Weekend Reading for Financial Planners (Jan 19-20)

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.

Jack Bogle Changed How Americans Invest For The Better (Barry Ritholtz, Bloomberg) - On Wednesday, John (Jack) Bogle died of cancer at the age of 89. Known to most as the founder of Vanguard, and the father of index investing, Bogle's cumulative impact to investors has been estimated to be as much as $1 trillion, which represents how much Bogle's company and the index investing approach he pioneered has saved investors over nearly 40 years. Though notably, Bogle's innovation wasn't merely the low-cost index funds that Vanguard created; it was also structural, by forming Vanguard as a kind of "mutual" investment company that was owned not by external shareholders, but literally but the shareholders of the company's own mutual funds (i.e., the investors who used Vanguard products). Which meant Vanguard had little need or reason to try to push up its fees, since the net outcome would simply be generating profits from the very investors it was serving in the first place; instead, the creative "mutual" structure of its mutual funds created an incentive to minimize costs for its investors (since higher costs were going to return to the investors as profits anyway), which then propagated throughout the industry. Since his death this week, obituaries and testimonials to his legacy has proliferated, with an especially fascinating personal look at Bogle and his motivations from the Wall Street Journal's Jason Zweig, and a call from self-proclaimed advisor "Boglehead" Rick Ferri that, given Bogle's advocacy that Wall Street should have a fiduciary duty to the clients it serves, the efforts to establish a fiduciary rule for financial advice should be renamed the "Bogle Rule" in honor of his legacy. In addition, of course, to the legacy that Bogle leaves behind in the form of the index fund itself, Vanguard and its unique investor-centric structure, and a long list of books that Bogle wrote for the benefit of both investors and the advisors who serve them.

Government Shutdown 2019 Explained: How The Shutdown May Compound And Ripple (Christopher Flavelle, Jennifer Dlouhy, & Ryan Beene, Bloomberg) - As the government shutdown continues with no end in sight, economists and analysts are starting to dig deeper into what really happens if the shutdown continues from here for an extended period of time. And unfortunately, the concern is that the impact on the economy won't just continue to add with each passing day; instead, the impact gets exponentially worse, as current stop-gap solutions from some agencies (e.g., the IRS still figuring out how to process tax refunds) by dipping into user fees, leftover funds, and other revenue streams will only last for so long. Notably, nearly 3/4ths of the government was already funded by appropriations before the standoff began - which is why the Departments of Defense, Labor, and Health and Human Services remain in business, along with the US Postal Service, and the Federal Reserve. Nonetheless, the remaining 25% includes agencies from Homeland Security to the Environmental Protection Agency and the Department of Agriculture. Accordingly, some of the areas of rising concern as short-term reserves are exhausted include: the food stamps program (administered by the Department of Agriculture) will not likely be able to keep supporting its nearly 38 million recipients past February, which accounts for nearly 10% of all the food U.S. families buy for their homes, and could strip 0.5% from GDP this quarter; if the Federal government stops paying its leases (given the lack of available funds), the drop in revenue could hit commercial property owners hard, as the General Services Administration (which oversees the government's space needs) was leasing out more than 190 million square feet across almost 7,000 buildings nationwide (for $460M/month in rent payments), even as landlords would have no good options because they actually cannot evict Federal tenants (at best, they can sue, which is a moot point if the agencies don't have the available dollars to pay anyway); public transportation services, which even locally are often supported by the Federal Transit Administration and its funding, could limit transportation accessibility; and even IPOs on Wall Street may be delayed (including widely anticipated IPOs like Uber and Lyft) given the upcoming February 14th deadline for key financial statements to be filed and approved; and government workers who continue to be stuck working without pay may eventually decide to take private industry jobs instead (given the otherwise-tight labor market), raising concerns about how quickly the Federal government's services will even be able to bounce back once the shutdown ends (which could be especially problematic in areas like TSA, as a post-shutdown worker shortage could impair air travel capacity for a long time to come). And of course, for many government workers, they are having their own household cash flow issues without a paycheck, with hardship withdrawal requests for the Federal TSP retirement plan already up 34% in the first two weeks of the year.

Some Individual Taxpayers Get Relief From 2018 Estimated Tax Underpayment Penalties (Sally Schreiber, Journal of Accountancy) - This week, the IRS announced in Notice 2019-11 that it is retroactively changing the standard requirement that taxpayers must pay at least 90% of their current year tax liability (or 100% of the prior year's liability, or 110% in the case of high-income earners) via estimated taxes or withholding in order to avoid any underpayment penalties; instead, the new requirement will be an 85% threshold instead (or the standard 100%-or-110%-of-prior year). The change has been rolled out in recognition that not all taxpayers were able to properly adjust their tax withholding and estimated taxes for 2018, given how the Tax Cuts and Jobs Act was implemented in just the final weeks of 2017, tax withholding tables weren't fully updated until after the year started in 2018, and some workers still may not have had proper withholding if they didn't also revise their W-4 withholding form in light of reduced itemized deductions and the elimination of dependency exemptions. Of course, for most, the net impact of TCJA was to reduce 2018 tax liabilities, not increase them, but for a subset of individuals with high deductions and large families who may see their deductions curtailed in 2018 and end out with a higher tax liability, the relief should help them to unwittingly avoid an underpayment penalty. Notably, though, the changes apply only for 2018, and taxpayers should still review their 2019 tax withholding to ensure it is in line going forward.

11 Tax Deductions You Can Still Take (Karen Wallace, Morningstar) - Under the Tax Cuts and Jobs Act of 2017, the standard deduction was consolidated with personal exemptions to create a new, higher standard deduction... which in total was only slightly higher than the prior combination of the two, but nonetheless will substantially curtail how many households can itemize their deductions at all. As in 2017, couples claimed a $12,700 standard deduction and $8,100 in personal exemptions for a total of $20,800, and in 2018 they will claim a single consolidated $24,000 standard deduction... which means while total deductions went up just $3,200 from $20,800 to $24,000, the threshold for itemizing went up a massive $11,300 from $12,700 to $24,000. And at the same time, the number of itemized deductions themselves were also curtailed under TCJA, with the elimination of miscellaneous itemized deductions. Fortunately, though, many deductions are still available "above the line" (claimed on the front page of the tax return to calculate Adjusted Gross Income in the first place, and not in the "itemized" category). Accordingly, Wallace highlights the most popular above-the-line deductions that are still available going forward, including: traditional IRA contributions of $6,000 in 2019 (which as long as the individual has earned income and isn't a high-income active participant in an employer retirement plan as well); student loan interest; alimony payments (but only for divorce settlements that had already taken place prior to December 31st of 2018); HSA contributions; various deductions for the self-employed, including self-employment taxes (the self-employed individual's 50% share of payroll taxes), retirement plan contributions, and health insurance; above-the-line teacher expenses; and certain low-income performing artist expenses.

4 Strategies For An Organized Tax Season (Christine Benz, Morningstar) - Tax season is anticipated to be a lot more complex for the 2018 tax year, both because it's the first year that the new Tax Cuts and Jobs Act has taken effect, and also because the tax return itself has been re-designed with the prior double-sided single page replaced with two half-pages augmented with (even more) supplemental schedules. The changes are intended in part to recognize that most people won't even need to use those supplemental schedules, as only about 10% of taxpayer are even projected to itemize their deductions in the first place (down from 30% in 2017) given both the curtailment of many itemized deductions (e.g., the $10,000 cap on state and local taxes, and the elimination of miscellaneous itemized deductions) and an increase in the standard deduction threshold. So how can you keep (or get) organized for the upcoming tax season? Benz advocates four core steps: 1) use some kind of tax checklist or organizer to ensure you bring together all the information you need in advance (and while tax preparers often send out their own, you can use this basic one from TurboTax as a starting point); determine if you'll likely be itemizing or taking the standard deduction in the first place (which will be driven primarily by just four key itemized deductions: the state and local tax deduction up to the $10,000 threshold, charitable contributions, home mortgage interest, and medical expenses in excess of 7.5% of AGI) so you know if you even need to collect detailed information on your itemized deductions (or not); round up your usual investment-related documentation (as all the rules for 1099-Bs and 1099-INTs for bank and investment accounts hasn't changed); and remember not to wait too long to make your prior-year IRA contributions if you plan to (so you don't have a contribution crunch at the deadline, or worse risk accidentally missing the deadline altogether!).

Who Owns Clients' Financial Data? (Bob Veres, Financial Planning) - With more and more advisor technology solutions offering online client vaults (from financial planning software providers like eMoney Advisor to investment portals like Orion to estate planning tools like Everplans and standalone file-sharing services like ShareFile and Box), not to mention the growing popularity of using account aggregation to gather a client's financial data digitally in one place, the question is starting to arise: who owns the clients' financial data... and who is responsible for ensuring its security in an era were hacking and cybersecurity are taking a front seat? The answer, unfortunately, is that "it depends"... on the exact type of data itself. For instance, financial account information is - technologically at least - the property of the custodian, while credit card activity information is the property of the credit card company, banking records belong to the bank, and so forth (as while it might all pertain to the client, in the end, it's the institution that literally controls and determines who has access to the data). In other words, if clients are really going to own their data, they would need to own and control it outside of the vendors it comes from, in their own client-specific "data repository" instead. Though Veres suggests that perhaps the industry can and should develop a centralized client data repository, outside of any particular financial institution or vendor, specifically to help empower clients to actually own their data (and have more control over who it does and doesn't go to). In turn, solutions from client vaults or account-aggregated portals then wouldn't need to link to (and risk having links broken from) each financial institution; instead, it could just link once, centrally, to the client's own data repository. Of course, centralization itself just puts even more dependency on a single organization, which itself might have to be a non-profit with clear governance documents to ensure it remains focused on consumers. But the idea isn't unheard of, as medicine has followed a similar path, where, in the past, doctors or hospitals "owned" the patient's medical records, until the Affordable Care Act clarified that patients do have a right to their own information (and mandated doctors and hospitals create systems that would allow consumers to quickly retrieve and share that information).

Here's What AI Can [Actually] Do For Advisors (Andrew Brzezinski, ThinkAdvisor) - In recent years there's been a growing buzz around Artificial Intelligence ("AI"), with some suggesting that a wave of Artificial Intelligence (and the robots it guides) will soon cause mass unemployment across a number of industries. Yet as AI continues to be developed, it's turning out that at least for the foreseeable future, AI will more likely simply support workers - especially in professional services industries - rather than replace them. Which actually makes the potential for AI much more interesting, but also more nuanced, in trying to assess what, exactly, it will do... and what it still can't. Brzezinski suggests that two key areas AI is likely to get involved first when it comes to financial advisors is around "natural language processing" (the computer being able to handle basic interactions with clients based on what seems like a conversation), and helping to generate ideas and actions. The starting point could be a form of virtual assistant (or virtual client service administrator) as a chatbot to help clients with basic service requests. A deeper and more nuanced application, though, might be AI delving into an advisor's client base and communication, to either find new and different ways to group clients for communication or services (e.g., rather than just focusing on age or net worth, grouping clients by who tend to open emails and who respond more quickly to phone calls), to better estimate a client's lifetime value (e.g., by more holistically projecting out a client's financial fee-paying ability over time), to predict attrition (e.g., by looking at engagement and online behaviors that predict when clients may be thinking about leaving), or to track or even predict upcoming life events (e.g., a reminder when a client's children are likely getting ready to go to college or graduate). The key point, though, is that the future of artificial intelligence isn't just about business intelligence and descriptive statistics, but actually using data to help generate predictive insights about what advisors should be doing to reach the right clients at the right time.

What To Look For When It's Time To Change Your Advisor Tech (George Svagera, T3 Tech Hub) - With modern computer operating systems, it is increasingly common for systems to "force" the user to engage in regular updates, from the iPhone reminders that just won't go away until you update, or those notifications from Windows that it's time to download and install an update (if the computer isn't already configured to do so automatically in the first place). When it comes to the software installed on those computers, though, updates are not always as regularly occurring, and a lot of advisors may simply become accustomed to their "old" software (or in an effort to avoid the occasional hassle of updating, "choose" to stay on increasingly outdated software!). The end result is that you may end up using "legacy technology"... which is defined as software so old it doesn't even undergo regular updates anymore, or relies on you to conduct your own maintenance, or any form of locally-installed software (as opposed to cloud-based software) that becomes outdated as new versions are released but don't get installed. And while advisors might still be comfortable with their own legacy technology, Svagera cautions that software not being updated can become a major security risk (as one of the most common reasons for updates is to plug security holes that are discovered, and it's very hazardous to keep running old technology after a hole becomes public), and risks simply "breaking" at some point and being unrepairable (if the company is no longer actively supporting that version anyway). Ultimately, this is why due diligence on a technology provider becomes so important in the first place - because it's important to understand whether the company itself is still actively trying to develop on and innovate new products... or there's a risk that even good technology you use will soon become legacy technology.

Best Practices For Passwords Updated After Original Author Regrets His Advice (Nick Statt, The Verge) - To help reduce the risk of being "hacked," most modern websites today have password requirements, such as using both upper- and lower-case letters, along with special characters, and at least one numeral. Thus, for instance, don't make your password "password," but if you do, at least make it "P@ssW0rd123!" instead, which is much harder to guess. The guidelines come from a document known as "NIST Special Publication 800-63," which, in Appendix A, details out the guidelines. Created by Bill Burr back in 2003, the NIST guidelines were created in the early era of the internet to reduce the risk that people would otherwise pick easily compromised passwords, and similarly encouraged people to regularly change their passwords (typically 90 days) so if the password did become compromised for some reason, it would get changed soon enough anyway. Except the problem is that computing power itself has grown exponentially since 2003, while the human brain still struggles to keep up with the requirements... and thus why we commonly make the same substitutions, like 1 for the letter i, @ for the letter a, or specifically adding 123 or 001 at the end to work in some numbers, and when the required password update comes, just incrementing the number to 002 instead. Yet, ironically, one of the best ways to increase password protection is simply to make the password longer, even if it uses words that are otherwise easy to remember; for instance, a "fancy" password like taking the word troubadour and turning it into a password "Tr0ub4dor&3" could be cracked in about 3 days with modern computing power, but a simpler longer password like "correcthorsebatterystaple" (four random common words strung together) would take 550 years to hack! As a result, even the founder of the modern password requirements Bill Burr himself now says he regrets the standard he created... as in the end, we're just creating passwords that are remarkably difficult for humans to understand... but still surprisingly easy for modern computers to hack anyway! (And while an updated version of the NIST standard has recently been released, and removes many of these now-outdated requirements, it may still be many years before modern systems are updated to eliminate the absurd password requirements.)

Time Use And Happiness Of Millionaires (Paul Smeets & Rene Bekkers & Ashley Whillans & Michael Norton, HBS Working Paper) - In this study, researchers try to evaluate how the wealthy spend their time, and whether/how their use of time relates to their happiness and well-being. Ultimately, the results show that millionaires do tend to spend a similar amount of time as the general population in "maintenance"-related tasks like cooking, shopping, and eating, and, on average, actually spend more time on household chores. Accordingly, the affluent also appear to spend similar time on leisure activities... but the nature of their leisure activities differs. As the wealthy spend more time on "active" leisure activities (e.g., exercising and volunteering), while non-millionaires were more likely to spend their leisure time in "passive" leisure activities (e.g., watching TV or just relaxing). And as it turns out, the amount of active vs passive leisure time (as opposed to just the amount of time) actually helps to explain much of the difference in life satisfaction between millionaires and the general population. Which, indirectly, supports other research suggesting that wealth can help increase happiness when it is spent on "experiences" (as opposed to material goods), though it highlights that spending more money on unique experiences may not actually be as important as simply having any kind of active leisure time (whether it's a one-of-a-kind expensive vacation, or simply spending your free time in otherwise-free-but-active leisurely pursuits like exercise and volunteerism).

You Should Adopt The Boring Habits Of Successful People (Pete Weishaupt) - In a recent TEDx Talk, Chris Sauve highlights three "boring" yet incredibly important habits of highly successful people, recognizing that even people who are "boring" in some ways often do incredible things as well. His key observations: 1) "boring" people who did amazing things wrote things down, recognizing that our brains can only remember so much at a time (short-term memory is limited to about 5-9 items at once), and people who wrote things down were ultimately able to retain far more of their great ideas in the first place); 2) boring-yet-successful-people focus on reducing down to the essentials, eliminating even minor but unnecessary choices (e.g., Steve Jobs always wore the same "uniform" for a decade, and former President Obama had only two colors of suits), to avoid depleting what is otherwise a very limited pool of mental energy (which means you don't want to expend it on not-actually-very-important decisions); and 3) is to always be questioning your systems, as unfortunately a lot of people do the first two items well, and then let their lives go entirely on autopilot, failing to make the ongoing changes that are necessary to keep on a path of innovation and continued self-improvement.

The #1 Job Billionaires And Multimillionaire Held Before They Got Rich (Catey Hill, Marketwatch) - For his recent book "The Wealth Elite," sociologist and historian Rainer Zitelmann interviewed dozens of individuals with substantial "self-made" (either entirely self-made, or built substantially on a prior inheritance) wealth, and were now either deca-millionaires (net worths of roughly $11M to $34M) or billionaires, to try to understand what led to their success. And as it turned out, one of the key skills they identified were their sales skills (with 2/3rds stating their abilities as salespeople had been a "significant" factor in their financial success, and 1/3rd stating they owed 70%-or-more of their success to their sales skills). And perhaps not coincidentally, it turns out that most of them had sales jobs early in their careers - from costume jewelry to cosmetics to used car radios and wheel rims. Similarly, a recent study from thousands of CEOs from LinkedIn found that "sales manager" was one of the five most common first jobs for CEOs (and #1 was "consultant," which itself often requires sales skills, too). Notably, though, the key point is not literally that the ultra-wealthy sold their way to the top - high-income sales jobs only carry one so far - but instead that their sales experience translated to their ability to sell themselves (and/or the entire company they represented), which can lead to everything from more clients to better salary to a better job promotion or even a better valuation for the business itself. And arguably, sales capabilities are equally relevant to financial advisors, as even for those who are fee-only advisors and don't sell any products must still sell themselves, as it doesn't matter how much you know about financial advice if you can't convince anyone to hire you and pay you for it! So what can those who are weak on their sales skills do to improve? First and foremost, don't be afraid to get a sales job early on in your career... as the experience is invaluable, even if you don't stick with it. And if it's really a weak point, consider classes on sales skills, or at least reading some of the leading books on the subject.

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.