Weekend Reading for Financial Planners (Dec 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.

Congress Passes Sweeping Overhaul Of Retirement System With SECURE Act (Anne Tergesen, Wall Street Journal) - This week, both the House and the Senate passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act as an extension of a year-end spending bill that is expected to be signed next week by President Trump, in what amounts to one of the biggest pieces of retirement legislation in years. The main focus of the legislation is bringing reforms to the defined contribution plan marketplace, including one provision that would make it easier to buy lifetime annuity income streams directly within a 401(k) plan by allowing employers to limit their legal liability as long as they select an insurance company to make annuity payments that were financially healthy at the time (effectively expanding the potential to turn defined contribution plans into 'old-fashioned' pensions at the time of retirement), and another that will institute "multi-employer plans" (MEPs) where multiple small businesses can band together into a single 401(k) plan where they share (hopefully lower) administrative costs. Notably, both provisions were ultimately controversial, with some suggesting that MEPs won't necessarily result in much adoption by small businesses where time and focus is the biggest constraint to start a plan (not the availability of a MEP), and where the average 401(k) plan administrative cost is down to 0.25% of assets (in 2016) and variable annuities in the retail market cost between 2.18% and 3.63%. A significant concern remains that the annuity provisions will just increase plan costs. Other notable provisions for advisors and their clients include: starting in 2020, the age cap on contributing to a traditional IRA will be removed (i.e., contributions will be able to continue even after age 70 1/2 for those with earned income to contribute); the RMD starting age will be increased from 70 1/2 to age 72; 529 plans will allow up to $10,000 of withdrawals to repay student loans; parents can take penalty-free distributions from retirement accounts up to $5,000/year for the birth or adoption of a child; and the so-called "stretch IRA" rules will be curtailed to require most beneficiaries to withdraw over (just) 10 years after the original account owners's death instead of over the beneficiary's lifetime. [Michael's Note: Stay tuned for a full in-depth analysis of the SECURE Act on Nerd's Eye View coming this Monday December 23rd!]

Task Force Finds 'Significant Failures' In CFP Board Enforcement (Andrew Welsch, Financial Planning) - Earlier this year, the CFP Board faced significant scrutiny after a Wall Street Journal story revealed a significant number of CFP professionals on the CFP Board's "Let's Make A Plan" website had material customer complaints and regulatory infractions that the CFP Board was failing to disclose. In response, the CFP Board immediately announced the formation of an independent task force to evaluate its own enforcement processes, and the final report of that task force was released this week in a 33-page report that stated it found "significant failures in the execution of the CFP Board's enforcement program and attendant communications to the public", due to "systemic, longstanding, governance-level weaknesses". Accordingly, the task force issued numerous recommendations, including: the CFP Board should strengthen the role and authority of public members on its board of directors; the CFP Board should either require a majority of its directors to be public members or assign responsibility for monitoring enforcement to a committee that has a majority of public members; some public members should have supervisory experience in enforcement at a regulator; the Appeals Committee should have public members; and the CFP Board's short tenures for directors and the chair are a handicap. Other notable concerns included: the CFP Board overly relied on self-reporting from CFP certificants themselves (a practice the CFP Board has already ended in response to the WSJ article); CFP Board should have had promotional activities for its CFP marks and Let's Make A Plan website overseen by an independent evaluation of the board's public members; the CFP Board should allocate additional resources for enforcement, including a seasoned director of enforcement (separate from General Counsel); and a review of every CFP certificant should be conducted at least once every year. Notably, the CFP Board itself in a press release "disagreed with some of the assertions and characterizations made in the report" but committed to making numerous reforms. Which may be lauded by many CFP certificants who have long been concerned that the CFP Board too easily shelters questionable practitioners in its ranks. But on the other hand, such reforms also suggest that the CFP Board may now conduct more audits and investigations, and may have to raise its dues in order to fund such activities, which will come directly back to CFP certificants in our own costs to maintain the marks!

SEC Advances Plan To Expand Accredited Investor Definition (Melanie Waddell, ThinkAdvisor) - This week, the SEC on a 3-2 party-line vote proposed amendments to its definition of an "Accredited Investor", expanding qualifications beyond the current test that is based only on a person's income (over $200k/year as an individual, or $300k/year as a couple) or net worth (at least $1M in assets outside one's home). Notably, the current income and asset tests would remain as an option, but other categories would also include: those who have a Series 7, 65, or 82 license (allowing financial advisors themselves to participate); those who are "knowledgeable employees" to a private fund that is itself an eligible investor; LLCs, RIAs, and Rural Business Investment Companies (RBICs); any entity (including Indian tribes) owning investments in excess of $5M that was not formed for the specific purpose of investing in the securities offered; "family offices" with at least $5M of AUM and their "family clients"; and  "spousal equivalents" (such that spouses may pool their finances together for the purposes of qualifying). The rising shift of companies growing larger in private markets (and IPO'ing into public markets at later stages of growth), including so-called Silicon Valley "unicorns" (that reach $1B market values while still in private markets) is attributed as the main driver of the rule, though notably the recent WeWork debacle has already raised concerns of whether it's better that investors don't necessarily have access to such high-flying investments with limited information and transparency to vet them appropriately. Ultimately, the proposed rule will remain open for a 60-day comment period, with a final rule anticipated sometime in 2020.

Advisors Are Drowning In FinTech Choices (Anders Jones, Investment News) - In the past decade, there has been a veritable explosion of advisor technology solutions, between the rise of the internet and availability of APIs that make it faster and easier to develop and deploy new technology, and the rise of "robo-advisors" that spurred the entire financial services industry to invest more heavily into its technology. In turn, advisor technology has grown so rampantly, that now there's a popular "FinTech Solutions Map" to keep track of it all, and arguably the biggest challenge today is not finding technology but figuring out how to choose amongst the breadth of solutions and how to actually fit them all together to work with one another. Jones goes so far as to suggest that the level of advisor technology choice today is a bad thing, creating so much complexity that advisors individually (given that most are sole proprietors or small partnerships) have to become experts in something (technology selection and vendor due diligence) that is not otherwise core to their skillset and success as a financial advisor. So what's the alternative? The rise of more "full-stack" integrated solutions - all-in-one platforms that do everything and weave it all together - either by building the components one by one into an integrated whole, or via larger FinTech firms or other financial services players that acquire and integrate them together. In fact, the latest data from CB Insights, which tracks Wealthtech funding, suggest that big investments into advisor technology may be stagnating, ostensibly because new entrants see an already-overwhelming amount of choice into which they don't want to compete, and recognizing that sales to independent advisors (a slew of small businesses that only buy one or a few licenses at a time but are still 'firms' that can require large-enterprise-level sales complexity) is a difficult way to grow and gain traction as a tech business. Accordingly, Jones suggests that the most likely players to fill out the full advisor tech stack are the ones that already have the capital and the distribution/access to a wide range of advisors: the RIA custodians, which already have significant practice management and business consulting teams, and now look increasingly to be in the advisor technology business, too.

Everything You Missed From The InVestWest 2019 FinTech Conference (Craig Iskowitz, Wealth Management Today) - Last week was the second annual InVestWest advisor technology conference; the sister conference to Source Media's InVest conference in New York City, InVest West is unique in that literally being situated on the west coast, in the San Francisco area, it attracts a unique level of participation from Silicon Valley companies that increasingly are playing a role in what was historically a very New-York-City-centric technology scene for financial services. Not surprisingly, given Silicon Valley's participation in the movement, "robo-advisors" were a big theme at the InVest conference this year, although notably their focus appears no longer being on 'just' trying to gather assets for a 0.25% AUM fee but instead pivoting into banking where there's both an opportunity for greater revenue and profit margins and a pathway to grow the client base without needing to compete with challenging industry incumbents in the traditional asset management world. For instance, Wealthfront's latest pivot is focused squarely into banking, with a vision of "self-driving money" where Wealthfront's AI can help households automatically allocate their cash to fit their intended budget, albeit while still focusing squarely on Millennials and less affluent (but accumulating and upwardly-mobile) investors that other financial services firms don't want. Similarly, Acorns has also moved into the blended banking and investment space, but from an ever stronger position - while Wealthfront now has 250,000 accounts, Acorns has over 6 million(!), and in just one year added 400,000 debit card customers (of which 50% made Acorns their primary checking account). And Betterment saw $1B of new flows in the first week into its new "Everyday" savings account (which is technically a cash swap account and not a bank savings account). Though notably, Betterment is also becoming increasingly aggressive in the advisor channel as well, with its Betterment For Advisors platform being positioned directly as an RIA custodial competitor (as unlike other robo-advisors, Betterment actually has its own back-end broker-dealer platform to facilitate this). Other notable themes of InVest West include: a growing focus on not just UX (user experience) and CX (client experience), but also the importance of AX (advisor experience) in advisor software tools; the latest AdvisorTech adoption survey by Financial Planning magazine (with some interesting data points, but also some concerns about their sampling methodology after results bizarrely showed MoneyGuidePro with a 65% market share compared to eMoney having only 13%); and a striking panel on the need and challenge in reducing sexual harassment in the financial services (and especially FinTech) industry, including eliminating mandatory arbitration for sexual harassment lawsuits and banning NDAs surrounding such occurrences.

The Next Generation Of Financial Planning Software (Bob Veres, Advisor Perspectives) - One of the fundamental problems of today's financial planning software platforms is that they're generally only good at creating an initial plan, as "calculation engines" that crunch the numbers up front but do remarkably little to provide ongoing expertise and advice support in years two and beyond (aside from running an entirely new standalone 'updated' financial plan). In addition, the broad-based nature of traditional financial planning software has also limited its ability to provide more 'specialized' analyses into particularly more specialized financial planning domains. Which is now leading to the rise of a slew of new independent "financial planning software" companies that are not providing comprehensive financial planning software, but instead more modular tools for particular financial planning specializations. For instance, Covisum offers a growing series of tools for advisors in specialized domains, from Social Security Timing analyses to their Tax Clarity module that shows clients a "tax map" of their marginal tax rates on each next/new additional dollar earned. Another option in the tax realm is Holistiplan, which can scan a PDF of a tax return and then make observations and spot planning opportunities (e.g., client's income is triggering the Medicare surtax, or the HSA deduction isn't being taken advantage of, whether they've crossed the QBI income threshold where retirement plan contributions have diminished value, or to model out the impact of future RMDs or a partial Roth conversion). On the retirement distribution side, the new player is Timeline, which has turned a slew of retirement research like Bill Bengen's "4% rule" into an illustration tool to show clients how their retirement spending strategies would sustain (or not) in various historical time periods. Other notable entrants in the specialized software area include: LifeYield (which overlays client portfolio positions across various taxable accounts, IRAs, and Roth IRAs to determine optimal asset location based on their "taxficiency" score); College Aid Pro which produces planning tools not to project saving for college but how to actually optimize financial aid planning and various scholarships when applying to college; i65 supports specialized Medicare planning for clients (e.g., pathways to sign up for Medicare and coordinate with employer coverage, comparisons of traditional Medicare Parts B and D versus a Medicare Advantage plan, and whether the client will be exposed to the IRMAA surtax on Medicare premiums); planning for clients around aging, cognitive decline, incapacitation, and end-of-life with Whealthcare Planning; helping clients visualize where all of their assets are with Asset Map; and a coming new financial planning software platform called PlanTechHub that aims to re-create a better data gathering experience for clients, and hopes to become a unified interface for all the various other specialized planning tools emerging in the marketplace!

5 Ways To Follow-Up With A Prospect (Don Connelly, Iris.xyz) - In an ideal world, every prospect would sign up in the first meeting, but in practice, most prospects are not "one-meeting closes" and instead will require some level of follow up and ongoing effort for the advisor to truly demonstrate their value. The caveat, though, is that prospects themselves rarely actively follow up with the advisor to get more information after the fact; instead, it's generally necessary for the advisor to do the requisite follow-up to keep the prospect engaged and nurtured through the sales process. Except obviously, being too pushy with follow-up can just turn a prospect off as well. Accordingly, Connelly suggests 5 potential options to engage in (constructive) follow-up: 1) send a follow-up thank-you email (ideally later in the same day after the meeting, with a brief recap of the meeting and any "to-do's" that can help you demonstrate that you've truly heard their concerns and understand their goals); 2) offer inspiration (e.g., by sending a follow-up article, links, an eBook, or a physical book, that is relevant to them and their financial situation and shows that you care and want to help them succeed); 3) invite them to a seminar (where you can provide additional education that not only shows additional value, but is an opportunity to demonstrate your likeability and trustworthiness); 4) ask prospects to subscribe to your blog (providing you an opportunity to drip market them with ongoing content over time... and ideally, send them a follow-up questionnaire a few weeks later to ask them if they're finding the material useful, and if they'd like to schedule a follow-up meeting to sit down and discuss further); and 5) invite prospects to connect with you on LinkedIn (which both provides an opportunity to scope out more information about them, another channel where you can drip market your own insights and perspective, and keeps you on their 'social radar'). The key point, though, is simply to recognize that even for prospects who are interested, they may easily get busy and distracted by life, so some level of follow-up is necessary (but doesn't have to be pushy!).

No Prospect Wants To Hear An Advisor's "Story" (Dan Solin, Advisor Perspectives) - The conventional view to 'selling' as an advisor is to entertain prospects with your 'story' that shares your path to success and allows you to connect with them. The storytelling approach is often justified by the neuroscience research that "our brains love good storytelling" and listening to good stories releases oxytocin (produced when we're trusted or shown a kindness, as it motivates cooperation with others). The caveat, though, is that listening to a story isn't nearly as powerful as telling one ourselves, with one study suggesting that telling stories about ourselves is as pleasurable as having sex or eating delicious food (activating the portion of our brains associated with enjoying rewards)! Which means the real key to making clients feel connected is not to tell them your story, but to get them to tell their story (and if you're telling your story, the prospect is listening and therefore not talking and not having the opportunity to get their own good feelings from telling their own story!). And notably, it's important not to expect reciprocity; if the prospective client spends the whole meeting talking about themselves and their story, and not asking the advisor about theirs, it may feel awkward to the advisor to never get a word in edgewise. But in practice, prospects who get the pleasure of talking about themselves rarely finish the meeting by complaining "I wish you spent more time telling me your story instead" as they finish with the 'natural high' feeling of having shared their own!

Getting Past The "I Already Have An Advisor" Response (Kerry Johnson, Advisor Perspectives) - While an estimated 60% of investors are "do-it-yourselfers", almost 80% of high-net-worth investors have an advisor. Which means that even if you're referred to a prospect, there's a good chance you'll soon hear "I already have an advisor"... for which simply saying "Well, call me if you ever need help" isn't likely to produce results. Similarly, simply pointing out that the 'incumbent' financial advisor has done a poor job (e.g., "your portfolio isn't diversified enough", "there are more tax-efficient alternatives", etc.) won't necessarily get anyone to switch either; instead, they'll likely just call their existing advisor for his/her views on your criticism... giving the existing advisor a chance to defend themselves and likely win back the client. Instead, Johnson suggests that the best first question to ask is "When was the last time you spoke to your advisor?" If it's been more than 3 months, the existing advisor isn't regularly contacting the client, and you may have a chance to get a foot in the door. From there, ask them what they like best about what the advisor is doing for them right now (don't ask if they like the advisor, but specifically what they like about what the advisor is doing for them), and ask what they would like to see improved (which opens the door to gaps in the current relationship if there are any). Next, engage in a "Let's Assume" exercise, asking them "Let's Assume it's 20 years in the future... looking back to today, what happened that let you know you had a perfect retirement plan and a great advisor relationship?" And after they respond, ask "Are you 100% on track to hitting those goals now?" If they are, move on. If they're not, ask further questions about their situation to understand where their needs are; identifying a need is an opportunity to demonstrate a solution, but ideally find at least 3 different needs of the client, as the ability to solve all 3 drastically increases the likelihood the prospective client isn't being served well currently and will be willing to make a shift.

Your Non-Rational Holiday Gifting Habits Are Officially Driving Behavioral Economists Crazy (Shannon Fitzgerald, Fortune) - With the gift-giving season well underway, so too is the stress of trying to figure out the good or 'right' gift to give. Is a Starbucks gift card reasonable to show appreciation, or too impersonal and non-financial? Is the goal just to show appreciation in the first place, or a more direct expression of caring and value, that might necessitate a more personalized (and time-consuming to select and purchase) gift? And how exactly do we know someone's preferences to buy the 'right' gift, in a world where gift-giving happens across an increasingly wide range of people (family, friends, co-workers, distant colleagues, your barista, or the kids' soccer coach) that we may not know all that well in the first place? In fact, from the economic sense, arguably gift-giving is extremely inefficient - an attempt to give a personal gift in lieu of just money, without necessarily knowing the preferences of the recipient and whether the gift is too expensive, too cheap, just right, or entirely off-target altogether? One popular study, "The Deadweight Loss of Christmas," estimated that even in 1993, poorly-received gifts resulted in up to $13 billion per year in economic waste! Ideally, the utility value of a really good (or even 'decent') gift can overcome the potential drag of waste, though many choose instead to play it safe with 'safe gifts' (e.g., wine or chocolate) that can show a non-monetary token of appreciation but do little to show a direct understanding or caring to the recipient... which may still be better than trying to give a more specialized gift that ends out being way off the mark (e.g., focusing too much on the 'wow' moment of opening the gift but not on its actual subsequent use or relevance). Some suggest that the best way to manage this is to gift an experience - something that can be done together - which not only provides value to the person (in a world where we often don't have time to schedule such activities for ourselves) but provides a direct opportunity to engage together and deepen the relationship (arguably the primary point of gift-giving in the first place!).

Are Experiential Gifts More Trouble Than They're Worth? (Marisa Meltzer, New York Times) - With the growing awareness that spending money on experiences contributes more to our happiness than spending on material goods alone, "experiential gifts" are becoming increasingly popular. The caveat, though, is that they can also be very expensive, from VIP tours of Disney World (starting at $425/hour) to a hot-air balloon ride over Mount Everest ($5,950,000/person!). The phenomenon has already reached celebrity culture, from Tori Spelling's father (producer Aaron Spelling) spending $2M on a snow machine to bring a snowy White Christmas to their southern California home, to actress Kristen Bell recounting the time her husband rented a sloth for her 31st birthday. The caveat, though, aside from just the cost of such experiential gifts, is the time and stress of planning for them, as it's not exactly easy to 'surprise' someone with a road trip to a national park or an exclusive midnight tour of a museum, and doing so for others may involve both secretly surprising the recipient and coordinating with spouses or other family members. Of course, there's always the simpler gift card option - letting people decide for themselves what experience they want to spend it on - or in some cases, simply deciding to Venmo them the relevant cash with a simple note that says "spend this for a [particular experience] on me".

Science Says Your Friends Like Your Badly Wrapped Presents More (Erick Mas, Business Insider) - The 'surprise' element of watching someone unwrap a gift has turned gift-wrapping supplies itself into a multi-billion-dollar industry, in an effort to make the gift look as presentable as possible, from the paper or box to the ribbons and bows. Except as a recent study entitled "Presentation Matters: The Effect of Wrapping Neatness on Gift Attitudes" found, it turns out that the more neatly wrapped a gift is, the higher the expectations of the gift inside... such that having an immaculately wrapped gift tends to just elevate expectations beyond whatever the gift inside can deliver! By contrast, gifts that were not as well wrapped tended to reduce expectations, such that whatever was inside tended to be better received (whether it was actually a gift they wanted, or not). In other words, the neatness of gift wrapping itself appears to be used as a cue for how good the gift itself is anticipated to be... and neat wrapping sets the bar dangerously high in many/most circumstances, while it's the sloppily-wrapped gift that is more likely to lead to a pleasant surprise! Notably, though, the relative impact of gift-wrapping does depend on the relationship between the gift giver and receiver, as when gifts come from close friends, a sloppily-wrapped gift tends to be more positive (surprises to the upside), but with a more distant acquaintance neat wrapping is still important (as it's used not as a reflection on the gift inside, but a reflection on the relationship with the gift-giver, such that a sloppily wrapped gift to a distant acquaintance just suggests that the individual isn't very invested in the relationship with that acquaintance!). The bottom line: it's OK to save some time and wrap your friends-and-family gifts sloppily - they may even appreciate it more - but for the others you don't know as well, still take the time to show them you 'care' with a gift where you take the time to wrap it nicely!

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.