Weekend Reading for Financial Planners (Aug 6-7)

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.

FINRA Launches Exam Sweep Of Business Development Companies (Mark Schoeff, Investment News) - Over the past few years, non-traded REITs have received increasing scrutiny from regulators, and now that non-traded REIT sales are plummeting in the aftermath of greater transparency requirements, FINRA is turning its attention to non-traded Business Development Companies (BDCs). The idea of a BDC is to invest in small- to mid-sized private companies, operating in a structure similar to a closed-end fund; however, the regulators are concerned both with the prospective illiquidity of the BDCs (given that they're non-traded), the underlying companies (given that they are typically smaller and non-traded as well), and the potential expenses that may be embedded within the BDC structure and obscured from investor view. Accordingly, this week, the regulator announced in an exam sweep letter that it wants broker-dealers to provide a list of BDCs being offered, the due diligence it did on each BDC, and a list of the brokers who have selling agreements with each BDC. Notably, the exam sweep does not automatically mean that BDCs are "bad" investments, but similar to non-traded REITs, there is growing concern about whether investors really understand the complexity, costs, and risk of the product, and whether broker-dealers and their representatives are appropriately assessing suitability and supervising sales, and providing breakpoints appropriately for large-volume purchases (which was also raised as a FINRA examination priority earlier this year). And FINRA also expressed concern that there has been some recent growth in non-traded BDC offerings that appear to be nothing more than non-traded REITs that are repackaging themselves to escape the new REIT transparency requirements implemented last year.

CFP Congressional Hopeful Seeks 'Financial Plan For America' (Kenneth Corbin, Financial Planning) - Financial planner and CFP certificant Andy Millard sold his advisory firm earlier this year in an all-out bid for a Democratic House of Representatives seat in North Carolina's 10th district. While he faces long odds against six-term Republican incumbent Patrick McHenry, Millard is running in part to help bring a voice to independent financial planners and investment advisors, who he suggests are not well-represented in Congress against the interests of traditional financial services firms (i.e., "Wall Street"), and is a noted supporter of both the Department of Labor's fiduciary rule, and also empowering the SEC to collect user fees for more rigorous exams for investment advisers. In addition, Millard is advocating for financial-planning-related reforms for consumers, such as a simplification of the "alphabet soup" of individual and employer retirement plans (i.e., 401(k), 403(b), SIMPLE IRAs, etc.) down to a single universal retirement savings plan for individuals to contribute to. Notably, it appears that if Millard wins, he would be the first CFP professional elected to Congress (though some have served in state legislatures) - which is relevant, in that Millard could quickly become deeply involved in financial services industry legislative issues, just as the members of Congress with medical backgrounds are often deferred to as 'experts' in medical-related legislative proposals. Unfortunately, Millard still faces a significant uphill battle - his district is called a "safe Republican seat" by tracking services, and although it includes the Democratic-leaning toward of Asheville, when combined with the conservative Charlotte suburbs, has not elected a Democrat since 1960. Still, the potential turmoil in the Trump campaign has begun to raise questions about whether some Republican congressional seats could unexpectedly come into play. Advisors who are interested in learning more about Millard's campaign, or wish to contribute financial or other support, can see his campaign website here.

Beyond Niche Marketing: Advisory Firms For All Life Stages (Angie Herbers, Investment Advisor) - In recent years there has been a growing awareness of the advantages of advisors focusing on a niche, including more targeted marketing, easier networking, higher referral rates, and a more efficient business. However, Herbers suggests that marketing niches aren't all they're cracked up to be, and that the case examples of very successful firms that built into niches may be the rare exceptions. Specifically, Herbers notes that many of the most successful niche firms were largely a byproduct of accidental happenstance - the advisor who focuses more into a niche after noting that a material subset of clients happen to already be in that niche, or the executive who retires from a corporate and becomes a CFP and goes back to specialize with employees of that business based on his/her prior knowledge. By contrast, advisors who are just getting started into a niche, and don't already have an existing connection there (e.g., already existing clients, or former colleagues from a prior career), face a far more uphill battle, in part because it's not easy to break into a new group as an outsider (it can take years to become known, liked, and trusted in a niche), and also because many of the more lucrative niches may already be taken (it's not "news" anymore that there's an opportunity to build a niche practice with doctors who have money!), it can cause the advisor to tunnel vision too much (missing other opportunities along the way), and in practice many niche practices aren't actually as focused in their services as having a niche would suggest (i.e., the clients still end out getting substantively similar comprehensive financial planning and portfolio management services as everyone else). Notably, this doesn't mean that advisors should just be completely broad-based generalists instead, but Herbers suggests it may be simpler and more straightforward to simply focus on a wide range of clients in a particular life stage, whether it's the "growth" stage (those still working and accumulating assets, who also need help with everything from budgeting to risk management products), the "transition" stage (those who are approaching or heading into the retirement transition, have more substantive assets and concerns about those assets, and need to make more complex financial decisions), or the "maturity" stage (where clients are now retired, in the portfolio spending phase, and need help with the common issues of older clients). Michael's Note: Ironically, I would still fully characterize Herbers' recommended alternative to niche marketing AS niche marketing - simply using niches that are defined by client life stages, rather than a particular career/industry/profession. The issue is not whether to niche, but how to most effectively define the niche to be appropriate in scope and reach.

Shining A Bright Light On The High Costs Of Breaking Away (Matt Sonnen, Iris.xyz) - The trend of advisors breaking away from wirehouses and broker-dealers into the independent RIA channel has been underway for years, helping to contribute to a whopping $3 trillion of AUM now held by RIA firms. The explosion of RIA growth has also led to a rise of many RIA "platforms" that help advisors break away, and relieve them of the many operational aspects involved in becoming an independent advisor (which can be a great relief indeed to breakaway teams who have never had to manage those issues before and still just want to focus primarily on their clients). However, Sonnen suggests that many of these transition and "aggregator" platforms are "extracting exorbitant rents" - i.e., are overpriced relative to the actual depth of the plug-and-play services they provide, preying upon breakaway advisors' lack of knowledge and experience. While the solutions may have been reasonable in the early stages of the breakaway broker trend, Sonnen claims that a lack of competition has meant that these platforms (charging a percentage of top-line revenue) and aggregators (participating in ownership and bottom-line earnings) are not evolving to keep up with the value-proposition of the marketplace (and/or should have a flatter compensation structure for the services they provide). On the other hand, advisory firm owners themselves seem to be slowly figuring this out - leading to the rising trend of breakaway advisors who go to platforms and aggregators subsequently breaking away from them to become "true" independents after a few years - particularly as advisory firms get large enough (e.g., $2B+ in AUM) where even a mere 5bps platform charge amounts to over $1M/year in revenue, to receive services that such a large firm could often replicate themselves with their own staff for a fraction of the cost.

The Young And Talented: Steps To Attract Gen Y Advisers (Kelli Cruz, Financial Planning) - Generation Y, also known as the Millennials, are now the largest proportion of the U.S. labor force, and still growing as the youngest graduate from high school and college and begin to enter the workforce. And while some have negatively characterized Millennials as spoiled, lazy, and entitled, the reality is that they're tech-savvy, skilled at handling multiple tasks simultaneously, and are the most educated generation in history, arguably leaving them well-positioned to survive and thrive as financial advisors in the future. However, several steps are still key to engaging and motivating Millennials in an advisory firm, including: Coaching (the Millennial generation was raised with constant coaching and feedback, and they expect and crave it in the workplace as well, though recognize it can be brief messages of encouragement or correction, and doesn't need to be overly time-consuming or formal); Collaboration (a childhood of team sports has perhaps made Millennials the best team players and collaborators ever); Performance Measures (have structured metrics for how Millennial employees will be assessed in the workplace is crucial, starting with creating distinct job descriptions, and then using those descriptions to create performance goals linked to specific objectives); Career Tracks (Millennials seek opportunities to job in their jobs and associated responsibilities, prizing employability and flexibility over job security and structure, so have a defined plan of career progress or at least potential opportunities); and Compensation and Benefits (while Millennials are heavily motivated by working for a business where they can have impact, carrying an average of $20,000 in student loans also means that compensation does matter, though Cruz suggests that a combination of base salary, incentives/bonuses, and medical/retirement benefits are important, over just pure cash compensation alone).

Financial Planning And Regulatory Assets Under Management (Chris Stanley, Beach Street Legal) - As the financial services industry evolves, there is an increasing distinction between pure "investment management" and "financial planning" services, which may (or may not) be offered as a separate or complementary service. And this distinction between being investment-centric or financial-planning-focused matters not only from the perspective of business model and technology needs, but also has regulatory ramifications - in particular, regarding what can and cannot be called "Assets Under Management" for Regulatory purposes (i.e., as reported on the advisor's Form ADV). Specifically, the SEC notes in its instructions to Part 1 of Form ADV that Regulatory Assets Under Management (RAUM) should only include "securities portfolios for which you provide continuous and regular supervisory or management services." The key distinctions here are both that the services must pertain to securities portfolios (which means portfolio investments, including cash and cash equivalents, but not family/proprietary accounts, not 'house' accounts for which the advisor is not compensated, nor non-US client accounts), and that the advisor provide continuous and regular supervisory or management services (i.e., ongoing management of discretionary accounts isn't an issue, but be cautious about claiming non-discretionary accounts in RAUM unless the advisor clearly really does have ongoing responsibility to select or make recommendations for specific investment decisions and must be responsible for arrangement/effective the purchase/sale of those investments once accepted by the client). Notably, if the adviser agrees to provide ongoing management services in the advisory contract itself (as an RIA), this naturally leans in favor of counting the assets as RAUM (even if the investment strategy is buy-and-hold) and not being deemed as reverse churning, though again beware of claiming RAUM for non-discretionary buy-and-hold accounts (if the portfolio is unchanging and advice is only intermittent at best). But beware of claiming as regulatory AUM any assets for which the advisor provides 'financial planning' advice but not ongoing and continuous investment management services - it may be valuable advice, but it's not considered RAUM!

Long-Term-Care Insurance Market Sees Rapid Decline (Greg Iacurci, Investment News) - The traditional long-term care insurance industry is in an increasingly difficult position, as traditional LTC policy sales that were once as high as 750,000/year (in 2000) have plummeted to just 105,000 in policy purchases for 2015. The driving force seems to be the sheer cost of new policies, which have become more and more expensive over the past 15 years, driven heavily by both ultra-low interest rates (which limits the insurer's ability to grow premiums before they have to be paid out as claims) and unexpectedly low lapse rates (as insurers early on were counting on a material number of people dropping their policies before claims, and high retention ironically means insurers have to price higher in the first place). In the past, insurers misjudged both of these factors (and were also more lax on underwriting health conditions), which allowed policies to be cheaper (leading to more sales), but those older policies proved to be so underpriced that subsequent (and sometimes drastic) LTC premium increases have had to occur (including a recent announcement in July that the group Federal LTC policies would be experiencing premium increases averaging a whopping 83%). Now that policies are priced higher, the "good" news is that the risk of future premium increases on policies issued today has never been lower, but it's also making the policies sheerly unaffordable for many. To combat this challenge, the industry has been shifting towards "hybrid" or "combination" life-insurance/LTC policies, which have exploded in popularity (from 15,000 sold in 2007 to 220,000 in 2015), though ironically those most concerned with hedging against actual long-term-care risks would still get more bang for the buck with a traditional policy (in addition to avoiding some potential interest rate risk).

Are Early [Social Security] Claimers Making A Mistake? (Alicia Munnell & Geoffrey Sanzenbacher & Anthony Webb & Christopher Gillis, Center for Retirement Research) - The increasingly popular view of Social Security is that it's a "good deal" for most to delay the start of benefits, yet in reality age 62 remains overwhelming the most common age for people to claim Social Security benefits. Accordingly, the researchers dig deeper to understand who it is that actually claims benefits early, and look at several different age cohorts in the Health and Retirement Study data to understand how behaviors have been shifting over the past two decades. The results reveal that overall, there has been a (slight) decline in the frequency of those claiming at age 62, but the overwhelming majority of those who do claim early are not otherwise prepared for retirement - in other words, the decision to claim early appears driven more by a sheer need to get Social Security benefits at age 62, particularly for those who have health or employments shocks and lack a defined benefit pension plan, rather than a proactive decision to claim early when delaying was otherwise an option. And unfortunately, the percentage of those who are unprepared for retirement at 62 is overall on the rise - driven at least in part by the decline of DB plans and the rise of 401(k) plans (where not everyone saves sufficiently) - which in turn suggests that future adjustments to Social Security should be cautious about increasing claiming ages, as that may further exacerbate the plight of those who needed to rely on Social Security at age because of a health or employment shock that forced them to retire unprepared in the first place.

What You Need To Know About Student Loan Forgiveness (Phyllis Furman, The Alert Investor) - The average student debt burden for new college graduates hit a record $37,000 in April of 2016, and an estimate 55% of Millennials are worried about their ability to repay their loans. The reality, though, is that there are several Federal programs that actually make it possible for student loan debt to be forgiven altogether. For instance, the Teacher Loan Forgiveness Program can get up to $17,500 of Federal Direct Loans or Federal Stafford Loans forgiven after working full-time for 5 years in certain schools that serve low-income families (and meet some other qualifications); Teachers with Federal Perkins Loans can potentially get 100% of the loan cancelled/forgiven. Similarly, the Federal Student Loan Repayment program awards $10,000/year (up to a total of $60,000) towards a borrower's student loans, for those who work for a qualifying government agency for at least three years. And those who work in public service jobs outside of the 15 cabinet-level U.S. government offices (e.g., various government and not-for-profit organizations) can have the balance of their Federal student loans forgiven under the Public Service Loan Forgiveness (PSLF) program, once they have made 120 monthly student loan payments (1o years) on a Federal Direct Loan (but only for student loans taken out after October 1st of 2007). Notably, though, all of these programs do require that the student loan be under a Federal student loan program, so students should be cautious about refinancing any Federal loans into private loans that would no longer be eligible for forgiveness (though Federal Direct Consolidation is still permitted). On the other hand, even those who have private loans may have the opportunity to get repayment assistance directly from the growing number of employers that provide student loan repayment as a new employee "perk" (in addition to or in lieu of retirement plan contributions and other common employee benefits).

Patience Is the Secret to Wealth and Health (Adam Creighton, Wall Street Journal) - A new working paper from the National Bureau of Economic Research finds that one's willingness to delay financial gratification really does appear to have a strong relationship to lifetime financial outcomes. The study analyzed older people - all over age 70 - and asked them how much they'd accept in a year's time instead of $100 today. The responses, which varied from just over $100, to more than $210, convey an implied discount rate to the time value of money, and mathematically express a willingness to delay gratification. Notably, the average response was a whopping 54% discount rate, far higher than similar studies for younger and middle-aged people, implying (somewhat logically) that people who are older and have a shorter time horizon are less willing to keep delaying gratification. Accordingly, those suffering from cancer or heart conditions showed even higher discount rates, as did those diagnosed with dementia or Alzheimer's (suggesting that the ability to delay gratification may also decrease with cognitive ability). Nonetheless, health conditions alone did not explain the huge range of variability, and the study found that overall those with materially-above-average discount rates had 29% less in net wealth... and were also more likely to smoke, drink excessively, and miss out on flu shots and medical examinations. The study also found that each extra year of education was associated with a 2-percentage-point reduction in discount rates (implying more capability to delay gratification), and surprisingly found racial differences as well. And somewhat controversially, the results also found that white participants had discount rates that were 11% lower than nonwhites. It remains unclear what drove the differences in patience and willingness to delay gratification in the first place - both across races, and within races, there was significant variability - and whether it is driven by genetics, education about financial trade-offs, or a skillset that can be nurtured with time, but whatever the cause, the relationship between willingness to delay financial gratification and the accumulation of wealth in later years appears to be quite strong.

The Incalculable Value of Finding a Job You Love (Robert Frank, New York Times) - While jobs may offer a wide range of income potential, the research increasingly finds that income alone is not a driver in our job decisions. Job satisfaction is also heavily impacted by the employer's mission - as one study found that students would require 80% more salary to work in an advertising job for the tobacco industry encouraging smoking, compared to a similar job for the American Cancer Society on a campaign to discourage teen smoking. In fact, this distinction appears to help explain why many jobs that have a high moral and societal value - such as teaching or serving as a police officer - end out being able to get employees despite not having pay levels as high as many other industries. Of course, "moral satisfaction alone won't pay the rent", and pursuing higher income along with moral satisfaction is even more appealing... for which the path appears to increasingly be towards developing deep expertise and a specialization. Yet the challenge is that specialization itself is also extremely challenging, requiring what could be years of effort and thousands of hours of training and education to develop a real expertise. Which means even if you're going to pursue an expertise, it's still crucial to do so in an industry and job that you really enjoy. In turn, this suggests that those who work in a job they love become exponentially better off, both because they have higher satisfaction, and the motivation to pursue additional training and education that can potentially lead to an bigger paycheck. On the other hand, because our overall happiness and well-being has only a limited relationship to money - especially once our basic subsistence needs are met - the implication is that once we find a job that does accomplish the income we want and need, it's time to step off the hedonic treadmill, or even switch to another job that pays similarly but leads to higher job satisfaction.

The Science Of Goals And Why It Matters To Your Future (Julie Littlechild, Absolute Engagement) - While many people set long-term goals and then break them down into smaller increments to establish an action plan (in the context of both financial planning clients, and advisors themselves), Littlechild suggests that for business success in particular, it's important not to just have a goal, but to have a big goal. The significance of having Big Goals (or as Jim Collins puts it, a Big Hairy Audacious Goal [BHAG]), is that it's only setting really big goals that you uncover the gaps that will have to be bridged in order to succeed. For instance, if you merely have a goal to grow by 15%, you may be able to achieve it with moderate incremental changes, but over time as you try to sustain that growth, you may uncover problems you hadn't anticipated. By contrast, if you set a BHAG to grow to $10M of revenue - even if the plan is to get there with 15%/year annual growth - setting your sights on the big goal forces you to really think through the big changes that will ultimately have to be made to accomplish the outcome. Similarly, trying to get healthy might involve getting some exercise, but a Big Goal to run a marathon creates recognition of the need for big changes; likewise, a goal to take 2 weeks of vacation might involve some planning, but a Big Goal to take an entire summer off helps you to recognize the need to build more of a team to support you. And in fact, recent research in Goal Setting theory finds that the greater the difficulty of the goal, the better the performance in trying to achieve it (as long as the person is fully committed to the goal, has the ability to attain it, and doesn't have any conflicting goals). Of course, the caveat is that Big Goals are also scary - they open us up to the possibility of failure, require a big vision, and sometimes even feel selfish, like a treadmill we can't step off - but again, without setting a Big Goal, it's virtually certain that you'll never be able to step off the treadmill you're currently on, either.

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.