Weekend Reading for Financial Planners (Oct 9-10)

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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'Pandora Papers' Leak Exposes Financial Secrets Of Rich And Powerful (The Guardian) - On October 3, the International Consortium of Investigative Journalists published a trove of leaked financial documents detailing the methods that some of the world’s most wealthy and powerful individuals employ to conceal their assets. Dubbed the ‘Pandora Papers’, the leaks continue what has become an ongoing series of revelations (starting with the ‘Panama Papers’ in 2016 and followed by the ‘Paradise Papers’ in 2017) that have exposed the inner workings of a “shadow financial system” of offshore accounts, trusts, and shell corporations. And while they are often legal in the technical sense, these entities, with their complex and opaque structures, have also facilitated tax evasion, fraud, and money laundering, and the journalists involved highlight how they have contributed to ongoing political corruption and inequality worldwide. The current batch of leaked documents names hundreds of individuals who have taken advantage of this system to shelter their wealth, ranging from current and former political leaders, to celebrities, to business executives. The most notable revelation, however, may be just how much of the global sheltering of wealth occurs within the United States itself, either via the purchase of assets like real estate and art or through professionals such as lawyers, accountants, and trust companies, who enable the flow of overseas money into the country. This is because, unlike traditional banking, these ‘gatekeeper’ industries are generally not required to conduct due diligence on their clients, enabling foreign funds to enter via, for example, a state with trust-friendly laws like South Dakota, without encountering any attempt to trace their source. In response to these reports, a bipartisan group of lawmakers has already introduced legislation (pointedly titled the ‘Enablers Act’) that would require the Treasury Department to impose due diligence requirements and other anti-money-laundering rules on these industries. But even though the United States and other countries are promising to take quick action to regulate the structures that have led to this type of abuse, details from the Pandora Papers leak itself show that many of the reforms enacted after the previous two leaks only caused the offshore shifting of money to grow even more complex and opaque… meaning that, while international authorities may now be one step closer to catching up to the “shadow financial system”, if they truly want to bring it under control they will need to take more action going forward rather than simply waiting for the next leak to drop.

FINRA Targets Firms' Social Media Activity (Patrick Donachie, Wealth Management) - The past 12 months have seen a fundamental shift in the relationship between the financial services industry and social media. This was fueled in part by the ‘meme stock’ phenomenon driven by Reddit and YouTube users in early 2021 (as well as by the long-awaited updates to the SEC’s Marketing Rule to allow client testimonials in financial advisors’ advertising), and almost overnight the industry’s stance toward social media changed from hesitant acceptance to wholehearted embrace. So it is only natural that industry regulators are now starting to take a closer look at firms’ social media practices for any signs of untrue or misleading information. To this end, in September FINRA released an exam letter describing how it plans to review how firms use social media to acquire new clients… specifically, whether and how they contract with outside individuals (e.g., ‘Influencers’) to post about the firm. But the regulator’s approach could have a significant impact on firms’ relationships with social media influencers because, as with any advertisement, firms are required to provide proper disclosures and adhere to written social media and privacy policies, and they must train and supervise those who work for them to ensure those policies are followed. However, as the recent $4 million fine of MassMutual for failing to properly supervise the social media posts of its employee (the Gamestop-touting Keith Gill, a.k.a. ‘Roaring Kitty’), regulators may take the view that firms need to supervise the activities of the influencers they contract with even when they aren’t posting about the firm, which could prove too burdensome for many firms to manage, and risks leading broker-dealers to instead start prohibiting their advisors from using social media platforms altogether (rather than risk opening the can of worms). Ultimately, however, the new generation of enthusiastic, social media-driven investing that has rapidly eclipsed slower traditional media like print and television may simply lead to a similarly updated regulatory approach that protects investors from false and misleading information and reflects the realities of modern, social media-based marketing.

Regulators Want Investors To Give Advisors A 'Trusted Contact' (Cheryl Winokur Munk, Barron’s) - In recent years, regulators have stressed the importance for financial firms to obtain a ‘trusted contact’ for each of their clients. This is someone whom the firm would be authorized to contact if they had a concern about activity in the client’s account (e.g., concerns about diminished mental capacity, elder financial abuse, etc.) and were unable to get in touch with (or cannot discuss with) the client themselves, and it is a potentially important tool in protecting seniors and other potentially vulnerable individuals from abuse and financial fraud. But while FINRA member firms, i.e., broker-dealers, are required to at least request a trusted contact for each client when opening or changing an account (though they are not required to actually obtain one), RIA firms have no such requirement. Consequently, many investors may be lacking a trusted contact with their advisory or brokerage firm, and in response, a group of financial regulators including FINRA, NASAA, and the SEC’s Office of Investor Education and Advocacy has launched a website directly targeted at clients of financial firms encouraging them to establish a trusted contact. Notably, the site emphasizes that individuals of all ages and abilities can benefit from having a trusted contact on file, which could be used in circumstances ranging from suspected fraud to displacement due to natural disaster to simply traveling outside of the country and being unreachable via phone or email. Ultimately, however, even firms that obtain trusted contacts from clients still need to know how to recognize signs of fraud and abuse, and use the available industry tools to identify and put a stop to it.

New Commission-Free Contingent Deferred Annuity Product Targets RIA Market (Emile Hallez, InvestmentNews) - Financial advisors working with clients nearing retirement age have to contend with sequence of return risk, the chance that a client’s portfolio will decline dramatically in the first years of retirement and potentially permanently impair the portfolio withdrawals the client will be able to take. Guaranteed income products like annuities – which can reduce the need for portfolio withdrawals during periods of poor investment returns – represent a potential solution to this problem, but the commissions and annuity-limited investment choices associated with the products have deterred some advisors (particularly fee-only RIAs that prefer to manage retiree portfolios directly) from recommending them to clients. With this in mind, Aria Retirement Solutions’ RetireOne has introduced a new fee-based contingent deferred annuity product that attempts to solve both of these concerns. In addition to being commission-free, the new product also tries to differentiate itself from other variable annuities that offer guaranteed living withdrawal benefits by offering underlying investment options that are not controlled by RetireOne, but rather wrap the annuity’s guarantees around existing investment accounts that advisors may already be managing via a variety of RIA custodians. With the “Stand-Alone Living Benefit” (SALB) product, once the assets in the investment portion of the account have been depleted, the insurance component begins making payments in retirement, providing protection in case of an unfavorable sequence of investment returns that cause depletion. The protection does come at a price, though, with the company expecting fees on the product to range from 1.3% to 1.6%/year for most clients (on top of the advisor’s own fees, and whatever the underlying costs are of the investment vehicles the advisor is using in their client accounts). While this new product provides another option to generate retirement cash flows while managing downside risk in an invested retirement account, the ultimate question is whether advisors and their clients will find the cost tenable relative to other alternative strategies to meet client retirement spending needs, including implementing spending guardrails or even using a plain simple ‘old-fashioned’ immediate fixed annuity!

Are Low Interest Rates Driving Advisors To Annuities? (Bernice Napach, ThinkAdvisor) - The low-interest-rate environment in recent years has dampened bond income, and the portfolio stabilizing benefits that come with it. To help counter this trend, financial advisors looking to provide retirees with a steady stream of income have pursued a variety of alternative options, according to a recent advisor survey by insurance and annuity broker DPL Financial Partners. The most popular strategy among those surveyed was to allocate more heavily to dividend-paying stocks, but the second-most frequent response was to allocate a portion of a client’s fixed income holdings to an annuity. In addition to Social Security, 32% of advisors said they used income annuities to fund essential retirement expenses, up from 13% in 2020 (although the composition of the advisors surveyed across the years might have changed). A majority of advisors surveyed said providing predictable income was more important than asset growth for their (retired) clients, further buttressing the potential attractiveness of annuities for their clients. DPL also questioned whether advisors charging clients based on Assets Under Management (AUM) are living up to fiduciary standards if they keep clients in low-yielding bonds (which they charge fees on), rather than potentially higher-yielding annuities that many RIAs have resisted because it can take money out of their billable managed portfolios (although billing options do increasingly exist for advisors using fee-based annuities). Nonetheless, bonds can provide portfolio benefits beyond income, including managing the risk of equities, and remaining available to be bequeathed at death, but advisors who once shunned annuities appear to be considering whether they are now more attractive for clients who desire more stable cash flows throughout their retirement.

Historical Returns Distort The Analysis Of Annuities (David Blanchett, Advisor Perspectives) - Low interest rates not only can impact financial products that are more directly tied to rates (such as bonds and savings accounts), but also products that depend on underlying investments that are sensitive to interest rates. For example, for accumulation-focused annuities like Fixed Index Annuities (FIAs), bond yields help determine the maximum upside (or ‘cap’) of the product since the insurance company can use the yield from bonds purchased to buy options that create the product’s cap. And so, when low interest rates drive bond yields downward, the cap on FIA crediting options (and similar annuities) is also reduced. Accordingly, Blanchett argues that using historical interest rates (that were significantly higher than today’s rates) to analyze options-based annuities can mislead clients into thinking there is greater upside potential to the product than would exist in actually purchasing one at today’s interest rates. For example, according to his calculations, when bond yields are 8%, the cap on an FIA would be about 15%, but when yields are around 2.5%, caps are closer to 5%, dramatically lowering the potential upside of the FIA! Blanchett also warns about treating FIAs as substitutes for bonds because, unlike bonds that have almost no historical correlation to stock returns, FIAs still have a positive correlation with stock returns (given that their indexing formulas are ultimately tied to market returns). With this in mind, financial advisors can consider not only whether these products are appropriate options for clients seeking upside with reduced volatility in a low interest rate environment, but also the importance of accurately explaining how the expected returns from a product are likely to differ from historical returns!

Free (Or Almost Free) Tools For Sending Better Emails (Lindsey White, XYPN Advisor Blog) - Email can take up a large part of a financial advisor’s time, particularly for solo or small-firm advisors without dedicated marketing or client service teams, and the question of how to better leverage email communication is often top-of-mind. Notably, though, not all types of email communication necessitate the same style in the first place. For instance, marketing emails need to stand out in a subscriber’s crowded inbox and inspire action, while everyday client communication needs to be clear and detailed… and, of course, all email needs to be grammatically correct and free of typos. And as anyone can attest who has ever spent untold amounts of time writing detailed instructions to a client that could easily be described in a five-minute instructional video, sometimes the most effective approach toward email is to eliminate the ‘writing’ part entirely, and embed a brief video instead (e.g., using Vidyard, BombBomb, or Loom)! Accordingly, White provides a list of potential solutions to help, ranging from free to $29/month, including tools that advisors can use to easily add graphic design and images to emails (Canva, Pexels, The Noun Project), eliminate back-and-forth scheduling threads (Calendly), and scan for grammatical errors (Grammarly), in addition to the aforementioned tools for sending personalized videos to clients and prospects. As long as email exists, it will still likely take up part of an advisor’s day, but for minimal or no cost, it's possible to make that email more impactful, while spending less time on it.

What Are Local Service Ads For Financial Advisors? (Samantha Russell, Advisorpedia) - Google Ads are a common way for advisory firms to establish a presence at the top of the results page for the most popular Google searches like “financial advisor near me”. But while this prominent position has value, and advisors can engage in local SEO tactics to improve their positioning in search results, traditional Google Ads are designed to blend in with the other ‘organic’ search results, and therefore can make it difficult for a firm to truly separate itself on a search page. So Google’s introduction of Local Service Ads (LSAs), which appear at the very top of the page (above even traditional ads), might be of interest to advisory firms that want to distinguish themselves in a different way. Compared with a traditional Google Ad, which typically comprises a hyperlink and a block of advertising copy, LSAs provide more ‘qualifying’ information about the advisor to potential leads (such as the advisor’s Google Reviews score, number of years in business, and a “Google Screened” checkmark for advisors that have undergone a background check with Google), as well as business hours and actionable contact information (e.g., a link to call or book a meeting). Furthermore, LSAs are not only limited to the firm’s physical location, but can cover their entire service area… meaning that an advisor that serves multiple areas (which is increasingly common as advisors go virtual and market by niche rather than geography) can advertise anywhere they serve clients. But LSAs also have potential downsides, like the fact that the advisor is charged for the ad each time a “valid lead” contacts the advisor through the LSA (which could add unnecessary expense if the LSA generates a lot of leads who are ultimately not the right fit for the advisor). Overall, while LSAs may be a good way to generate additional visibility at the top of a search page, and can better ‘qualify’ the advisor in the eyes of potential leads than traditional Google Ads, Russell suggests that they are only one potential marketing channel in a long-term approach that could also include generating organic search results by producing content to attract ideal clients… which, in addition to being ‘free’, is often more relevant to potential leads and therefore more likely to generate qualified leads than any type of ad.

More Investors Are Vetting Their Advisors On Social Media (Tracey Longo, Financial Advisor) - So many of our day-to-day decisions are impacted by social media – where we get our news, what we watch, where we shop, who we vote for, etc. – that it is only natural that social media would become a part of the decision to hire a financial advisor as well. And as a new survey from Hartford Funds finds, this is increasingly what is happening, with almost half of investors reporting that social media is a factor in whom they hire as a financial professional, and 20% reporting that it is the deciding factor. Furthermore, given different age groups’ embrace of different social media platforms, advisors who want to appeal to multiple generations of clients increasingly need multiple digital presences to remain relevant to those groups. And while the social media presence itself has value (because prospective clients vetting potential advisors often take it as a sign of legitimacy when an advisor has a presence on multiple platforms), the content of the advisor’s messaging can also shape how clients view and, ultimately, decide whether or not to hire the advisor. Because social media can be the advisor’s opportunity to ‘preview’ aspects of their service – like knowledge, personality, and responsiveness – that the prospective client otherwise would not see unless they actually booked a meeting with the advisor. So even for advisors who don’t consider themselves social media savvy, establishing a presence that at the very least shows that the advisor is in business and available to engage with (current and prospective) clients may be necessary to reach the increasing number of individuals who see that as a minimum requirement to be considered further.

Believing In Yourself Is The First Step To Achieve Anything (Darius Foroux) - Self-confidence can be fragile for many people. A professional success one day can lead to an abundance of confidence, while a small mistake can cause doubts about one’s skills and abilities. Financial advisors are not immune to this either, as ‘impostor syndrome’ (thinking that one is unqualified for a position or opportunity they have received) can creep in when faced with the enormity of being responsible for a client’s entire financial livelihood. Advisors can also be blamed for investment losses, causing self-doubt even if the decline was to be expected and the portfolio allocation was sound. Nevertheless, there are steps that advisors can take to help maintain their self-confidence. Being able to recognize one’s unique strengths and abilities, and following through with them at work, can build confidence. In addition, earning additional credentials, such as the CFP designation, can build confidence in one’s qualifications (and diminish imposter syndrome). Gaining this self-confidence can not only improve an advisor’s energy, but also be particularly lucrative for their business, whether it is from better demonstrating value to clients or gaining more referrals. Ultimately, building self-confidence starts with identifying the smallest doable step that can lead one on the path toward their goals, and regularly reassessing their situation to discover opportunities for the next step forward.

Even Great Advisers Can Use A Coach (Tony Vidler) - Coaches are ubiquitous throughout individuals’ lives, from the first soccer coach, to a professional coach who provides the guidance to get a career jump-started. Some financial advisors take a coach approach toward their clients, and financial coaching has become a business opportunity in itself. Yet while the value of a coach to those just starting out is more apparent, the need for a coach once professionals have hit a comfortable place in their career is often less considered. For advisors, the jumps from working as an employee advisor to starting a solo practice to building a business entail significant changes in mindsets and responsibilities that can benefit from coaching. An advisor who has strong skills in the craft of financial planning might have more difficulty with the tasks that come with running a business, such as managing people and resources. Those who do master these additional responsibilities can end up looking inward, focusing on driving efficiencies, rather than looking outward for opportunities to grow the business further. Vidler, a coach himself, suggests coaching can be particularly valuable in challenging the advisory firm owner’s thinking and leading them to consider what is possible. The key point, though, is simply that coaching is not just valuable for those who are struggling, but can help even the most seasoned firm owners take their business to the next level!

Your Life Is (Almost) A Call Option (Byrne Hobart and Jack Wiseman, The Diff) - Options are a popular financial product because they offer the promise of significant upside (based on the growth/returns of the underlying investment) but at ‘just’ the cost of the option itself. In fact, those holding out-of-the-money options hope for increased market volatility that will (hopefully) bring even more opportunity for the price of the underlying investment to be in the money. At the same time, Hobart and Wiseman suggest that individuals and businesses have opportunities to take similar longshot bets on themselves, with similar (and potentially dramatic) reward opportunities. Some of these are likely to have a negative risk-adjusted return (and are morally dubious!), such as committing financial fraud, but others share similar dynamics with an out-of-the-money option. This could include applying for a highly competitive job opening that seems unlikely (but what if it does work out!?), changing careers into a new profession with more upside potential (e.g., career-changing into becoming a financial advisor!?), or starting a new business rather than operating as an employee. Yet ironically, many successful professionals try to dampen the volatility in their lives, as those who have reached a comfortable position might not want to risk their position, even if it means missing out on the potential for dramatic upside benefits. For financial advisors, this could mean transitioning from a broker-dealer to an RIA, transitioning from a lifestyle practice to a larger advisory business, or alternatively breaking away from a larger firm to start a solo practice instead. And while career decisions do not have the same clean math as call options, the potential financial and lifestyle upside can make buying one of these ‘options’ a risk worth taking! Ultimately, though, the key point is simply that if you don’t put yourself in the position that an ‘extreme upside’ event at least could happen, it most definitely never will.

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.