Executive Summary
Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the announcement that after 18 months of development, June finally saw the launch of four states' Section 529A "ABLE" accounts, the new tax-free accounts for disabled beneficiaries that are expected to become popular as a supplement to (or in some cases, a cheaper alternative to) special needs trusts.
From there, we have a few technical articles this week, from a look at how various types of retirement spenddown strategies may be impacted if market returns stay persistently low (hint: even flexible spending strategies may be at risk), to a discussion of the rules on Medicare enrollment and the (potentially adverse) consequences of delaying past age 65, and a look at how to coordinate the rules for contributing to and withdrawing from a Health Savings Account (HSA) after reaching age 65 and Medicare eligibility.
We also have several practice management articles, including: why it's crucial for wealth management firms to evaluate their advisors more broadly than just new client assets and business development; strategies to prevent burnout from your advisory firm staff; how the best path to client loyalty is not about avoiding all mistakes but having a process to promptly and effectively fix mistakes when they inevitably occur; what to be aware of when it comes to the new prohibited transaction rules for the Department of Labor's fiduciary rule; and why success for advisors is not just about doing "what you love" but finding the activities you enjoy doing, are good at, and the ones that actually help to move the business forward.
We wrap up with three interesting articles: the first is a look at Schwab's recent announcement to revive its consumer marketing campaign on behalf of RIAs that use the Schwab platform, and whether it's a real business development opportunity for Schwab-based advisors or just a way to appease those advisors even as the Schwab retail offering increasingly competes with them; the second is a look at how the advisory business is shifting from one where firms simply create something of value and offer it to clients, to instead a world where advisors and (prospective) clients actually 'co-create' the value that is meaningful and personalized for the client; and the last is a look at what advisors should be thinking about if they're considering a coach, and the kind of mindset that is necessary to really get the most value out of a coaching relationship.
Also, be certain to check out the video at the end, an excerpt from a two-part series for advisors from Carl Richards of the Behavior Gap called "Your Manual For Scary Markets" on how to talk clients through times of market volatility and be an effective buffer between them and the "scary markets" that can arise from time to time.
Enjoy the "light" reading!
Advisers To Start Recommending ABLE Plans To Clients (Liz Skinner, Investment News) - Created in late 2014, ABLE accounts are tax-free investment accounts that disabled beneficiaries can use for their living needs. Also known as 529A plans, they were intended to be made available through the same structure that states use to offer 529 college savings plans (although 529A plans are entirely separate), and function as either a supplement for or a less-expensive alternative to special needs trusts that families can use to set aside dollars for disabled children (including adult children who had been diagnosed as disabled by age 26). However, it has taken 18 months since they were first created by law to actually become available. Now, finally, some 529A plans are rolling out, starting with Ohio in early June, then Tennessee, and this past week Nebraska and Florida plans. Notably, the accounts only allow $14,000/year to be contributed (from all sources), which means those who want to start a 529A plan would be well-advised to get it opened this year and start the (limited) contributions.
Retirement Planning And The Impact Of Investment Performance (Joe Tomlinson, Advisor Perspectives) - Today's combination of higher market valuation (implying lower future equity returns) and low interest rates (implying lower future bond returns) paints an especially troubling picture for the sustainability of retirement income. Accordingly, Tomlinson 'stress tests' retirement income sustainability in various low-return environments. For instance, while the historical real return on equities has been about 6.5%, Tomlinson also tests a 5% real return on stocks and also a 3% "stress test" real return. For a retiree following the "4% rule" (taking 4% of the initial account balance, with that dollar amount adjusted each year thereafter for inflation), the results show that there is only a modest risk of shortfall with historical returns, but a material risk of shortfall at the stress-tested 3% real return on stocks. Against this backdrop, Tomlinson also tests a strategy where withdrawals are 'reset' every year, based on the actual account balance (and remaining life expectancy), which notably helps to reduce the average shortfall (i.e., the magnitude of failures) but still does not materially reduce the risk of failure in the stress-tested lowest return environment. In fact, amongst a variety of alternative spending scenarios, Tomlinson finds that if the retiree (or advisor) really anticipate that returns will be this low, the only strategy that effectively secures retirement income is to buy a single premium immediate annuity to secure an inflation-adjusting 4% initial payout rate (though in today's market that would consume nearly all of the retirement assets, living almost nothing remaining for legacy goals or unexpected spending shocks).
Medicare Late Enrollment Can Cost Your Clients More Than Cash (Stacy Rush, Advisor Perspectives) - Age 65 is the point at which most people transition from the traditional health insurance marketplace to Medicare (plus potentially a supplemental health insurance plan). However, while those who are no longer working at age 65 and have started Social Security are automatically enrolled in Medicare Parts A and B, those who retire later and/or are deferring Social Security benefits may still need to take proactive action to enroll in Medicare at age 65 (during the open window that runs from 3 months before to 3 months after the month the month the individual actually turns 65). Taking an active step to enroll in Medicare also includes situations where many retirees don't think they need to enroll, because they have 'retiree' health insurance under a (former employer's) group plan; since technically Medicare Part B considers retiree plans to be secondary to Medicare, delaying Medicare enrollment can result in a coverage gap and late enrollment penalties. And late enrollment can be very impactful; Medicare Part B adds 10% to Medicare premiums, for life, for each year someone was/is eligible to enroll in Medicare Part B but fails to do so, and the individual will have to wait until the next open enrollment period (from January 1st to March 31st) to sign up after waiting. Notably, those who are actually covered by a group health insurance plan at a company with at least 20 employees and where the client is still working (or via a spouse with similar employer coverage) can delay Medicare Part B and avoid any coverage gaps or late enrollment penalties. However, COBRA coverage does not count as qualifying coverage, which means waiting until COBRA runs out can cause a Medicare late enrollment penalty if stretched past age 65. For clients who are ready to enroll, it's now possible to enroll online via the Social Security Administration's website.
HSA Rules Get Tricky Once You Hit Age 65 (Sarah Benner, IRA Help) - A Health Savings Account (HSA) is one of the only types of "triple tax benefit" accounts, where contributions are deductible, growth is tax-deferred, and distributions (for qualified medical expenses) are tax-free. And while HSAs are normally tied to a high-deductible health plan (HDHP) while an individual is still working, the reality is that an HSA can be used in retirement and even after enrolling in Medicare at age 65; the withdrawals for medical expenses are still tax-free, for both yourself and your spouse or dependents, and regardless of whether incurred in the current year or as a self-reimbursement for a prior year (as long as the HSA had already been established when the expense was originally incurred). In fact, you can actually pay Medicare Part B and Part D premiums (but not Medigap supplemental insurance premiums) with tax-free HSA distributions. And even if the distribution is not for a qualified medical expense, it is still penalty-free after age 65 (though it would be taxable). However, the big caveat to an HSA after age 65 is that Medicare itself is not an HDHP, which means once you are enrolled in Medicare (whether it's Parts A, B, C, or D) you may no longer contribute new dollars to an HSA. And don't forget that applying for Social Security benefits at age 65 or later will automatically (and unavoidably) enroll you in Medicare Part A.
Great Expectations Can't Be Met Without Leadership (Mark Tibergien, Investment Advisor) - Historically, performance success for financial advisors has been based primarily on financial outcomes, where "sales" and "production" is the focus. However, Tibergien notes that this approach is problematic in many ways for wealth management firms. The first issue is that it may place an undue emphasis on new clients/business over serving existing clients well. The second challenge is that focusing too much on outcomes may lead too inappropriate behavior, as some may be so incentivized they take questionable means to achieve the ends. So what's the alternative? Don't just create expectations about the outcomes to be achieved, but also focus on and reward the efforts that must occur along the way. For instance, consider employee performance markers such as their commitment to lifelong learning (to advance themselves), safety (do they push the limits of compliance and ethics?), people development and succession (are they advancing their teams are well as themselves), financial contribution (are they managing themselves and their client base profitably), and peer evaluation (do their colleagues in the office agree that they're making positive contributions?). Ultimately, the point is not to reduce the value of salespeople who actually do bring in business, but to recognize that in a modern advisory firm, there's a lot more to the success of the business than just sales production, and so it's crucial to design incentives and evaluate employee accordingly.
5 Ways To Prevent Burnout Among Your Staff (Ric Edelman, Financial Advisor) - Staff burnout happens when your employees feel overworked and underappreciated, especially for long periods of time. And eventually it can impair not only the performance and efficiency of those employees, but bring down the morale for all employees, and impact clients who may notice the issue as well. So how can team burnout be minimized? Edelman offers 5 core suggestions: foster a team environment (as the support of the group/team can help sustain their motivation and make them feel more recognized for their contribution); set reasonable expectations (as many burnout situations are triggered by unrealistic expectations that lead to employees being pushed too hard in the first place); communicate clearly and often (as feeling of burnout are often spurred by miscommunication that leads to mismatched expectations); recognize good performance (as giving public credit to those who deserve it builds morale for both the recipient and the rest of the team that sees good effort will be recognized); and provide relaxing downtime (which means even if the business is extremely busy, it's crucial to have some 'fun time' events for employees that encourages them to relax and have fun for a little while).
How Mistakes Can Improve Client Satisfaction (Dan Richards, Advisor Perspectives) - Most businesses try hard not to make any mistakes for their customers, and arguably the stakes are especially high for advisory firms, where screw-ups relating to a client's money can quickly damage trust. Yet the reality is that short of truly dire and damaging mistakes, most service problems aren't actually fatal to a client relationship; instead, it's the firm's response and follow up to a mistake that really dictates the outcome of the client relationship. In fact, research on the concept of "service recovery" (from mistakes) finds that effectively resolving inevitable client/customer problems can actually strengthen trust and the business relationship, as it builds confidence in the client's mind that if/when mistakes do occur they will be rectified appropriately. So how do you handle a mistake "properly" in a manner that builds client loyalty? Richards outlines a 9-step process: listen (put aside everything else and really listen to the complaint with 100% attention), apologize (with a clear unqualified apology), clarify (ensure you have all the details and ask if there's anything else you should know), confirm (restate the problem to be sure you have it right), empathize ("I can imagine how frustrating this is"), propose a solution ("here's what I suggest..." and get the client's agreement ("is this acceptable?)"), implement the solution (promptly!), follow up afterwards (to ensure the resolution was satisfactory), and then be vigilant that it doesn't occur again (as repeat problems can quickly undermine trust). You may even consider authorizing employees with a small budget (e.g., $10 or $50 per client) to spend to resolve a problem immediately and satisfactorily for a client.
Prohibited Transactions In A Post-Fiduciary Rule World (Thomas Giachetti, Investment Advisor) - The DoL fiduciary rule will introduce a new definition of fiduciary and new requirements on advisors, with some substantive differences from how "fiduciary" is applied for RIAs. A key distinction is that as an RIA, most conflicts of interest are actually permitted as long as they are disclosed (e.g., in form ADV), while the DoL fiduciary rule outright prohibits many forms of conflicted advice or conflicted transactions. Affected advisors are any of those who give advice to a retirement plan or an IRA, for compensation, involving either a recommendation on what to buy/sell, how to invest, what investment managers to use, or simply whether to roll over in the first place. And once affected by the rules, several forms of transactions become outright prohibited, including any scenario where the investments are used to benefit the fiduciary (no "self dealing"), where investments are used to benefit someone with an adverse interest to the retirement account owner, and where the fiduciary receives indirect compensation for being involved in a transaction (the "anti-kickback" rules). Advisors can only navigate these rules by following the narrow and specific exemptions under the Best Interests Contract (or a streamlined version of the rules as a Level Fee Fiduciary), and it's crucial to do so, or else the advisor may be personally liable for losses and can trigger excise taxes and civil penalties as well.
Why Doing What You Love May Be A Bad Idea (Julie Littlechild, Absolute Engagement) - While there are all sorts of time management techniques out there, arguably the biggest key to time management is simply ensuring that you're doing the "right" things, and delegating all the rest. And the essence of delegation is to focus solely on the things you love to do, that only you can do; if it's something you love to do but others can too, it needs to be delegated (you can't do everything!), and it's crucial to delegate tasks you don't enjoy doing (as you're probably not doing them well anyway!). Yet Littlechild's advisor surveys find that only 12% of advisors spend at least 3/4ths of their time on those truly essential activities (what they enjoy doing that only they can do). The challenge in part is that in an advisory firm, the tasks of the day don't always neatly separate themselves into these categories, and there's a "messy middle" where it's hard to really figure out what should be retained and what should be let go. Accordingly, Littlechild surveyed advisors to try to clarify what activities are typically those 'ideal' advisor activities, amongst six core categories: client relationships, investments/planning, growth, team, strategy/business management, and admin. However, even once broken down in this manner, a secondary concern quickly emerges: not everything an advisor loves to do will necessarily drive the business forward. As a result, it's ultimately necessary to find the intersection of 'ideal' advisor activities (based on his/her skillsets) and what actually helps the business to grow and succeed. But the starting point is to go through all the tasks that are done in the business, and figure out what you really shouldn't be doing at all to begin with.
Schwab Revives Bid To Advertise RIAs (Lisa Shidler, RIABiz) - At the recent Schwab EXPLORE conference, the company announced that it is reviving a version of the RIA-Stands-For-You consumer marketing campaign in ran back in 2011, intended to help drive consumers to the independent RIAs that use the Schwab platform. This time, the FindYourIndependentAdvisor.com website will be supported by both print and online media, and will feature a "Find A Local Advisor" search tool to match consumers to advisors based on zip code (geography), and will be available to all Schwab advisors with at least $35M in assets that are SEC registered and have been on Schwab's platform at least one year (and without any requirement to pay for leads, unlike Schwab's Advisor Network referral program). Yet critics raise the question of whether the campaign will realistically drive a material amount of business to Schwab's 7,700 RIAs that already have $1.2 trillion of AUM, or whether it is simply "window dressing" and intended to buy goodwill from advisors who might otherwise be wary of Schwab's ever-increasing retail push into advice that is putting it in conflict with the RIAs on its platform. Especially since Schwab appears to be de-emphasizing the offering as a full-on "lead generation" tool. Still, the CFP Board's multi-year public awareness campaign has shown measurable success, suggesting that broad-based marketing can be effective to support advisors when done with sufficient dollars and scale. Although notably, the Schwab campaign is still focused on Schwab and the advisors on its platform, and not together with other RIA custodians that also support the RIA community.
Co-Creation And The Future Of The Client Experience (Julie Littlechild, Absolute Engagement) - As the world of financial advice shifts from being product-centric to client-centric, aided by regulatory change like the Department of Labor's fiduciary rule, as well as the encroachment of client-friendly technology tools, the question arises of how financial advice will ultimately change in the coming years. Littlechild suggests that the future of financial advice is all about the "co-creation" of value, where the advisor doesn't just give/deliver value to clients (in the form of products and advice) but works together with clients (and the value is created in that collaborative working relationship). While that shift may seem nuanced, it is actually rather profound. An example from the coffee industry helps to illustrate - a firm-driven value offering would be opening a coffee shop and letting customers who want to buy come and buy, while a client-centric value would be a coffee company that does market research to find out what key segments of consumers want and offer it to them, but a co-created value might be a coffee company that creates an online forum for customers to interact with and participate in the product and service development. In other words, clients don't just come buy what the company offers, but are actually involved in creating the solution. Which suggests that in the future, advisory firms may need to engage their clients at a whole other level of depth, far beyond just surveys, focus groups, or client advisory boards - and the fact that so many firms don't even engage in that level of client interaction suggests that the shift to co-creation may be a very challenging transition! Still, the opportunity is powerful. For instance, imagine that a client's retirement goal involves climbing Kilimanjaro, and the retirement plan includes not only savings goals to make that achievable, but also links to training schedules, insurance providers, packing lists, travel companies, online communities, and more, as a truly holistic value experience.
Do You Need A Coach? (John Bowen, Financial Planning) - As the advisory world becomes more competitive, the good news is that there's no shortage of advice on how to build a great business, from conferences and seminars to strategy sessions and business books. However, the challenge is that it's not always easy to turn that advice into action that generates results - and that's where coaching comes in, which (when done well) is meant not just to share a few ideas or theories but a more holistic focus on how to actually put the ideas into action. When done well, that should in turn lead to more tangible business results (e.g., more clients, greater AUM, better retention, and an improved work/life balance). Of course, that presumes you want/need to improve those aspects of your business in the first place; the best coaching relationships tend to come when an advisor has a specific 'pain point' in the business they're trying to work through, rather than just doing coaching for the sake of doing coaching. And small/modest improvements are probably better accomplished in a self-directed manner, rather than going through the cost and effort of a full coaching relationship. For those who do want to pursue a coach, Bowen suggests that you should find one with a track record of working with advisors (though it's worth noting that Bowen has a bias in this regard, as he runs a firm that specializes in coaching for advisors!), a screening process (beware coaches who will take 'anyone'), tool kits that can be applied systematically, and someone that has the right 'gut' feel for you (because if you're not really comfortable working with your coach, it's probably not going to work out!).
I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!
In the meantime, you may want to check out this recent video from Carl Richards of the Behavior Gap, from his 2-part series "A Manual For Scary Markets" on how advisors can talk to their clients (and take care of themselves) in the midst of volatile markets. For the full video series and further information, see "A Manual For Scary Markets" on the Behavior Gap website.
Hi, Michael – Just wanted to let you know how much I appreciate your Weekend Reading lists. I have become a devotee of all your writing on Practice Management, because I really appreciate that you take the time to address topics in detail, which makes the learning much more comprehensive and compelling. The fact that you share others’ work too (e.g., Julia Littlechild is one of my favorites now, thanks to you) is very generous, and helps reinforce how plugged in you are to seemingly EVERYTHING that is ever published that has anything to do with Financial Planning. I have no idea how you can possibly find the time to be as prolific as you are, but I certainly do appreciate it!