Weekend Reading For Financial Planners (Apr 9-10)

White House To Extend Student Loan Moratorium Once Again

(Eugene Daniels and Michael Stratford | Politico)

On Wednesday, the Biden administration announced that the moratorium on Federal student loan payments will be (once again) extended until August 31, 2022. The payments had been set to resume on June 1 after being on hold since the early days of the pandemic (with the original moratorium having been extended numerous times by both the CARES Act and executive orders along the way).

Notably, in addition to the payment extension, the Biden administration also announced that approximately seven million Federal student loan borrowers who are currently in default will have their status restored to “good standing” when payments eventually resume. Many borrowers in default have wages or Social Security benefits garnished to collect on their loans, and until this week’s announcement, the resumption of Federal loan payments would have meant that those collection practices would have restarted as well.

While Wednesday’s announcement likely comes as welcome news to most Federal student loan borrowers (who, even if their financial situation has recovered or even improved since 2020, may now be struggling in different ways as inflation has raised the cost of many living expenses), it also raises the question of just when payments will resume. The string of extensions, often coming within a month or two of when payments were set to start, have made it difficult for those with significant student loans to make long-term plans, since loan payments for those borrowers might make up a large part of their monthly cash flow, resulting in a significant lifestyle change if and when the payments do resume.

And so, while political tea-readers predict various outcomes (e.g., payments resuming after the November midterm elections, resuming once the Biden administration follows through on its campaign promise to cancel $10,000 in student loan debt per borrower, or the payment freeze simply being extended indefinitely), the reality is that the status quo of random periodic extensions may not be tenable for much longer. Because as helpful as the payment freeze may be for many families, much of that benefit is negated when those families cannot make long-term plans out of uncertainty about when the freeze will end.

Declining Trust In Financial Institutions Is Reducing Americans’ Willingness To Invest In Stocks

(Joanne Cleaver | InvestmentNews)

One of the dominant narratives of the pandemic era has been an increase in interest and participation in the stock market by everyday retail investors. As the story goes, people with more time on their hands (as pandemic lockdowns kept people inside their homes) and more cash available to invest (both from government stimulus payments and less spending on travel, movies, and concerts) put their money into the markets, aided by the rise of easy-to-access stock trading apps like Robinhood, Acorns, and Stash, riding the meme-stock wave of early 2021, and generally benefiting from the market’s incredible post-pandemic recovery.

But new research released by Ariel Investments and Charles Schwab contradicts this narrative, finding that broad-based participation in the stock market has actually declined precipitously in recent years. The focus of the research is on studying the differences in investment behaviors between Black and white Americans, and the study finds that Black investors have particularly low trust in the stock market and financial institutions (potentially the result of structural discrimination from institutions like banks and mortgage lenders over the past century that have left Black Americans at a financial disadvantage compared to whites), with only 58% of Black Americans owning stocks in 2022 (down from 74% in 2002).

But at the same time, the study finds that the majority of white investors also show declining trust in financial institutions, and that white investors have actually abandoned the stock market at twice the rate of Black investors since 2015, with only 63% owning stocks today (down from 86% as recently as 2015!). Which means that, ironically, the gap in stock market participation between white and Black investors has reached an all-time low of just a 5% difference (with 63% of white Americans and 58% of Black Americans owning stocks), but that only comes as overall market participation for both groups nears historic lows.

Another of the study’s takeaways is that the declining trust in traditional institutions is related to investors (and younger investors in particular) relying more on alternative sources, like technology and social media, for investing ideas. As a result, Black investors were more likely to own cryptocurrency than white investors, as well as being more likely to invest based on something they had seen on social media. The lack of trust in financial institutions, it seems, has pushed many young people to invest in more speculative and risky investments… which, concerningly, could ultimately result in even less faith in the financial system if and when those bets don’t pan out.

The implication here is that the financial services industry’s woes in the aftermath of the 2008 financial crisis have only further reduced consumer trust (and potentially pushed investors into riskier products). Which creates an uphill battle for financial advisors as well, as while the broader industry’s challenges are separate and distinct from the fiduciary advice business, consumers may not perceive that difference (especially when so much of the reduced-trust brokerage industry still markets itself as providing financial “advice”). Thus accentuating the key reason why higher standards for financial advice have become so important: they’re a critical foundation for consumer trust, which appears on track to continue to decline as long as the industry continues to resist increasing the standard of financial advice?

Advisors Who Connect Monthly With Clients See 56% More Revenue, Consultant Claims

(Jennifer Lea Reed | Financial Advisor)

With many advisory firms offering services similar to one another (e.g., financial planning and portfolio management for affluent or high-net-worth clients), firms often try to differentiate themselves by providing great service for their clients. But in the eyes of potential and current clients, “great service” might not be that much of a differentiator – and in reality, what some people might consider to be great service (e.g., being friendly and responsive to questions and quickly returning emails and phone calls) might be perceived as the bare minimum to others, depending on what each was expecting to begin with.

It is less common for advisors to focus on the client experience, which encapsulates how a client feels about a firm at a deeper emotional level, and can drive the client’s loyalty to a particular firm or brand. A firm that responds in a friendly way to a client’s questions might have a pleasant association in that client’s mind, but if a different firm came along offering a better deal, that pleasant feeling might not be enough to keep the client from jumping ship. On the other hand, a firm that enhances its client experience by going beyond simply delivering its services well – for instance, by proactively reaching out to recognize important dates or milestones, or by providing a curated experience like a wine tasting for premier clients – can create a deeper emotional connection that is harder to dislodge.

According to RBC Wealth Management consultant Richard Beckel, a more proactive client experience program can lead to a more successful firm. By his estimate, practices that connect at least once per month with their clients have 56% higher gross revenue than those that don’t. And while larger firms might be able to afford some of the more over-the-top client experiences (think yoga classes and ski weekends), an exceptional client experience doesn’t have to be a big financial investment: Steps as simple as following a consistent brand image (from the firm’s office space to the art on its walls to the way its employees dress), recognizing events that are important to the client, and requesting (and listening to) client feedback can create emotional engagement with clients at little or no cost.

Ultimately, according to Beckel, client experience can be summed up by the phrase “Know your client, show your client”. Understanding what is important to the client, and then demonstrating that knowledge consistently with personal, unasked-for gestures, can be what truly differentiates a firm and creates a deep sense of loyalty in its clients.

Harold Evensky: Is This Time Different?

(Bob Veres | Advisor Perspectives)

Several events in the news have many investors worried about the potential for a sharp stock market downturn. From increased inflation to Russia’s ongoing invasion of Ukraine, there is no shortage of potential downside triggers for the market. At the same time, the impact on the market of any of these (or future) events can be hard to predict, creating a challenge for financial advisors to consider how to adjust client portfolios (or not) amid the current swell of negative news.

Harold Evensky, the co-founder of Evensky & Katz/Foldes Financial Wealth Management notes that one problem advisors face is that clients with above-average intelligence assume they are smarter than the average and can use these smarts to time the market. Evensky responds to these clients by noting the dearth of famous market-timers, which not only demonstrates how difficult it is to do so, but also absolves the advisor of responsibility for timing the market.

Another aspect of working as an advisor in a turbulent market environment is discussing rebalancing strategies with clients. Because while it is typically easier to rebalance when markets are rising (as clients are less likely to mind ‘taking profits’ from investments that have increased in value the most), it can be harder for clients to swallow rebalancing in a falling market (as they might be skeptical about investing in the asset class that has fallen the most in value). But putting off rebalancing can reduce its benefits (including risk management), so it is important for advisors to create a rebalancing strategy that both they and their clients will implement and stick to through a range of market conditions.

Further, when it comes to displaying the risk of different portfolio asset mixes, advisors often use standard deviations calculated over a five-year (or longer) time horizon. However, clients might experience a bear market in a much shorter timeframe (perhaps within a year), which suggests that displaying standard deviation on a shorter timeframe can give clients perspective on the range of potential investment outcomes in the near term (while keeping in mind that they might have long-term goals for their portfolio).

The key point, though, is that financial planning involves much more than investment management, and the advisors that are able to add value in a wide range of areas will be able to better weather market downturns than those whose value proposition focuses on strong investment returns. By quantifying client goals and objectives and providing the full range of planning services, advisors can build loyalty from their clients and make their business less vulnerable to market downturns!

The Yield Curve Just Inverted...Now What?

(Nick Maggiulli | Of Dollars And Data)

Many investors pay close attention to the yield curve, which, in a common form, represents the difference between the 2-Year U.S. Treasury rate and the 10-Year U.S. Treasury rate. A yield curve inversion occurs when the 2-Year rate exceeds the 10-Year rate, and this has served as a signal for future trouble in the economy. In fact, every recession since the mid-1970s has followed an inverted yield curve (although it can take up to two years following the inversion for the recession to begin). And so, with the yield curve inverting on March 31, many market observers are wondering whether the inversion presages a stock market downturn.

Because recessions are typically associated with negative equity returns, this could persuade some investors to pull their money out of the market now. The first issue with this, though, is that the stock market often surges between a yield curve inversion and an eventual downturn. For example, the S&P 500 returned 28.4% between the December 2005 yield curve inversion and the beginning of the bear market in October 2007. More broadly, looking at the six yield curve inversions since 1978, 1-year returns following an inversion average 4.7% compared to 9.0% in all other 1-year periods, and annual returns two years out average 4% compared to 8% for other two-year periods. And while those looking to avoid below-average stock market returns might turn to bonds for relative strength in these periods, it turns out that 5-Year U.S. Treasuries underperform U.S. stocks on average in 1- 2- and 5-year periods after an inversion (suggesting that while below-average stock returns might be on the horizon, moving to bonds is not necessarily an attractive alternative).

In the end, the recessions (and any associated stock market declines) that follow yield curve inversions can be thought of as the price investors pay for participating in the market (and the strong returns associated with non-recessionary periods). And while history suggests that advisors might not want to make dramatic changes to client portfolios because of the recent yield curve inversion, it can be an opportunity for advisors to consider whether their clients’ portfolios are aligned with their objectives and risk tolerance to get ahead of a potential market downturn in the years ahead!

Is International Diversification Necessary?

(Amy Arnott | Morningstar)

Diversification across asset classes is one of the core investment principles of many financial advisors. By spreading out a client’s assets across a range of asset classes with varying degrees of correlation, an advisor can reduce the overall risk to the portfolio (because a downturn in one asset class is likely to be ameliorated by the returns of the other less-correlated investments). And while many advisors diversify client assets by investing in both U.S. and international equities, a combination of increasing correlations between U.S. and international stocks and relative underperformance by international stocks might have some wondering about whether they are actually adding value to client portfolios.

A problem for investors looking to use international stocks to diversify their equity holdings has been high correlations between U.S. and international stocks in recent years. For example, between 2019 and 2021, the correlation between U.S. and developed market (ex-U.S.) stock returns was 0.93 and the correlation between U.S. and emerging markets was 0.82. Both of these figures are significantly higher than they have been in the past, reducing the international stocks’ diversification benefits in case of a market downturn.

However, historical correlations suggest that international stocks could provide increased diversification benefits in the future. For example, as recently as 2019, the correlation between U.S. and developed market stocks was below 0.8 and the correlation between U.S. and emerging market stocks was less than 0.6. And looking back further, correlations between U.S. and non-U.S. stocks were as low as 0.12 during the 1970s, 0.29 in the 1980s, and 0.54 in the 1990s, making them significantly more valuable as a portfolio diversifier (of course, there is no guarantee that these historical conditions will return). Also, those looking for equity diversification could also look to emerging markets, which are typically less correlated with the U.S. than are developed markets.

In the end, having a diversified portfolio of assets with low correlations means that some portions of a portfolio will necessarily underperform others. And so, while clients (and their advisors) might be frustrated by the recent underperformance (and higher correlations) of international markets compared to the U.S. in recent years, a return to lower correlations between the asset classes could increase the value of international stocks as a portfolio diversifier!

Direct Indexing Is Coming Your Way

(John Rekenthaler | Morningstar)

The buzz around direct indexing has increased significantly over the past year, from a wave of acquisitions of direct indexing platforms by large asset managers to the dramatic decrease in the required assets needed to use direct indexing. And with reduced fees and transaction costs involved in direct indexing, the potential use cases and client profiles who could benefit from direct indexing have expanded.

At its core, direct indexing allows investors to purchase the underlying shares of an index (e.g., the S&P 500) rather than the index itself, allowing them to adjust the index as they wish. Traditionally, direct indexing was most commonly used for tax-loss harvesting, as some individual component companies within an index are almost certain to decline in value (and can be sold at a loss) even if the index itself rises. Rekenthaler argues that this will remain direct indexing’s chief benefit, and that the democratization of direct indexing will allow more investors to take advantage.

In addition, investors can use direct indexing to personalize an index by excluding certain component companies. For example, investors who want to over- or under-weight certain stocks or industries on Environmental, Social, and Governance (ESG) grounds can use direct indexing to tailor an index to their exact specifications. While recognizing this possibility, Rekenthaler is circumspect that the customization benefits provided by direct indexing will make up for its fees, which are higher than the expense ratios of many available ESG mutual funds and ETFs.

Further, Rekenthaler is particularly skeptical about investors using direct indexing for customized investment management, adjusting an index based on investment theses. Instead, he suggests investors could save on fees by buying index funds for the core of their portfolio and setting aside separate money to buy individual stocks, rather than combining the two together (but while stock-picking investors might not benefit from direct indexing, advisors who use rules-based investment strategies could benefit from direct indexing compared to the high costs of some packaged funds and ETFs).

Ultimately, the key point is that while direct indexing has generated a lot of attention, it is up to advisors to determine whether it is an appropriate tool for their clients. Nonetheless, with expanded uptake by many large asset managers and an expanded range of potential uses, it appears likely that direct indexing is likely to remain a hot topic in investment management in the years ahead!

Schwab Plans April Debut Of 'Personalized Indexing'

(Samuel Steinberger | Wealth Management)

Direct indexing largely remained the purview of high-net-worth individuals until 2013, when robo-advisor Wealthfront introduced its own direct indexing service with an account minimum of $500,000 (later reduced to $100,000) for a flat 0.25% advisory fee and no underlying transaction charges on each direct-indexed stock trade. Since that time, several major asset managers have jumped into the field as well, increasing the opportunities for advisors and investors to take advantage of direct indexing. And now, asset management industry giant Charles Schwab has announced that it will debut its direct indexing platform, Schwab Personalized Indexing, later this month.

Schwab’s platform will be available for both advisors and retail clients, and will charge a 0.40% fee with a $100,000 account minimum. Advisors and investors will be able to choose from three indexes representing large-cap stocks, small-cap stocks, and stocks meeting Environmental, Social, and Governance (ESG) criteria. And while Schwab plans to create additional opportunities for customization and personalization in the next 12 to 18 months, it appears that for now, the primary benefit of the platform will simply be owning stock indexes in their component parts to be able to engage in automated tax-loss harvesting (because investors for the moment will only be able to exclude up to three stocks per index, they will unlikely be able to implement the other potential strategies that take advantage of direct indexing).

In the end, while competition appears to be heating up between platforms in the direct indexing space, the broader implication is that direct indexing as a whole has the potential to disintermediate ETFs and mutual funds altogether, if investors decide to stop owning index funds (as funds) and start ‘personalizing’ them through direct indexing instead. And so, through its direct indexing platform, Schwab has the potential to benefit in two ways: by hedging against a decline in revenue from its mutual fund and ETF business if and when direct indexing takes off, but also to attract assets to an offering that, through offering more personalization, is able to charge higher fees than many of its funds. And to the extent that Schwab apparently sees direct indexing not only as a way to challenge ETFs and mutual funds, but potentially to generate more revenue from personalization, it suggests that advisors (particularly those who use Schwab as their custodian) could see a major push from Schwab for them to bring client assets onto its Personalized Indexing platform in the months to come!?

Fidelity Launches FidFolios Direct Indexing Offering With $5,000 Account Minimum

(Brooke Southall | RIABiz)

In the increasingly crowded direct indexing space, platforms have several potential ways to differentiate themselves. Some are specializing in use cases like personalization (e.g., Ethic for ESG investing), while others are focusing more on the tax benefits of direct indexing (i.e., the ability to tax-loss harvest the individual stocks of the index). The caveat to them all, though, is that there’s still a cost to owning a large number of small stock positions (either in trading fees for the investor, or even just for the underlying brokerage platform to execute a large number of small trades), which has still kept direct indexing minimums fairly “high” at $100,000 or even $500,000+ threshold. Which makes it all the more notable that this week, Fidelity has debuted its Fidelity Managed FidFolios direct indexing offering, which is now available to investors with a minimum account balance of $5,000.

The $5,000 minimum is significantly lower than several of Fidelity’s competitors, including Charles Schwab’s Personalized Indexing offering, which has a $100,000 account minimum. Notably, FidFolios are currently only available to retail investors (but not advisors using the Fidelity platform), while Schwab also plans to make its platform available to advisors when it goes live later this month. At the same time, the two platforms share many similarities, including 0.40% advisory fees, and three indexes to work from (both offer large-cap stock and ESG-focused indexes; Fidelity also has an international stock index, while Schwab has a small-cap stock index). Also, both appear to be initially marketing their offerings as vehicles for tax efficiency (as Fidelity will only let users exclude up to five individual stocks or two industries from their account and Schwab will only let users remove three stocks per index), increasing the importance for advisors of clients using direct indexing to understand the true benefits of tax-loss harvesting.

On the other hand, it’s worth recognizing that in most cases, tax-loss harvesting does not actually represent tax savings, but merely tax deferral (as harvesting losses steps the cost basis down, increasing exposure to capital gains by an equivalent amount in the future). And in the context of tax deferral, platforms like Fidelity (and Schwab) will have to make the case that their tax savings are even worth the 0.40% fee that is being assessed. Which, notably, is most valuable for those who have the highest incomes (and thus the highest tax brackets)… while those with more limited financial means (that Fidelity is ostensibly targeting with its ultra-low $5,000 minimum) might not benefit at all if they’re in the lowest two tax brackets that were already eligible for the 0% capital gains rate!

Ultimately, the key point is that reduced transaction fees and increased competition among direct indexing platforms have turned what was once a tax-management strategy for the wealthy into a product that can be accessed by a wider range of investors. However, the fact that a wider range of investors will be able to access direct indexing doesn’t necessarily mean it’s a good deal for them – especially for investors with more limited investment dollars (who tend to have lower income and thus lower tax rates)… increasing the importance for advisors of determining which clients really could benefit the most from direct indexing, and which would be better off remaining with more traditional portfolio construction.

The Rise of the 9PM Work Hour

(Derek Thompson | The Atlantic)

In the traditional (pre-COVID) office workday, workers’ productivity tended to rise and fall in two “peaks” before and after lunchtime. But according to new research from Microsoft, as the pandemic has shifted many offices to remote work, a new, smaller peak is emerging at the end of the day after 9:00 PM. The new “triple-peak” day suggests that, as employees have brought their work home in the past two years, the line between what was traditionally considered work and free time has become blurrier.

The natural reaction to Microsoft’s findings might be to assume that employees’ working hours have simply become longer, and that the separation between work and home life that a traditional office environment previously allowed has been eroded by remote work. And this could be true in many cases: for employers whose approach to remote work is to attempt to recreate the office environment, much of the traditional working hours are filled with Zoom meetings and email and chat notifications, making it difficult for employees to do much in the way of real work until after dinner when the interruptions (mostly cease).

But another way of looking at the triple-peak day is that, in some cases, working hours are being shifted rather than extended. In addition to evolving the relationship with work, the past two years have also reshaped how many individuals approach their family and leisure time. For example, parents who may have previously sent their children to after-school programs until the end of the workday might now be able to pick their children up directly from school, allowing them more family time during the day before returning to work once the kids have gone to bed. And others might be shifting their schedule to align with the hours that they prefer to work: Some people are happier and more productive working at night, and for these workers, the decline of the 9-to-5 workday gives them the flexibility to optimize their schedule to when they hit their creative and productive stride.

For employers whose workers experience the triple-peak workday, ensuring that the new schedule represents a better, more flexible way of working – rather than simply encompassing more working hours – could be a key to having a happy and productive remote workforce. By embracing asynchronous communication (i.e., giving employees tools to access information when they need it, rather than scheduling more meetings), employers can reduce the need for their employees to be in a certain place at a certain time – making it less likely that they will need to add a “worknight” to their day just to get things done.

More Than Half Of The Working Day Is Spent on “Work About Work”

(Matthew Boyle | Financial Advisor)

According to a recent survey by Asana (a company that makes collaborative work software), office workers spend about 62% of their days on average on “work about work” – that is, on meetings, following up, and searching for information to ensure that things can get done. Though such work coordination might be a part of the job description for some managers, these tasks fall outside of what most employees were actually hired to do, meaning that untold amounts of productivity are potentially being lost as employees spend the majority of their time managing work rather than simply doing work.

But there are additional opportunity costs – beyond lost productivity – to the preponderance of time spent working on work. Constant communication on the status of current projects keeps employees focused on the short term, which often comes at the cost of planning ahead. Asana’s survey showed that the amount of time spent on long-term strategy declined by over 30% (from 13% of working hours to 9%) from 2019 to 2021. Though some of the shift in focus may be explained by companies needing to react to constantly shifting business conditions during the pandemic, it seems clear that expanding the amount of time devoted to ensuring that work gets done takes time away from other functions, like strategic planning, that are essential to a business’s long-term health.

Ultimately, then, carving out space for longer-term planning might depend on reducing the amount of time devoted to managing shorter-term projects. Although some degree of communication might always be needed to ensure that things get done, those communications can often be made less disruptive – for example, by sending an email (or even a short video message) to provide a status update rather than scheduling a meeting – so they take up less time, giving the employees more time to do the jobs they were hired for and the managers more time to focus on longer-term company goals (both of which will likely create more value for the business than time spent in meetings).

How To Hack Your Work Schedule For A More Productive Day

(Aditi Shrikant | Grow)

People often like to set a schedule for their day to give themselves structure and a sense of purpose. But an overly rigid schedule – or one that is laid out suboptimally – can often work against productivity. A tight schedule might be necessary for an extremely busy executive just to accommodate the sheer daily demands on their time, but following a CEO’s schedule would be overkill for most people – they just need to get work done, and their schedules can be much more flexible while still allowing for productivity. In other words, getting too granular– such as scheduling specific time slots to complete individual tasks, even if they have no specific deadline – may create the illusion of being more productive, but it can also create excessive rigidity in one’s schedule and limit the amount they can get done.

A big part of creating a more productive schedule involves eliminating most small (one hour or less) gaps between meetings or other tasks. According to the experts interviewed for the article, our brains perceive time differently when a time commitment is imminent – or put another way, a one-hour time slot feels shorter if there is a meeting coming up at the end of it than if there isn’t. Clumping meetings together – or even going to the extreme of holding all of one’s meetings on just one or two days during the week – can eliminate these gaps, and also leaves larger uninterrupted chunks of time (or even entire days) open for focused “deep work” that can enhance productivity even more.

Sometimes small scheduling gaps can’t be avoided, and in those times, according to the experts, it’s helpful to trust the clock and not one’s own sense of time (since we can often accomplish a lot more in an hour or less than we think). Keeping a list of small-scale tasks to get done can help make those gaps productive, and it often feels good to cut down on the list of lower-priority-but-still-nagging tasks during that time (that might otherwise have been wasted).

For most workers, scheduling is often about managing when and how often they are committed to certain things (e.g., meetings and time-specific tasks), so that the work that takes mental free space really remains clear so it can be as productive as possible. In the advisor context, this may mean clustering internal meetings all on one day (e.g., Mondays to start each week) so the rest of the week can be focused on clients, and/or clustering client meetings on just a few days of the week (e.g., Tuesdays, Wednesdays, and Thursdays) so Fridays can have big chunks of open time to work on bigger client or company projects. Because ultimately, the point of the schedule is not just to schedule for its own sake, but to use the schedule as a structure to manage the concentrated meeting time… and the flexible focus time we also need to do some of our most productive work.

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In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "Wealth Management Today" blog, as well as Gavin Spitzner's "Wealth Management Weekly" blog.