Weekend Reading for Financial Planners (Apr 9-10)

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.

DOL Final Rule Contains A Litany Of Concessions But Tort Lawyers Are Licking Their Chops (Lisa Shidler, RIABiz) – The mega news this week was the final release of the Department of Labor’s “Conflict Of Interest” rule, which will extend the reach of advisor fiduciary duty to all retirement accounts, including for the first time, individual IRAs. After 6 years and 2 public comment periods, the final rule includes a number of areas where the DoL ultimately gave ground. For instance, the last proposed version of the rule would have required advisors to provide estimates of cost over one-, five-, and 10-year projections, which was scrapped in the final rule for a far more ‘streamlined’ disclosure rule. Other concessions included that proprietary products will still be allowed, that annuities and other previously excluded asset types (e.g., non-traded REITs) will still be permitted in retirement accounts, and that 12(b)-1 fees and revenue-sharing arrangements will not be banned. However, the overriding requirement that remains, despite all these concessions, is that advisors will still need to sign a best interests contract with clients, and provide recommendations that meet the advisor’s obligation to put their clients’ interests first. Accordingly, the DoL still insists that the core purpose and protection of the fiduciary rule remains intact, including that attorneys can still engage in a class action lawsuit against financial institutions for a breach of fiduciary duty if the firm and its advisors fail to follow their fiduciary obligations. However, a follow-up article from RIABiz notes that proving a bona fide breach of fiduciary duty is still a difficult thing to enforce in a court of law, and the final rule actually made it harder for the best interests contract to be enforced by requiring attorneys to prove a breach of fiduciary duty, and not just a lesser breach of the best interests contract. Ultimately, though, it may be years before we see the real outcomes when the Department of Labor’s fiduciary requirements are truly tested in court.

Data-Driven Marketing Breaks Through The Online Crowd (Mandy Fisher, Advisor Perspectives) – In the past, it was hard to measure the outcome of marketing strategies, leading advisors to make decisions based on our personal preferences of what we “thought” was best and would work. In today’s digital world, however, it’s feasible to engage in far more effective data-driven marketing strategies, built around an approach of creating a digital platform, and then trying to experiment and test, measure to see what works, and then repeat whatever is proving most effective. For instance, rather than spending months trying to build a ‘perfect’ beautiful website, which could take months and once done won’t change for years, the data-driven marketing approach would suggest just getting a relatively simple initial website set up, then use tools like CrazyEgg to see how your visitors are actually interacting with the pages on your site and Google Analytics to track overall site traffic and popular pages. Once you see what’s actually working, the website can then be adapted to go further down the path of whatever is proven to be connecting. Similarly, if you want more people to visit your advisory firm website in the first place, you might do a small experiment running half a dozen different ads on social media platforms for 10 days at $25 each, and then at the end, see which one(s) worked, and ramp up the marketing dollars to whatever has been shown to work the best. Ultimately, by focusing on such data-driven initiatives, improving results will be accomplished by a never-ending series of tweaks and adjustments, tests that lead to a new tactic being deployed, which is then measured and tested against another alternative to try to improve even further. But the key distinction was that until digital marketing showed up – along with the associated ability to track data and measure outcomes – it wasn’t even feasible to engage in such iterative marketing tactics as an advisor.

How To Use Search Engine Optimization (SEO) To Grow Your RIA Firm (RIA In A Box) – While there are many tactics to improve your financial advisor website to turn visitors into prospects, often the greatest challenge is just getting people to show up to your website in the first place. In a world where consumers conduct an unimaginably large number of searches using platforms like Google and Bing, what does it take to ensure that your advisory firm shows up at the top of the results list? The path to getting better results and reach prospects who might be using the various search engines is a process called “Search Engine Optimization” (or “SEO” for short). In the advisor context, though, the opportunity is complicated by the fact that relatively “generic” search terms are likely to be dominated by large media sites (or even just large-firm competitors); good luck coming up #1 for “fiduciary financial advisor”. However, being more focused in a niche makes the SEO process easier, because now the advisor may be competing for a more specialized search query. First instance, it may be far easier to rank #1 for “fiduciary financial advisor for doctors in Cleveland”. Of course, the caveat is that a more focused niche (and associated search phrase) may not be used nearly as often… but that doesn’t necessarily matter if it’s leading to clients. And in fact, someone searching for a phrase as specific as “fiduciary financial advisor for doctors in Cleveland” is almost certainly going to be a doctor in Cleveland searching for a fiduciary financial advisor… so if that’s who you are and what you do, it’s a “perfect” match with a very high likelihood of becoming a high-quality lead for the firm. To expand the reach further, the next goal of the advisor should be creating content relevant to their target clientele (e.g., what else would doctors in Cleveland be searching for with respect to their finances?), such that hopefully the prospects will hit any one of a number of relevant articles the advisor has produced (each of which may come up in a search result). And ideally, create the content with some of these SEO mechanics in mind… which means using page titles that clearly convey the point (with a headline that someone using a search engine would want to click!), using compelling images (which is important not only to be visually appealing, but also because the ‘alternative text’ of an image is used by search engines), be willing to link to other valuable websites (yes, your prospect may leave your website for a moment, but if you’re perceived as a valuable resource, they’ll be back!), and be certain to write content that’s long enough and goes deep enough to actually be compelling to the interested prospect!

How To Edit Your Financial Firm’s Bios (Susan Weiner, Investment Writing) – Financial advisors are in the people and relationship business, yet often do a remarkably poor job of writing bios for themselves and their teams that make them sound like interesting human beings a prospect would want to have a relationship with! Having a professional editor review the firm’s bios can help, but first the firm has to be clear on what it wants to accomplish – is the goal to make the bios more client-focused, or to add more personality and ‘authenticity’ than just being a boring list of professional endeavors and accomplishments, or is the issue that all the bios of the firm need to be updated just to be more consistent? Ultimately, Weiner suggests the best path is to create a standard template of how you’ll compose bios for everyone in the firm (e.g., do you always mention where they’re from? Do you always mention previous experience? Will you discuss awards and publications? Will you include social media profiles?). The bio template should also address the style of how you’ll communicate the key points (e.g., as a narrative or as a series of bullets?). Either way, it’s a good idea to have a professional editor give the final results a once-over review, both to ensure that you’ve done the bios consistently and professionally. And also just to ensure you don’t have any embarrassing typographical errors! And remember that once done, bios should be updated on a periodic basis as well, so your website information doesn’t become embarrassingly dated!

Who To Recruit To Your Client Advisory Board (Stephen Wershing, Client Driven Practice) – A client advisory board is a dedicated group of clients that the advisory firm can solicit for feedback about what the firm can/should be doing to make improvements. But ultimately, an advisory board is only valuable if it has the “right” people involved in the first place. Wershing notes that the first key distinction in choosing people to be on your client advisory board is that they should truly fit your target market in the first place – not just a “representative sample” of all clients, which may give you an overly wide range of feedback (sometimes pertaining to clients you wouldn’t want to have more of anyway!), not necessarily just the “biggest” clients (if some of them are hard to work with), but instead a focused representation of the kinds of clients you want to serve better and have more of! Similarly, when choosing clients who will be expected to give you a wide range of feedback on your services, be certain to include the kinds of clients who actually are utilizing the full breadth of your services (i.e., don’t invite an “investment-only” client if you’re trying to be a financial-planning-centric firm), to ensure you can get constructive feedback on the relevant services. In fact, Wershing notes that some of the most effective clients to work with on an advisory board are those who have experienced some prior ‘speed bump’ in service, that you resolved successfully, because those clients are even more likely to engage in the process (because they’ve already seen how you try to improve your service and fix any problems!). And notably, if you’re trying to grow into a new target market where you don’t currently have a lot of clients, you could even invite people who are still prospective clients, or relevant centers of influence, with whom you’re trying to build a relationship. This may open a door to the prospect themselves, or simply help the center of influence to really understand what you do and the value you’re trying to provide, which can help to stir more referrals in the future.

Why Firms Pay For Services They Don’t Need (Matt Lynch, Advisor Perspectives) – As the vendors that serve financial advisors increasingly expand their service offerings, advisors themselves are increasingly getting stuck with a bill for services they didn’t want, need, or purchase. The trend can be seen perhaps most clearly in the work of asset allocation and data aggregation tools, which are increasingly being incorporated into a wide range of technology solutions (from financial planning software to CRM), but even in the impact of large platforms buying more specialized solutions (e.g., if you’re a Fidelity client, you may be indirectly paying for a piece of their eMoney acquisition, even if that’s not your own financial planning software of choice). Yet at the same time, consumers are being more cost-conscious as transparency of financial advisor pricing continues to rise, and ultimately all these platforms expanding their reach (potentially outside their core competencies) is reflected in consumer costs at some point along the way. Accordingly, Lynch suggests that at some point, advisors need to take a hard look at whether their technology stack and service providers are providing duplicative costs (that impact the profitability of the business and the cost charged to clients). For instance, in the past a custodian did clearing and trading and billing, a TAMP managed the asset allocation, and a FinTech firm might handle the portfolio accounting and performance reporting; now, TAMPs may also provide portfolio accounting and reporting, FinTech firms may facilitate asset allocation directly, and custodians may offer their own suite of services, which means the advisor who buys each separately ends out with duplicative platforms (and ultimately, duplicative costs). And the problem is not unique to independent RIAs; as broker-dealers expand and adapt their business models to become more of a comprehensive financial advisor support platform, the problem is increasingly present there, too. In the end, Lynch suggests that advisors need to take a hard look at the technology and platform tools they’re really using, and even should start to push back on their vendors more by insisting on unbundled “a la carte” pricing to help eliminate the redundancies.

How ETNs Win Over ETFs (Robert Gordon, Financial Planning) – An Exchange-Traded Note (ETN) and an Exchange-Traded Fund (ETF) are often referred to interchangeably, as they are priced similar, and use a similar creation/redemption mechanism to ensure that the trading price doesn’t stray far from its underlying value. However, ETFs and ETNs are substantively different, because an ETF is actually a basket of underlying securities, while an ETN is technically a form of debt issued by an investment bank that just happens to provide based on a target measure (but in the event of default, the ETN owner doesn’t own a portfolio, they’re simply creditors of the issuer). This is important from the tax perspective, because ETFs that hold the underlying securities must distribute all realized gains, dividends, and interest each year (or risk losing their status as pass-through tax entities), while ETN holders are only taxed if they actually receive a distribution (or liquidate themselves)… and an ETN generally doesn’t make a distribution until its final payoff at maturity. In fact, even if there are changes to the underlying referenced portfolio/index it tracks, an ETN still isn’t taxable from year to year when changes occur (for instance, an ETN tracking the Dogs of the Dow index won’t have a taxable event when the index recomprises every December 31^st). Accordingly, Gordon suggests ETNs will fit best in scenarios where the tracking portfolio has a lot of changes that would have otherwise triggered taxable distributions, or have otherwise inconvenient tax treatment (e.g., MLPs that have K-1s and confusing recapture issues, as well as UBTI hassles when owned in an IRA). However, it’s important to note that the distributions from an ETN are ultimately taxed as interest income, though the sale of the ETN is still taxable as a standard long-term capital gain if held for more than a year (which in the case of a gold ETN, may even be better than a gold ETF that has a higher 28% maximum rate as a collectible!). In addition, it’s important to recognize that as a bond, the ETN also introduces credit default risk based on the issuer!

Can Roth Conversions Protect Clients From Higher Tax Rates? (Ed Slott, Financial Planning) – Given no more income limits on Roth conversions since 2010, for any client who has an IRA, the conversation will inevitably come up of when/whether it makes sense to do a Roth conversion. The essence of the Roth vs Traditional decision is to pay your tax bill whenever the tax rate will be lowest… but that still leaves open the question of whether the client can know what their future marginal tax rate will be. In some cases, clients may do at least a partial Roth conversion simply to hedge their bets, and eliminate any uncertainty or fear about the risk of a future tax rate increase – effectively a form of “tax risk diversification”. In other cases, it may be appealing to do the Roth conversion not for the tax bracket arbitrage benefits, but to avoid future RMDs that apply to traditional IRAs but not to Roth IRAs (at least until/unless Congress eliminates that favorable treatment for Roth accounts!), especially since large RMDs can indirectly trigger the 3.8% Medicare surtax as well (though on the other hand, large medical deductions in the later years might be able to offset that income, too). Either way, though, a Roth conversion will virtually always be appealing if the client has significant deductions to claim to offset the conversion at the time (e.g., a business net operating loss or big medical expenses in a single year), and those who plan to leave the IRA to a trust as beneficiary (and potentially be subject to compressed trust tax brackets). This tactic can work when leaving an IRA to family beneficiaries as well – converting at the parent’s rates to avoid the higher tax rates of the beneficiaries – but be cognizant that if the kids are actually in lower tax brackets, the best tactic may simply be to leave them a pre-tax IRA and let them pay taxes in the future at their lower tax rates!

Incorporating Home Equity Into A Retirement Income Strategy (Wade Pfau, Journal of Financial Planning) – For many retirees, their personal residence is a significant asset that could potentially be used for retirement spending… except the retiree doesn’t want to give up the home by liquidating it to access the capital. The solution to fill this gap is the reverse mortgage, and a number of recent studies in the Journal of Financial Planning since 2012 have shown that using a reverse mortgage to access home equity can enhance retirement outcomes, particularly when they are not used as a loan of last resort but a proactive part of the retirement income strategy. However, there are still many ways to potentially leverage a reverse mortgage, from using the home equity first and the portfolio later, draw from both the reverse mortgage and portfolio at the same time, a coordinated strategy where the reverse mortgage is used when markets are down but the portfolio is used when it’s up (a form of bucketing/reserve strategy), using the lifetime “tenure” reverse mortgage payment, or simply tapping the reverse mortgage if/when necessary (after everything else has been depleted). Pfau compares all these different scenarios, and generally finds that in good market environments its best to use the home equity first (and let the portfolio enjoy a bull market), but in bad market scenarios (or more generally to hedge market risk), the best tactic is to use the home equity last (and minimize any cumulative interest payments that undermine the legacy value). However, the “use home equity last” is only superior if the retiree opens the home equity line of credit early, at the beginning of retirement, and allows it to compound over time – producing a higher available line of credit in the later years when needed. If the retiree actually waits to even open the reverse mortgage line of credit until the funds are actually needed, the borrowing limits are too limiting to allow the retiree to get access to the amount of funds necessary to sustain their lifestyle at that time.

How To Identify And Overcome The Limits To Your Success (Bob Veres, Advisor Perspectives) – For many advisors, what starts out as doing work they're passionate about can end up feeling like a prison, where you have to get up every day and keep pushing the cart up the hill. Practice management consultant Stephanie Bogan suggests that it's internal confusions we create for ourselves about what "success" really means that leads to these problems, where misconceptions about ourselves or self-limiting beliefs create blocking points. In other words, if you're not happy with the advisory business, look to yourself, first. In fact, the aspects of your life where you're dissatisfied - whether it's the business, your work relationships, your financial situation, or your marriage - are a form of feedback to remind you that something isn't in proper alignment. For instance, if you're having trouble sticking to your fee schedule and keep offering discounts to clients, is the problem an issue of marketing, your unique value proposition... or something more internal and personal, where perhaps the reason you feel compelled to discount your pricing is because your ego won't let you get in a situation where you stick to your pricing and let a prospective client reject you? Because if that is the real issue, the solution is about how you get comfortable enough with yourself to quote a fair fee, not about how you might change the business. Similarly, for many advisors, a problem employee may not actually be a problem with the employee, but an issue with the advisor who is afraid to confront a problem and simply give the candid but difficult feedback necessary to resolve the situation; in other words, it's not a hiring problem, but one of being comfortable trying to resolve an interpersonal conflict. Ultimately, Bogan is beginning work on writing a new book to delve further into these issues, but the Veres article includes several more examples of ways that as advisors we may be limiting our own businesses without even realizing it.

Stop Operating A Practice And Start Running A Business (Ric Edelman, Financial Advisor) - While most independent financial advisors view themselves as small business owners, Edelman suggests that ultimately, many don't really own a business, they merely create and own a job for themselves. The distinction is that a business is something that survives and surpasses the founder, while a practice is something only lives as long as the founder does the work themselves (even if supported by many employees along the way). Of course, virtually every advisory business will start out as a practice at some point; the key is to evolve the practice into a business over time as a grows. Edelman suggests this occurs in a series of stages: first, the advisor is like a store clerk, who simply takes the orders that the client presents, and fulfills it for them (think: shoe store clerk who goes to the back room to get the shoe order that the customer requests); second, the advisor evolves into a salespeople, not in the perjorative sense, but in the context of being a fiduciary who still has to "sell" and persuade someone to change their behavior and do something different (e.g., engage the advisor, take the advice, purchase a product/solution); the third stage is the advisor who transitions from transaction business (proceeding from one prospect to the next) to a relationship-based business, where you need to serve the existing clients and not just find new ones (which requires a new series of hiring steps, and beginning to develop operational efficiencies); the fourth level (which Edelman suggests few ever reach) is where the firm grows to the point of hiring people into specialized roles (IT, HR, operations, marketing, etc.) and actually starts to create a true business that has a value of its own, but it's still not necessarily sustaining; and at the fifth and final level is the business that so effectively sustains beyond the founder, it builds into an entity of significant value, that may ultimately be acquired, or even launched as an IPO. But the fundamental point is simply this: having an entity that secures a paycheck for you may be a steady job, but in order to truly be a business, it has to not just pay you to do the work in the business, but have value even if you're not there to do it yourself.

Why Do We Work So Hard? (Ryan Avent, 1843 Magazine) - When we're young, we can't stand being required to work (as is evident from any child asked to do their chores), and many types of work in the past were gruelling and thankless (e.g., working in a textile mill). In today's environment, we're increasingly exposed to work that is at least more interesting, and often is so engaging that it can even be "fun" (at least at times!)... yet in the process, it's becoming increasingly hard to escape from work at all, especially when the availability of smartphones makes it almost 'impossible' to unplug, and the lines of personal and work space just get more and more blurry. It's actually an interesting change of events, too, as nearly a century ago, John Maynard Keynes suggests that by now, we might only be working 10-15 hours a week, as even by the 1930s the average length of the work week was plummeting, as enhancements in productivity and the rising affluence of the country created a growing middle class that actually had "leisure time" and the opportunity to take family holidays. The reigning discussion of the time was what we would do with all that freedom from the pressing economic cares that productivity and a rising standard of living would bring. Yet somewhere along the way, it turned awry. Work hours are on the rise again. In the past a male professional might have worked 50 hours a week while the wife stayed home, but now they don't just split the hours in a dual-income household... they both work 60 hours a week just to make ends meet (after child care expenses!). So what happened? To some extent, technology and globalisation appear to be culprits, facilitating more winner-take-all environments where those at the top enjoy the spoils, everyone else is left with little, and we all feel compelled to work extra hours trying to reach that coveted tier. Yet perhaps the greatest mystery is that amongst this overworked group of professionals, many are not actually unhappy, because they find the work personally fulfilling. At some point along the way, work also ceased to just being a means to an end, and the work itself actually became the rewarding ends to pursue. In addition, the tools and technology have made work less drudgery - eliminating the least desirable and repetitive aspects - and more interesting and engaging (not to mention freeing our brains of tasks that become automated and no longer distracting). At the same time, this more rewarding work does still seem to be a sort of prison, a life that is so engaging, it can be a difficult treadmill to step off from, for fear of losing a sense of identity and purpose. In fact, it actually seems to be the social connection around this type of engaging work that makes it so difficult to step away, as the community around which we work, and the identity we create there, increasingly replaces the community of non-work leisure activities that dominated just a generation ago.

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.