Weekend Reading For Financial Planners (Jan 28-29)

CFP Board Creates Separate Arm To Promote Planning Careers, Hiring Of Planners

(Mark Schoeff | InvestmentNews)

As currently structured, CFP Board serves a wide range of functions, from its role creating and enforcing the standards to be certified as a CFP professional (and license CFP Board’s trademark of the CFP marks) to promoting research on financial planning-related topics. Though because the organization is legally structured as a 501(c)(3) nonprofit (which must make the public its priority), it has been limited in how it could work to advance the planning profession and CFP practitioners themselves.

With this in mind, CFP Board announced this week that it is bifurcating into two organizations: CFP Board of Standards (which will be a 501(c)(6) nonprofit) and CFP Board Center for Financial Planning (which will continue to the carry the 501(c)(3) status of the current CFP Board), both of which will have the same board of directors and chief executive.

Notably, the 501(c)(6) status is traditionally used for membership associations (it is the same tax status as the Financial Planning Association and NAPFA, and this is why payments to (c)(6) organizations are deductible as a business expense rather than a charitable contribution), but the CFP Board has indicated that it does not intend to become a “membership association” and that it will not have individual “members” at all. Instead, according to the announcement, the CFP Board’s intention in becoming a 501(c)(6) nonprofit is to be able to be more explicit in marketing the benefits of becoming a financial planner (e.g., salary ranges and workplace flexibility, which the CFP Board can highlight to recruit more future CFP professionals), and to be able to more proactively communicate about the value the public receives from working with a CFP professional (e.g., doing even more to direct consumers to find a planner on CFP Board’s “Let’s Make A Plan” website). In the meantime, the remaining 501(c)(3) segment of the CFP Board will focus on advancing competent and ethical financial planning (in particular, by supporting research pertinent to financial planners and the delivery of financial planning advice), and expanding CFP professional diversity, for the benefit of the public.

In addition, the new 501(c)(6) organization will have expanded lobbying abilities. While CFP Board leaders said the organization does not plan to form a Political Action Committee (PAC) to make donations to lawmakers’ campaigns, CEO Kevin Keller did suggest as one example that the organization could join the Financial Services Institute (which represents independent broker-dealers and their advisors) in discussions about the Department of Labor’s independent contractor rule (which would likely result in many advisors working for independent broker-dealers being classified as employees).

Notably, this week’s announcement comes after CFP Board in 2022 announced an increase in its annual certification fee, with the additional funds being divided among its ongoing Public Awareness campaign and workforce development initiatives, both of which can be expanded further under the new capabilities of the new 501(c)(6) organization. It also comes as the Financial Planning Association (FPA) has launched a campaign to protect the title “Financial Planner”, about which the CFP Board has been significantly less enthusiastic and could even outright oppose via new 501(c)(6) lobbying efforts (though CFP Board officials said the decision to split the organization is unrelated to this effort, and it is simply remaining focused on its efforts in promoting the value of the CFP marks among consumers and advisors).

Ultimately, the key point is that CFP Board has long been constrained in what it is (and is not) permitted to do because of its 501(c)(3) status (which required it to operate first and foremost for the benefit of the public), while the creation of a new 501(c)(6) entity (into which the bulk of the CFP Board’s current operations will shift) will allow it to take a more “self-interested” approach in promoting the CFP marks within the industry and promoting its own CFP professionals to the public. Which may be appealing to CFP professionals who wish the marks were even more recognized by the public, and to firms that are struggling with the talent shortage of CFP professionals to serve clients. Still, though, the broader question in the long run is whether the CFP Board’s new 501(c)(6) status may create a more direct overlap with (or competition to) the FPA, NAPFA, and other 501(c)(6) membership associations, and however else CFP Board officials plan to use the new powers and flexibility of the 501(c)(6) status in the future!

Rich Customers Pull Money From Banks Offering Paltry Interest Rates

(Rachel Louise Ensign | The Wall Street Journal)

Cash management can be an important part of financial advisors’ value proposition, as advisors can help clients balance their need for liquidity with the opportunity cost of not investing in potentially higher-return investments like equities. But for the money that is kept in cash, there are a range of options, from bank savings accounts and Certificates of Deposit (CDs) to custodians’ cash sweep accounts. And while the yield offered on these accounts varied less when broader interest rates were relatively low, a rising rate environment has led to new opportunities to earn a greater return on cash holdings, and, it appears, more scrutiny from wealthier clients.

Several of the major commercial banks (which often pay lower interest rates on savings products than do some smaller and online banks) saw their customer deposits fall late last year, driven by customers in their wealth management units. For example, deposits at Bank of America’s wealth unit (which includes Merrill Lynch Wealth Management) fell 17% in 2022, while deposits in the bank’s consumer unit only fell by 0.6%. Bank of America CEO Brian Moynihan said this shift was the result of affluent customers moving funds into money-market funds and Treasurys (which are now offering significantly higher yields than the 0.88% the bank pays on U.S. interest-bearing deposits across all businesses). Wells Fargo and JP Morgan saw sharp declines in deposits in their wealth management units as well.

For advisors, the key point is that clients (particularly those with a large cash allocation in their portfolio) might increasingly ask about the return they earn on their cash holdings now that the spread between the lowest- and highest-paying products has increased significantly. And as the availability of cash management tools designed for advisors (e.g., MaxMyInterest, Flourish Cash, and advisor.cash by StoneCastle) has grown, advisors have a range of options for helping their clients earn more on their cash holdings!

With Yields On Cash Climbing, Advisors Struggle To Keep Some Clients In Stocks

(Jeff Benjamin | InvestmentNews)

Investors in 2022 faced a double-whammy of weak stock and bond returns. One of the few asset classes that saw positive (nominal) returns was cash, whose returns have become even more attractive as interest rates on deposit products and yields on government bonds have risen during the past year.

However, the combination of market volatility (and discussion in the media about a possible recession) and higher yields on cash products could lead some investors to want to adjust their asset allocation away from more volatile asset classes into cash. Of course, while it might seem to many clients that doing so is a prudent, conservative move, moving to cash comes with risks, whether it is potentially selling out of equities or bonds near the bottom of the market, or the challenges of redeploying cash to riskier asset classes (which often occurs after a run-up in the markets, making some clients nervous that another downturn might be in the cards!).

When meeting with clients who want to make major adjustments to their asset allocation, advisors can consider using a three-part ‘pyramid’ framework: the Plan, at the foundation of the pyramid (representing the financial plan itself that was developed around the client’s personal values and goals); the Process, in the middle (i.e., the method whereby an advisor helps their client determine how those values and goals will become reality); and the Product, at the top of the pyramid (which are the tools that were chosen but that are now the focus of the client’s fears and anxieties). By using such an approach, an advisor can draw the client’s attention away from the initial cause of alarm (e.g., market volatility) back to the grounding ‘roots’ of the client’s financial plan, which (as they’ll be reminded) was built around their own personal values and unique goals. And then, once the client is (hopefully) back at a place where their point of reference is centered on their foundational values and goals (instead of on whatever external, uncontrollable news story or event that made them worry in the first place), it’s at that point where data and evidence can (finally) be brought into the discussion and how the plan originally factored in the potential for both good and bad outcomes to begin with!

Ultimately, the key point is that as the past few years have been challenging, both in client’s personal lives and with regard to their portfolios, the ability to earn higher returns from low-risk products might become increasingly attractive to many clients. But by reminding them of the ‘roots’ of their plan (while also perhaps seeking to increase the yield they get on their current cash holdings), advisors can help draw the asset allocation conversation away from recent market volatility and toward a more holistic and long-term view.

How Custodial Competition Will Transform The Advisor Space

(Bob Veres | Advisor Perspectives)

RIAs have a variety of custodians from which to choose, from the ‘big’ players like Charles Schwab and Fidelity to a wide range of ‘smaller’ custodial platforms. And the recent announcement that advisor technology platform Envestnet is entering the custodial space gives advisors an additional option. But many questions surround the advisor custodial landscape, from how legacy custodians and software platforms plan to compete in the coming years to whether advisors will be willing to switch custodians more frequently.

Veres sees Envestnet’s move into the custody space as a protective one. For instance, a custodian that develops or acquires its own advisor-friendly software tools (e.g., for portfolio management) could lead some advisory firms to leave software platforms like Envestnet for a more tightly integrated tech stack under one roof. By offering its own custodial platform, Envestnet can potentially mitigate the risk of a custodian severing ties and/or trying to compete with it. And from an ‘offensive’ perspective, the move could draw in advisors dissatisfied with their current custodian to Envestnet’s custodial offering, creating the opportunity to cross-sell its (likely more profitable) software solutions for financial planning, portfolio management, and account aggregation.

While advisors have long been loath to change custodians, which can require an arduous process of ‘repapering’ clients, Veres notes that this burden has been reduced in recent years by the use of digital onboarding and e-signatures (sometimes eliminating the need for actual paper), as well as the introduction of client-friendly questionnaires that facilitate the information-gathering process. This could ease the process of changing custodians, though according to the 2022 T3/Inside Information Software Survey, advisors are broadly happy with their current custodians and might have to be convinced to move.

In the end, greater competition among custodians and software providers could be to the benefit of advisors, whether by driving down costs for advisors (and their clients) or just a greater variety of offerings to meet a firm’s specific needs!

Rising Interest Rates Not A Killer For RIA M&A

(Bruce Kelly | InvestmentNews)

The brisk pace of deals and generous valuations have been themes in the RIA Mergers and Acquisitions (M&A) market during the past couple years. But a series of factors, from weak market performance in 2022 to the need for acquirers to ‘digest’ the firms they have purchased, have been cited as potential headwinds for deal pace and size to continue apace in 2023 and beyond. However, one industry observer thinks that one reason cited for a potential slowdown, rising interest rates, might be overexaggerated.

Speaking at the Financial Services Institute’s OneVoice Conference this week, Dan Seivert, CEO and managing partner of RIA-focused investment bank Echelon Partners noted that borrowing constraints put into place by the Federal government in the wake of the 2008 financial crisis limit the impact of interest rates on borrowing costs. For example, while RIA M&A deals have routinely been valued at multiples of 8- to 10-times Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) of the selling firm (reaching as high as 12- or even 20-times EBITDA in the recent sellers’ market), banks will only lend to acquirers at 4-times EBITDA, limiting the size of the deal that is actually subject to interest rate costs.

And so, while some potential headwinds to RIA M&A remain, rising interest rates might not be the limiting factor they are sometimes considered to be. And with a larger number of private equity firms interested in funding deals than in years past (as well as an aging base of advisory firm owners potentially looking to sell their firms), RIA M&A has the potential to remain strong in the years ahead.

How Price Changes Influence Consumers' Buying Decisions

(Ioannis Evangelidis and Manissa Gunadi | Harvard Business Review)

The internet makes it easier than ever to check not only the current price of a good or service, but also how expensive it was in the past, which can alter consumer behavior. For instance, as anyone who has observed ‘Black Friday’ (when retailers often discount goods the day after Thanksgiving) knows, when consumers perceive that the price of a good has declined, they often pounce (sometimes literally) on these ‘deals’. And while financial advisors rarely if ever cut their prices to incentivize new clients, rising inflation (and its impact on staff salaries in particular) is putting growing pressure on advisory firms to raise their fees… which in turn raises questions about the best way to strategically approach advisory fee increases.

Perhaps not surprisingly, research by Evangelidis and Gunadi suggests that there is nuance when it comes to consumer reactions to price changes. For example, consumers who see a large, one-time price decrease in an item will be more likely to purchase it (as they appear to expect the price will revert higher at some point, and want to grab the deal while they can) than they are if they see a series of smaller price declines (which creates anticipation that the price of the good will continue to decrease further and tends to make them delay their purchase decision). And an opposite effect occurs when it comes to price increases; in these cases, consumers were reluctant to buy a good that experienced a large, one-time price increase (possibly assuming that it will revert to a lower price at some point), but were more eager to purchase a product that had a series of smaller price hikes (as they appeared to want to buy before additional price increases that they’d expect will occur in the future).

In the context of financial advisors, this research suggests that for advisors considering increasing their fees (perhaps in response to the higher inflation levels experienced in the past year), doing so on a regular, gradual basis could be preferable to making a large, one-time change. Of course, the nature of AUM fees being recalculated on successively larger portfolios that grow over time naturally creates a steady rising fee over time, but advisors using hourly or subscription/retainer fee structures in particular may benefit from implementing smaller but systematic fee increases each year (rather than waiting until they ‘need’ to raise fees and implementing a large increase all at once to catch up for prior years). Of course, for existing clients, smaller regular fee increases might also simply be easier for current clients to stomach, particularly if the fee increase is revealed in conjunction with a discussion of the value the advisor is providing!

When It Comes To Marriage And Money, Opposites Attract

(Julia Carpenter | The Wall Street Journal)

When looking for a potential spouse, an individual might look for someone with similar values and qualities, thinking that doing so will lead to less conflict in the marriage. But recent research suggests that when it comes to money, having different values (combined with strong communication skills) can actually boost a couple’s financial partnership.

For instance, an individual who tends to save and rarely spends on themselves might look for a partner who can help them feel more comfortable with an occasional splurge. And rather than staying rigid in their views, spouses often find middle ground over the course of their marriage, learning from each other in the process (although money can become a source of conflict for those couples who cannot find a middle ground).

At the same time, productive communication between spouses about financial issues is an important part of building mutually beneficial financial practices. For instance, if one spouse serves as the household ‘CFO’ (e.g., by managing the couple’s bank accounts and investments), it can be useful for the other spouse to remain aware of and involved in the couple’s finances, not only to be prepared in case something happened to the ‘CFO’ but also to contribute their own ideas and values to financial decision making. In addition, by discussing their mutual goals for their money couples can avoid falling into the trap of focusing on what one partner wants the other to avoid when it comes to spending (which can breed antagonism rather than cooperation).

Notably, financial advisors can play a positive role in encouraging positive financial communication between partners. Whether it is through encouraging both partners to participate in financial planning meetings (and serving the couple as a unit rather than two individuals) or helping client couples practice gratitude to reduce money disputes, advisors can help clients reap the benefits of working in tandem to achieve their financial goals!

Hate Budgeting? Try Rethinking It.

(Sarah Newcomb | Morningstar)

Budgeting can often leave individuals feeling judged for their spending choices. A common piece of advice is for budgeters to separate their wants from their needs. But the term ‘need’ does not have a set definition. For example, if the only ‘needs’ were food, water, and shelter, then spending on a monthly massage might seem frivolous.

Newcomb first suggests that individuals take a broader view of what constitutes a ‘need’, expanding from food and shelter to more ‘higher-order’ needs such as love, purpose, respect, or meaning. After all, while an individual could survive by spending only the minimum necessary to survive physically, this might not be a particularly meaningful life.

Instead, Newcomb suggests reframing the conversation around budgeting; instead of focusing on what is a ‘want’ versus a ‘need’, individuals can learn to differentiate between a need and a strategy for meeting that need. For example, buying coffee at a coffee shop rather than brewing it at home is often cited as an example of a ‘want’ versus a ‘need’ (as the consumer could get their caffeine fix at less cost by making coffee at home). Though for some, going to the coffee shop is not just about buying the coffee itself, but also perhaps the walk to get there as well as the opportunity to socialize with friends. So instead of the limited view of the coffee fulfilling a need for caffeine, one can take a more expanded view by noticing how it also fulfills needs to exercise and build social connections. Though if a daily coffee habit is straining an individual’s budget, rather than cutting it out altogether (as might be suggested if buying coffee was seen as a ‘want’) they can consider alternative strategies to meet their needs for exercise and socialization, perhaps by brewing coffee at home or in the office and taking it on a walk with a friend.

For financial advisors who are used to thinking strategically, this framework can help when working with clients who are struggling controlling their spending. By helping clients explore the needs that are being met by different purchases and then offering potential alternative strategies to meet these needs, advisors can help them meet their higher-order needs while moving forward along a financially sustainable path!

The 'Buy Now, Pay Later' Bubble Is About To Burst

(Mac Schwerin | The Atlantic)

In the past, layaway was a popular option for shoppers who wanted to purchase an item but did not have enough money at the time. The store would set the item aside for the shopper in return for a down payment, and the buyer could only claim it once they made enough payments to pay for the item in full. This was a potentially thriftier way to purchase expensive items than taking a loan out for it or putting it on a credit card.

But a more recent innovation, dubbed ‘Buy Now, Pay Later’ (BNPL), has flipped the script on layaway, allowing buyers to receive the item immediately after making a small deposit and passing a cursory credit check, then beginning payments. And while items purchased on layaway in the past typically were bigger-ticket items (e.g., major household appliances), individuals are now using BNPL for significantly smaller purchases. For buyers (notably, BNPL services are particularly popular among young adult consumers), BNPL represents an alternative to the high interest rates charged by credit cards (and because no interest is charged, it can seem like they are receiving ‘free money’), and, despite earning no interest from the consumers themselves, BNPL companies (e.g Affirm, Afterpay, and Klarna) are able to generate revenue by charging merchants fees that are 3- to 4-times the average credit-card processing fee. And, despite the hefty fees, merchants participating in these programs appear to assess that allowing consumers to make their purchases using BNPL platforms will lead to higher sales.

At the same time, there are several potential downsides to the parties involved. For consumers, BNPL programs can lead them to make more purchases than they might have if they had to use cash, or even a credit card, with one study finding that using BNPL causes a permanent increase in total spending of about $60 per week. Further, if they do not track the variety of BNPL purchases, they might not realize the total payments they will owe for the coming months. For BNPL companies, a major risk is that consumers will be delinquent on their payments, and with BNPL delinquency rates currently outpacing those of credit cards, the BNPL companies have seen their valuations slashed.

Altogether, BNPL programs are the latest innovation to allow consumers to purchase items that they cannot afford (or do not want to pay for) at the moment. And while these interest-free loans might be more attractive than spending on a high-interest-rate credit card, advisors can help clients (and perhaps their clients’ children) understand the potential downsides, from the temptation to spend more than they can afford to potentially ending up in a mountain of debt they cannot pay off!

Don't Optimize Your Downtime

(Rahul Chowdhury | Hulry)

In recent years, there has been no shortage of articles and books written about how to improve your productivity. Often, this is framed in a professional context, such as how to improve workflows or how to find more time for focused work during the day. But this productivity mindset can seep into our personal lives as well, as we seek to maximize the value out of each hour.

But trying to have the most productive ‘free time’ as possible can reduce or eliminate the relaxation benefits of this time. For example, while listening to music can be an enjoyable experience in its own right, you might feel tempted to ‘maximize’ that time by simultaneously checking email. Even those who meditate often might spend more time worrying about having the ‘perfect’ practice rather than enjoying the experience for its own sake. Eventually a lack of ‘true’ downtime can lead to burnout (especially if your non-leisure time is a whirlwind of productivity as well).

One way to reduce the temptation of optimizing your downtime is to schedule time for pure leisure and relaxation. This can give you ‘permission’ to focus on relaxing, whether it is by listening to music, reading a good book, or going on a slow walk for its own sake (leave that pedometer at home!). And for those who might view it as a missed opportunity to multitask, it’s important to recognize that because having dedicated time to relax can help prevent burnout, it can ultimately lead to greater productivity in the long run!

Can You Have Too Much "Alone Time"?

(Khe Hy | RadReads)

Over the course of a lifetime, the people with whom you spend the most time tend to change, transitioning from family members as a child to friends and coworkers in young adulthood to spouses and children later on. Though notably, time spent alone tends to increase as we get older as well, particularly after children leave the house and in retirement. But because research has shown the health and wellbeing benefits of maintaining strong relationships, working to maintain relationships over many years could potentially prevent some of the negative effects of too much alone time.

However, maintaining relationships as a working adult can be challenging as one tries to balance work and professional life. Because relationships often fall into the ‘important, but not urgent’ category (as there is no specific end date by which it has to be completed), it can be easy to forget to work purposefully to nourish these ties. Further, unlike a task such as ‘wash the car’, there is no set deliverable for ‘being a good friend’ or a similar relationship objective. With this in mind, Hy tries to overcome these challenges by scheduling time for relationships well in advance. For example, when he goes out to dinner with friends, the group schedules their next hangout (which might not be for a couple of months) at the table while their future calendars are largely empty and so they don’t need to remember to do so in a month or two.

Ultimately, the key point is that while it is easy to recognize the importance of strong relationships over the course of a lifetime, it can be equally easy to let the work of actually maintaining these ties fall by the wayside. But by setting concrete plans to meet with friends, family members, and others, relationship-building can become a regular habit rather than just another item on a perpetual ‘to-do’ list.

Is It Time To Shake Up Your Work From Home Routine?

(Elizabeth Grace Saunders | Harvard Business Review)

The onset of the pandemic in 2020 led to an abrupt change of scenery for many workers. Rather than planning their days around work in an office, they had to establish new routines and habits working from home. But now, almost three years on, many of these routines might have become stale, or perhaps even bad for workers' mental and physical health.

For instance, some employees who work from home miss the social aspects of working in an office, whether it is the random encounters with coworkers around the proverbial watercooler or the opportunity to walk out of the office for lunch. But those working from home have several options to get the social vibe of the office without going in, whether by occasionally working in a public place (e.g., a coffee shop or co-working space), or perhaps by scheduling a video call with a coworker to work together on video (without distracting each other too much).

In addition, while working from home can create more free time (e.g., by eliminating the daily commute), it can be easy to let that extra time to be consumed by work rather than personal interests as the office and your home are now one and the same. This increases the importance of creating healthy work-life habits, for example by scheduling time for exercise (as it can be easy to walk to your home office and not stand up for several hours). In addition, while working from home can allow for flexibility in work hours (allowing you to handle family or other responsibilities during ‘normal’ work hours), setting boundaries for when you will work (e.g., no work after 9pm) can help prevent it from eating into your leisure time or sleep.

Ultimately, the key point is that like any routine, checking in on your work from home habits can ensure that you are making the most of your time…in a sustainable manner!

---

We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in a future column!

In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "Wealth Management Today" blog, as well as Gavin Spitzner's "Wealth Management Weekly" blog.