Weekend Reading for Financial Planners (Sept 25-26)

Authors:

Ben Henry-Moreland

Team Kitces

Ben Henry-Moreland is a Senior Financial Planning Nerd at Kitces.com, where he specializes in writing and speaking on financial planning topics including tax, practice management, and technology. He also co-authors the monthly Kitces #AdvisorTech column. Drawing from his experience as a financial planner and a solo advisory firm owner, Ben is passionate about fulfilling the site’s mission of making financial advicers better and more successful.

Read more of Ben’s articles here.

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Adam Van Deusen, CFP

Team Kitces

Adam is a Financial Planning Nerd at Kitces.com. He previously worked at a financial planning firm in Bethesda, Maryland, and as a journalist covering the banking and insurance industries. Outside of work, he serves as a volunteer financial planner and class instructor for local and national non-profits.

Read more of Adam’s articles here.

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Is It Time to Revisit Who Gets To Be An “Advisor”? (Kenneth Corbin, Barron’s) - Those working in the financial advice industry use a wide variety of titles… which matter, because research has shown that titles alone can shape consumer perceptions of the services they will receive. Yet in the current environment, the “financial advisor” title has become so ubiquitous that a consumer might not know whether the person they are working with is primarily charged with providing advice under a fiduciary standard, or actually is in the business of selling investment products instead. With these issues in mind, the XY Planning Network this week filed two petitions with the SEC calling on the regulator to clarify who exactly should be permitted to hold themselves out as a financial advisor, and when someone should use the title of broker versus investment adviser. The first petition asks the SEC to reconsider a regulation provision that exempts brokers from advisor status when the advice they provide is deemed “solely incidental” to their conduct as a broker, noting that when it comes to offering financial planning in particular, the nature of preparing a comprehensive financial plan goes well beyond what it takes for a broker to just know their customer… and therefore the advice cannot be incidental (such that anyone providing a financial plan would have to be registered as an investment adviser, and operate as a fiduciary). The second petition asks the SEC to modernize the 1940 Investment Advisers Act, with respect to how a broker can market themselves when in an ongoing relationship with clients, noting that the Act limits who can market themselves as offering “investment counsel”… a term that is now antiquated, but that simply describes an ongoing advice relationship (which again means brokers would not be permitted to market themselves as “financial advisors” unless they were actually RIA fiduciaries). Notably, a petition for rulemaking simply asks the SEC to issue new rules, and it is unclear how the SEC under new Chairman Gary Gensler will approach such investor protection issues. Nonetheless, the petitions offer an opportunity to debate thorny issues that have led to consumer confusion for years, and potentially clarify the true roles of financial professionals with widely divergent sales-versus-advice practices so consumers understand which they’re actually choosing.

Biden Tax Plan To Get A Major Haircut? (Robert Huebscher, Advisor Perspectives) - All eyes have been on Washington since the September 13^th introduction of proposed legislation by the House Ways and Means Committee that would represent some of the biggest changes to the tax code in decades. The sweeping legislation includes proposals that would raise the top tax bracket to 39.6% (plus a 3% ‘surcharge’ for ultra-high-income earners), limit the size of large retirement accounts, crack down on popular estate planning strategies, and impact other areas of importance to financial advisors and their clients. Yet while Democrats control both the House and Senate, it remains to be seen which of the proposals will end up becoming law, and which will be adjusted or eliminated to satisfy enough legislators to pass a bill. Washington pundit Andy Friedman expects the proposed increases to the top marginal income tax bracket (from 37% to 39.6%) and the top long-term capital gains rate (from 20% to 25%) to stick in the final legislation. He also thinks the proposed restrictions on retirement accounts for higher earners (including restrictions on Roth conversions starting in 2032, and mandatory distributions from retirement accounts with large balances) will likely pass as well. However, Friedman also expects haircuts to other proposals. Measures that could be pared back include the proposed increase in the corporate tax rate to 26.5%, and limits on the Qualified Business Income (QBI) deduction. In the meantime, one provision not addressed in the proposals was the current $10,000 cap on the State And Local Tax (SALT) deduction. Friedman doubts that the cap will be eliminated, but suggests that there could be phased-in increases to the limit. In the end, Friedman expects the tax legislation to pass this year, but given that the proposed tax measures already deviate significantly from President Biden's original proposals, further change is probably the one thing financial advisors and their clients can count on until the measures are signed into law!

Schwab Aims For Free Financial Education For All Schools By 2025 (Michael Fischer, ThinkAdvisor) - The state of financial literacy in the United States, and how to improve it, has been a hotly debated topic for years. While most adults agree that teaching financial literacy is important, research on how best to actually improve financial literacy is decidedly mixed. Some analyses have shown little effect from financial literacy interventions, while others find benefits when the curriculum is more robust and teachers are better trained. With only 21 states requiring high school students to take a personal finance course before graduation, financial giant Charles Schwab is entering the field with a new financial literacy program, “Moneywise America”, targeted at teens. Schwab wants to make free financial education available to every school in the US by 2025, and is focusing on reaching students in under-resourced schools and communities. The curriculum will be facilitated by Schwab employees trained to volunteer, and the company wants to mobilize a quarter of its workforce to participate. While youth financial literacy programs seek to provide a baseline of knowledge, financial advisors can also play an important role in translating that knowledge into action when financial decisions need to be made. “Just in time” financial education offers financial advice to individuals at the moment they are making important financial decisions, such as taking out a mortgage (when the client is ready to relocate or is considering homeownership) or deciding how much to contribute to their workplace retirement accounts (when they are in a financial position where they are ready to begin saving for retirement). Of course, there is plenty of room for bias if the person providing this education is also the one selling the product (and, in this case of Schwab, perhaps getting the Schwab brand in front of teenagers before they are tempted to create an investment account with Robinhood as young adults!?)... making a source of unbiased information all the more important. Which means whether it is through working with younger clients that face many important financial decision points or taking part in pro bono work for low-income individuals, objective financial advicers have much to offer in helping Americans make better financial decisions!

Why Risk Tolerance Questionnaires Don’t Work For Determining Retirement Strategies (Wade Pfau, Alex Murguía, Advisor Perspectives) - Accurately gauging a client’s investment risk tolerance can be a challenging endeavor for financial advisors. As while advisors in the past might have used conversations with clients to determine their risk tolerance, a variety of financial technology assessment tools have emerged that can provide a more accurate view of the client's true risk tolerance. Yet despite the advancements in measuring risk tolerance, Pfau and Murguía argue that risk tolerance questionnaires are more valuable during a client’s accumulation years, and are less useful when assessing risk tolerance in their decumulation years in retirement when sequence-of-return risk becomes a serious issue. Accordingly, Pfau and Murguía suggest advisors and clients first need to decide on a retirement income strategy, and only then consider a (risk-tolerance-appropriate) asset allocation in retirement. Potential retirement income approaches include total return (drawing from a diversified investment portfolio), protected income (using guaranteed lifetime income products to build a floor for essential expenses), risk wrap (blending investment growth potential with lifetime income benefits), and time segmentation (earmarking assets for spending immediately, soon, and later). Once a strategy is selected, Pfau and Murguía propose a tool that uses two scales to determine the client’s risk tolerance in the decumulation period: probability-based income sources (e.g., from market growth) versus safety-first income sources (e.g., from contractual obligations), and optionality (degree of flexibility) versus commitment (adherence to a single solution) with respect to how much a client is willing to change their approach in response to economic or personal developments. The results of this exercise can then be used to select appropriate investment products to meet the client’s needs. The key point is that selecting an appropriate allocation of assets in retirement isn’t just a function of the retiree’s tolerance for market volatility… instead, it starts with their preferences for even taking a risk-based investment (versus a more guaranteed-income) approach in the first place, and how much spending flexibility they have (or want or need) along the way!

Can Young People Still Count On Social Security? (Ben Carlson, A Wealth Of Common Sense) - Each year, the Social Security Board of Trustees releases a report outlining the current state of the program’s income and benefits payouts, and projections for its future solvency. And every year the report leads to concerns that Social Security’s trust funds are projected to run out, which means benefits will have to be cut if nothing is done to rectify the situation. The Board’s 2021 report was no exception, showing that the Old Age and Survivors Insurance (OASI) Trust Fund (used to pay out Social Security benefits for seniors) is now projected to be depleted in 2033, due in part to a wave of retirements during the pandemic. Yet Carlson argues that some of the concern is overblown because the majority of benefits will still be funded through payroll taxes. In fact, according to the projections, the government would still be able to cover 78% of payouts in 2033 when the trust fund is depleted, and 74% of payouts by 2095. In addition, even a ‘moderate’ 22% - 26% cut in benefits would still give the government time to take policy action to shore up the system. And given that there were 65 million people receiving Social Security payments in 2020, and roughly half of senior citizens getting at least 50% of their income from Social Security, the government has significant incentive to act. Potential options for the government include delaying the retirement age for young people (while allowing those nearing retirement to retain the currently-phasing-in full retirement age of 67), raising the cap on income subject to Social Security tax (i.e., the Social Security wage base), or changing the way cost of living adjustments are calculated. Of course, while advisors can help frame the potential consequences of changes to Social Security for clients, they can also make sure clients are optimizing their Social Security benefits, reviewing their annual Social Security statements, and correcting any errors in the first place, too.

Three Social Security Do-Over Options (Mary Beth Franklin, InvestmentNews) - Social Security provides individuals significant latitude on when to begin receiving retirement benefits. Of course, the decision on when to claim comes with consequences for the amount of the monthly benefits the individual (as well as their spouse and potentially other survivors) will receive as benefits are adjusted higher or lower based on their start date… which inevitably means some recipients later come to regret their choice based on a change in personal circumstances. Nevertheless, Franklin notes that there are three “do-over” strategies that advisors can consider for clients who have already claimed benefits. To start, any individual who has claimed Social Security retirement benefits can withdraw their application within 12 months of doing so. This allows the individual’s monthly benefit to continue to grow, but they (and any family members receiving benefits based on the worker’s earnings record!) must pay back any benefits already received. This strategy could be useful for individuals who decide to go back to work within a year of claiming their benefits. Another option, going in the opposite direction (for those who wish they had claimed earlier) is to elect to receive a lump sum payout of six months of retroactive benefits, which is available to (only) those individuals who have reached their Full Retirement Age (FRA). Thus, a retiree in need of a short-term cash infusion could retroactively start their benefits if they wish they had started earlier (and take the lump sum for what they missed!). The third strategy for recipients who have reached their FRA is to suspend retirement benefits in order to get delayed retirement credits until age 70, at the latest. This option is potentially useful for married couples because, if the higher-earning spouse had originally started benefits early (reducing their payments), subsequently suspending their benefits can increase their benefits again, such that if the higher-earning spouse dies first, the survivor will get the larger benefit amount. Notably, those who claim a retroactive 6-month payment for delaying can do so and then also suspend their benefit after taking the lump sum, receiving the lump sum (for a small infusion of cash) and still earning delayed credits up to age 70! Ultimately, these Social Security strategies become tools in the toolbox for advisors to create significant value for clients or prospects whose financial situation changed after claiming their Social Security benefits.

Why Most Financial Plans Fail (Tim Maurer, Forbes) - Financial advisors, who often pride themselves on their ability to make a difference in their clients’ lives, may be shocked to read studies that show how only a small number of financial plans produced by financial advisors are actually implemented by their clients. But it's less surprising after considering that, in many cases over the year, the financial plan was not actually the product being sold by the advisor: the end goal may have been the sale of an insurance policy or mutual fund, with the financial plan serving as a sales tool that had little relevance once its purpose was served. Which meant there was little incentive for the client to follow through on it (or for the advisor to nurture the recommendations beyond the sale itself) to begin with! Though, on the other hand, even advice-centric advisors with a more holistic financial planning focus can unwittingly succumb to the temptation of focusing too much on ‘advisor-driven solutions’ (e.g., as Roth conversions and tax location) and not enough on the client’s own goals, leaving the client with few emotional stakes to actually follow through on the plan’s implementation. And in some cases, plans can also go by the wayside because of human psychology, both innate (as when people emphasize the wants and needs of the present over our future selves) and learned (as when advisors are trained to leave emotion out of financial decision-making, discounting its power as a motivational tool to inspire action). In either case, when what is delivered as a ‘plan’ is really only a justification for some end that the advisor hopes to realize – whether a product sale or a particular tax, retirement, investment, or other advice strategy – it’s unsurprising that the client would fail to adopt it as their own. The key to a financial plan that actually has a positive impact on a client is for the client to truly be at the center of the process, with the advisor working to emphasize how the plan will not only improve the client’s future but also create value and help the client live their best life today. Such that it’s the client who wants to follow through and is eager to implement their own recommendations.

What Do Clients Really Think About Virtual Reviews? (Julie Littlechild, Absolute Engagement) - Over the course of the COVID-19 pandemic, the number of financial advisors conducting virtual client meetings regularly jumped from a small minority to nearly the entire industry. And while the adoption of virtual meeting technology went smoothly on the whole (especially given the speed and unexpected circumstances that necessitated it!), one common lament of advisors during the pandemic has been that they miss the personal connection of a live, in-person meeting. After all, these review meetings are important touchpoints... not only for the value of the information delivered in the meeting, but also for the ability to build a deeper level of connection in the client-advisor relationship. And for advisors who were trained in an environment where live meetings and all their trappings – from comfortable chairs and optimized meeting spaces to nonverbal cues and firm handshakes – signify exceptional client service, the shift to virtual may indeed make them feel out of their element. But according to recent research, over three-quarters of high-net-worth investors surveyed felt it was still possible to have meaningful conversations with an advisor while meeting virtually, while nearly the same portion rated the quality of virtual meetings to be the same or better than the in-person variety. So while some advisors may feel as though it is harder to create a personal connection in virtual meetings, in reality the client may feel otherwise, and may actually appreciate the ability to meet under their own roof. Which means that advisors who do eventually move back to their offices can use this opportunity to reconsider what parts of their client service their clients actually value, because ultimately, creating a deep personal connection is about being genuine and focusing on the client’s needs, no matter the venue!

The Psychology Of Savings Habits (Steve Wendel and Stan Treger, Morningstar) - Behind the income a household earns (to be able to save in the first place), the greatest contributor to a household’s financial success is the ability to turn their income into saving at a high rate. Consequently, financial advisors are often thinking of ways to convince their clients to save more… which can be challenging because as humans we naturally value our present happiness more than that of the future, making it easier to spend money today than to save it for tomorrow. And while the physical act of saving has never been easier – almost anyone with a bank or brokerage account can easily set up an automatic transfer to increase their savings without having to think about it again – spurring clients to take that initial action can still require creative thinking to frame the issue in a way that the client will respond to positively. One possible solution comes from a study conducted on households in the U.K., suggesting that certain demographics may respond predictably to specific types of motivators to increase (or reduce) their savings rates, which could mean that advisors may be able to tailor their approach to the types of clients they serve to achieve more success in boosting savings. For instance, younger households are less likely to save not because they are lacking self-control but because they simply don’t have the resources to save yet (contrary to the claims of those who say it is actually expensive coffee causing young people to save less); “promotional” goals focused on a specific gain (like buying a house) are associated with higher savings rates, particularly among younger, lower-income “striving” households; goals focused on preventing loss (like maintaining emergency savings) increased savings rates in “striving” households but actually decreased savings rates in more established households; and the personality trait of optimism is actually associated with decreased savings (perhaps because optimistic people are inclined to believe that the worst possible scenarios are unlikely to occur, meaning there would little need for an extra savings cushion, and they’ll just be able to earn more in the future to make up for any shortfall!). For financial advisors, the key takeaways may be that utilizing promotional goals and visualizing a tangible outcome is likely to have a positive response no matter the demographics of the client, while framing savings as a matter of self-control or promoting unrealistically optimistic future outcomes may end up backfiring.

The Life-Changing Magic Of Asking Good Questions [Of Yourself] (RadReads) - Financial advisors are often taught the importance of asking clients good questions to learn about their goals and deepen the personal connection that comes from empathy and gaining knowledge about the clients’ inner selves. But while asking others questions serves a specific purpose in our careers, we are not often taught how to ask ourselves the kinds of questions that can change our perspective of our own personal and professional lives… and open the door to possibilities we may never have considered without asking the right questions in the first place! But knowing how to ask ourselves these questions might be a skill that needs re-learning; as children, we are relentlessly inquisitive but are quickly taught that society values those who can answer questions more than those who ask them. As a result, question-asking tends to drop off as those children grow into adults (and their maturing egos often convince themselves that they know all of the answers anyway, so there’s no need to ask questions to begin with). But in order to discover what is important to help ourselves grow, we need to learn how to ask ourselves the ‘$10k Questions’ that help us discover something new about ourselves. These questions may be broad to start out – even as broad as “What does success mean to me?” – but the right questions will spark further lines of inquiry and, with a commitment to staying honest and continually drilling deeper, can eventually result in a level of self-discovery that is only possible through this process of continual questioning. Because ultimately, while most of us are kept busy every day with tasks of finding answers to client problems, understanding what is truly important to us beneath the surface can only be accomplished by a commitment to asking ourselves the right questions first!

Good Leadership Is About Asking Good Questions (John Hagel, Harvard Business Review) - The concept of leadership is often associated with being the person whom people look to for answers. Yet while it’s true that being an executive in an organization often involves making decisions that require definitive answers, the assumption that providing answers comprises the entire job of a leader neglects another important side of the role: that of being the visionary who asks questions that can help define the challenges and opportunities that the organization will use to grow in the future. These questions have their own intrinsic value, inviting creative and ambitious thinking that can take the organization to new places that would have otherwise been left unimagined. In addition, asking these questions also plays a role in signaling the leader’s high degree of trust in their team members, inspiring the team’s trust in return. And because an organization’s members often take their cues to interact with each other from leadership, openly asking these questions as a leader can have a cascading effect throughout the organization, building a culture where collaboration, learning, and vulnerability are valued; whereas in an organization where people are always expected to have answers, members can become anxious and closed-off when they fear they don’t have the right ones. Ultimately, in uncertain times, while it can be easy to become bogged down in providing answers, leaders who remain committed to asking powerful questions can create a self-reinforcing culture of inquiry that can keep their organizations moving toward exciting future opportunities.

The 25 Most Popular Icebreaker Questions (Claire Lew, Signal V. Noise) - Establishing trust and rapport across an organization has never been an easy task, even in normal times. And in the COVID-19 era, where some or all of an organization’s members work remotely as a fact of life, getting team members to let their guard down and get to know each other can be next to impossible. This is especially so when teams that don’t work directly together are often quasi-permanently siloed apart from each other. Thus, team leaders can find that using icebreaker questions is a good way to spur conversations between employees, and to encourage (not-too-serious) debate during team-building exercises. But the questions must walk a fine line between prompting genuine responses from people and not asking them to reveal something uncomfortably personal. Questions that elicit interesting stories, like, “What was your first job?”, “Have you ever met anyone famous?”, and “Have you been anywhere recently for the first time?” can provoke fun responses and provide opportunities for (gentle) self-effacement (or even the occasional humblebrag). Other popular questions, like, “What’s your favorite family tradition?” use nostalgia to bring people into their comfort zone, and aspirational questions like, “What’s something you want to do in the next year that you’ve never done before?” give people license to talk about their own hopes and dreams. And of course, questions that allow people to defend random irrational loyalties – think “How do you like your eggs?” and “What’s your favorite breakfast cereal?” – often stimulate the longest and most heated (yet good-natured) discussions. There is no single formula for a good icebreaker question (and every team might have a different response to each one), but a question that provokes meaningful and memorable responses from team members goes a long way toward building warmth and trust among their coworkers (and this article gives a handy list of several to try out!).

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 Craig Iskowitz's "Wealth Management Today" blog, as well as Gavin Spitzner's "Wealth Management Weekly" blog.