Weekend Reading for Financial Planners (May 21-22)

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 May 21st/22nd:

Why There’s More To The UBS-SigFig Deal Than Meets The Eye (Brooke Southall, RIABiz) – This week, UBS announced a new partnership with SigFig, one of the many B2C robo-advisors that in the face of growth challenges has recently pivoted to become a B2B service for advisors instead. But what’s significant about the announcement is not just that another robo-advisor has paired with an established firm, but specifically that the established firm is UBS, one of the four major wirehouses, which are typically viewed by independent advisors as one of the slowest to adopt outside technology solutions. And the shift does not appear to merely be a lightweight experiment of bolting on a robo service to the existing firm; instead, the SigFig deal was vetted extensively across the UBS executives (from both their US and Switzerland headquarters) over the span of 18 months, and UBS is so committed that they’ve also become an investor into the platform as well. Notably, though, the initial plan for UBS is not to deploy the software with its nearly 7,000 top-end wealth managers, but instead to its 120-person UBS Wealth Management call center in New Jersey, aiming to wean clients back from telephone communications into using the SigFig tools instead. Which means relative to its total size, the UBS-SigFig deal still represents more of a “pilot program” experiment than a wholesale shift for the wirehouse. Still, though, its sheer size and clout does much to validate the relevant of “robo tools” for large financial services firms, and if the initial program is successful could at a minimum become the standard for an ever-growing number of call-center-based financial-advisor-at-a-distance service providers (including Vanguard Personal Advisor Services). If very successful, the SigFig tools could become deployed across the entire UBS advisor organization, becoming the new central platform by which all their advisors service clients.

College Loan Planning: A Ripe Revenue Source For Advisors (John Wasik, Financial Planning) – More than 40 million Americans currently carry college debt, and with total student loan debt now over $1.2 trillion and growing at 11%+ per year, there is a significant opportunity for advisors to get paid for providing relevant advice. And the niche is not only an opportunity for advisors who can give objective advice, but one that is beginning to see the growth of dedicated tools for advisors specifically to help with the planning process, like EFC Plus. Advisors can help in areas from cash flow and budgeting, strategizing about which loans should be repaid first, and can also help clients navigate the range of student loan refinancing sites (and also to recognize when Direct Federal Loan Consolidation would be better than refinancing to avoid losing favorable flexible payment options only available from Federal loan programs). Typical charges might be $250 to $400 for an initial advice consultation or loan repayment analysis, and perhaps a subsequent monthly retainer for ongoing assistance.

Ten Secrets To Promoting Your Client Or Prospect Event (Claire Akin, Indigo Marketing Agency) – One of the biggest problems for many advisors is that they run events for clients or prospects, but fail to drive a good turnout. Akin suggests that the reason is usually because advisors just don’t give enough time to conduct a good and thorough registration process, for which marketing should begin about two months before the event begins. From there, plan out at least three rounds of emails and related marketing to drive registrations: a “Save the Date” announcement, a “Register Now” email, and then a “Last Chance to RSVP” message to compel the procrastinators to action. Also, have a means to handle event registrations online; Akin finds that even when invitations are printed and mailed, almost 50% of RSVPs come through an online registration page, so it should have all the key details and information. Pay attention to the design of the email and messaging as well; a clear layout and some good pictures matter, impacting both the click-through and RSVP rates. Other key tips include: leverage social media tools, such as creating a Facebook event through your Facebook company page (and then invite clients and prospects using Facebook’s “invite” feature), and promote via LinkedIn as well (as it’s likely at least some of your clients/prospects are there); be certain to spread the word with professional partners (e.g., accountants and attorneys and other centers of influence) as well; consider using a paper invitation, which still produces a lot of traction even in our increasingly digital world; and if you’re really serious about driving attendance, even consider an outbound calling campaign for attendance, which can be time-consuming (or outsourced) but really does work. And remember the most important detail can be the most basic one: be certain to give the event a title that’s compelling enough people will actually want to show up!

When A (Newer) Adviser Doesn’t Want To Advise Anymore (Dave Grant, Financial Planning) – While there are many experienced advisors who have spent a career advising clients and decide to retire, Grant notes that there are also a number of younger advisors who may have started out in advisory firms, worked there for 5-10 years, and decided after their experiences that they like financial planning but don’t want to managing client relationships for the rest of their career. Perhaps it’s because they’d rather focus their energy with family or on other causes or hobbies, or maybe they would just prefer another career track. For those at the crossroads, Grant suggests a few issues to consider, including: simply remain an employee, and let your job be your job, if ultimately having a job that funds the other areas of your life is what makes you happiest; if your firm is growing, explore career track opportunities that focus internally on the management of the business, as more staff infrastructure becomes a necessity as the firm gets larger anyway; become a consultant that works with other advisors, contributing your unique knowledge and experiences back to those who have not yet gone down that same path; be wary of becoming a partner if you don’t really want all the additional work and responsibility that comes with being an owner; and if you do want to be an owner, consider starting your own firm, which may be one of the riskiest paths, but can also be financially rewarding and eventually help you find a desirable work-life balance (since you control the size of the business and whether/how it grows). And of course, there’s always the option to leave the industry altogether, but hopefully once recognizing the breadth of other choices available to stay within the industry, you’ll find a way to stay somewhere in the industry and apply the experience you’ve already gained.

Can A One Degree Shift Change Your Life And Your Business? (Julie Littlechild, Absolute Engagement) – For advisors who have been in practice for many years, often where the advisory firm (and the advisor’s life) has ended out is not necessarily what was originally expected, and often there’s a large gap. Littlechild suggests that this is typically the result of the “One Degree Effect”, where we often make small decisions that only shift the trajectory of our business or career by one degree, but cumulatively over time those one-degree shifts that create an enormous gap between intended goals and actual outcomes. By analogy, if a plane flying from New York to San Francisco is off by just one degree in its trajectory, the difference is trivial early on, but by the time it flies across the country the plane will be dozens of miles off from its intended target. In the personal context, Littlechild notes that there are many things that cause one-degree shifts, from marriage and children (which can be more than one degree!), to tragic circumstances (e.g., illness), or simply small shifts in business strategy that compound over time. Recognizing this is important, though, because Littlechild notes that ultimately the advisor controls the decision about whether to make a change, and if necessary hit the “do-over” button, recalibrating the direction and even making a more dramatic shift from what we’re currently doing. This might involve shifting to a small business (or a bigger one), changing what kind of clients you work with and what you do for them (not for the money, but based on who you feel energized to work with and what you feel energized to deliver), changing who you work with, and even changing your work environment (e.g., to start working from home, or to travel more and work remotely). But the bottom line is simply to recognize whether where you are is really where you wanted to be, and that if it’s not, it’s ok to decide you want to make a change.

Broaching The LTC Insurance Topic With Clients (Kimberly Foss, Financial Planning) – The statistics suggest that nearly seven in 10 people will require long-term care in their later years, but clients too-often insist that they’ll be in the other 30%. Foss highlights some of the talking points that she uses to persuade clients that long-term care is a risk they need to take seriously, and how to consider LTC insurance, including: it’s a good conversation to broach with clients as early as their 40s, even though at the time they’ll be more likely to buy disability insurance (but it at least prepares them to switch to LTC insurance later); the pricing favors buying as early as possible, even if you have to pay more years, and you also lock in your ability to get coverage in case of a later change in health (and in fact the average age of those buying LTC insurance has declined in recent years); remind clients that LTC insurance should be viewed just like homeowners, automobile, and other types of insurance, where you don’t necessarily expect to ever get your premiums back, and that’s ok (but if it’s necessary to make a big claim, you’ll be thankful it’s there nonetheless); hybrid-LTC policies may have some initial intuitive appeal, but be sure to fully investigate any hybrid-LTC policies so clients don’t just buy even more expensive coverage that happened to be intuitively appealing; focus on getting ‘basic’ coverage first, rather than looking at a quote for a “Cadillac” plan out of the gate; be certain to frame the potential impact of LTC costs on both retirement needs and legacy goals; and try not to view LTC insurance through an emotional lens, but it can be helpful to remind clients of the potential family burden that arises if they are underinsured and family has to lend a hand later (which may be especially poignant for clients who have been caregivers themselves for elder family members).

Beware: Another Roth IRA Scam Backfires (Ed Slott, Investment News) – The allure of maximizing tax-free growth in a Roth IRA is powerful, but overly aggressive Roth tax strategies have caused the IRS to increasingly scrutinize transactions. The latest case, of Polowniak v. Commissioner (T.C. Memo 2016-31), is a case-in-point example, which ultimately triggered over half a million dollars in taxes, interest, and penalties. Polowniak had pursued the so-called “Privately Owned Roth IRA Corporation” (or “PIRAC”) strategy, where he created a small standalone business called Bevco, and then arranged to have all the consulting income he earned from his consulting practice (a separate S corporation) paid into Bevco, effectively funneling 100% of his sizable consulting income (a $680,000 consulting agreement) into his Roth IRA. When the IRS caught the transaction, it declared that Polowniak had made an excess contribution to his IRA, as the $680,000 of consulting payments were far in excess of the annual contribution limit, resulting in a 6% penalty for each year he had failed to report. In addition, the IRS penalized Polowniak for never reporting his consulting income for tax purposes (since it was paid to his Roth IRA, he pretended that it was never taxable income in the first place). And given the magnitude of these adjustments and penalties, Polowniak was subject to a 30% enhanced accuracy penalty as well. Ultimately, the Tax Court relied heavily on the fact that while some of the individual steps of Polowniak’s transactions may have been legitimate, the final substance of the transaction was clearly an impermissible Roth contribution, and then ruled against him on all counts given prior IRS Notice 2004-8 had already warned the IRS would look at the substance of Roth IRA transactions rather than their mere form.

Inverted Withdrawal Rates And The Sequence Of Return Bonus (John Walton, Advisor Perspectives) – The standard for evaluating retirement income strategies is to compare them to the so-called “4% rule” safe withdrawal rate, which assumes an initial withdrawal of 4% of the original account balance, with the dollar amount of spending adjusted for inflation in each subsequent year. The caveat to this strategy is that by holding spending at a constant (inflation-adjusted) level, if the portfolio declines the spending rate actually rises, while when the portfolio rises the spending rate falls (as the constant spending is a smaller slice of a growing retirement portfolio). This form of “negative tilt” can potentially amplify sequence of returns risk, where bad returns early on cause the portfolio to dip, and the higher withdrawal rate that results can just accelerate the demise. The alternative approach is to use some version of the “endowment “model”, where endowment funds often take a fixed percentage of the account balance (whatever it happens to be), which can produce more variable spending but ensures the portfolio won’t be depleted (as if the portfolio keeps declining, so will the withdrawal amounts as well). In the extreme, the retiree can even use a “positive tilt”, where the withdrawal rate is increased if the portfolio rises (and there are more ‘extra’ dollars to spend), and the withdrawal rate is cut if the portfolio declines (which amplifies the magnitude of spending cuts but also helps to further preserve the portfolio). In this context, Walton finds that negative tilt strategies (including the 4% rule) work best with lower volatility portfolios for those who want to stabilize income (but don’t care about remaining capital at the end), while higher volatility portfolios paired with a positive tilt allow for some potentially substantial increases in wealth and retirement income (in part because they can take advantage of favorable return sequences) but with the caveat that income may be more volatile along the way.

The Taxation Of Social Security Benefits And Planning Implications (Greg Geisler & David Hulse, Journal of Financial Planning) – The taxation of Social Security is a key issue for retirement planning, given that 0% of Social Security benefits are taxable for lower income workers, while as much as 85% of Social Security benefits are taxable for higher income workers. Of particular concern, though, is the impact as the taxation of Social Security phases in from 0% to 85%, which has been dubbed by some as the “tax torpedo”, and can boost the marginal tax rate by as much as 21.25% for someone in the 25% tax bracket (bringing their total marginal tax rate as high as 46.25%!). The exact income range over which this applies will vary depending on the total amount of Social Security benefits, as the taxation of Social Security is calculated based on Provisional Income (which is Adjusted Gross Income plus one-half of the Social Security benefits themselves), but is most impactful for those with roughly $25,000 to $60,000 of income. From the planning perspective, this introduces significant tax complexity for retirees, as it can impact the decision of whether to start benefits early or to delay, especially if the Social Security benefits will stack on top of other income sources (driving them into the tax torpedo range). Though notably, delaying Social Security to generate higher benefits doesn’t always make the tax torpedo situation worse; in fact, delaying Social Security to get higher benefits can reduce the need to tap other (taxable) income sources for retirement cash flows, reducing provisional income and actually minimizing the tax torpedo burden (although if income goes too low, the retiree fails to use their standard deduction and personal exemptions, which would be less favorable from the tax perspective in the long run).

Is “Grit” Really The Key To Success? (Daniel Engber, Slate) – A decade ago, then-psychology-grad-student Angela Duckworth conducted a study on 1,200 West Point cadets, trying to predict which would survive “Beast Barracks”, an infamous seven-week training program where the new cadets toil in the classroom and on the field for 17 hours every day without a break (and many drop out). What she found was that a relatively simple measure testing each candidate’s willingness to persevere in pursuit of long-term goals – a measure she called “grit” – was more predictive of the cadets’ ability to get through Beast than West Point’s long-standing “whole candidate score” evaluation system. In the decade since, Duckworth’s work has blown up into a whole new body of research around “grit”, including how to identify who has “grit” and how to increase your inner “grit”, and Duckworth herself covers the research in her new book “Grit: The Power Of Passion And Perseverance”. Yet Engber raises the question of whether the research on “grit” is more fad than substance, because as it turns out, there isn’t much of a link between grit and someone’s ultimate success. The issue is that grit only seems to matter in situations that specifically require someone’s strength of will – so it was particularly relevant for cadets going through Beast – but for most people, the path to success isn’t necessarily a grueling marathon requiring such continuous strength of will. Thus, while grit predicted cadets’ ability to get through Beast, it didn’t actually do much at all to predict their subsequent grades or military performance scores (which is important, because most of the students who fail at West Point flunk out in those later phases, not just in response to Beast). More generally, broader studies are now finding that grit may really just be a subcategory of an already-known-to-be-predictive measure called conscientiousness, part of the “Big Five” personality traits that have been studied for years. On the other hand, even Duckworth notes that we’re still studying grit – she was actually quite critical of recent efforts to measure grit in public schools, suggesting that “we’re nowhere near ready” – so it remains to be seen whether the research can really be refined to the point that it scientifically validates efforts to refine and improve our own grit.

Beyond Nudge: Building A UK Savings And Investment Culture (Greg Davies, LinkedIn Pulse) – While there are many challenges for consumers to improve their financial decisions, from inertia to short-sightedness, Davies notes that the huge and ever-present barrier that everyone must contend with is the sheer complexity of the financial system itself. And given limited bandwidths of time, energy, cognitive capacity, and emotional resilience, not everyone is able to optimally (or even effectively) manage their own personal balance sheet, income statement, and future cash flow goals. Accordingly, Davies suggests that any interventions to help consumers need to consider these issues of complexity given limited bandwidth – in fact, that may do much to explain why tactics like “more disclosures” and “teach financial literacy” have such limited beneficial effects. Instead, researchers are increasingly looking to various forms of “nudge techniques” – changing the ways that decisions are presented to attempt to drive a different outcome, such as automatic enrollment to default people into employer retirement plans and letting them opt out, rather than the traditional approach of requiring them to go through the effort of opting in. However, nudges are not always the best tactic, either; they can be a blunt instrument for certain problems, and potentially can even disengage people as they decide they don’t need to spend any mental energy on the issue at all. Instead, Davies suggests that the ultimate goal should be to help people at the moment of decision itself, ensuring that they have the knowledge to make the decision, are engaged with the decision-making process, and have the emotional comfort to follow-through and enact it. The distinction is important, because it implies that different tools are necessary for different groups; those who are engaged but need knowledge should be educated, while those who are disengaged may need to be nudged. All of which suggests that in the future, the very nature of helping people make better decisions may itself require a far more customized and individualized approach than to “just” rely on disclosures, or education, or nudges (or arbitrary combinations of the three that can be even more overwhelming), where “engagement” (or lack thereof) is the driving factor to determine the best approach.

Cashing In On Experience (Mitch Anthony, Financial Advisor) – The Industrial Age was labeled as such because of industrial factories that drove the economy of the time, a substantial differentiation from the preceding Agricultural Age. In recent decades, we’ve been living in the Information Age, where the driving economic force is not factories, but computers and information instead. Yet Anthony suggests that perhaps we’re now passing out of the Information Age, as tools like Google have been incredible at delivering the information for us, but that just means we now have an abundance of information we don’t know how to apply. In fact, given the challenge of figuring out how to apply an abundance of information, Anthony advocates that we should now call it the “Experience Age”, an era where experience and maturity are more necessary than they’ve ever been in the past to ensure that information is applied properly. In the context of retirement, this is important, because it suggests that those who are best equipped to create value in the Experience Age – those with the most experience – are retiring, which could create a dearth of the very talent that is needed the most. In turn, organizations like the Global Institute for Experienced Entrepreneurship are trying to help train corporations (and even governments) how to better tap the experienced individuals who might best contribute to society by not retiring. Of course, a growing base of research is showing that maintaining meaningful engagement during “retirement” is important for staying healthy in our later years, but the point here is that continuing to find meaningful work in retirement isn’t just socially beneficial, but economically beneficial for society as well, as entrepreneurialism is actually booming amongst “seniors” (people over age 45 are the fastest growing cohort creating jobs, and overall the highest rate of entrepreneurial activity in the U.S. for the past 15 years was amongst those aged 55-to-64). And one global study found that ventures established by senior entrepreneurs are more likely to survive and flourish (at a 70% rate, compared to just 28% of enterprises created by younger entrepreneurs). But ultimately, the bottom line is simply to recognize that in a glut of information, experience is becoming a chief economic driver (in the U.S. and around the globe), which means financial planners have a unique opportunity to help their senior clients transition not to retirement but to entrepreneurialism instead, which will be better for both themselves, their health, and the economy as a whole.

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!