Weekend Reading for Financial Planners (Apr 13-14)

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.

Envestnet To Offer Pre-Qualified Loans For Advisors' Clients On New Credit Exchange (Ginger Szala, ThinkAdvisor) - This week, Envestnet announced that it will soon be launched the "Envestnet Credit Exchange" in partnership with Advisor Credit Exchange to facilitate advisors' ability to provide (pre-qualified) loans to clients for real estate, commercial or business loans, and for securities-based loans. The exchange will function as a kind of "credit storefront," where advisors can log into the Envestnet system and shop with clients directly to find loan offers (that will be generated in real-time and available immediately). From a practical perspective, the appeal of such a platform is that it becomes a means for independent advisors, from RIAs to broker-dealers, to have more direct access to bank lending capabilities that traditionally have only been available at wirehouses or banks offering wealth management. More generally, though, the new Credit Exchange appears to fit within Envestnet's broader shift towards being a more "holistic" financial wellness platform for advisors, in a world where advisors have historically been constrained to only offer advice in their "industry channel" (e.g., investments and/or insurance). And ultimately, creating a Credit Exchange gives Envestnet another way to leverage its technology platform as a distribution channel for various financial services products as it continues to expand from its roots distributing third-party separate account managers into also supporting the distribution of insurance and annuity products, and now credit/lending products as well.

Betterment (And RBC) Rush To Exploit Fissure Between Dimensional Fund Advisors (DFA) And RIA Custodians (Brooke Southall, RIABiz) - Earlier this week, robo-advisor Betterment announced a deal with Dimensional Fund Advisors (DFA) to make its mutual funds available through Betterment's RIA unit (Betterment For Advisors). In fact, the new DFA offering will only be available to the Betterment RIA division (and not directly to consumers through its retail platform), and advisors will still have to go through DFA's own vetting and training before being allowed access to the DFA funds on the Betterment platform (as is typical for most of DFA's advisor partnerships). From Betterment's end, the announcement is a big deal not only because of the DFA partnership as well, but also because it signals that Betterment will now be able to handle trading and especially the transferring-in of mutual funds (as Betterment historically was a purely-ETF platform). The broader significance of the announcement, though, isn't merely that Betterment will be giving access to DFA funds for its RIAs, but that Betterment's RIAs will get access to DFA funds with no additional expense (beyond Betterment's existing platform/wrap fee)... unlike most traditional RIA custodians that still assess higher ticket charges for many DFA (and Vanguard) funds in light of the fact that those fund companies are notorious for refusing to pay any revenue-sharing or shelf-space agreements with RIA custodians (forcing them to charge advisors' clients more to make up the difference, with $10 to $30 ticket charges being common). Or viewed another way, Betterment's deal with DFA highlights the potential of RIA custodians charging a standardized basis-points custody/platform fee... which then obviates any need to make money back from asset managers, or by racking up (higher) ticket charges to clients, in turn making it feasible for the platforms to become more open and uniform in their fund offerings (as Betterment is now demonstrating with DFA funds available for no trading fees).

FINRA Guidance Could Help Departing Reps Hang Onto Clients (Mark Schoeff, Investment News) - With the rising volume of brokers breaking away from broker-dealers, either to go from a wirehouse to an independent broker-dealer, or to depart either a wirehouse or independent broker-dealer to become an independent RIA, there is a growing level of acrimony between departing brokers and their former firms over who keeps control of the client and what can be said (or not) to those clients when the break-up happens. Accordingly, FINRA has now issued a new "Customer Communications" Regulatory Notice 19-10, which explicitly urges brokerage firms to "communicate clearly, and without obfuscation, when asked questions by customers about the departing registered representative," and that the firm must also clarify that the customer can remain with the brokerage firm or transfer assets elsewhere... including providing the former broker's contact information (if the customer requests it, and the former broker provided it, which will likely lead to brokers now including their new contact information in their resignation letters going forward!). The real significance of the guidance, though, is not merely that it's arguably more pro-consumer - better enabling clients to keep their own control about who they work with and where - but that it gives departing brokers another way to (re-)gain contact with their former clients, potentially creating at least a partial workaround to broker non-solicitation agreements and/or for firms that have left the Broker Protocol. In addition, the guidance should also reign in the unfortunate tendency of some firms to bad-mouth their former brokers after leaving and reduce the potential for ex-broker arbitrations over alleged defamation as well (though FINRA does note that the vast majority of broker-dealers are already acting consistently with the guidance).

Schwab Pursues Advisors Who Jumped To Morgan Stanley (AdvisorHub) - Last month, Schwab filed a request for a Temporary Restraining Order (TRO) and preliminary junction against two departing high-net-worth brokers who were leaving to join Morgan Stanley to prevent the brokers from contacting (or even taking any client contact information regarding) their former clients; specifically, Schwab alleged that they both took "confidential information" (i.e., names and/or contact information) about their now-former clients, and also "failed to give four weeks' notice in advance of their resignations" (which would obviously be problematic for the departing brokers as it gives the firm a 4-week headstart to contact and retain their soon-to-be-former clients, or would even force them to transition their own soon-to-be-former clients to other advisors already at Schwab). In fact, Schwab specifically noted that the broker "printed out some or all of his entire practice list three times shortly before he resigned, and without any apparent legitimate business reason, reviewed in rapid succession 148 client-overview screens in a proprietary database about a week before he resigned," providing a fascinating and somewhat dystopian view of how tightly large firms monitor the seemingly mundane activities of their brokers. The greater irony of the situation is that, while historically, it was wirehouse firms that filed TROs and sought injunctions against their brokers leaving for the RIA channel, now its the employees at discount brokerage firms that are triggering such lawsuits as well (in this case, while trying to go to a wirehouse instead!). The actions by Schwab appear to be part of a larger trend, that as the discount brokerage firms that historically serviced self-directed investors - like Schwab, Fidelity, and E*Trade - have focused more on delivering wealth management services themselves, the firms have increasingly adopted the tactics of other captive wealth management firms in implementing and (increasingly aggressively) pursuing non-solicit clauses and similarly restrictive employment agreement provisions.

Mega-RIA Edelman Financial Engines Pursues Departing Advisors (Mason Braswell & Jed Horowitz, AdvisorHub) - In recent months, Edelman Financial Engines (EFF) has reportedly "sought restraining orders and millions of dollars worth of damages" since September from at least 3 advisors who left Edelman's firm to launch their own. EFF alleges that the advisors violated their employment contracts by soliciting their former clients and taking "proprietary information" (e.g., client information?) with them to their new firms. Notably, though, Edelman has not succeeded in all of its cases; while in one case, Edelman did win a restraining order against two Cleveland-area advisors who joined Stratos Wealth, in another FINRA arbitration, a $3.2M claim from Edelman's firm was dismissed and it was ultimately ordered to pay the advisor and his new firm $160,000 in legal fees plus interest, and in yet another case in front of a Kansas county judge Edelman's firm lost a request for a temporary restraining order against a Minnesota advisor who left to join Gladstone Wealth Group. Even with the losses, though, the concern is that by showing a willingness to litigate over the non-solicitation provisions of its RIA employment contract, EFF may frighten other Edelman advisors into staying with the firm. Perhaps even more striking, though, is that historically, such tactics - aggressive enforcement of non-solicitation agreements, preventing the transfer of client information, and filing temporary restraining orders - was the domain of employee-based wirehouses and not the independent RIA channel. Nonetheless, as RIA firms grow and institutionalize their own marketing processes to bring clients to their advisors, large RIAs appear to be similarly adopting similar employment agreements and tactics, increasingly highlighting the battle over when and whether a client is a client "of the advisor" or a client "of the firm" instead.

Recruiting Loans Swell At LPL And Ameriprise But Compress At Wirehouses (Mason Braswell, AdvisorHub) - In their recent financial reporting to the street, LPL revealed that its balance of forgivable loans (used for recruiting and forgiven over 3-8 years if the brokers stay) was up a whopping 46% in 2018, rising to $233M from only $160M the prior year. At Ameriprise, the use of forgivable loans has become even more popular, with the company showing a massive $558M balance of forgivable loans (amortizing over 5-9 years), up 9.6% from the prior year. By contrast, though, UBS' advisory loan balances declined by 12% in 2018 (albeit dropping to a still-massive $2.3B, but down from $3B just 2 years ago), and Morgan Stanley's forgivable loan balances dropped 18.4% to $3.4B in 2018 (down from almost $4.2B a year earlier), a total reduction of nearly $1.5B in recruiting loan balances since the two wirehouses dropped out of the Broker Protocol in late 2017. Overall, the significance of the trend is that, while they're still smaller in assets and size, independent broker-dealers are becoming increasingly aggressive in spending dollars on recruiting, even as wirehouses seem to have reached the breaking point of recruiting economics and have been scaling back in recent years. Even as the forgivable-loan approach to recruiting is itself getting a hard look, as consumer advocates raise concerns about whether the pressure of the forgivable loan structure can itself induce at least some brokers to engage in inappropriate behavior to avoid triggering the payback provisions.

Is Concierge Medicine Worth The Cost? (Jessica Sommerfield, MoneyNing) - The concept of "concierge medicine" has been around since the 1990s, but is gaining substantial momentum in recent years due in part to the growth of consumer demand for the service and also doctors themselves (especially the younger generation of doctors) showing interest in adopting the model as medical practitioners. The basic approach of concierge medicine is that it's a private form of medical care, where physicians charge patients an out-of-pocket retainer fee in exchange for full and immediate access to their services (and in the process, doctors then maintain a much smaller pool of patients, typically ranging from 500 to 1,000, as contrasted with sometimes several thousand patients in a traditional practice). And while the perception historically was that concierge medicine was only for "wealthy patrons," the rising cost of healthcare itself is beginning to close the price gap between concierge plans and more traditional health insurance. Still, though, the primary driver of concierge medicine is a driver for "more personal care," with a focus on preventative care (as opposed to sick care), and the opportunity when a health event does occur to get faster diagnoses and treatment from a doctor with fewer patients who can spend more time/attention on the ones they do have (with common options like next-day appointments, longer appointment times, in-home visits, fast emergency care, and a wider range of preventative screenings and tests not always offered by traditional insurance plans). For expenses not covered by the concierge model, concierge doctors typically still coordinate with traditional insurance providers and networks. Still, though, that means that most who purchase concierge medicine services still need to have some level of traditional insurance as well, for the potential needs and procedures that aren't covered by the retainer fee (which means in practice it's usually a concierge medicine retainer fee and health insurance, not instead of the insurance), and the retainer fees themselves typically are not covered by insurance (which means a separate entire-out-of-pocket fee). For those that do want to explore further, organizations like the American Academy of Private Physicians have created "Find A Physician" tool to identify concierge medicine providers by geographic area or specialty.

What Is Financial Health? (Samantha Lamas & Sarah Newcomb, Morningstar) - The classic view of determining someone's "financial health" is based on their economic stability, and whether they have the financial wherewithal to achieve their goals, or at least are financially on track to achieve their goals and are "healthy enough" (i.e., not financially fragile) to withstand any reasonable economic shocks that might come along the way. Yet as Lamas and Newcomb note, even some people with "robust" financial resources to last the rest of their lives still get very anxious about even the smallest splurge... which means even if the individual may mathematically be financially healthy, to say the least, they don't appear to think (or take actions based on the belief) that they are so financially healthy. Or stated more simply, it's not enough to get clients to a financially healthy state... for them to act upon and enjoy their financial health, they must think and believe they are financially healthy, which is actually an issue not of their financial state but their psychological state instead. While for other clients, a problematic psychological state can self-sabotage their efforts to even reach financial health in the first place (e.g., the household that stops saving for retirement because they think they're already too far behind to catch up, even if they actually could). As a starting point, the authors suggest asking clients to think about "a day in the future" and tell you (the advisor) about it, and see whether their mental time horizon is the more distant future (suggesting they already have a long-term mentality), or a much shorter time horizon (suggesting that the advisor needs to help them think more long-term). The bottom line, though, is simply to recognize that it's not enough to help clients get to the point of being financially healthy; it's also important to ask them if they feel financially healthy... and if not, have a discussion about what it would actually take to align their financially healthy state with their current state of mind.

Unconventional Financial Planning [For Entrepreneurs] (Justin Castelli, All About Your Benjamins) - Traditional financial planning prescribes a series of "rules" that, if not hard-and-fast, are at least strong "rules of thumb" about the best path to financial health, including strategies like "Max out your 401(k)" and "Fund Roth IRAs," "Avoid debt" and "Never use retirement funds early," and the infamous "Don't put all your eggs in one basket" (i.e., "thou shalt diversify"). Yet as Castelli notes, when working with small business owners and entrepreneurs, a lot of the traditional rules of thumb don't hold up as well, and in his own personal situation as an entrepreneur (in launching his own advisory firm), Castelli finds that, despite recommending the traditional "rules" to his clients, he often hasn't followed them himself. For instance, when the launch to start his own firm look longer than anticipated, Castelli ended out invading his emergency fund, and took a $10,000 distribution from his Roth IRA (from his retirement account, to fund his start-up!)... which, given the success of his business, may end out being the best investment he ever made! Other exceptions to the typical financial planning rules that Castelli has gone through himself and/or made as recommendations with clients include: rolling an old 401(k) into a new 401(k) in order to take out a loan for a downpayment on a house (while waiting for the "old" house to sell); taking the aforementioned distribution from his retirement account to "invest" in his own startup rather than keeping the funds in a diversified market portfolio; and forgoing his retirement savings contributions for several years even after starting his firm (as the dollars and cash flow were still tight). Of course, the fact that these "non-traditional" financial planning tactics worked in particular client situations (or Castelli's own) doesn't mean they should be standard tactics or recommendations for all clients; but at the same time, Castelli's story helps to highlight that sometimes, the best tactic in the moment really is to do the opposite of what traditional financial planning rules of thumb would suggest!

7 Benefits Of Writing (Ben Carlson, Wealth Of Common Sense) - As someone who writes and blogs extensively, Carlson is often asked how he finds the time to write on top of his own duties in his advisory firm... or at least, why he prioritizes writing above the other tasks that he might be doing in the business. Ultimately, Carlson highlights 7 key benefits that he finds from prioritizing writing, both personally and professionally, and they include: helping to go through the learning process itself (as the process of writing itself can force/help you to better learn something or think through an issue... thus the saying "I write to learn what it is I think"); the process of writing often involves doing a lot of reading to pull together the ideas to write about (which itself further extends the learning process); regular writing can become a constructive routine, especially if you remember that the point is the writing process and not necessarily the outcome itself (i.e., "you're never going to create a masterpiece straight out of the gate," so give yourself permission to produce something terrible and then go ahead and do it anyway for the sake of the process itself); the feedback to your writing can itself help you to learn more and inspire more ideas; regular writing helps you to practice communication skills that are relevant beyond the realm of writing alone; sometimes writing results in some unintended but favorable consequences (you never know who might find their way to read what you write!); and writing regularly is a great way to find your own voice, and ultimately the self-confidence that comes from really knowing and fleshing out your personal views through the writing process.

Five Writing Tips To Sound More Eloquent (Nick Maggiulli, Of Dollars And Data) - Virtually no one is a very good writer when they start (which is easily observed by going back to read a writer's early articles and writings!), but there are techniques that can be learned to become a better writer and communicator. Maggiulli notes that one of the key breakthroughs for him was learning to better use stories and analogies to explain concepts, which is especially effective as a teaching method (and therefore a writing/communication method). But another was simply learning some rhetorical techniques to sound more eloquent - drawn heavily from "The Elements of Eloquence" by Mark Forsyth. Key tips include: Remember the rule of 3 (from the three blind mice, to the three little pigs, the Three Musketeers, and even Jim Cramer's infamous "Buy Buy Buy!", or structuring entire articles in grouping of 3 questions or topics at a time!); Don't be afraid to reinforce a point by repeating yourself (as Maggiulli notes to make the point, "I don't know why it sounds so good. I don't know why it works so well. I don't know why, but it's just that easy!"); follow a rhythm (known technically as an "isocolon," or the repetition of grammatical structure, starting from the simple "Roses are red, Violets are blue..." [a classic 2-1-1, 2-1-1 structure] and building from there); ask questions (because it gets the reader to think about something more deeply, thus literally the label "asking a rhetorical question"!); and just keep writing (because in the end, it still takes practice to perfect any kind of eloquence technique!).

The Surprising Benefits Of Journaling One Sentence Every Day (James Clear) - Journaling is simply the act of thinking about your life and writing it down, and doing so on a regular basis is a known habit of many famous personalities, from writers (e.g., from Mark Twain to Virginia Woolf) to inventors (e.g., Thomas Edison to Albert Einstein) and leaders and politicians (e.g., George Washington, Winston Churchill, and Marcus Aurelius). Why was/is journaling so common amongst them? In some cases, it provides an opportunity to glean new lessons from old experiences (i.e., sometimes we gain insight in reading old journal entries and a perspective that we didn't have at the time/in the moment), while in others it helps to sharpen our memories (to literally have a written record of some key events, thoughts, or ideas going through your head at the time), and for some it helps to motivate us to make the most of each day (so there's something good to write down at the end!), which in turn can provide a personal "proof of progress" to see how our journal entries shift and change over time. The challenge, of course, is simply finding time to journal in the first place, given how busy most of us are in our own lives. The first key is simply to find what's a comfortable method to journal, as some prefer printed/physical journals to write in, while others may prefer to jot notes electronically instead. Clear actually created his own (physical) Habit Journal, which prompts to enter just "One Line Per Day" in a key area (e.g., "What happened today" or "What am I grateful for today" or "What is my most important task today", etc.). And at the end of the month, there will be 28-31 statements at the end, providing the initial momentum for some self-reflection and substance. The key point, though, is simply that Journaling doesn't need to be a big production; just literally try to write one sentence about what happened during the day... and then look back in a month or few, and see how it feels to reflect on the progress you've made?

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 Bill Winterberg's "FPPad" blog on technology for advisors as well.