Weekend Reading for Financial Planners (Jan 14-15)

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 14th/15th:

SEC to Seek Public Input on Fiduciary Cost-Benefit Analysis - Breaking news this week is that SEC Chairman Mary Schapiro is planning to open a public request for information regarding the cost-benefit analysis for putting brokers under a fiduciary duty. While some have suggested that this may be the SEC's way to continue delaying the rule, Knut Rostad of the Institute for the Fiduciary Standard notes that if the SEC's comment period is relatively brief and on-point, this could actually represent a step in expediting the process of implementing a fiduciary rule for brokers. On the other hand, Barbara Roper of the Consumer Federation of America suggests in an Investment News column on the SEC's announcement that the public comment period means there won't be a fiduciary rule in 2012, which in turns means its outcome may ultimately rest on the 2012 elections, as a Republican win in the White House could tilt the SEC Commissioners to a Republican majority and delay further Dodd-Frank implementation.

Asking the Wrong Questions of FINRA - This article by Dan Moisand in the January Journal of Financial Planning look at the recent testimony by FINRA Chairman and CEO Rick Ketchum regarding why FINRA thinks a FINRA-run SRO for advisors would be a good idea. But Moisand suggests that the questions were easy softballs, and don't get at some of the real issues at FINRA, such as the close relationship and leadership positions of Madoff (not just Bernie, but several of his children) in FINRA, the initiatives at FINRA's 2010 annual meeting for transparency that were overwhelming affirmed by members and uniformly rejected behind closed doors, the criticisms of FINRA's mandatory arbitration process, or FINRA's generally problematic regulatory record. Moisand suggests that in reality, the real question that should be asked of FINRA is "Should FINRA continue to exist" at all; a change that sounds almost impossible, yet Moisand notes that the UK recently shut down its SRO as a part of regulatory reform.

Online Scheduling Apps Are Going Mainstream And Coming To Be Used By Consumers - This article by Andy Gluck of Advisors4Advisors highlights the emerging use of online scheduling programs like Tungle (or ZocDoc for the medical industry). The basic principle is simple. Tungle integrates with your calendar (such as Outlook) to present your schedule. You mark on your schedule when you're available for appointments. The people you contact can then set themselves up with an appointment based on your availability, and you both get an email confirmation with the details. No phone calls or staff time necessary. Thus far, it appears applications like Tungle haven't really penetrated the financial planning space yet (although I know a handful of planners who use it), but Gluck notes that online schedulers are becoming increasingly popular in the medical field, which means it may be a matter of just a few years before they go mainstream into other industries like financial services.

Salesforce: More Than Just CRM - This article in Financial Planning magazine by new technology guru columnist Joel Bruckenstein discusses the rise of Salesforce, and suggests that it may still have much further to go. While Retail CRM has thus far been the leader as a cloud-based CRM solution for advisors, Bruckenstein suggests that Salesforce is better positioned for the future. As a much larger platform, Salesforce is already working to integrate social media activity into its CRM, from tracking what your clients are saying on social media to being better prepared to engage them there. In addition, because of the flexibility of the Salesforce platform to work with other companies, there has been a significant increase in vendors integrating with Salesforce (Schwab selected Salesforce as the exclusive CRM solution for its outsourced, turkey solution, Schwb OpenView Integrated Office), and there are opportunities for third party vendors to develop apps that can make Salesforce more efficient for your office (such as XLR8). Overall, it seems like some of Salesforce's capabilities may still be beyond what financial planning firms "need" right now, but as the landscape shifts, Salesforce seems well positioned for the future.

Next Generation Investment Risk Management: Putting the 'Modern' Back in Modern Portfolio Theory - This contribution to the Journal of Financial Planning by planners Jerry Miccolis and Marina Goodman of the Giralda Fund highlights what the next generation of "Modern" portfolio theory might look like, suggesting that the primary problem with MPT is that we are relying on simplifying assumptions that may have been necessary for Markowitz in 1952 but are no longer relevant nor necessary today. Key improvements they cite include a richer analysis of return data that breaks returns into 'quiet' and 'turbulent' times, new measures of risk such as shortfall probability and conditional value-at-risk, more complex models for the interrelationship between assets like copula dependencies instead of a singular correlation statistic, and an enhanced optimization process that can incorporate all these new factors. Readers of The Kitces Report will recognize many of these topics when Miccolis and Goodman collaborated with me for the December 2009 and January 2010 issues of the newsletter, but this latest contribution by Miccolis and Goodman has extended their research even further to reflect upon what may be the next generation of portfolio design; work which, notably, is not purely hypothetical, but is something they have been actively implementing with clients.

Leading Indicators and the Risk of a Blindside Recession - In John Hussman's weekly piece, the discussion focuses on the fact that while some recent economic indicators have improved, it doesn't negate the possibility of a "blindside" recession coming right around the corner.  Hussman criticizes the fact that many are failing to distinguish between leading, coincident, and lagging indicators, are not looking at the reality that some data points are more predictive than others, and most significantly are looking at the individual data point trees but failing to perceive the forest as a whole. Hussman then proceeds to apply this framework in looking at the recent economic data, and concludes that a probable recession is still imminent. Hussman also provides a striking perspective on why the Conference Board's Leading Economic Indicators (LEI) may be giving a false positive signal, due to the abnormal monetary policy environment.

2012: A Year of Choices - This article by John Mauldin on Advisor Perspectives is not just Mauldin's weekly piece; it is his annual forecast article. Mauldin's theme for 2012 is that this is the year the consequences of choices made by the developed nations regarding their debt and deleveraging will begin to really matter and manifest. In reality, Mauldin's piece is actually rather light on actual forecasts (especially compared to some of his prior pieces). But he does a good job highlighting the challenge that many countries are increasingly faced with only bad or worse choices because of the prior decisions that have been made, and yet nonetheless difficult decisions must be made because the can just cannot be kicked much further down the road. Stay tuned for next week's Mauldin piece, which apparently will go into more detail about Europe, Japan, China, and the US.

The Misreading of Reinhart and Rogoff - This piece by Advisor Perspectives' editor Robert Huebscher takes a hard look at how the research of Reinhart and Rogoff has been quoted in the financial press - especially regarding the "threshold" that once debt reaches 90%-of-GDP that everything goes downhill. Huebscher highlights that in reality, what Reinhart and Rogoff say is more complex; on average, economic growth is slower for countries that have higher debt levels, but the data set is limited, and there is nothing magical about 91% debt ratios that wasn't true at 89%. It's also important to distinguish between the debt level where growth slows (approximately 90%), and the "debt intolerance" level where debt markets revolt and demand higher interest rates; the latter can be much higher than the former, as Japan's 200%-of-GDP debt ratios affirm, and Huebscher points out that there are a lot of reasons to believe that the US, as a global economic powerhouse (notwithstanding its debt) and reserve currency status give it far more flexibility than many countries. In the end, Huebscher provides some policy prescriptions about how the US might proceed to address its situation, but also highlights a caution that formulating drastic public policy changes based on limited historical data (such as a major economic policy shift because debt reaches 91% instead of 89%) may be inadvisable.

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!