depletion is suddenly very high. Indirectly, this research is also notable, given Cotton's prior analysis of when most retirees go broke, which actually occurs mostly in their 60s and 70s, implying that despite all the discussion of sequence of return risk, that does not actually appear to be the primary factor causing retirees to fail.

Pitfalls of Medicare Advantage Plans (Tanya Tucker, Trust Advisor) - Medicare Advantage plans, also known as "Part C" plans, are an alternative to traditional Medicare and often sound appealing to retirees as they can have a premium of $0. However, Tucker notes that the devil is in the details for Medicare Advantage plans, which may require you to go only to their network of doctors and other health providers (which at its worst can be a form of rationing by limiting the total number of providers to which all patients have access), and can often have very substantive co-pays and deductibles (from $300 for an ambulance ride to a $100 co-pay for any lab services) designed to discourage utilization. In fact, for many, the $0 premium may be more than offset by the accumulate of co-pays and deductibles throughout the year. Accordingly, Medicare Advantage will generally only be best as a 'backstop' for someone who is otherwise already very healthy and unlikely to utilize health care services; for the rest, the most comprehensive coverage, with the most stable payment obligations, will still tend to be traditional Medicare coverage, including Part B, Part D, and a Medigap policy (ideally Type F). Notably, it is possible to switch from Medicare Advantage back to traditional Medicare for those who want to change, but only during the open enrollment seasons for Medicare in the fall, and even then Medigap may charge you a higher rate because you didn't originally enroll in it when you first became eligible for Medicare.

Strategists: Full Of Bull (Salil Mehta, Statistical Ideas) - At the beginning of every year, market "strategists" come out with their market views for the upcoming year, and typically form a relatively tight range of optimistic views for the market by year end. Given the long history of this tradition, Mehta pulled together 186 public forecasts culled from 19 years of media coverage from various market strategists. On average, market strategists project a market growth rate of 9% each year, and the annual deviation of those predictions is a mere 8%; in the meantime, over this time period, the actual market returns have been only about 4.5% on average, with a standard deviation of 19%. And as it turns out, not only is there very limited volatility in the predictions of strategists, but when they do predict, on average they tend to shift in the wrong direction. Thus, even though investors could simply assume the markets would get their average returns (and be off by a standard deviation of 19%), the standard deviation of forecasting errors was even worse, at 21%. Or viewed another way, market strategists were actually more wrong on average than just making no prediction at all (besides getting the long-term average return)! In part, this appears to be because strategists really do have a bullish bias - the most optimistic forecasts have only been slightly higher than what markets have actually returned, while downside forecasts when markets experience losses have been consistently wrong to a much greater degree. In fact, only 9% of market strategist calls even got the direction of the markets correct in down years (i.e., by predicting any kind of market decline), and strategists that are bullish in one year are likely (to a slight degree) to be even more bullish in a subsequent year. Ultimately, Mehta looks at how high markets would be if they actually produced the returns that strategists project, versus what the S&P has done, and found that overall some strategists get at least reasonably close over time (e.g., Merrill Lynch, JP Morgan) while others have compounded to dramatically incorrect projections over time (Prudential and especially Goldman Sachs). So where does all of this stand for 2016? 10 market strategists have given their calls for 2016, and the average is (once again) for the market to rise, this year by about 8%; of course, in the first 2 weeks of the year, the market actually fell by 8%, which ironically sets a record for market strategists being the most wrong ever to start the year!

Beyond Wealth: What Happens After You Have Enough — and Then Some? (J.D. Roth, MoneyBoss) - While there is some research to suggest that having more money can lead to more happiness, authors Vicki Robin and Joe Dominguez in their book "Your Money Or Your Life" argue that the relationship is not a straight line. Instead, they suggest that while more spending can lead to more happiness up to a point, as we cover our needs for survival, then comfort, and finally the occasional luxury, additional spending beyond that point is just "overconsumption" that leads to less happiness, not more. In this context, then, the goal of financial accumulation should be to reach "Financial Independence", where you have "Enough" (to cover the necessities, the comforts, and a few luxuries) but that if you never draw the line on what constitutes "enough" you can never reach the point where you have the money to achieve and enjoy it. In turn, Roth points out that once that point of independence and "enough" is achieved, our needs for fulfillment become challenged, because we've reached that point where accumulating itself is no longer a goal to fulfill. In this regard, the research suggests that it's crucial for retirees (or those who are "financially independent") to find some other sense of purpose - a personal mission of where they want to dedicate their time and effort. Otherwise, financial freedom can ironically just plunge someone into a sad combination of decadence and despair; in other words, money may buy freedom, but that's only fulfilling if you have a plan about what to do with that freedom. Of course, most people have never actually been faced with the decision of what they want to do when money is no longer the driving factor, so Roth suggests prospective retirees take some time to actually think about and write down answers to key questions, like "what are my lifetime goals", "how would I like to spend the next five years", and "how would I live if I knew I'd be dead in six months". (These questions are drawn from Alan Lakein's "How To Get Control Of Your Time And Your Life" but financial advisors will likely see the similarities to George Kinder's famous "Life Planning" questions as well!)

Drawing A Line On ‘Enough’ (Mitch Anthony, Financial Advisor) - The Mayo Clinic was established by Charles and William Mayo, who early on decided to set aside any money they earned "over and above the amount necessary" to maintain their basic lifestyle (and ultimately donated significant sums of money that they had made by serving the sick, to further advancing causes to help the sick). The key distinction here is that the Mayos were emphasizing how wealth accumulation for its own sake can distract us from our true sense of purpose (leading to everything from wasting time to a profligate and non-productive lifestyle), rather than targeting what is "enough" and deploying the rest in a manner that advances a greater good. Yet as Anthony points out, discussions about retirement are almost always in the context of accumulating more wealth, and rarely about determining what is "enough" so that we can allocate the rest of our capital and our time to a greater purpose. According, Anthony suggests that for advisors who have never done so, consider raising those questions with clients looking out towards their retirement: how much is enough, really, and once that's achieved how will you allocate your time (or even excess capital) to sow into a greater purpose for the future (from which we ultimately derive our greatest meaning)?

What Do We Know Of Money? (Dick Wagner, Financial Advisor) - As a thought exercise, trying answering the question "What do you know of money?" Upon answering it, ask yourself the same question again, to go deeper, and see what the answer is. Wagner notes that he once participated in a Sufi exercise where this process was repeated half a dozen times. Most people will eventually run out of responses after 5-6 rounds, but the process itself becomes instructive as you really consider what money is and what it means. Wagner points out that for most of us, the implications are far more profound than we give it credit to be; in fact, he suggests that it's the sheer intimacy of money, and how it both impacts and reflects upon our lives, that makes it such a taboo subject (in society at large, and often even between spouses). And the role of money is changing, both in how it operates as a currency (think the transition from coins to cash to credit cards to bitcoin) and in a social context (historically it was primarily to facilitate international trade, but now both fulfills social functions and also drives conversations from income inequality to income redistribution, and it is the great motivator of Adam Smith's "invisible hand"). In turn, this means that the role of money in our lives is changing as well. The whole concept of accumulating money, and then using it to fund retirement, is itself a very recent phenomenon. Ultimately, Wagner raises the question of how we can even make intelligent decisions about money, both as individuals, and as a society at large, when we can't even clearly answer basic questions about what we know of money and what it really is. And how can we as financial advisors guide our clients about money issues, when we're not clear on these answers 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!

In the meantime, if you're interested in more news and information regarding advisor technology I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read "FPPad Bits And Bytes" on his blog!