Weekend Reading for Financial Planners (Aug 21-22)

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.

CFP Board Adopts Framework Of New 5-Year Strategic Plan (Kevin Keller, CFP Board) - This week, the CFP Board announced updates to its 5-year strategic plan that the Board of Directors sets to guide the CFP Board's focus in the years to come. The update builds on the back of the CFP Board's last strategic plan update (from 2017), which had set its previous priorities of Awareness (of the CFP marks as a recognized standard), Access (to CFP professionals for competent and ethical financial planning), Accountability (of CFP professionals to the CFP Board's Standards), and Authority (where the CFP Board is recognized as the standards-setter for the profession). Going forward, the CFP Board has stated that it is lifting "Standards & Certification" to the center of its priorities (that the CFP Board sets, administers, and enforces Certification Standards that warrant public trust), with four pillars built around it: increasing Access (to competent and ethical financial planners by increasing both the number and diversity of CFP professionals); Workforce development (i.e., developing a sustainable and diverse financial planner workforce); Engagement across the financial advice ecosystem, from the community of financial planners to the regulators that oversee them; and Awareness (of the CFP certification as "the must-have financial planner credential" in the eyes of both consumers and advisors themselves). Notably, in practice, many of the core strategic pillars - from Access to Awareness - maintain the CFP Board's existing priorities, while its Access and Workforce Development initiatives remain focused on growth. Arguably the most significant change is the CFP Board's expanded focus on Standards - which already was part of its Accountability focus, but is now literally at the center of their strategic map in what appears to be an escalation of priority for CFP Board, as its new fiduciary standard of conduct took effect last year and the organization has been beset with enforcement challenges since it was called out in the Wall Street Journal in 2019 for allowing CFP certificants with problematic FINRA records to have a 'clean bill of health' on the CFP Board's own website. Though in the end, the real question will come when CFP Board inevitably faces the crossroads between 'cleaning its ranks' with greater enforcement, and its desire to grow the ranks of CFP certificants in order to expand Access to financial planning; does the CFP Board's increased strategic focus on enforcement mean it's ready to do so even at the (short-term) cost of its own growth to build a stronger long-term foundation for the profession?

Study Alleges 6% Of RIAs Committed Fraud With Large PPP Loans (Tracey Longo, Financial Advisor) - In a study released this week entitled "Fraud and Abuse in the Paycheck Protection Program: Evidence from Investment Advisory Firms", researchers William Beggs and Thuong Harvison found that nearly 25% of SEC-registered investment advisers eligible for PPP funds (about 2,999 out of 12,643) took out PPP loans, totaling $590M in loans received. Of those, the researchers estimate that 6% of them were "fraudulently overinflated", where the firm took out more than the maximum that should have been available based on the program guidance. For instance, one advisory firm in California received $127,852 of PPP funds to retain two employees, but with the program loan limits of 2.5X average monthly payroll, the maximum loan amount of a 2-person firm (even assuming both earned the PPP-maximum-allocable $100k/year) would have been $200,000 / 12 x 2.5 = $41,167, or barely 1/3rd of the PPP loan that was received; similarly, another advisory firm with 6 employees managing $82M received a PPP loan of $409,722, but even if the firm's 6 employees earned $100,000 each, the maximum loan should have been closed to $125,000. Notably, the researchers were limited in their data regarding how many employees the firm had previously at the time it applied for the loan (which may have permitted a higher amount), and some of the firms involved maintained that they did in fact have higher employee counts (and/or other eligible expenses) such that their loans were in fact handled appropriately and within the specified limits. Ultimately, the researchers note that the total amount of projected abuse was relatively small compared to the total number of firms participating and dollars that were drawn. At the same time, though, the researchers also found that those advisors receiving 'abnormally large' PPP loans were also 3X more likely to have disclosed past civil or criminal misconduct, 2X as likely to disclose prior regulatory infractions, and 8X more likely to have committed fraud in the past, in addition to being more likely to pay for client referrals or taking an interest in client transactions... suggesting more broadly that advisors with a history of misconduct and/or who operate their firms in a more conflicted manner are substantially more likely to engage in other 'questionable' behaviors (e.g., with respect to PPP loans), amplifying the ongoing industry discussion of whether regulators (from FINRA to the CFP Board) need to take more aggressive steps to clean up the 'bad apples' in our midst?

Advisory Firm Culture Took A Pandemic Beating (Investment News) - In their latest "RIA Talent Management Report", David DeVoe & Company highlights recent research on how advisory firms' culture and employee engagement were impacted by the pandemic... and finding that the pandemic was in fact a significant challenge for a large number of firms. Overall, the majority of firms (51%) reported that COVID and the work-from-home shift had no impact, but of the remainder, 38% of firms stated that their firm's culture declined and that employee engagement suffered, compared to only 11% of firms that declared it improved in a work-from-home environment. Consistent with these numbers, a majority of advisory firms (52%) anticipate that greater use of remote work will remain a permanent post-pandemic feature, suggesting that, in practice, a schism is emerging amongst advisory firms, with some that are able to operate effectively in a virtual environment (and intend to continue to do so), and a smaller but non-trivial subset that have struggled in a virtual environment and want to reduce remote work in the future. On the other hand, the DeVoe study also notes that the forced communication changes brought about by the pandemic improved internal communications for many advisory firms, and that the pandemic also ended out prompting more advisors to seek help in developing a succession plan.

How Do You Persuade Tax-Allergic Clients To Rebalance? (Steve Garmhausen, Barron's) - While systematic rebalancing has long been a staple of portfolio management for financial advisors, in practice rebalancing can become challenging at market extremes, including both bear markets (when clients are afraid to rebalance and buy stocks that may be tumbling), and times like the present when the market has been in the midst of a long-term bull cycle and long-term clients hold substantial embedded capital gains in their current positions... which makes them reluctant to sell and rebalance at the exact point that their portfolios may face elevated risk because the growth in stocks has caused their allocations to become overweighted to equities. So what's the best way to approach clients who still need to rebalance? Suggestions include: try to reframe the conversation by pointing out what a good problem it is to face capital gains when rebalancing (would you really rather have no capital gains... which means your portfolio hasn't been growing!?); note how rebalancing only triggers a small portion of their total gains, and that the strategy actually is spreading out their capital gains over time (but it's still important to take at least a little bit of the medicine now); emphasize that capital gains are still the "cheapest" tax that a client will have to pay (i.e., it's better than ordinary income tax rates), and that while it might feel like they're 'losing' on the tax impact of rebalancing, it's only because they're already winning with a preferential tax rate; quantitatively highlight the level of tracking error the client will introduce by keeping their (out-of-allocation) holdings and how that risk may dwarf the more 'modest' tax cost of rebalancing; delay taking capital gains to rebalance if the reality is that the client doesn't need the dollars anytime soon and can 'afford' to be at least a little out-of-balance; consider selling out-of-the-money call options that will 'force' the client to sell if the stock keeps rising and the option gets called (but then the client can see they got even more appreciation, plus the call option premium, which more-than-offsets the taxes on the sale itself); and highlight the benefits of diversification and the fact that whichever asset class does best in one year rarely repeats in the next, so it's best not to tempt fate. Alternatively, some advisors try to mitigate the impact in the first place by using the client's most appreciated positions for their charitable giving, donating stocks in-kind (directly to their charity of choice, or via a donor-advised fund) as a way to fulfill charitable giving, avoid taxes, and rebalance (not by selling the stocks but giving them away) in one fell swoop.

Bonds 'Stink': Do They Still Have A Place In Client Portfolios? (Andrew Welsch and Ross Snel, Barron's) - With interest rates continuing to be floored near multi-decade lows year after year after year, there is an ever-growing challenge for advisors to either find alternatives to fixed-income allocations for client portfolios, or to work harder to explain and justify why they should remain. Potential talking points include: remember that the main purpose of bonds is to act as an anchor for the risk side of the portfolio, and even if they don't provide much yield, they still provide that anchoring effect (as witnessed by the performance of conservative bonds during the pandemic rout last year); diversify across a wider range of bonds, from municipals (where appropriate for higher-income clients) to inflation-linked bonds; own bonds, but also buy a small sleeve of investments that hedge against the interest rate risk (e.g., or at least own more global bonds that may not be as sensitive to the US interest rate cycle in particular?); or simply acknowledge that perhaps the new 60/40 portfolio really is 60/20/20, with 'just' 20% in traditional bonds and the last 20% in bond alternatives (albeit perhaps more 'conservative' alternatives that are simply looking to replicate mid-single-digit returns)... because in the end, ultra-low-interest-rates are great if you're a borrower, but for investors looking for return, there's no choice but to move further out the risk spectrum to achieve desired returns (which arguably is the exact purpose of such 'monetary stimulus' in the first place?).

My Investing Nightmare (Nick Maggiulli, Of Dollars And Data) - While bear markets can be scary, the reality is that even the Great Depression was something that the US economy recovered from 'relatively' quickly. In fact, for nearly a century, the 'worst' decline in US markets has been no more than 'just' about 50%, and while the markets have experienced rough decades with no returns (e.g., from March 1999 to February 2009 where U.S. stock prices were flat), even those events tend to be bookended by more positive outcomes (e.g., the tech crash of the early 2000s did only come after an exuberant 1990s bull market), and the decade of the 2010s that followed the financial crisis was similarly buoyant. Such that even when markets inevitably reach their next bear market and the typical 30% - 40% decline, it will still only take a slice off the gains that have already been booked for the past decade. Given all of this, Maggiulli suggests that what really "keeps him up at night" is not having another bear market in US stocks - even a 40%+ decline - but what happens if the US replicates some of the disasters that have befallen other countries. For instance, in the aftermath of the global financial crisis, US markets at least recovered... while the Italian stock market remained down nearly 40% by the close of the 2006-2016 decade (making a "flat decade" like 1999 - 2009 seem great by comparison!). An even worse global example is Spain, which experienced its own bout of high inflation in the late 1970s and into the early 1980s... but while the stagflation of the 1970s in the US spawned a subsequent bull market recovery, in Spain the markets remained down 60% even after a decade (from 1974 to 1984), which included a four-year decline, only to be followed by a mediocre 4-year rally, and then 2 more years of declines to new lows! Or, in the greater extreme, consider Greece, which from 2008 to 2018 lost nearly 95% of its value... to the point that even a tremendous economic recovery will not likely ever get those investors back to their starting point during their lifetimes. Ultimately, Maggiulli notes that this is why diversification beyond equities (e.g., even low-yield bonds) matters so much; it's not about the relatively 'benign' bull and bear markets of the US, but what happens if the US has an experience more akin to some other countries, where the economy can experience far more catastrophic returns that take far longer than a decade to recover at all?

Why Do Clients Complain About Good Advisers? (Adviser Voice) - While most financial advisors would like to see the industry's bad apples cleaned up, a fundamental challenge of more aggressive regulation of those who receive client complaints is that sometimes, a client complains about something that really was not the advisor's fault or was otherwise out of the advisor's control, such that even 'good' advisors can sometimes receive bad complaints. So how can even (and especially) good advisors head off such complaints? At its core, it's crucial to recognize that a complaint is simply an expression of dissatisfaction, which represents a situation where the client's expectations did not match the reality of what they received... and when that gap emerges, emotion sets in, and people get upset (and may voice it!). Notably, though, dissatisfaction with an expectation gap often exists on a spectrum - it's not as though clients are either happy or irreconcilably unhappy, with nothing in between; instead, dissatisfaction tends to escalate to a complaint the longer that it festers and remains unresolved. Accordingly, the key to managing complaints - given that no one is perfect and problems will happen - is to try to minimize the extent to which they escalate when problems do occur. Which means beyond simply having good oversight and prevention measures to try to keep mistakes from happening, the key is to hear complaints as early and quickly as possible, acknowledging the issues (whether valid or not), explaining what will be done to address the concern... and then acting promptly to take action (and demonstrate that the concern was really heard). And notably, because gaps between expectations and reality result in a breakdown of trust, it's most important for the advisor leading the client relationship to take the lead on a resolution with the client, not only to address the issue itself, but also to restore trust. Because in the end, complaints - including and especially those that get escalated all the way to a regulator - are virtually always the end result of failed attempts or lost opportunities to de-escalate the issue with the client in the first place. Or simply a failure to communicate often or proactively enough with the client to identify those issues in the earliest stages of escalation when they can still be easily de-escalated!

How Life Changes Affect Client Behavior (Danielle Andrus, Journal of Financial Planning) - Investment management has become more and more commoditized and easier to automate or outsource. The good news of this trend for financial planners is that it can actually free up more time to help clients address the non-investment (or even increasingly non-financial) aspects of planning that may be even more important to them and impact their behavior, including many life transitions they will surely encounter over a long-term relationship. In other words, as Andrus notes, "increasingly, planners are filling a role similar to that of a therapist as they uncover their clients’ true motivations, fears, and biases that affect a financial plan’s success." In fact, one study found that planners spend 25% of their time with clients on these life issues, and 74% predict they will be spending more time on these in the future. Andrus makes the interesting point that planners should be on the lookout for both negative and positive life changes in that both can trigger symptoms of grief, with the former leading to leaving things behind and creating different types of stress. Role changes are a significant stressor that is often under-recognized  (e.g., a child's graduation, starting a family, job changes, marital status change, loss of income, retirement, and caregiving), even though they often serve as the trigger event to seek out advice in the first place. And even if a client recognizes these events are normal, it may not lessen the psychological impact and lead to poor decision-making or possibly harmful indecision. As advisors, the way we help begins with simply being aware of these stressors, and being on the lookout. Given our roles, we can often be the first people to be aware of these changes and are therefore on the front line to provide support. Giving clients permission to grieve, and helping them understand that what they're going through is normal, and then serving as a sounding board and helping them break through the fog and move forward, is invaluable. And for advisors who haven't naturally engaged this way with clients in the past, when these trigger events do occur, it provides the opening we may need to more naturally ease into engaging beyond the financial aspects of advice and planning. As Amy Florian of Corgenius says, “If advisers can’t connect on these other levels, not just the financial level, sooner or later they’re going to lose that client because the client will find an adviser who can.” One tool advisors can use to help identify how clients may react to these types of life event-based stressors is the Holmes-Rahe stress inventory. It explores both major and minor changes we encounter in our lives, and includes financial changes as well. The assessment specifically indicates how likely a client is to suffer from a stress-induced illness (but can of course be used as a tool to discuss with clients ahead of time what this means, how it might impact their decision-making ability, and how to prepare for it). When clients are going through these events, advisors can play an enormous role as someone who is somewhat removed, and can serve as an independent advocate to help them normalize the experience and simply listen to their story and then help them think about the implications of the changes and avoid making any major - especially irrevocable - decisions. This also speaks to the need to establish listening processes to ensure we're aware as early as possible of these types of triggers (including recognizing the signs of cognitive decline so that we’re in a position to protect and guide impacted clients).

'You Were Surprisingly Unhelpful': Why I Embrace Client Rejection (Allan Roth, Barron's) - Like many financial advisors, Roth conducts a 20-minute phone meeting with prospective clients to get to know them and decide whether there is a mutual fit... after which he has both won new client relationships, and received harsh criticism from "you were surprisingly unhelpful" to "my wife thought you were the devil". Yet while such responses - and the clear offense that some prospects have taken - don't feel good, Roth remains committed to his approach. In fact, having initially been trained to get new clients by getting them to envision their own lives once they're financially independent, and then getting them to sign an advisory agreement in the midst of that emotional euphoria, Roth felt the approach was a turnoff and deliberately designed his process to be the opposite, where prospects must complete a personal profile upfront and Roth would then give them a "brutally candid" assessment of where they stand (and then require them to think about it for a day before they could move forward with him). Accordingly, feedback that Roth has given to prospects includes: "You appear to have one of the most expensive portfolios I’ve seen in a very long time," and, "Your 4.38% muni bond income is an illusion. The vast majority of it is just the return of your own principal"... akin to a physician who delivers difficult but useful and important information (in this case, about wealth) in a clear and direct manner. The point is not simply to be blunt, though; instead, the 'method to the madness' is that if clients are going to make sometimes-painful changes, they have to really be ready to do so, and Roth's blunt approach effectively screens out those who weren't prepared to accept that reality and thus weren't likely to implement his recommendations in the future anyway. In other words, when presented with such a blunt assessment of bad news, prospects often respond in one of two ways: either they have a desire for more understanding and to take action (and become clients), or they are offended or defensive because they weren't ready to accept that information (in which case Roth simply apologies that he didn't intend to offend, and that it seems like he's not a good fit for what they're looking for).

Big Wins Come From Being Decisive (Tony Vidler) - For some clients, "paralysis from analysis" and the inability to wade through a seemingly overwhelming amount of information in order to make a decision can be a trigger to seek out a financial advisor in the first place. But Vidler notes that such 'analysis paralysis' can occur amongst financial advisors themselves when managing their own practices... a challenge that may be increasingly common in the current environment of uncertainty, from the economy to potential regulatory changes, a growing focus on income inequality and the ongoing disruptions of the pandemic and its waves of variants. Notably, when faced with uncertainty, one very natural human response is simply to 'go with the herd', relying on the social proof of what everyone else is doing to figure out at least a 'reasonable' course of action for ourselves, too. Yet when you look at those who have standout success, one of their most distinguishing traits is often decisiveness, and their willingness to make decisions that may be different from the herd in order to take the next step forward (and if those decisions don't work out, they take another decisive action swiftly to get to a better place!). In other words, the key is not just a willingness to make decisions and be 'decisive', but also the willingness to make subsequent decisions and take action quickly if/when/as necessary based on how the initial decision turned out. Which isn't to say it's a good idea to not look before you leap, or to be cautiously prudent. But in the end, the most successful businesses aren't necessarily just the ones who make the 'best' decisions, but the ones who simply make decisions the most often and are willing and ready to be decisive whenever and as often as they must in order to keep moving forward.

Multi-Tasking And Our Greatest Fear (Lawrence Yeo, More To That) - One of the most remarkable and unique traits of human beings is our ability to not just take in sensory information and react to it (like most animals), but to "think"... where we consider the future, and potential actions we might take, visualizing those outcomes in the abstract and being able to take action despite the fact we may never have actually experienced them. Yet while our capacity for abstract thinking has driven a wide range of human ingenuity and innovation, it also "gives" us the daunting ability to contemplate our own death in the future, which in turn drives many of our strongest actions and emotions (from reflecting on our lives and the actions we're taking, to trying to maximize the precious little time we're given on Earth). The caveat, though, is that the potential foreboding of 'maximizing our lives before our deaths' can actually undermine our very ability to enjoy it, as it can push us to do 'as much as we can' with the time we have... to the point that we so distract ourselves with multi-tasking that we don't get to enjoy many of those moments. For which Yeo suggests that the real key is not about maximizing our time at all... but maximizing our attention and where we direct it. Because the reality is that we can't actually control our time - an hour is an hour is an hour - but we can control whether and how we direct our attention during that hour. And in that context, it becomes clearer that multi-tasking really is the antithesis of attention focus; it's about trying to maximize time (by stuffing as much activity into the available hour that we can), instead of controlling attention and what we can do best with that hour. The key point, though, is simply that by recognizing that time is finite and we can never do everything that we might dream of doing, the only real choice is how we prioritize our attention, because that's the resource we actually get to control to make the most of our time!

The Best Decision I've Made In Years (Josh Brown, Reformed Broker) - As someone who has built a substantial following via the media, social media, and blogging, Brown recognized last year that he was reaching a crossroads between trying to reach more people ("bigger, faster, louder, more"), or becoming more focused on reaching the particular people he wanted to reach the most... for which he was making a decision to focus in on his best audience and try to be better for them, even if it meant having a smaller audience and reach. Because the focus of doing so also meant that he would no longer have to pursue the 'lowest common denominator' to fit whatever the most people wanted, and instead could spend his energy trying to create whatever would best help the people he most wanted to serve anyway. The end result has been a year of doing even more for their clients, and more growth, despite consciously creating a 'smaller footprint' that reaches fewer people. Notably, an ancillary benefit of this approach is that now it's no longer as necessary to argue with and debate others who disagree; because it's not really about winning over the naysayers, it's simply about attracting the people who already believe what you believe, and simply want your help to implement/achieve it. In Brown's case, this means marketing to those who have already succeeded in life, who want to get better at investing to build upon that success, who are serious about their portfolios but lighthearted and intellectually curious about everything else. Ultimately, Brown acknowledges that the hardest part is still turning people down who want his opinion, or to comment on an article or speak on a stage or debate some topic. But fulfillment comes directly from his energy, where it matters most, and is the most rewarding: family, employees, clients, and their investments, spending time with the people he enjoys working with, who appreciate what he and his firm have to offer... and letting the rest go.

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 Craig Iskowitz's "Wealth Management Today" blog, as well as Gavin Spitzner's "Wealth Management Weekly" blog.

Gavin Spitzner contributed this week's article recap on "How Life Changes Affect Client Behavior".