Weekend Reading for Financial Planners (Dec 10-11)

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 December 10th/11th:

Trump Understands and Has Opinion on DOL Fiduciary Rule (Jed Horowitz & Mason Braswell, Advisor Hub) - At this week's MarketCounsel Summit conference, President Trump's former campaign manager and now senior advisor Kellyanne Conway revealed that President-Elect Trump does have an opinion on the Department of Labor's fiduciary rate, and that his view "does not necessarily gibe" with the oppositional view of his advisor Anthony Scaramucci (who has called for the fiduciary rule to be repealed and even compared it to the Dred Scott decision). While Conway did not elaborate further on how the views differ, or what Trump's exact view is, but it casts into further doubt the likelihood that President Trump would actually seek to repeal the rule, and at most might aim to just defang some of its most "onerous" provisions (e.g., regarding the potential for class action lawsuits). The likelihood that the DoL fiduciary rule will not be a central issue of President Trump was further signaled when he announced this week his nomination for Labor Secretary - Andrew Puzder - as Puzder is the CEO of fast-food chains Hardee's and Carl's Jr and is much more likely to focus on issues of minimum wages and employment regulations, than the fiduciary rule for financial advisors. Especially since ultimately, materially altering the DoL fiduciary rule at this point would likely require an Act of Congress, where Republicans have opposed the fiduciary rule but the Democrats retain enough votes in the Senate to filibuster any attempts to outright repeal it.

Now Is the Time to Build Your 2017 Marketing Plan (Kristen Luke, Advisor Perspectives) - As year-end approaches, it comes time to craft business plans for 2017, and for growth-minded financial advisors, that includes a marketing plan as well. Luke suggests that financial advisors think about a marketing plan in 4 tiers: 1) Infrastructure (Do you need to update your branding or logo? What differentiators are you communicating? Do you need to update your website, or add some Calls to Action?); 2) Awareness (how are you building awareness of your business, from word-of-mouth and speaking engagements, to direct mail or social media or newsletters, sponsorships, etc.); 3) Lead Generation (what are you doing to generate actual prospect leads from your awareness, from driving client or COI referrals, running events, or something else?); and 4) Conversion (what is your sales process to actually convert prospective client leads into actual clients, and do you need to update or refine any of your sales materials?). For many financial advisors, the key is not coming up with sophisticated or creative marketing ideas, but simply to review each part of this marketing plan structure, and ensure there's something in place to be executed at each step along the way!

Six Tips To Make Your Client Communications Work (Dan Solin, Advisor Perspectives) - Communicating effectively with clients is essential, not only to actually transmit important messages, but also because regular client communication is a key factor is client retention. Yet Solin notes that most advisors communicate poorly, especially when it comes to email and social media. Accordingly, he provides six tips on refining (technology-based) client communication: 1) Make an emotional connection (you may feel it's professional to be middle-of-the-road and neutral, but clients want to connect with you emotionally, which means you have to share something personal to connect to!); 2) Have a goal (for instance, if your primary goal is to enhance trustworthiness, view every message to clients through that lens, and confirm you're really delivering consistently); 3) Use images and visuals (as research indicates we really do process visuals faster than text, and photos and images can also help to make client communication more personal); 4) Make sure you're communicating about the benefits you're providing (or have provided) to clients, rather than just trying to demonstrate your expertise; 5) Create a marketing budget, so you have earmarked at least a little money to spend on improving the quality of your client communications; and 6) Beware overcommunicating (as while regular communication is important, more than once per week - or even once per month? - is probably overkill for most).

Should I... Write A Book? (Ingrid Case, Financial Planning) - A growing number of financial advisors are looking at publishing books as a way to market themselves, especially with the growth of self-publishing platforms like Amazon's CreateSpace. Notably, though, even a "great selling" book only has limited potential in terms of direct book sales; for instance, advisor Cary Carbonaro's "The Money Queen’s Guide for Women Who Want to Build Wealth and Banish Fear" was a #1 new release on Amazon and the #1 in wealth management for several months, yet ultimately sold "only" about 5,000 books. However, the book generated substantial (i.e., hundreds) of media appearances, plus speaking engagements, and even some financial planning prospects who read the book (though in Carbonaro's case, none who could meet her $1M AUM minimum). And notably, despite the fact that most advisors fear the sheer writing process of producing a book, Carbonaro points out that in the end, "writing the book was the easy part" (albeit with the help of a freelance editor); ultimately, 80% of the energy went into marketing the book after it launched, especially since even with a traditional publisher, about 90% of the book marketing effort fell on Carbonaro's shoulders (including contacting media outlets). The good news is that advisors can get assistance for many of the key elements of producing the book - a freelancer to design a cover costs about $700, while proof-reading a book manuscript costs about $1,000 - though in the end, even if book sales cover those costs with a small profit, the real benefit of writing a book is about trying to generate new clients and other business opportunities by leveraging the book (not from the book sales themselves).

How Do You Know You Are Providing "The Disney Experience" (Steve Wershing, Client Driven Practice) - Any business owner, financial advisor or otherwise, has a vision in their head of how the firm should operate, how clients should be served, and what the client experience should feel like from the client's perspective. And while that's all well and good when the advisor is the sole person delivering that service, ensuring that the business is still delivering the desired experience to clients gets much harder once it's being done by other employees besides the founder. Even with reasonably courteous, conscientious, service-minded employees, what clients experience may not be the kind of service that the founder expects to be delivered. So how should advisory firms try to manage this? The first key is to have clear client service standards - for instance, client inquiries will always get a response in one business day, client meetings will always have a follow-up letter to summarize, clients get a review meeting every six months, etc. The goal is to have specific, concrete service standards - ones that can be overseen, managed, and evaluated to ensure they're really being delivered. Other key steps to really ensuring a quality client experience include: having clear processes to document how services are provided, as doing a process consistently provides the basis for adapting and improving it to elevate the client experience; recognize the importance of training, and that even service-minded employees still need to be trained in your way of providing good service; have a mechanism to gather client feedback, so you know how you're doing; and even consider hiring a "mystery shopper" to test your client experience and processes (at least for prospective new clients).

Fidelity Introduces Industry-First Mystery Shopping Program for Advisors (Fidelity) - Continuing the theme of evaluating an advisory firm's marketing and sales process, Fidelity has announced a new "Mystery Shopper" program, that will bring in a third-party market research firm using real investors to pose as shoppers (based on the firm's pre-defined client profile), and then provide feedback on what the experience was like (both positive and negative aspects). The issue is relevant not only for reviewing and controlling a prospect's first impression, but also because consumer expectations of a positive first impression are shifting, with less focus on whether the firm has an exclusive or high-end image, and more about whether the firm has a warm and personable image and conveys high-touch service (recognizing that if the firm doesn't do "high-touch" effectively in the prospecting stage, prospects will likely lose trust that the firm can be high-touch for ongoing clients, either!). Areas to focus on will include the effectiveness of the firm's discovery process, whether it is consistent in its messaging and experience (e.g., claiming "personalized" experience but using an automated phone system), whether the firm's website is reflective of its brand, perceptions of the firm's office space (from a prospect's perspective), and more. No costs have been provided yet; Fidelity simply states that the program will be available through market research firms HawkPartners and GfK at a discounted rate from the firms' usual pricing for mystery shopper services.

Long-Term Care Insurance: A Looming Catastrophe? (Joseph Belth) - Long-term care insurance firm came onto the scene in the 1970s, accelerated in growth in the 1990s after the passage of HIPAA formalized the rules for tax-qualified long-term care insurance, culminating in over 100 LTC insurance companies providing coverage in the early 2000s. Over the past 15 years, though, LTC insurance has shifted dramatically, with now barely a dozen companies offering individual LTC coverage, and a recent announcement that Penn Treaty insurance may soon be forced to liquidate in what would actually be the largest insurance company failure in 25 years (with assets of $700M and liabilities of almost $4B, with losses for policyholders likely even after the involvement of state guaranty associations). At the same time, even existing and stable insurers are struggling with long-term care insurance; John Hancock recently decided to leave the individual LTC marketplace (ceasing new policy sales, but remaining committed to service their existing 1.2 million LTC policyholders), and even Northwestern Mutual just announced its first-ever LTC premium increase request to state regulators. Overall, industry reports indicate that LTC insurance sales are continuing to fall, with new premiums and new policies down almost 35% from 2013 to 2015, and the number of participants added to group LTC plans collapsing by 65% from just 2013 to 2014 alone, and another 55% in 2015. Ultimately, the path forward remains unclear, but there is a growing clamor that a new solution may be necessary - potentially a public-private partnership between government and insurance companies - though some like Belth still question whether long-term care itself is even an "insurable" risk in the first place, given that it has such a high likelihood of occurring (at least, unless dramatically longer LTC elimination periods are allowed).

U.S. Life Expectancy Declines For The First Time Since 1993 (Lenny Bernstein, Washington Post) - For the first time in more than two decades, the life expectancy for Americans declined last year, according to a new report released by the National Center for Health Statistics. The issue doesn't appear to merely be a matter of one unusual event or deviation (as was suggested by a study last year finding the opioid epidemic may be increasing the death rate for middle-aged white men); in fact, the researchers this time found that the death rates rose simultaneously for eight of the top 10 leading causes of death, including deaths from heart disease, chronic lower respiratory diseases, unintentional injuries, stroke, Alzheimer's, diabetes, kidney disease, and even suicide; the only cause of death with a material decrease was cancer (which is attributed primarily to better early detection systems, as well as the ongoing decline in the national smoking rate). Amongst subgroups of the population, the rising death rates were found primarily for white men and women, and black men, but stayed even for black women, Hispanic men and women; in addition, it's notable that life expectancy for those already age 65 did not fall, implying that the rising mortality problems are primarily for those who are middle-aged or younger. Some are suggesting that the broad rise of heart disease, particularly in middle age, may be related to rising obesity challenges, though the question remains why mortality rates are rising in the U.S. but remaining stable in other countries around the world.

Does the Star Rating for Funds Predict Future Performance? (Jeffrey Ptak & Lee Davidson, Morningstar) - The Morningstar Star Rating is nearly ubiquitous amongst advisors and investors as a way of evaluating mutual fund performance, but has long been criticized for the fact that it a backward-looking quantitative measure of fund performance (rather than necessarily being predictive of future performance, especially given the standard consumer warning that past performance is not necessarily an indicator of future performance). Notably, star ratings are based on a combination of funds' trailing 3-, 5-, and 10-year returns (not just short-term returns), and are benchmarked against category peers on a net-of-fees basis and adjusting for downside volatility. But the question still arises as to whether star ratings are actually predictive on a forward-looking basis. To evaluate, Morningstar evaluated whether star ratings have any connection to monthly returns (e.g., do 5-star funds product better monthly returns than 3-star funds), as well as testing over longer-term subsequent periods. Overall, Morningstar found that amongst equity and fixed income funds, monthly returns are slightly higher amongst 5-star funds, even after accounting for differences in expenses (to the tune of about 0.09%/month, which compounds to just over 1%/year annualized), though with alternatives there is no measuring difference for higher-star-rated funds over the rest. When evaluated over long-term time periods, though, the results appeared to average out; when comparing three-star funds and their subsequent 5-year returns to higher (or lower) rated funds, there was no statistically significant outperformance (or underperformance). However, lower rated funds were much more likely to be closed and terminated, which means even if star ratings don't directly predict outperformance, they do predict fund survival, which matters at least to some extent given the costs and potential tax consequences of funds that liquidate.

The American Dream, Quantified At Last (David Leonhardt, New York Times) - The actual phrase "American Dream" came forth during the Great Depression, from a book by historian James Truslow Adams who defined it as "that dream of a land in which life should be better and richer and fuller for everyone." And in most of the decades that followed the Depression, rapid economic growth meant that nearly all children really did grow up to achieve a better life than their parents. However, it's historically been hard to actually measure this, given that most economic data is taken as broad-based snapshots, and doesn't literally follow individual families over time. In recent years, though, economist Raj Chetty received access to a data set of millions of tax records that, while anonymized, were capable of linking generations, and provide new perspective on how often children really do manage to be more successful than their parents. And unfortunately, what they've found is that the percentage of children earning more than their parents by age 30 has been falling almost continuously since the aftermath of World War II, from a high of nearly 92%, to only 79% for late baby boomers, and what is now just a 50/50 coin flip that today's 30-somethings are doing better than their parents did at the same age. Ultimately, this challenging phenomenon both helps to explain the growing negative sentiment in national institutions (where in Midwestern industrial states in particular, the percentages are even worse), and puts new pressure on policymakers to figure out how to lift GDP growth and slow (or reverse) the growth of income inequality. In fact, the researchers found that if we merely dealt with our lower economic growth in recent years, but not the income inequality that has also arisen, the number of children born in 1980 who are living better than their parents would be 80%, instead of just 50%. Which means coming up with policies that limit income inequality in particular may come even more to the forefront in the coming years.

Meet The People Who've Retired At Sea (Elizabeth Garone, BBC) - The classic vision of retirement is living out your golden years in a warm, sunny climate, but for a growing number of retirees, they're living out their golden years on cruise ships. Not just taking cruise vacations, but making the cruise ship their second or even primary home. After all, cruise ships function as a veritable city on the sea, offering nightly entertainment and exercise equipment and the Internet, a wide range of travel options, favorable climates, and none of the responsibility of home maintenance. In fact, some cruise ships even sell a "residence" pass - effectively a high-end apartment the owner can stay in for multiple cruises over time - and the cost can come out to less than $300/day, which is actually cheaper than a lot of assisted living facilities. High-end options are available as well, with one cruise charging as much as $15M for a 3-bedroom top-deck penthouse (plus, of course, access to any and every one of the ship's amenities). In some cases, retirement cruises may not "move" to the cruise ship permanently, but some cruise lines are offering four-month world cruises, an alternative winter getaway for those who want to escape cold winters at home. The rising popularity is leading more cruise lines to build ships that have a dedicated set of "residence" cabins for those who at least want to make the cruise ship their second home for extended stays. Of course, the one major caveat to retirement seniors on cruise ships at sea is health care concerns, although the large ships do maintain medical staff on call 24 hours a day, and most have a helipad for emergency evacuation as well (although "evacuation insurance" is reportedly expensive). On the other hand, for those who are still in a more active early phase of retirement - where health concerns are less of an issue, and it's easier to enjoy both the cruise ship amenities, and the visits to various ports around the world - retirement residence cruises seem poised to continue rising in popularity.

One Money Question to Rule Them All: How Much Is Enough? (Ron Lieber, New York Times) - Ultimately, all of our fears about money, and whether we need to earn more, or can afford all the things we want, comes down to the fundamental question of "how much is enough" in the first place. Especially because for any particular individual, the "how much is enough" question is primarily qualitative, not merely quantitative, given that our goals themselves can (and often do) adjust to our financial circumstances. Of course, the reality is that the question of "how much is enough" isn't new, with the issue raised in the liturgy of various world religions going back for centuries, but it seems to be gaining new prominence recently, including a prominent book "Enough" by Vanguard founder Jack Bogle. So how do we make the "enough" determination for ourselves? Lieber suggests that it starts with enough awareness - do we even know what we spend, and have we given any cognizant thought to what kinds of spending really improves our well-being? Once that is determined, you can then consider the gaps of what's missing, and start to ponder what aspirationally you'd like like to add, that would make it feel like "enough". Notably, for some, having "enough" is just not enough for personal well-being and satisfaction, but being able to support children as well (or at least give them opportunities to try and fail and still be able to pick themselves back up again). But throughout it all, the key point remains the reflection that having "enough" will always and forever be relative to your wants and expectations in the first place, which means it's as much about being satisfied with what you have, than trying to figure out how much more you need to finally have "enough".

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, 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 as well.