Weekend Reading for Financial Planners (Aug 28-29)

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.

Money Managers Race to Launch First U.S. Bitcoin ETF After SEC Signal (Michael Wursthorn, Wall Street Journal) - Earlier this month, SEC Commissioner Gary Gensler signaled that the SEC would be receptive to "Bitcoin ETFs" as long as they traded in Bitcoin futures (e.g., the CME's Bitcoin futures contracts), rather than the underlying cryptocurrency itself, and as long as they follow the stricter rules that otherwise apply to mutual funds (under the Investment Company Act of 1940), which in turn would require such offerings to have an independent board (to provide better oversight and reduce the risk of Bitcoin-related fraud), and give the fund the ability to stop accepting new money. The news follows on the SEC's recent approval of the first Bitcoin-futures-based mutual fund - the Bitcoin Strategy ProFund (BTCFX) - that began trading last month. In the aftermath of Gensler's statements, a slew of asset managers, including ProShares, Invesco, VanEck, and more, have filed plans for Bitcoin-futures-based ETFs to launch later this year or sometime in 2022. Notably, though, beyond regulator concerns about potential Bitcoin fraud, there is still the fundamental challenge of handling Bitcoin's volatility... and the fact that futures prices themselves can become disconnected from the price of their underlying asset, which has the potential to further amplify the price volatility of a Bitcoin ETF, and more generally means that a futures-based Bitcoin ETF may not fully replicate and track the returns of Bitcoin itself (not to mention the potential cost drag of rolling over futures contracts as they expire, which one analyst estimated could drag performance as much as 10 percentage points per year, on top of what will likely be a 1% expense ratio). Nonetheless, with the SEC's shift, it does appear increasingly likely that Bitcoin ETFs will be coming to the market (and the potential use for advisors) sooner rather than later?

Gensler Appoints Longtime Investor Advocate Barbara Roper As Senior Advisor (Tracey Longo, Financial Advisor) - This week, the SEC announced that it was appointing Barbara Roper, long known for her role as the Director of Investor Protection with the Consumer Federation of America, to become a Senior Advisor to the SEC Chair, with a particular focus on issues relating to retail investor protection, "including matters relating to policy, broker-dealer oversight, investment adviser oversight, and examinations". The appointment comes after Roper 'introduced' herself to Gensler, in a similar manner to prior SEC Chairs over the past 20 years, with an open letter outlining what the SEC chair needed to do to fix the SEC's retail investment advice rules for brokers (i.e., Regulation Best Interest), and is widely being interpreted as a signal that Gensler intends to have the SEC take a renewed focus on Regulation Best Interest - not necessarily to replace it, but at the least to enforce it more stringently as a way to curtail non-fiduciary sales activities of brokers. Notably, Roper's role will also position her as the voice for the SEC with the Department of Labor, which is scheduled to start enforcing its own new fiduciary rule at the end of December, and similarly is expected to take a more stringent enforcement approach to the new DoL "Best Interest" rules that were implemented under the prior administration. As a result, industry commentators are suggesting the likelihood for several new draft rules to emerge in 2022 as the SEC (and potentially the DoL) look to further refine the enforcement of financial advice in the years to come.

Survey Finds Millennials Increasingly Turning To (Human) Financial Advisors (Samuel Steinberger, Wealth Management) - According to a new consumer study by Broadridge of 1,000 U.S. retail investors, of the 39% of Millennials who do not currently use a financial advisor, a whopping 65% of them plan to begin using a (human) financial advisor in the next two years. The finding is especially notable given the industry dialog of the past decade that Millennials would 'inevitably' eschew human financial advisors for robo-advisors; instead, the study found that overall, while 1-in-3 consumers are familiar with robo-advisors, only 6% of consumers are actually using a robo-advisor at all. Other highlights of the study included: 53% of Millennial investors state that they are likely to work with an advisor due to a concern of not being on track to meet their financial goals (46% indicated that they intend to work with a financial advisor to reduce their financial stress); Millennials are actually the most likely to use self-directed brokerage accounts (65%, compared to 'just' 52% of all investors), but the availability of low-cost, self-directed brokerage accounts is not dissuading Millennials' interest in financial advisors for a broader range of financial advice beyond their investment accounts (and 28% of investors report using both a financial advisor and a self-directed brokerage account); and nearly all consumers who are using a financial advisor are happy with their advisor (96% of investors reported that they were very or somewhat satisfied).

5 Lessons On Investment Indexes Used By Insurers And Other Firms (Allison Bell, ThinkAdvisor) - In recent years, the rise of ETFs and more "passive" investment vehicles that track various indexes has led to an explosion of new indexes around which funds can be tracked. In some cases, it's because the asset managers don't want to pay licensing fees to use popular third-party indexes; in other cases, it's because the asset manager wants to differentiate itself with its own unique "proprietary" index; and in yet other cases, companies create their own index funds as a way to manage and control their own exposure (e.g., for many indexes created by indexed annuity providers). But now, Laurence Black - who for nearly 20 years has been directly involved in the creation of numerous standalone indexes - is launching The Index Standard, which aims to evaluate and rate investment indexes (and the products built around those indexes, from ETFs to indexed annuities), with a scoring system that will include about 30 criteria, from returns themselves, to the efficiency of the vehicle, and the capital at risk. Recent themes that Black has observed in the adoption of index funds include: the S&P 500 index continues to be one of the most popular, but given that nearly 40% of the value is now in tech stocks, it is arguably more concentrated and less diversified than other custom index funds being created; the market volatility in March of 2020 has become a recent litmus test to evaluate whether more "risk-managed" indexes actually did a good job of managing risk; and rising scrutiny on new indexes is actually leading them to become simpler and more transparent (unlike some of the early custom indexes a decade ago, that were often viewed as more opaque and "over-engineered"), particularly with respect to the rules being used to create them (which in turn makes it even easier to scrutinize them going forward).

Vanguard Total Bond Market: A Success Story (John Rekenthaler, Morningstar) - When it was first launched in 1986, Vanguard's Total Bond Market Fund (VBMFX) carried what at the time was viewed as an "unprecedented" charter: to replicate the lead bond index (then called the Lehman Brothers Aggregate Bond Index), which, unlike its landmark S&P 500 fund, would have to track not hundreds of stocks but thousands of bonds, many of which were themselves illiquid. Yet in the 35 years since, Vanguard's fund has done a remarkably good job of tracking, with a 30-year annualized return (from January 1991 to December 2020) of 5.67%, just slightly lower than its (expense-ratio-free) benchmark return of 5.86%, and a nearly dead-on volatility (with Vanguard Total Bond's standard deviation at 3.56%, compared to 3.54% for the now-Bloomberg-Barclays Aggregate Bond Index). And while index skeptics - particularly with respect to bond funds - have long raised concerns about whether bond trading spreads or commissions would undermine returns, it turns out that the average expense ratio of Vanguard's Total Bond fund over that time period is 0.19%... which is exactly the same as the 0.19% that its returns have lagged. In other words, short of the (modest) cost of the index fund itself, Vanguard's Total Bond fund precisely replicated the returns of its index, even despite the real-world trading costs to implement a bond index fund. Notably, though, Vanguard's bond fund was not the highest-performing over the entire time period; out of 92 intermediate core bond mutual funds in the market 30 years ago, Vanguard's bond index fund placed 10th. On the other hand, a whopping 72 of the 92 bond funds have disappeared entirely, through liquidations or mergers over that time period, which still places it near the top (and with greater stability and consistency than trying to guess which of the other 72-out-of-91 bond funds would have or have not survived starting 30 years ago). In addition, the breadth of diversification that the bond fund allows - which makes it more feasible to own some corporate bonds, despite their individual default risk - also means that Vanguard's bond index fund beat a more conservative intermediary Treasury index (which returned only 4.88%/year over that 30-year time period). Ultimately, there may still be a subset of investors who wish to seek out bond funds that can beat their index (and not just lag it by the fund's stated fees), but Rekenthaler emphasizes that at least when it comes to replicating the returns of a bond index itself and gaining the diversification benefits thereof, it's hard to dispute how incredibly successful Vanguard's Total Bond fund has been at doing exactly what it said it would do, over the past 30+ years.

How Direct Indexing Can Save The Investment Management Industry (Timothy Welsh, ThinkAdvisor) - One of the greatest challenges for asset managers has been the ongoing advisor adoption of ultra-low-cost ETFs and index funds, as advisors either become more passive, or at least choose to use lower-cost more "passive" vehicles amongst which they select for their own tactical investment management processes (leading to explosive growth and flows for Vanguard and BlackRock... to the detriment of nearly every other asset manager in the industry). But now, the new emergence of Direct Indexing solutions is leading to a new shift, as advisors begin to seek out even more "customized index" offerings for clients. Historically, such solutions were implemented through SMAs (Separately Managed Accounts), but the higher costs of SMAs have increasingly become a deterrent for many advisors, while the higher minimums of many SMAs limited the ability of advisors to implement the solutions consistently across all of their clients. However, the ongoing rise of Direct Indexing technology providers - or more generally, the increasing robustness of popular trading and rebalancing software amongst advisors - is making it possible for advisors to implement direct indexing strategies themselves, without the SMA wrapper (and its associated costs). From the industry perspective, the significance of this is not only that advisors can create more customization for clients as a means to differentiate (or capitalize on the growing popularity of customized ESG portfolios for clients), but also that direct indexing allows for more granular and proactive tax-loss harvesting... which creates an additional level of "tax alpha" that means asset managers and technology companies can even charge for direct indexing, and have the client still finish with higher after-tax returns (as the tax savings from loss harvesting trumps at least a modest platform cost for direct indexing itself). Which some technology firms have tried to capitalize on (e.g., Orion Advisor Services rolled out ASTRO to implement direct indexing as an extension of its Eclipse platform). Though in the end, asset managers seem to increasingly be recognizing that the best strategy is "if you can't beat 'em, join 'em"... which is leading to asset managers trying to get in on the direct indexing trend directly, from JP Morgan acquiring OpenInvest, BlackRock buying Aperio, and Fidelity partnering with Ethic, on top of Morgan Stanley acquiring Parametric, and most recently Vanguard acquiring JustInvest.

Talent Pools, Fields, and Courts: Where an RIA Finds Employees With a Flair for Wealth Management (Gary Stern, RIA Intel) - In an industry that has become increasingly competitive for a limited pool of advisor talent, more and more advisory firms are forced to figure out how to find the "right" talent either from outside the industry or at a younger and earlier stage to develop the talent internally. For mega-RIA Beacon Pointe, their approach has been to focus more and more on those who were previously athletes, with 47 of its 256 employees previously college athletes and/or on some U.S. National Team, recognizing that many of the qualities that are developed in competitive sports translate well to the world of wealth management, from being a self-starter, having a healthy competitive attitude, the ability to wear multiple hats and effectively prioritize time, and the self-awareness and willingness to recognize where one needs to improve and then seeking out the coaching to do so. To support the process, Beacon Pointe also uses iWorkZone, a software solution that uses psychometrically designed questionnaires to measure candidates' interests and abilities, and then matches them to roles within the organization. Notably, though, Beacon Pointe does not explicitly post job descriptions that require athletic achievements to apply; nonetheless, their approach does attract and connect with athletes in particular, and the firm attributes the competitive-athlete ethos of the firm and how it impacts the firm's growth culture as a material factor in Beacon Pointe's own growth from 1 office and 22 employees just 11 years ago, to 24 offices and 265 team members today.

Why I Look Outside the Industry to Find Advisor Talent (Steve Garmhausen, Barron's) - Dale Yahnke first founded Dowling & Yahnke 30 years ago (at the tender age of 34), and in the 3 decades since, the firm has grown to more than $5B of AUM. For Yahnke, a key aspect of their growth was the firm's ability to hire well - a skillset that he first developed as a college basketball coach and recruiter, where he saw the direct connection between the quality of a team's players that are recruited, and its subsequent ability to win as they developed. Which for Yahnke, meant not hiring people who had industry experience and might bring a book of $100M, because doing so may add incrementally to the firm but won't materially move the needle in the long run to take it to the next level; instead, the firm has sought to recruit people from elsewhere, from the accounting and consulting worlds, to the military, who brought good talents that could be developed to apply to the business of financial advice in particular. In turn, the growth of talent within Dowling & Yahnke led the firm to decide to sell to CI Financial earlier this year, recognizing that it was increasingly hard for the younger advisors to buy out the founders (given the size of loans involved), but that rolling into CI Financial would allow the next generation of the firm's advisors to have a stake in CI's new US Wealth Management business, allowing the firm to better capitalize on the entrepreneurial drive of (and thus retain) its younger team members.

The 3 Elements To Hiring An Adviser Successfully (Tony Vidler) - While investing in any staff hiring is a difficult and potentially expensive proposition for an advisory firm owner, hiring another advisor is an especially high-stakes challenge for most firms, given both the cost of the hire and the sheer time it takes to identify the right candidate (not to mention train and develop them once onboard). Vidler suggests that ultimately, getting the "right" hire entails 3 core components. The first is picking the right person, for which it's important to remember that despite the wide range of psychological profiling tools, along with innumerable tips on the "best" interview questions, and various work sample assessments for competency, nothing will be foolproof; at best, hiring is a probabilistic exercise of giving the best odds of choosing well, and accepting that it may take more than one hire (at once, or over time), to really find the right and best fit in the long run (though that isn't an excuse not to run a thorough multi-step interview process, and do all the background and reference check due diligence!). The second is to consider the right compensation structure, recognizing that the industry's tendency to disproportionately (or solely) compensate for business development runs the risk of dissuading someone who may be the best long-run candidate but simply isn't willing to take the upfront career risk themselves (at least relative to a hiring competitor who is willing to offer more base salary). And, finally, because no candidate (or compensation system) will ever be perfect, it's crucial to recognize that even the best hires will require an ongoing process of providing feedback and managing their performance to develop them; again, successful hiring is virtually never a once-and-done get-it-perfect-the-first-time no-further-effort-necessary process, even when the firm does find the right hire the first time!

Don't Turn Your Passions Into Work (Kitty) - Mark Twain once famously quipped "Find a job you enjoy doing, and you will never have to work a day in your life", and the advice has only become even more popular in recent years with article upon article about how to "turn your passion into work". The caveat, though, is that often we enjoy our passions precisely because they're a form of 'escape' from our reality, and entail tasks that we enjoy in part because we are choosing to do them... whereas "work" has a sheer necessity to it (in order to earn a living and put food on our table), which means turning your passion into work risks reformulating it into the exact thing that makes it not an enjoyable escape! By analogy, Kitty notes how spouses often give each other spontaneous kisses and other signs of affection... but if kissing your spouse was treated like a job, it would entail mandatory minimums on the number of kisses, daily check-in meetings on kissing activity, spreadsheets to track kissing productivity... and an obligation to maintain that "production" even when otherwise stressed or not in the mood. Not to mention that turning passion activities into work inevitably adds a number of non-fun activities alongside it (the "business" parts of ensuring the passion actually pays as work). The end result of this process is that what once was an enjoyable activity turns into an obligation that we may even sometimes resent... or stated more simply, "obligation kills passions". Because at its core, one of the fundamental roles of work is that it's an obligation - that's simply a reality in a world where we have to fulfill our work obligations in order to earn what we need to live. By contrast, play (and passions) are what we choose to do, and they're joyful in part because we get to seek them out when we want to, and engage with them on our own terms. Notably, though, the things we're passionate about are often built upon skills that we're good at, and while turning a passion into work may not be a good idea, it is a good idea to focus on what you're skilled at. So when you're trying to figure out your future career, don't try to do what you love... do what you're good at (and let the passion hobbies remain as such, even if the skills are complementary!).

Mental Models For Career Changes (Shane Parrish, Farnam Street) - One of the greatest challenges we ever face in our careers is that moment when you're at a job, and realize that it's really not for you anymore, where every Monday is dreaded, the week is unfulfilling, and we look forward to the weekend simply because the work will end. For which it may be intellectually "obvious" that it's time for a job or career change... but nonetheless incredibly stressful in practice, to the point that many of us never actually manage to make the leap to something better. So how does one change their mindset to better prepare and handle the perceived risk of making a big career change? One approach is simply to take some time to get clear with ourselves about where we really want to go - otherwise, what seems like the positive velocity of our current career (e.g., "at least I'm moving up in the organization and getting raises") fails to capture the reality that we may be hurtling towards something that will just make us even less happy; in other words, if you're going to make a career change, it's much better to figure out what you want to run towards, and not just what you wish to move away from (and then once you figure out where you want to be, work backwards to figure out what it takes to get from here to there). In turn, if you've decided on what direction you want to go, be certain to connect with and talk to as many people as you can who do the work to find out what it's really like (so we don't fall in love with an idealized version of the next job, only to make the switch and find out that the new role isn't any better than what we left!). And recognize that once you know the direction, it's important to stay focused on what it can achieve in the long run, and not get caught up on the first step - especially if the first step may mean taking a step back from your current income, as sometimes that's the only way to eventually take two steps forward to a better long-term outcome! And if you're still not sure after all of that to take a leap, consider treating the choice of "stay or go" like a bet as a casino: if someone else you knew were considering the change, how much would you bet on their ability to navigate the inevitable challenges that will crop up along the way, and achieve success? If you'd make a big bet on their situation... then it's time to make the bet on yourself, too.

Want To Improve Your Career: Become An Uncertainty Killer (Nick Maggiulli, Of Dollars And Data) - A lot of popular career advice is arguably too general to be practical, from "follow your passion" (ok, but how do I get paid for it?), to "find a mentor" (ok, who exactly?), or "expand your network" (ok, where and how?)... but Maggiulli suggests that one bit of career advice is more universal: you will be rewarded if you can reduce uncertainty for others (as much as you can). Because the reality is that as human beings, we do not deal with uncertainty well; in fact, a number of studies have actually found that having a known bad thing that will happen to us regularly is still less stressful than the uncertainty that it might (e.g., during the Nazi blitzkrieg bombings on England, Londoners who were hit every night like clockwork were less stressed than those in the suburbs who were hit only once a week but never knew when or where the bombs might be coming). Conversely, another study found that "the single best investment ever made by the London Underground in terms of increasing passenger satisfaction was not to do with money spent on faster, more frequent trains – it was the addition of dot matrix displays on platforms to inform travelers of the time outstanding before the next train arrived." In other words, reducing the uncertainty of when the next train was coming - even if it was still far away and wouldn't arrive for a long time - lifted mood more than the frequency of the trains themselves! So how does one reduce uncertainty in practice in their own careers? Consider the classic example of a boss who asks for an update on a project and when it will be done, to which you can reply that it's "not done yet", or "not done yet, but will be finished by [x]"... for which Maggiulli notes the correct answer is actually neither, but to be more proactive in communicating its progress so the boss doesn't even need to ask in the first place (thereby reducing their uncertainty!). A principle that can be applied widely across any number of workplace opportunities; taking the time to proactively reduce the uncertainty of those around us reduces their stress... making you invaluable as a stress reducer in the lives of your co-workers and boss, which to say the least positions one well for career success!

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.