Weekend Reading for Financial Planners (Jan 24-25)

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 January 24th/25th:

Adviser Pool Continues To Drain, Losing 2% In 2013, But The Trend Is Changing (Liz Skinner, Investment News) - According to the latest research from Cerulli Associates, the number of financial advisers in the US fell again in 2013, down 1.9% to 287,119 advisers (due in large part to a significant reduction in advisors at MetLife, which accounted for almost half of the net loss in advisor headcount). Across the channels, the declines were most significant amongst independent broker-dealers, followed by banks and wirehouses, while the number of RIAs and dually-registered advisers continues to rise. Notably, though, Cerulli found that due to efforts at employee-based firms to reinstate training programs, and the ongoing push from the industry to bring in younger advisors, the total headcount is now expected to rise by a modest 1%/year going forward. The fact that only 4% of advisers indicate they plan to leave the industry in the next 5 years is also slowing the attrition of veteran advisors and supporting the total number of advisors, as the anticipated wave of succession planning turns out to be a mirage (as predicted by some!). On the other hand, Cerulli notes that 21% of advisers still plan to leave or retire in 5-10 years; thus, the industry still faces significant demographic pressures in the longer term.

Rich Millennials More Likely to Keep Advisors Than Poor Millennials (Megan Leonhardt, Wealth Management) - According to a recent new study from TD Ameritrade entitled "Millennial Millionaires in the Making", the risk to advisors of losing assets when their affluent (Baby Boomer) clients pass away may be less severe than previously thought. According to the study, about 71% of high-net-worth Millennials (defined as those under age 35 with more than $500k in investable assets) are currently using their family's financial advisor, and almost 90% of those Millennials plan to stick with the family advisor. By contrast, in the case of mass affluent Millennials, only 40% are using their family's advisor, and 1/4th of those are planning to switch (and a whopping 49% have already switched away). Prior research studies of Millennials who had not yet inherited wealth but expected to have indicated significantly higher anticipated attrition, from a Morgan Stanley study in 2014 that showed only 49% of ultra-high-net-worth young inheritors were likely to continue with their parents' advisor, to a 2012 Campden survey that found 62% of heirs were likely to fire their parents' advisor, to a 2009 Rothstein Kass study that found 86% of heirs with family offices planned to fire their parents' advisors. Ultimately, it's not clear if the higher retention results in the TD Ameritrade study are a sign that advisors are doing a better job connecting with their next generation of clients (perhaps in response to the prior studies), or if the simple reality is that inheritors anticipate in advance that they're going to change advisors but are then much less likely to make the change when the time (and inheritance) comes.

If You’re Looking for a Successor, Hire a Recruiter (Angie Herbers, ThinkAdvisor) - As advisory firms continue to grow, and the industry still struggles to bring in young talent, Herbers suggests that the talent shortage is becoming so severe that advisory firm owners have little choice but to work with a professional recruiter to find the right successor at the right price. Notably, Herbers points out that using a recruiter won't necessarily help to get an advisor hired faster; in fact, the process with a recruiter may even be slower, but only because the recruiter's focus is not just to hire a candidate quickly but to hire the right candidate however long it takes (similarly, you wouldn't want your clients to pick a financial planner based on who does the fastest financial plan, but who does the best plan with the right recommendations!). In fact, Herbers suggests that a good recruiting process should start with an in-depth look at the current firm, and what kind of candidate it really needs (as many firms aren't actually very good at articulating this clearly, leading to mismatches between the candidate and the job), and then an initial round of candidates to review just to ensure the recruiter is on the right track (which in turn often opens up further discussion with the firm owner about what kind of candidate is really the "right" fit). Ultimately, it may even take a few rounds of candidates to find the best match. Notably, Herbers also points out that it's important for the firm owner to vet the recruiter as well - does the recruiter actually have experience with firms like yours, what's their process for finding and placing candidates, how many candidates have they placed, and do they have a supply of potential candidates right now to get the process started?

Some Financial Advisers Abandon Asset-Based Fees (Robyn Post, Reuters) - While advisors who are involved in the active selection of individual stocks or funds continue to charge AUM fees, a number of advisors who are focusing more on passive investment vehicles - or are eschewing asset management altogether - are increasingly looking at using flat annual or monthly retainer fees instead. The trend also appears to be more popular for those who provide substantive financial planning services as well, charging a blend of a partial retainer fee for planning services (or a financial "counseling" fee) and a (lower) AUM fee for investment management. One advisor example in the article felt pressured by a client who realized his AUM fee on his $5M portfolio was his single largest expense, and upon realizing that the advisor "only" spent about 30 hours on the client himself, converted to a much lower flat yearly retainer instead that was much cheaper for the client but still fair compensation for the advisor's time. In fact, a number of advisors suggest that the trend is especially appealing for higher net worth clients, where the cost savings of a flat-fee-versus-AUM-fee structure can be significant.

How Virtual Advisors Can Create Their Ideal Office (Alan Moore, XY Planning Network) - As the technology tools continue to approve, the number of advisors working mostly (or entirely) virtually with clients is on the rise, and the approach is especially appealing for newer advisors who may be eager to control startup expenses by avoiding the cost of a physical office space altogether. Other advantages to meeting virtually with clients include: it's more efficient for the advisor (no need to get ready for an in-person meeting 20 minutes ahead of time in case clients show up early!); it's more efficient for the client (no need for clients to sit in traffic, get a babysitter, find parking, etc.); expands the potential client reach (no need to be constrained to "just" clients in your local geographic area); and allows the advisor to be more mobile and flexible (whether it's moving to another state, or taking extended trips/"vacations" while still doing occasional client meetings from the road). For those who want at least "some" office space, an alternative for the mostly-virtual advisor is to set up an office space in the advisor's home (though notably, some homes have a better physical layout/arrangement for this than others), or to use (i.e., rent) part-time office space facilities like Regus (available on an a la carte or bundled monthly subscription for a range of office and support services), or even to find co-working spaces (which have been popular in the tech community but are springing up now for more industries as well). Another option for client meetings is to use third-party locations, from meeting in the client's home (which may help improve the personal connection, but can be a hassle for clients with busy lives who feel pressured to "clean up" first), to meeting in a restaurant or coffee shop, to using/"borrowing" the office space of a Center Of Influence (COI) with whom you already have a relationship. Ultimately, some advisors will still feel the need to have an established, full-time physical office space, but Moore cautions that the need for such arrangements may be increasingly overrated, and are often more expensive than anticipated (especially for startup advisors).

Gay Marriage May Be Legal Across U.S. After Supreme Court Review (Greg Stohr, Bloomberg) - The Supreme Court has agreed to hear a case in April that could lift the bans that remain against same-sex marriage in 14 states, to resolve a series of four underlying court cases involving same-sex couples whose states will not allow or recognize their marriages (which has been a challenge for everything from same-sex couples seeking jurisdictions to marry, to corporations struggling with employee benefits issues that vary for same-sex employees based on the state in which they live). From the legal perspective, the focus is the case is on two key issues: whether a state must give licenses to same-sex couples (i.e., whether same-sex couples have a Constitutional right to marry), and whether a state must recognize out-of-state (same-sex) marriages even if not allowed within the state. Some courts have suggested that the issue should ultimately be resolved with legislation, not through a court case, although with the latest Gallup survey showing that 55% of the public supports gay marriage (up from 27% in 1996) a legislative solution may soon become feasible as well. Supporters suggest that the Supreme Court's decision in United States v. Windsor in 2013 indicates that the Supreme Court will rule in favor of same-sex marriage (especially since "swing voter" Justice Kennedy, while traditionally conservative, has been a champion of gay rights over the past 20 years), and President Obama has indicated that his administration will file a brief backing the couples.

Encore Nation (Mitch Anthony, Financial Advisor) - As the concept of retirement continues to be redefined, an organization has emerged called "Encore" to help celebrate and support those beyond age 60 who still wish to "work" and contribute to society. At their annual conference gathering, Encore awards its "Purpose Prize", where individuals (over age 60) who are making unique contributions to their community in their "Encore" phase of life are granted prizes up to $100,000; recent winners include on individual who retired from heading a telecommunications company and has since launched a global network of 91 therapeutic riding centers for children with disabilities, while another individual who has become nearly blind is using help adaptive technology to help other blind people find jobs, and yet another individual founded a family life center in his rural community, boosting student high-school graduation rates and economic potential. More generally, Encore and the Purpose Prizes are meant to celebrate "gray-headed 'social entrepreneurs'" who are using their experience, wisdom, talents, and resources to engage in second "encore" careers for social good. Yet ultimately, Anthony suggests that the real point is not merely the success that Encore is having for those who eschew the traditional retirement approach, but that Encore may represent what "retirement" should really be in the first place.

Five Life Insurance Game-Changers In 2015 (Brian Greenberg, Wealth Management) - While there has been a great deal of buzz lately about how the adoption of technology is impacting financial planning, this article highlights a number of ways that technology is impacting the world of life insurance as well. For instance, a number of insurers have been experimenting with no-medical-exam "simplified" underwriting (though there is still a health questionnaire and some medical information may be requested); the coverage is typically slightly more expensive, and has limited coverage amounts (e.g., no more than $400,000 of death benefit, though the insured might apply for and obtain several policies at once from different carriers), but may be very appealing for those who just need to quickly and easily get some term insurance coverage with a digital application process that allows coverage to be issued in 24 hours (though beware that also means a quick decline could be coming, too!). Other notable changes include: coverage costs overall are declining, a function of both improving health/longevity and also the technology efficiencies of the insurance companies themselves; the "hybrid" life/long-term care insurance policies have been increasingly popular, including policies with Chronic Care and Critical Illness riders (allowing an acceleration of the death benefit in such situations); even with "full medical exam" insurance applications, the process is increasingly digital/online to apply, followed up with a paramedic exam, allowing clients to avoid both paperwork and even eliminating the need for a face-to-face meeting with an insurance agent (as digital signatures are now being accepted for insurance policies).

The Advantages of a Dynamic Retirement Income Strategy (Joe Tomlinson, Advisor Perspectives) - Most retirement research is built assuming that clients spend the same (inflation-adjusted) dollar amount throughout retirement, reflecting both consistent needs over time and an assumption that retirees can't/won't adjust their spending more dynamically (e.g., in response to their investment experience). However, Tomlinson notes that while dynamic retirement strategies may be more difficult to analyze and model, a deeper look suggests that there may be far more value to dynamic spending than commonly realized. For instance, one strategy that recalculates potential spending each year - but with a preference towards stable income - finds that dynamically adjusting spending up (conservatively) when times are good, with the potential for (usually modest) cuts in severe downturns, can produce results with significantly more spending but only very slightly higher failure rates, as retirees mostly trade off "excess" wealth at death for more spending along the way. In his study, Tomlinson also finds that from this perspective, using a single premium immediate annuity to help fill the income gap can largely eliminate the potential failure rate, but the narrowing of the outcomes eliminates both upside as well as downside (which may be appealing to very risk averse investors). Notably, though, Tomlinson points out that the difficulty in creating dynamic spending strategies is determining what kinds of trade-offs clients will be comfortable with in the first place, both from the modeling perspective (to determine the proper utility function for retiree spending preferences), and simply to explain and get buy-in from the client on the strategy itself.

How To Look Smarter (Sue Shellenbarger, Wall Street Journal) - There is a growing base of research about how people form first impressions of others' intelligence, and also how well it works when you try to manage those impressions. One major study analyzed the problem with a series of videotaped sessions, where one person tried to "appear" intelligent while talking to another in a recorded conversation, and then a third group of participants watched the videos and judged whether the person "appeared" to be intelligent. The striking findings: common behaviors like trying to have a more serious facial expression and holding hands/arms still had no positive impact, nor did using bigger words and more complex sentences. In fact, those who were asked to try to appear intelligent most commonly "tried too hard", and those with lower intelligence were more consistently judged as such when they tried to hide it! On the other hand, the most effective behaviors included looking at others while speaking, and standing or sitting up straight. More generally, the researchers found that people judge the intelligence of others by assessing whether they appear self-confident, are responsive in conversation, speak in a pleasant and expressive voice, and use clear language. Notably, though, a few "unexpected" cues of intelligence showed up in the results as well; for instance, those who wore glasses were viewed as more intelligent, along with those who used a middle initial when writing out their name! But overall, the most significant finding across several studies remains: the more you try to appear intelligent, the worse it tends to go, whereas being clear, direct, and authentic usually ends out being more credible.

Three Reasons why Robo-Advisors are a Huge Benefit to the Advisory Profession (Bob Veres, Advisor Perspectives) - While there has been a great deal of recent buzz about the "threat" of robo-advisors to today's financial advisors, Veres notes that virtually no financial advisors are reporting losing any actual clients to the online platforms. In fact, Veres suggests that the technology that robo-advisors represent will actually be far more beneficial to (human) advisors than any threat to them. For instance, the fact that robo-advisors are taking in at least some assets, but apparently not from existing advisors, highlights the fact that robo-advisors may actually be making the "pie" bigger, expanding the total number of people who consume financial services, and who are not clients of advisors today anyway but now may become clients in the future (especially as they accumulate wealth and their planning needs and situation become more complex and need deeper and more personalized advice). Similarly, the fact that the robo-advisor technology is making it feasible to serve clients often not served today means the technology also potentially opens the door for (human) advisors to leverage that technology for themselves - a trend that is already underway, with a long list of "robo" platforms now offering institutional versions of their platforms for advisors, from Betterment Institutional and JemStep to Folio and Motif Investing and more (not to mention Upside Advisor, which skipped the direct-to-consumer stage and launched with an advisor platform from the start). These platforms as advisor technology tools provide a means for advisors to serve "smaller" clients at a low price point, while providing higher-value higher-cost services to higher-net-worth clientele. Notably, Veres also suggests that the technological progress of the robo-advisors is putting pressure on traditional custodians, raising questions about their costs and the quality of their services... with the potential competitive pressure to ultimately bring costs down for advisors while raising service levels as traditional players seek to compete for advisor services, or risk having (especially newer) advisors build their entire business on a new "robo" platform and never using a traditional custodian at all, now or in the future!

McDonald's Fixes Its Marketing, Chipotle Fixes Its Product (Josh Brown, Fortune) - With four straight quarters of declining sales and "horrific" losses in market share, McDonalds has gone on the marketing offensive with a new wave of television commercials and other advertising. Yet Brown suggests that McDonalds may be wasting its money, and that any marketing benefit will be ephemeral at best, as the US becomes more health conscious, has open access to nutrition information from their smartphone, and the outright quality of McDonald's food continues to decline - last year, their signature offering, the "Big Mac", was ranked dead last (21st out of 21) as America's worst hamburger. By contrast, Brown points out that while McDonalds had a 30% plunge in net income last fall, Chipotle reported a 31% increase in revenue and a whopping 57% jump in profits. While Chipotle is still a much smaller organization (with about 1/10th the stores), the difference in growth trajectory is still stunning, and Brown attributes the difference to the fact that Chipotle not only has a better product, but is so focused on the integrity of its product - right down to the fact that a few weeks ago, Chipotle stopped all sales of their carnitas (pork) burritos and tacos because the organization found out that one of its pork suppliers was not living up to the company's "Responsibly Raised" farm standards. Notably, this wasn't about substandard, tainted, or "dangerous" meat, but simply that the meat wasn't being raised in a manner consistent with the company's promise to customers. While there may be a short-term hit to Chipotle until the problem is resolved (carnitas are estimated to account for approximately 7% of Chipotle customer orders), Brown makes the case that as long as Chipotle remains so dedicated to its integrity and its customers, the customers will quickly return to the good product. More generally, though, the point of the McDonalds vs Chipotle parable is that when the product is bad, marketing alone is not a sustainable solution, and that it's key to focus on the product and the customers/clients first.

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!

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. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read "FPPad Bits And Bytes" on his blog!