Weekend Reading for Financial Planners (Apr 21-22)

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Read all of Michael’s articles here.

Weekend reading for April 21st/22nd:

How the Social Security Claiming Decision Affects Portfolio Longevity - This article by William Mayer and William Reichenstein in the Journal of Financial Planning explores how the decision regarding when to start Social Security benefits can impact how long a portfolio sustains retirement withdrawals. Generally framed around a safe withdrawal rate approach, the article finds that delaying Social Security benefits beyond age 62 can provide for a material increase in portfolio longevity, although the benefit diminishes as wealth increases and Social Security constitutes a smaller and smaller part of the client's overall retirement income. Although the benefits delay will result in a drawdown through the client's 60s, the significantly higher benefits by age 70 greatly diminishes the withdrawal need through the client's 70s and into his/her 80s, allowing for the portfolio overall to sustain withdrawals for a longer period of time. Of course, because the Social Security delay decision is effectively a longevity hedge, it extends the portfolio longevity precisely because it provides the biggest bang-for-the-buck in extended lifetime scenarios. If the client has a shorter life expectancy, the delay decision is less helpful or even harmful; of course, in shorter life expectancy situations, providing for longer portfolio longevity is usually not a driving concern, anyway! On the other hand, the research also shows that the delay decision can increase spending levels as well, for clients who prefer to harvest the value by spending more instead of making the portfolio last longer. One notable caveat of the study, though, is that results were analyzed assuming a poor return environment (where safe withdrawal rates are necessary), but not on a randomized, Monte Carlo basis; it is not entirely clear whether the exact same results would be achieved when accounting for the risk of an unfavorable sequence while the client was delaying Social Security benefits.

Alternative Investments: How Much Is Enough? - This article from Morningstar Advisor explores how much of a client's portfolio should be invested in alternatives, especially as the breadth and depth of options continues to explode across the mutual fund and ETF space. The explosion of choice appears to be a direct response to demand, as Morningstar shows net outflows from equity mutual funds for each of the past 5 years, with net inflows to alternative investment mutual funds for each of those years. Yet in the process, the definition of "alternative" itself is changing; while the term once primarily described hedge funds, it now covers a far wider range and a number of asset classes. The definition is even more confusing as some avant garde asset classes, like emerging markets and global REITs, go from the "alternative" category a decade ago to mainstream today. The article suggests that ultimately, if the purpose of alternatives is diversification, the key characteristic of an alternative should be its low correlation (to equities, as the common mainstay of most client portfolios), especially during bear markets. This can be evaluated by looking at how the investment generates its income, and whether those payments are likely to be as sensitive to economic growth as are corporate profits (which supports infrastructure assets, but not necessarily private equity or emerging markets), and by examining whether the general behavior of returns is different than equities (such as global macro strategies and managed futures). In the end, the article notes that historically the recommended allocation to alternatives was 10% as a rule of thumb, but that in today's world that may be a bare minimum, and recommendations as high as 20% or more are common given the liquidity of alternative vehicles available today.

CFP Board's New Chief Investigator Adds Enforcement Muscle - This article from Investment News discusses the recent hire of Rex Staples, former general counsel for the North American Securities Administrators Association (NASAA) and a former branch chief for broker-dealer and investment adviser enforcement in the Washington State Securities Division, who is now taking on the newly created position "Director of Investigations" for the CFP Board. The interview with Staples notes an increase in the CFP Board's focus on enforcement, including investigations, with an emphasis on quicker response times to complaints and inquiries and a faster resolution. From the longer term perspective, a quote by yours-truly notes that the CFP Board's increasing enforcement focus raises the question of whether it ultimately hopes to serve as a more formal regulator of financial planners.

8 Notable Takeaways From The Spring 2012 Tiburon CEO Summit - This article from RIABiz covers the spring Tiburon CEO Summit, an industry-star-studded event hosted by Chip Roame that looks at where the business is heading. The summit put forth a number of notable predictions and takeaways, including: a continued rise of discount brokerage firms and "DIY" (Do-It-Yourself) investors; the breakaway broker movement will continue, but may or may not reach a tipping point that topples the wirehouses; that indexing will continue to boom; that the SEC is increasingly likely to oversee advisors after all (and not FINRA); that mass marketing with scale can work, as evidenced by Edelman's success, along with Fish Investments, the Mutual Fund Score, etc.; and that independent aggregator firms and outsourcing will continue to rise. 

Flying Solo - This article from Financial Planning magazine looks at the trend underway for solo advisors to merge and create multi-advisor practices. Although some advisors continue to remain solo, more and more are trying to grow or merge, as advisors find less and less time available to actually advise clients as the complexity of running a practice continues to rise. Those who are trying to stick it out solo are increasingly focusing on outsourcing where they can while retaining the core competencies for themselves, and engaging practice management consultants to help make their practices as efficient as possible. In addition, technology is increasingly crucial for efficiency, although the article notes that many advisors tend to overbuy software that they don't really need or can't effectively implement.

The Changing RIA - This article by Bernie Clark of Schwab Advisor Services in Financial Advisor magazine notes that as the RIA industry continues to grow, an ecosystem of companies to serve independent advisors is growing as well, giving RIAs a chance for more effective outsourcing, technology solutions, and overall efficiency. At the same time, as RIAs become more common, the challenge is on for firms to better differentiate themselves. Consequently, Clark recommends that firms get more strategic about their direction, better segment their clients to ensure clients are getting the right level of service commensurate with the revenue they generate, and get better at using technology to improve both productivity and service. No major revelations, here, but a nice summary of ideas and focus for any advisor's firm.

The Off Ramp - This article in Financial Planning magazine makes the point that ultimately, maximizing the value of your practice for whenever you exit - whether it's in years or decades - takes time to do right. The article provides a nice list of 8 key drivers to maximize value - which, notably, happen to be good business practices for the firm you own, as well as the firm you plan to sell - including a real focus on strategy, a management team not reliant on the founding principal, systems and processes that ensure things can run smoothly without you, marketing and branding that ensure the firm can grow without you, client relationship managers on staff who can retain relationships when you're not longer in the picture, a strong client base that is profitable and well diversified, and a spotless regulatory record. Ultimately, the practice can be sold to insiders or to outsiders, and the article recommends that you always be prepared for a possible inside sale, as you can always transition to an outside sale should an opportunity arise.

7 Core Elements of a Powerful Financial Blog - This article by Stephanie Sammons of Wired Advisor, an integrated digital media marketing platform for financial advisors, discusses key elements for advisors to launch a successful blog. The article is extremely practical in tips that advisors should bear in mind when launching a blog for themselves and/or their firms, from the important of a good layout and clean design, to choosing a good blog theme, title, and website address that build a personal brand, to the importance of quality content and delivering it consistently (once a week or even once a month can be fine), to the value of being search engine optimized, integrated with social media, and capable of capturing readers as leads to nurture and eventually convert into clients. If you're thinking about starting a blog, this is a great overview. If you already have a blog, it's a good checklist of reminders to review against what you're already doing.

The Trials and Tribulations of the Variable Annuity Business - This article from Morningstar Advisor provides a nice overview of the evolution of the variable annuity business for the past 50 years. Starting as a product that was of the lowest risk to the insurer - because their only obligation was the assets already held in separate accounts - it has evolved to include first basic death benefits in the 1960s, then enhanced death benefits in the 1980s, then living benefits into the 1990s and 2000s. Yet this evolution of products to compete in the marketplace has shifted the risk from the investor back to the insurer, forcing them to establish greater reserves against potential guarantees that might need to be paid in the future, which in turn can decrease available capital and/or profits of the insurance company. Now the industry seems to be in a squeeze. It's not clear that variable annuities would still be compelling to annuity buyers without the guarantees, yet insurers are less and less interested in offering the products and the reserves they necessitate in the current environment. As a result, the companies thus far are simply trying to curtail sales and limit volume to limit their exposure. While the author notes that no companies are currently near insolvency, and in fact the historical guarantees that were purchased probably represented a great deal, it's not clear where the future of the variable annuity business is heading at this point.

It's Not What You Sell, It's What You Believe - This article by Bill Taylor on the Harvard Business Review blog highlights a 2009 interview by Tim Cook, then newly-CEO of Apple as Steve Jobs stepped down on his medical leave, who emphasized that Apple would continue to be a great company regardless of who is in the CEO position because of its great values and beliefs. Taylor notes that this phenomenon - that the best companies succeed driven not ultimately by the products that they sell or services they provide, but by the values and beliefs the company uses to operate - is not unique to Apple, and spans many great organizations, including Southwest Airlines, USAA, the Marine Corps, and Pixar. They are organizations where "every person in the organization, regardless of job title or function, understands what makes the organization tick and why what the organization does matters." After citing advertising legend Roy Spence's book "It's Not What You Sell, It's What You Stand For", Taylor concludes by posing three questions that organizations should be able to answer crisply, clearly, and compellingly: "What do you promise that nobody else in your industry can promise?" "What do you deliver that nobody else can deliver?" and "What do you believe that only you believe?"

I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!