The Best Of Weekend Reading 2023: Top 25 Articles You Might Have Missed

Retirement Planning

Here's What Retirement Looks Like In America In 6 Charts

(Veronica Dagher, Anne Tergesen, and Rosie Ettenheim | The Wall Street Journal)

Helping clients plan for successful retirements is at the core of many financial advisors' value propositions. And while advisors typically focus on the details of each client's case, it can also be helpful to step back and consider the broader picture of what retirement looks like today for Americans overall.

First, the number of retirees (and potential planning clients?) is expected to increase in the coming years, moving from just over 15% of the American population today to more than 20% by 2030. In terms of net worth, those between ages 65 and 74 have larger median wealth ($266,400) than other age brackets (notably, the mean net worth of this age bracket is $1.2 million, driven higher by a number of retirees with significant wealth). In addition to tapping assets, Social Security remains an important part of the retirement income equation as well (with these benefits comprising 90% or more of retirement income for 12% of men and 15% of women); the average benefit currently stands at about $1,825/month. In terms of expenses, healthcare costs are often top of mind for retirees; according to the Bureau of Labor Statistics (BLS), households headed by people aged 65 or older spend an average of $7,030/year on healthcare, broken down into an average of $4,974 in health insurance costs, $1,077 for medical services, $726 for prescription drugs, and $253 for medical supplies.

Perhaps most interestingly, BLS's American Time Use Survey provides a glimpse into how the average retiree spends their day. According to this data, retirees spend the most time sleeping (about 9 hours), followed by relaxing and leisure (about 6 hours and 15 minutes), watching television (4 hours and 30 minutes), with other activities (e.g., working, reading, cleaning) taking up significantly less time.

Ultimately, the key point is that while these figures are broad averages, advisors can play an important role in helping their clients in each of these areas, from optimizing their Social Security benefits to analyzing their retirement health care coverage options to thoughtfully creating their ideal lifestyle in retirement!

Which Social Security Claiming Strategy Generates The Highest Legacy Value?

(Wade Pfau and Steve Parrish | Journal Of Financial Planning)

The decision of when to claim Social Security benefits is one of the key choices for individuals as they approach and enter retirement. While there are significant benefits to delaying Social Security (e.g., monthly benefits will be 77% larger in inflation-adjusted terms for those who claim at 70 instead of 62), many individuals decide to claim earlier for a variety of reasons (e.g., because they need the income to support their lifestyle or based on a belief that claiming early and investing their benefits is a superior strategy to waiting to claim until their Full Retirement Age or later). 

Using historical return data, Pfau and Parrish explore whether claiming benefits at age 62 leads to greater wealth at death compared to delaying Social Security benefits until age 67 or 70. Using selected assumptions (e.g., an individual's life expectancy, current wealth, and spending needs), the researchers found that delaying Social Security typically led to higher amounts of wealth at death than claiming it at age 62, refuting the idea that it's a good idea to start Social Security benefits early just to keep more dollars invested in the market. The percentage of cases where the legacy amount is greater when claiming at 67 or 70 compared to 62 ranged from about 60% to almost 97% depending on the assumed allocation to stocks (the early claiming strategy tended to fare better when higher stock allocations, and when stock market returns were strong in the years between when the individual turned 62 and 70). 

Ultimately, the key point is that the 'guaranteed' return provided by delaying Social Security is actually a compelling benefit for those who have the means to delay claiming – effectively competing with the returns of (all but the most aggressive) investment portfolios. And as Pfau and Parrish's data show, waiting to claim benefits can not only decrease the risk that an individual will run out of money during their lifetime, but also increase the likelihood that they will be able to leave more assets to their heirs!

The Problems With Monte Carlo Are In Your Mind

(David Blanchett | Advisor Perspectives)

Monte Carlo projections have become a common way for financial advisors to demonstrate the uncertainty associated with planning projections and accomplishing financial goals and represent a significant improvement over straight-line projections that (unrealistically) assume a constant investment return across a single 'trial'. Nonetheless, advisors (and clients) sometimes are frustrated with the presumed limitations of Monte Carlo analysis in providing a more nuanced view of a client's situation.

However, Blanchett argues that many of the complaints about Monte Carlo simulations are not with the concept in general, but with the software tools available to financial advisors that incorporate Monte Carlo functionality. For instance, the output of many Monte Carlo tools is a probability of success expressed as a percentage (often to multiple decimal places). But, because individuals do not experience binary outcomes (i.e., pass or fail), being able to understand the magnitude of failure can provide more insight into the efficacy of a given strategy. For instance, a client with a 0% probability of success who could cover 95% of their spending needs through guaranteed income sources (e.g., Social Security benefits or an annuity) if their portfolio went to $0 might be better off than a client with a 90% success rate who would only be able to meet 15% of their spending needs if their portfolio were depleted. 

Blanchett suggests that advisors could move away from precise success levels (e.g., 85.23%) to more general guidance on the likelihood of achieving a certain goal (e.g., off-track versus on-track) as a way of communicating the results of Monte Carlo analysis more effectively in these situations. An alternative approach is to focus on outcome percentiles instead of success rates (e.g., tell the client what their expected income would be in the bottom quintile of trials and ask how that makes them feel). Other options for using Monte Carlo analysis include reducing the target success rate (which can allow for increased income early in retirement while leaving the door open for spending adjustments later on) or factoring a spending cut into retirement (i.e., incorporating the "spending smile", Blanchett's finding that spending tends to decline in real terms during retirement) to better track real-world spending patterns.

In the end, Monte Carlo analysis is a flexible tool that advisors can use to model uncertain futures. And whether advisors are using more basic Monte Carlo software tools or those that allow for more advanced calculations, it's not just the results of the analysis that add value, but also how they are communicated to the client to give them a better idea of their planning options and the chances they will achieve their financial goals!

Investment Planning

Stocks Beat Cash Even If You Could Time A Recession

(Nir Kaissar | Bloomberg)

Throughout 2023, pundits debated whether the U.S. economy was headed for a recession (though it can sometimes seem like a perennial conversation topic). Predictions of a coming recession might lead some advisory clients (and perhaps a few advisors) to consider moving out of riskier investments like stocks and into cash to ride out the storm. But stock market performance leading up to and during previous recessions suggests that 'recession timing' might not actually be profitable.

According to the National Bureau of Economic Research, there have been 30 recessions since 1871 (the longest period for which performance data is available for the S&P 500 Index and its predecessor compilation of U.S. stocks). In the 6 months leading up to each of these recessions, stocks produced a positive total return 21 times, suggesting that trying to 'get ahead' of the recession might not necessarily be an effective strategy. And even if an investor could time the beginning and end of a recession exactly, an investor still might not beat the market, as stocks produced a positive total return during 12 recessions. Overall, during the periods beginning 6 months before and ending 6 months after each historical recession, the market produced a positive total return 22 times, with a median total return of 16%, a formidable benchmark to beat (and this assumes that an individual could predict accurately when a recession will begin and has ended, and be willing to take their cash off of the sidelines!).

In the end, a potential recession is a legitimately scary prospect for clients, given its potential impact on markets and the broader economy. At the same time, this provides advisors with an opportunity to help put a potential recession into perspective for nervous clients, whether it is by showing how stocks have performed in previous cycles or by helping them remember how they (and their portfolio) made it through previous recessions!

Bad Timing Cost Fund Investors 17% In Gains The Past Decade, Morningstar Says

(Tracey Longo | Financial Advisor)

The ever-rising increase in the amount of available financial 'news' and commentary with the accessibility of smartphones, as well as a dramatic reduction in the cost of trading in and out of mutual funds and ETFs, can increase the temptation to time the market and trade in and out of investments. Which, in turn, can exacerbate the so-called "behavior gap", where investors tend to underperform the returns of the underlying funds they invest in (because they often buy after the fund has risen in value and sell when it falls).

The latest edition of Morningstar's annual "Mind the Gap" report shows that this trend is still prevalent, with the average dollar invested in mutual funds and ETFs earning a 6% return during the 10 years ending in December 2022, compared to a 7.7% return for the average fund, an annual "behavior gap" of 1.7%. Looking at different fund types, the report found the largest gaps in more volatile funds, with these funds seeing a 1-percentage-point increase in the gap compared to less-volatile funds, as well as in sector funds. Fund categories where investors tended to fare better included large-cap growth and large-cap blend funds (which ranged from a slight gain of 0.10% to a gap of just –0.59%), as well as in broader-based asset allocation funds (i.e., those that invest in multiple asset classes, including stocks, bonds, and cash).

Altogether, these results show that even though consumers may be doing better in sticking with their 'core' holdings (e.g., asset-allocation funds and broad-based large-cap funds), they may still succumb to the behavior gap (and temptation to trade), especially when it comes to more volatile investments in particular. Which means advisors can add particular value to clients by helping them stick with the most volatile elements of their diversified portfolio (and the Morningstar study suggests that closing the behavior gap could make up for an advisor's fee on its own). Nonetheless, because prospective clients don't tend to look for an advisor who promises to 'handhold you through the emotions' of market swings (as they might be in denial and believe it's not a problem for them), framing this value in a gentler way (e.g., by connecting their portfolio design with their goals) could help advisors demonstrate their benefits without making clients feel judged!

Cash Flow Planning

The True Cost Of Owning A Second Home

(Kristin McKenna | Darrow Wealth Management)

For many individuals, owning a vacation home is an enticing proposition. Some might be attracted by the potential financial benefits of doing so (e.g., earning income from renting it out or not having to pay for hotels or a rental home on vacation), while others might be interested because of emotional reasons (e.g., having a place for the whole family to meet up, even after the kids move out of the house). Nonetheless, it is important for potential homebuyers (and their advisors) to consider the costs associated with a second home as well.

The largest cost involved in buying a vacation home is generally the purchase price of the home itself, which comes with the opportunity cost of not being able to invest those funds (or spend them on something else). Moreover, obtaining a mortgage comes with an interest cost (which could be burdensome considering today's elevated rates). Prospective buyers must also factor in property tax and insurance costs (the latter of which could be particularly expensive if the home is in an area prone to natural disasters). The costs of furnishing the home – from appliances to furniture – and ongoing maintenance costs are additional financial considerations. In addition to monetary expenses, owning a second home generates time costs as well, such as the time needed to find appropriate service professionals to maintain the vacation home (or the time to take care of it themselves). This can be tricky to handle if the property is far away from the owner's primary home, although hiring a property management service is an alternative solution that would incur additional costs.

Ultimately, the key point is that while purchasing a vacation home might be a goal for many financial planning clients, they might not realize the full scope of costs involved in doing so. Which means that advisors can add significant value by helping clients plan well in advance for the purchase and by helping them understand how doing so would affect their other financial goals and the projected success of their overall financial plan!

What Does "Upper-Middle Class" Actually Mean?

(Jack Raines | Young Money)

When you think of what it means to be "middle class", you might think of someone with a moderate income, a comfortable home, and perhaps some savings put away for the future. This stands in contrast to someone in the "upper class", who might have income well into 6 figures, a large home, and significant accumulated assets. But between these 2 groups sits the "upper-middle class", which has become a more common category in the American lexicon (and likely includes many financial advisors and their clients), but the definition of this group is somewhat unclear.

The Pew Research Center defines the middle class as individuals earning between 2/3 and twice the median household income, which was $70,784 in 2021 ($46,000 for single-person households). From this, Raines draws the line of upper-middle class as those earning between 1.5–2.5X the median income. This (somewhat arbitrary) measurement suggests that a household would qualify as upper-middle class if it earns between $106,176 and $176,960 (or between $69,000 and $115,000 for a single-income household). Of course, because the cost of living varies across cities, it can help to look further into the data by locality, which can be determined using a calculator provided by the website DQYDJ. For instance, with a median household income of $113,440 in 2022, the income range for upper-middle class households in San Francisco is $170,160 to $283,600, significantly higher than the 2021 national median.

At the same time, even if an individual has income above what might qualify as upper-middle class, they still might not feel 'rich', perhaps because they are comparing their income to that of their friends and colleagues rather than the population at large (e.g., it's easy to think you're in the middle class if you earn well over the median income making $200,000 and everyone around you does as well!). This effect can show up for many financial planning clients, who might have high incomes or significant wealth when compared to the broader population but might be worried about their financial situation compared to their contemporaries (or the advisor's other clients!). Which can provide advisors an opportunity for advisors to help their clients refocus on whether they remain on track to meet their own financial goals and, more broadly, consider whether they are truly living the life they want to live (regardless of how they label themselves!).

Married Couples Who Merge Finances May Be Happier, Stay Together Longer

(Science Daily)

When a couple is about to get married, there are many decisions to make, from deciding where to live to choosing a destination for their honeymoon. Another decision that isn't as much fun – but that could be consequential to the relationship – is how to manage finances as a married couple. This includes the choice of using separate bank accounts, combining their accounts into joint accounts, or maintaining both separate and joint accounts.

Previous research into this question often used survey data to determine whether the types of accounts a couple used were correlated with their happiness in the marriage. And while these studies typically found that those with joint accounts were, on average, happier than those who kept their bank accounts separate, it's possible that couples who were more trusting of each other (which could lead to a happier relationship) chose to have joint bank accounts, rather than the use of joint bank accounts itself leading to greater happiness.

With this in mind, a group of researchers from Indiana University sought to test whether there is a causal (and not just correlational) relationship between couples who merge their finances and happiness in the relationship. To do so, the researchers recruited 230 couples who were either engaged or newly married (all were first marriages) and had not yet combined their finances and divided them into 3 groups: 1 group was told to keep separate accounts, 1 was told to open a joint account, and the final group was allowed to make the decision on their own. The researchers then surveyed the couples several times over the next 2 years and found that couples who were told to open joint bank accounts reported substantially higher relationship quality than the individuals in the other 2 groups. Given that the couples were assigned randomly to the 3 groups, this result suggests a causal relationship between having a joint account and happiness in the marriage (perhaps because having a joint account forced the partners to communicate more about income and expenses, or possibly because getting a more intimate view of their partners' financial activities built more trust).

In the end, the decision of whether to combine finances is both functional (e.g., whether to pay bills out of a joint account or separate accounts) and emotional (e.g., while some individuals might see having a joint account as a sign of trust, others might want to maintain a separate account to feel more independent). But this study suggests that many newly married couples who do decide to use a joint account could be making a deposit toward the overall happiness of their relationship!

$50 Or $500? When Do We Tell Our Partner What We've Spent?

(Julia Carpenter | The Wall Street Journal)

Going from being an individual with complete control of one's finances to being part of a couple can be challenging, particularly if the partners decide to, at least partially, combine their finances. One potential area of discord is each partner's spending on personal, or 'fun', purchases. Because while a more spendthrift partner might see nothing wrong with spending $250 on new hiking gear or the latest electronic gadget, a more budget-conscious partner might balk at such an expense.

One way that many couples get around this issue is to set a 'cap' on how much each person can spend on a given purchase with 'no questions asked' (i.e., not being required to let the other partner know about the purchase). This cap could vary based on the couple's income and savings priorities. For instance, a couple focusing on saving for a home down payment might agree on a spending cap of $50 for individual purchases, while a retired couple with plenty of assets might set their limit at $500. This approach allows each partner to make purchases below the cap guilt-free, confident that the other individual's spending won't put their shared financial goals in jeopardy.

Ultimately, the key point is that setting a 'cap' on how much each member of a couple can spend without having to notify the other can free both partners up to a certain level without feeling judged. And financial advisors can support couples not only in facilitating a discussion regarding what the cap might be for their given financial situation, but also, once it is enacted, in monitoring whether they remain on pace to meet their spending goals (as purchases below the cap could add up over time, particularly if the cap is high!).

Tax Planning

How You Can Grab A 0% (Capital Gains) Tax Rate

(Laura Saunders | The Wall Street Journal)

In the United States, different types of income are taxed at different rates. For example, the tax brackets for ordinary income are different than the rates paid on long-term capital gains and qualified dividends, with these latter sources of income getting preferential treatment. In fact, while the lowest tax bracket on ordinary income is 10%, long-term capital gains and qualified dividends can be taxed at a 0% rate, depending on a taxpayer's circumstances! Nonetheless, given other tax strategies available, financial advisors can help their clients determine whether taking advantage of this 0% bracket is the best course of action given their particular circumstances.

Currently, the 0% long-term capital gains tax rate is available to taxpayers with taxable income up to the upper thresholds of the 12% ordinary-income tax bracket, which is currently $44,625 for single filers and $89,250 for married filers filing jointly. Which means, for example, a couple with $50,000 of other taxable income in 2023 could realize up to $89,250 – $50,000 = $39,250 in long-term capital gains without having to pay any (Federal income) tax on those capital gains proceeds! Which not only allows for the opportunity to sell appreciated investments' tax free' for retirement withdrawal purposes, but – if the funds aren't needed for spending – the investor could also just buy back the investments that were sold and get a 'free' step-up in basis (a tactic known as capital gains harvesting). Notably, doing so won't violate wash sale rules, as these rules only apply to buying back investments sold at a loss (and not buying it back after being sold for a gain… even if that gain was harvested because it was 'tax-free' at 0% rates!).

Given the potential benefits of the 0% long-term capital gains tax rate, though, it is important to recognize how this income interacts with other sources of income and tax strategies an advisor might implement. When it comes to the 'stacking' of income, ordinary income comes first, and long-term capital gains (and qualified dividends) come second and stack on top (any available deductions are applied against ordinary income first). This means that if taxable ordinary income reaches $44,625 (for single filers in 2023), there is no more 'room' in the 0% long-term capital gains bracket, and any further gains will be taxed at the 15% long-term capital gains rate (until they reach the 20% long-term gain bracket threshold); in turn, it also means that if there is only $10,000 of 'room' left (e.g., taxable income was previously $34,625) and the investor has a larger $25,000 long-term capital gain, the first $10,000 that falls under the threshold gets the 0% rate, but any additional capital gains that land above the threshold are still taxed at 15%. 

Notably, because ordinary income not only includes earned income but also the proceeds of Roth conversions, Required Minimum Distributions (RMDs), and other income sources, a key task for advisors is to consider these additional sources of income when determining how much 'room' might be left in the 0% bracket and whether they want to recommend certain ordinary income-generating strategies (e.g., Roth conversions) instead.

Ultimately, the key point is that the 0% long-term capital gains tax rate can be a valuable tool for clients in a variety of situations, from retirees who have not yet reached their beginning date for RMDs to working-age individuals who have an unusually low-income year due to a layoff or other circumstance. And it's not just about getting the tax benefit as investments are sold for rebalancing or portfolio changes or for retirement spending purposes…it can also be a proactive capital gains harvesting strategy to get an ongoing step-up in basis for clients any year they're in one of the bottom 2 tax brackets. Though advisors still have to weigh whether other tax-saving strategies (e.g., partial Roth conversions) might be more important given the client's individual situation!

Don't Worry Too Much About IRMAA

(James Dahle | The White Coat Investor)

While some of the benefits for clients of working with a financial advisor are qualitative (e.g., the peace of mind knowing that they are on a sustainable financial path), retirement income planning (particularly as it relates to taxes) can be a way for financial advisors to show how they are saving their clients hard dollars on an annual basis. And when it comes to retired clients who are on Medicare, one area where advisors can potentially help their clients save money is on the Income-Related Monthly Adjustment Amount (IRMAA), a surcharge on Medicare Part B and Part D premiums for individuals whose income exceeds certain levels.

But Dahle suggests that while IRMAA surcharges might be a nuisance, those who are subject to them might not want to spend too much time worrying about the surcharges because they represent a relatively small percentage of an individual's or couple's income. For instance, married clients who have reached the first IRMAA tier (greater than $194,000 of Modified Adjusted Gross Income [MAGI] for those who file joint tax returns) would have to pay a total of $1,874.40 in IRMAA surcharges per year, representing less than 1% of their AGI (which notably excludes non-taxable sources of income such as qualified Roth distributions). Similarly, those in the highest tier of IRMAA surcharges (single filers with income of at least $500,000 or joint filers with income of at least $750,000) would only pay 1% to 2% of their AGI each year (e.g., married couples in this tier would pay a combined $11,328 in surcharges per year).

That being said, there are areas where an advisor could add value to their clients by paying attention to IRMAA thresholds. For instance, an advisor recommending that their client engage in Roth conversions or capital gains harvesting could weigh the benefits of these strategies against the costs of moving into a (higher) IRMAA tier, especially if they're very close to a threshold (as each of the 4 surcharge tiers are 'cliff' thresholds, meaning that even $1 of income past the threshold results in the entire [higher] surcharge amount being applied). Another potential way for advisors to add value is to recognize when clients have a specific "life-changing event" that leads to a reduction of income (e.g., retirement or death of a spouse). Because while IRMAA surcharges are typically calculated based on 'prior-prior' year income (e.g., charges paid in 2023 are based on the client's AGI in 2021), individuals can apply (typically by using Form SSA-44) to have their IRMAA surcharges reduced to reflect substantial changes in income if one or more listed "life-changing events" occurred since the prior-prior year.

Ultimately, the key point is that relative to the income levels it takes to hit IRMAA thresholds in the first place, IRMAA is really just the equivalent of a modest income surtax. Nonetheless, there are potential opportunities for advisors to add value by helping clients in certain scenarios (e.g., if they are very close to the next surcharge tier threshold or experience a "life-changing event" that leads to a reduction of income) to reduce (or eliminate) the Medicare surcharges they are required to pay!

9 Ways To Help Clients Reduce Taxes On Social Security

(Roger Wohlner | ThinkAdvisor)

After contributing to the Social Security system by paying payroll taxes over the course of their careers, some retirees are surprised to find that a portion of the benefits they receive can be subject to taxes. And with taxation of benefits starting once provisional income reaches $25,000 for single filers and $32,000 for those filing jointly, even retirees with moderate income can end up paying taxes on their benefits. At the same time, there are several strategies that financial advisors and their clients can consider to reduce this tax burden.

One way for an advisor to reduce a retiree's income is to minimize the impact of Required Minimum Distributions (RMDs). This can be done in several ways, from engaging in strategic (partial) Roth conversions (which can reduce the size of tax-deferred accounts that will be subject to RMDs) to making Qualified Charitable Distributions (QCDs) (which can satisfy some or all of a client's RMD requirements) or purchasing a Qualified Longevity Annuity Contract (QLAC) (as the money used for the contract premium is excluded from their RMDs until they commence receiving the annuity payments, though this can come with a cost). Separately, clients who do not use itemized deductions annually (because they add up to less than the standard deduction) could potentially benefit from bunching charitable contributions or medical expenses (if possible) in order to exceed the standard deduction in certain years. Advisors could also consider engaging in tax-loss harvesting in client accounts to reduce the amount of income associated with taxable investments.

In the end, minimizing the taxation of Social Security benefits is not the only reason to try to reduce a client's taxable income, as doing so can help them remain in a lower tax bracket or, for those on Medicare, avoid or minimize Income-Related Monthly Adjustment Amount (IRMAA) surcharges. At the same time, advisors can add value by assessing tax-reduction strategies within the scope of each client's financial plan, as those that apply to one client (e.g., QCDs for a client who is charitably inclined) might not be appropriate for others!

Insurance Planning

A 10- Point Medicare Primer

(Tony Isola | A Teachable Moment)

Given that healthcare costs are a major concern for many retired clients, financial advisors who help clients make Medicare coverage decisions not only provide them with greater peace of mind, but also potentially save them significant money by choosing the most appropriate coverage for their needs. In addition, helping clients understand the basics of Medicare can make them feel more confident in their decisions.

Medicare is composed of 4 parts: Part A covers hospital costs, Part B covers outpatient visits and related services, Part C (also known as Medicare Advantage) is an optional private plan that provides both Part A and Part B benefits, and Part D is an optional prescription drug plan. Seniors can also choose to use a Medigap plan, which covers costs not included in Parts A and B (with a range of coverage levels available). Advisors can support their clients both in their initial Medicare election (made in the months leading up to their 65th birthday) and in navigating the annual open enrollment period (which runs from October 15 through December 7 and allows participants to make changes to their coverage).

Advisors can also help explain to clients the Medicare coverage costs (and potential healthcare costs, depending on the plans chosen) they will face. For instance, the premiums for Part B vary by income (due to Income-Related Monthly Adjustment Amount [IRMAA] surcharges), from $174.70 in 2024 (for those with Modified Adjusted Gross Income [MAGI] less than or equal to $103,000 for individual filers and less than or equal to $206,000 for joint filers) to $594.00 (for individual filers with MAGI of at least $500,000 and joint filers with MAGI of at least $750,000). Notably, advisors can also help clients manage their income to minimize the IRMAA surcharges to be paid (with those whose incomes are already near the thresholds most likely to benefit).

In the end, because Medicare is quite complicated, advisors can add significant value for their clients by helping them make appropriate coverage choices both initially and during the annual open enrollment periods. Which not only can save clients money, but also ensures they have the appropriate coverage for their healthcare needs!

The Healthcare Plan Most People Should Buy – And Why They Don't

(Amitabh Chandra | The Wall Street Journal)

Each year, employees have the opportunity to adjust their elections for a wide range of employer-sponsored benefits, from health insurance to disability coverage. Although this is an opportunity for employees to assess their current coverage and decide whether a different plan might be appropriate, the number of different benefits offered – and the choices within each benefit category – can be overwhelming, leading some to default to their plans from the previous year, which might not always be the best option.

Chandra suggests that for most employees (perhaps excluding those with expensive chronic conditions or major planned procedures), a High Deductible Health Plan (HDHP) could be the optimal decision. In return for having a higher deductible than other plans (which could lead to higher out-of-pocket expenses for the insured), these plans typically come with lower premiums. In addition, being enrolled in an HDHP gives an individual the opportunity to make contributions to a Health Savings Account (HSA) and the "triple-tax advantage" (i.e., tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses) it offers that makes it one of the top options among tax-preferenced savings vehicles. In some cases, the combination of lower premiums and employer contributions to employee HSAs could make up for most of the difference in the deductibles between an HDHP option and a standard plan (without even considering the potential benefits of the employee's own HSA contributions).

Altogether, the challenge of comparing different healthcare plans presents an opportunity for financial advisors to support clients during the annual open enrollment period by helping them review their plan options (e.g., which plans are taken by their preferred medical providers) and financial circumstances (e.g., their ability to meet certain deductibles or the potential tax benefits from HSA contributions) to choose the best option for them, whether it is an HDHP or otherwise. Which not only could save clients hundreds or thousands of dollars, but also represents a way for advisors to demonstrate their ongoing value! 

Are IUL Insurance Policies Good Retirement Income Tools?

(Andy Panko | Rethinking65)

Indexed Universal Life (IUL) insurance policies have been hot products for life insurance companies, growing from 4% of life insurance sales (as measured by new annualized premiums) in 2008 to 28% of sales by the third quarter of 2022 (though the pace of sales slowed in the third quarter amid weak stock market returns and inflationary pressures on consumers' ability to pay policy premiums). These policies are often marketed as a way for policyholders to earn higher returns than previous universal life policies (where the crediting rates were pegged to bond rates) by providing a participation mechanism that delivers a portion of the upside price return of the stock market while simultaneously protecting against losses (though upside gains are often capped as well).

In addition to offering potentially higher returns than other permanent insurance policies, IUL policies can also be structured and funded to provide income in retirement. This can be accomplished by contributing as much premium as possible, as early as possible, without triggering Modified Endowment Contract (MEC) rules, letting the cash value sit and grow over the years, and eventually taking out loans against the policy to cover living expenses (while incorporating certain features to protect the policy from lapsing).

But for an advisor who has not previously worked in insurance sales, these policies can be confusing, particularly because they are sometimes marketed in ways that obscure the fact that they are insurance policies (e.g., as 'tax-free retirement accounts' or 'private reserve accounts') and are subject to possible changes over the life of the policy (e.g., to the levels of interest that will be paid). But when Panko, the owner of RIA Tenon Financial, questioned how these policies work and whether they can live up to some of the marketing messages (e.g., one salesperson referred to them as "can't-lose-money assets"), he was often rebuffed by insurance salespeople.

So Panko has now taken matters into his own hands, purchasing an IUL policy for himself to see how it performs in real-time. Further, to help advisors and consumers better understand the policies, he has started a website that includes his policy documents and where he will track its terms and performance. Which could ultimately support advisors with clients who own IUL or other permanent life insurance policies by helping them decide whether to hold or cancel their policies, or, if they have sizable loans, whether to 'rescue' them!

Practice Management

10 Harsh Lessons From 10 Years Of Entrepreneurship

(Darius Foroux)

Many entrepreneurially minded financial advisors dream of one day starting their own planning firm. While they might be enticed by the prospect of setting their own schedule, working with their ideal clients, and the ability to own their business, starting any company brings inevitable challenges as well. Based on his personal entrepreneurial journey, Foroux lists a series of 'harsh' lessons he learned that could be applied to any business, including financial advice.

Foroux starts with a discussion of the difficulties entrepreneurs face in their first few years of business, from the time that it takes to build up a strong client base to the lack of revenue generated early on. He also highlights that while business owners might not have to physically work all day, their business is likely to be on their mind even when they are off the clock (though he suggests that while this can be mentally taxing, it can also help the business owner be prepared for contingencies that arise). Given these challenges, he notes the importance of having the support of a spouse or other family members who can provide a psychological boost during tough times.

In addition, Foroux suggests that the discipline of the owner (in the form of doing what they say, showing up on time, executing goals, and being consistent) is a key factor in the success of a business and that a lack of discipline is often the source of a business's failure. Relatedly, he notes that while it can be easy for entrepreneurs to be tempted by the latest 'shiny object' (e.g., upgrades to the office or a flashy new logo), it is important to first consider whether the expense will help the business generate more revenue and potentially avoid those that will not do so.

In the end, Foroux concludes that while the entrepreneurial journey may be challenging along the way, those who succeed tend not to want to go back to life as an employee. Similarly, while financial advisors might encounter challenges (as well as thrills) in the early months and years of firm ownership, those who are able to overcome these hurdles remain disciplined and, by leveraging a support network, can achieve a feeling of entrepreneurial success that is hard to match!

Too Much Work

(Morgan Ranstrom| The Value Of Advice)

While Kitces Research has found that, on the whole, financial advisors score better than those in other professions across several dimensions of wellbeing, serving clients can take up a significant amount of an advisor's time. This includes both the actual time spent in the office as well as the time thinking about client issues (i.e., the 'mental load' of thinking about client issues outside of regular work hours). And given separate research showing that experiencing 'time poverty' (i.e., not having enough time to do everything an individual wants to get done) can lead to reduced happiness (and can claw back the happiness gains that come from having a higher income), managing one's workload appears to be an important part of an advisor's wellbeing.

For Ranstrom, the key to creating a manageable workload is to focus on what 'matters' to his clients (where the most important thing was to assure clients that they would be okay financially – and to ensure that they were set up for good outcomes) and to cut out work that mattered less (e.g., general market commentary, being accessible at all times). To address his workload, Ranstrom shortened the duration of his prospect meetings (from 30-minute phone calls and 60-minute meetings to single 20-minute phone calls), reduced the length of his first-year onboarding program (from 5–8 meetings to 3 meetings), and shrank the number of meetings with ongoing clients from 4 to 2 per year. In addition, he was able to reduce his workload and gain efficiency by transitioning from a generalist firm (with 3 to 4 core client types) to a niched firm working solely with prospective retirees (and began targeting 50 clients per advisor in part to manage their workload).

Ultimately, the key point is that for advisory firm owners, managing workload is an important part of preventing burnout and wellbeing. And they have several potential options to do so, from shrinking the number of meetings to reducing client variability!

Dear Advisors: Stop Building To Sell

(Morgan Ranstrom | The Value Of Advice)

Many owners of growing financial advisory firms (often those that reach $100 million to $300 million of assets under management) end up becoming 'accidental business owners', who spend much of their time managing their business (e.g., teaching and training employees) rather than working directly with their clients (which is why they might have become a financial advisor in the first place). Some firm owners in this position might lean into their role as business owners, spending most of their time managing and scaling the business rather than on client work. Others might decide to sell their firm, cashing out what might be their most valuable asset and perhaps returning to a client-facing role as an employee of the acquirer (though some of these advisors might find that the combined income from their salary and a reasonable withdrawal rate from the proceeds of the sale don't match what they were earning as a firm owner).

Another option for these 'accidental business owners' is to reduce the size of their client base, which has the potential to result in significant time savings without necessarily putting a major dent in their income. For instance, an advisor with 100 clients might look at their client roster, find the 20 who are their least favorite and/or bring in the least revenue (there might be overlap between the 2 groups), and offer to refer them to another advisory firm. In this way, the advisor might be able to reduce their workload by 20% while their revenue is reduced by a (potentially much) smaller amount. Further, the advisor might find that as they shrink their client base, they no longer need as much staff support. As the number of staff members is reduced (either by natural attrition or by helping them find a new role at another firm), the firm owner might find themselves not only with more time (as they no longer have to take the time to train and manage the employee) but also with fewer costs (due to no longer paying a salary and benefits).

In the end, 'right-sizing' a firm's client base could allow an advisory firm owner to spend more time working with clients (rather than managing others) and create free time for themselves (potentially allowing them to reduce their work hours) without a dramatic reduction in earnings. Which could ultimately create a more sustainable – and enjoyable – lifestyle for the owner while still bringing in a solid income!

Marketing

10 Ways Financial Advisors Can Use ChatGPT

(Justine Young | Advisorpedia)

Among the many Artificial Intelligence (AI) advances that have been rolled out in the past couple of years, OpenAI's text-based conversational interaction tool ChatGPT has become one of the most talked about tools. ChatGPT is a language model that can generate human-like text based on a prompt and can complete tasks ranging from composing emails to summarizing and proofreading large blocks of text. And there are several ways in which advisors can use this (currently free) tool to support their marketing efforts.

One potential use of ChatGPT is to help advisors brainstorm blog or podcast topics. For example, a firm could describe its ideal target client and prompt ChatGPT to generate a list of issues that could be discussed on an upcoming podcast episode. Advisors creating blogs can even ask ChatGPT to proofread the entire post and can highlight specific areas for ChatGPT to focus on (e.g., ensuring the text conforms with AP style handbook guidelines). And on the opposite end of the spectrum, when consuming content, ChatGPT can save advisors time by summarizing certain articles or books (perhaps leaving the advisor with enough time to consume the content on their favorite websites in full; wink wink!).

Given that many financial advisors are not necessarily marketing specialists themselves, ChatGPT can play a valuable role in drafting social media posts or advertising copy based on a topic or article provided by an advisor. While advisors will likely want to adjust any text to match their desired tone and flow, ChatGPT can speed up the process. And at a meta level, ChatGPT can be used to brainstorm marketing ideas given the firm's goals and target client!

Ultimately, the key point is that while a firm might not be able to outsource its marketing program to ChatGPT, the tool can help generate ideas, suggest text, and proofread content to help advisors market more efficiently!

Mastering The Art Of Attracting Affluent Clients

(John Bowen | Financial Advisor)

For some advisors, working with high-net-worth clients is an attractive proposition, whether because of a desire to work on the planning issues that wealthier clients face or the opportunity to earn greater revenue per client. At the same time, attracting wealthier clients can be challenging, as the pool of prospective clients tends to grow shallower as an advisor moves up the wealth ladder and also because many of these individuals are already working with a financial advisor.

Nevertheless, Bowen believes that the level of uncertainty permeating society today (in the economy and otherwise) presents an opportunity for advisors to seek out wealthier clients. One strategy is to leverage referrals from both clients and Centers Of Influence (COIs), such as accountants and estate attorneys. While these are already popular sources of prospective clients for many advisors (e.g., research from CEG Insights found that 75.5% of advisors get the bulk of their new clients from client referrals and that 70.8% of advisors said their best clients came from a COI introduction), asking these individuals for referrals in an unstructured way might not be particularly effective.

Instead, Bowen suggests that advisors could potentially receive more referrals and convert more of these prospects into clients by offering a "second-opinion service". With this tactic, an advisor can offer to provide friends and family of current clients (or the clients of a COI partner) a free analysis of where the prospect's financial situation is now, where they want to be in the future, and the best ways the advisor sees to close that gap. Doing so provides an incentive for clients and COIs to make a referral (as the recipient will receive free, helpful advice) and could encourage more prospects to sign on with the advisor (if the advisor is able to show the prospect could be on a better path compared to working on their own or with their current advisor).

Ultimately, the key point is that while winning high-net-worth clients can be challenging, advisors who are able to demonstrate their expertise and offer a differentiated value proposition are more likely to find success. And by offering a free 'second-opinion meeting', advisors can potentially increase the flow of prospective clients referred by current clients and COIs!

5 Pages Every Advisor Website Must Have

(Susan Theder | Financial Advisor)

Financial advisory firm websites can serve a variety of purposes, from introducing a visitor to the advisor(s) and their team to demonstrating the firm's unique value proposition and explaining its fees. While these websites may offer a variety of features, ensuring that 5 of the 'basic' key pages are well-constructed can make the site more effective in attracting prospects and encouraging them to engage further with the firm.

The home page gives site visitors a first impression of the firm and can guide the visitor to take action. Theder suggests that within 5 seconds (and without scrolling or clicking), a visitor should be able to know who the firm serves, the problems it solves, and what they can do to take the next step through a "call-to-action". Doing so can ensure that the site resonates with the firm's ideal client and gives them a clear way to get in touch with the firm.

Once visitors decide the firm might be a good fit for them, they can explore the firm's "About Us" page. Rather than providing a generic resume on this page, advisors can opt for a more engaging approach by crafting a first-person narrative that explains how they got into the business and why they love their work. This page can also introduce the rest of the team, highlighting their qualifications, unique attributes, personal interests, and individual personalities.

Next, advisors can frame their "Services" page in terms of the challenges their target clients are facing and how the firm can solve them (rather than just a laundry list of the services the firm provides) to stand out from other websites. In addition, including information about the firm's pricing structure for planning services promotes transparency and filters out potentially unsuitable clients.

Firms can also include a blog on their website, which gives them the opportunity to share unique content and demonstrate their expertise. The key is to be consistent and focus on topics (that might not necessarily be related to finances) of interest to the target audience (and to consider ways to repurpose this content for social media and other channels!). Finally, the firm's "Frequently Asked Questions" (FAQs) page provides firms with the opportunity to answer the most common questions a potential client might have (and can help boost search engine optimization by using keywords that align with the firm's services).

Ultimately, the key point is that by designing a website that demonstrates how the firm can meet the needs of its target clients in a clear way and gives them (potentially multiple) ways to keep the relationship going, firms can potentially attract and convert more qualified prospects!

Career Development

How To Be Resilient: 5 Steps To Success When Life Gets Hard

(Eric Barker | Barking Up The Wrong Tree)

Modern life can be stressful, whether it involves dealing with competing professional and personal priorities, or just digesting the latest news. One trait that not only helps us get through the week but also enables us to thrive is resilience. But resilience does not necessarily come naturally. Instead, research presented by Gabriella Rosen Kellerman and Martin Seligman in their book, Tomorrowmind: Thriving at Work with Resilience, Creativity, and Connection – Now and in an Uncertain Future, suggests that practicing a series of exercises can help develop this skill and increase the chances for us to handle whatever comes our way in the future.

The first key area to practice is emotional regulation, or the ability to handle the wide range of emotions felt during the day. This can be done in 2 steps: first, the next time a strong negative emotion arises, slow down and get some distance (preventing an individual from doing something they might regret later); second, reappraise and consider whether the current situation is objectively that bad and whether the feelings are useful. Then, once a person has built the ability to regulate their emotions, building a sense of optimism can help them see that their current predicament is only for now (one exercise to practice optimism is to imagine what their "Best Possible Self" would look like at some point in the future, which can help chart the path to get there).

After cultivating a sense of optimism, the next step is to practice cognitive agility, or the ability to consider many possibilities before focusing and acting on only one option (this can be particularly helpful for individuals who tend to 'catastrophize' or immediately jump to the worst-case scenario). Next, cultivating a sense of self-compassion can help a person forgive themselves when they inevitably make mistakes. This can be done by imagining how to respond if a friend or loved one were in the same position (as we often use kinder language with others than we do ourselves). 

Finally, resiliency can also be built by developing a sense of self-efficacy –the belief in one's ability to exercise control over their actions and the factors influencing their life. One approach involves acquiring "mastery experiences", where mastering one skill can boost confidence in handling other challenges that may arise.

Ultimately, the key point is that developing resilience, which is often the key to overcoming challenges individuals face, can take time and practice. But by focusing on 5 key areas – emotional regulation, optimism, cognitive agility, self-compassion, and self-efficacy – people can find themselves better able to handle whatever life throws at them!

Focus: The Last Superpower

(Frederik Gieschen | Neckar's Alchemy Of Money)

When we hear the word 'focus', the first thing that often comes to mind might be the ability to avoid distractions and dig into our day-to-day work, which is undoubtedly an important skill at a time where there are seemingly unlimited potential distractions in modern society (step away from that smartphone!). Nevertheless, while the ability to focus on the task at hand is a valuable tool, it's equally important to remain focused on the 'right' overarching goals.

Gieschen describes 2 distinct types of focus: "macro focus" and "micro focus". Macro focus refers to the ability to focus on what truly matters. Finding this macro focus is crucial because pursuing the 'wrong' overarching goal (e.g., a dissatisfying career) can undermine productivity, no matter how many distractions are removed from day-to-day life. Once an individual knows where they are headed, micro focus (i.e., the ability to stay on task) can be deployed to better follow through on the job at hand. 

For example, Warren Buffett identified investing as his macro focus and then structured his day for maximum micro focus by shutting out the outside world to minimize interruptions while he researched potential opportunities. 

Ultimately, the key point is that while the skill of avoiding distractions during work is valuable, it also helps to periodically take a step back to confirm that the task at hand is contributing to worthwhile goals in the first place. Which not only helps to enhance daily productivity but also ensures fulfillment by pursuing a meaningful craft!

You're Not Powerless In The Face Of Impostor Syndrome

(Keith Dorsey | Harvard Business Review)

Impostor syndrome – doubting one's skills and achievements or fearing being exposed as a fraud – can happen to anyone, but often is felt by high achievers from underrepresented backgrounds who might feel that they do not fit in, are not welcome, and do not belong in a certain position or title they have earned. Impostor syndrome can be crippling mentally and emotionally, as those who experience it regularly tend to worry about whether they deserve their role, distracting them from actually doing their best in the position. But Dorsey, who has worked with many individuals experiencing impostor syndrome in his role at an executive search firm, suggests that there are several ways to address and potentially overcome these feelings.

Dorsey highlights the importance of having moxie – an intensity of motivation characterized by strength of will, self-discipline, and the ability to persist despite challenges – as an important factor in finding success in a challenging role and overcoming impostor syndrome. For instance, when individuals with moxie face an obstacle, like negative feedback on a project they are working on, they don't tend to see it as a personal failure or as an insurmountable systemic barrier. Instead, they tend to turn it into a source of motivation. In fact, one study revealed that moxie was a stronger predictor of both intrinsic and extrinsic motivation compared to other constructs like grit and self-control, and it also appeared to predict goal achievement.

And while moxie does not necessarily come naturally, there are several ways for individuals to build and deploy it in their professional lives. For instance, hardship can be turned into moxie by reflecting on how a previous difficult situation was handled and resolved successfully. Doing so can help a person uncover their unique brand of moxie and help them overcome future challenges. Another method is to engage in "identity play", experimenting with new ideas and behaviors when taking on new professional challenges and roles. This tactic recognizes that a new position might require different knowledge and behaviors than previous roles, emphasizing the presence of a learning curve whenever trying something new. In addition, tuning out negative voices who point out supposed inadequacies can maintain their focus on the task at hand rather than worrying about belonging. Notably, this approach is different than accepting constructive criticism about a specific project, which could help improve performance going forward.

In sum, while building moxie is not necessarily easy, taking the time to focus on previous successes and challenges that have been overcome and accepting that it's impossible to always perform perfectly in a new role can help overcome impostor syndrome, whether working with clients for the first time or starting a new firm!

Poise: The Key Personality Trait For Worldly Success

(Darius Foroux)

What's more important for professional success: style or substance? On the one hand, the ability to work well with others and display confidence can help an individual rise up through the ranks in their firm and attract clients. On the other hand, it can be hard to succeed by relying on style alone, as professionals typically need some sort of substance (e.g., technical knowledge) to back it up. But rather than favoring one over the other of these characteristics, the true magic happens when an individual cultivates both by displaying poise.

Whether it is in building broad knowledge in school or being able to execute projects in the workplace, having both know-how and follow-through (i.e., 'substance') are important components of success. Foroux considers "qualities of substance": the skills, habits, and mindsets that determine the way a person works and behaves when they are alone. These are the qualities that change the inner world of a person. For instance, successful financial advisors need to have the technical skills to provide quality service as well as the diligence to complete the range of tasks required to effectively serve clients.

At the same time, just being a person of substance is not necessarily enough to ensure a successful career. Rather, those who succeed typically also have what Foroux calls "qualities of style": the skills, habits, and mindsets that determine the way a person works and behaves when other people are watching, or the qualities that change the way a person carries themselves in the world. For example, in addition to technical finance-related skills, a successful advisor will often have good communication skills, both to confidently explain the value of their services as well as to clearly deliver their recommendations.

Putting these pieces together, a person with poise is someone who has both style and substance. This means that while substance can be used as the foundation for a career, developing a personal style, being aware of how others perceive you (while staying true to yourself), and displaying confidence in your work (without appearing arrogant) are also key parts to being a successful professional!