Weekend Reading for Financial Planners (Dec 26-27)

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.

SEC Approves Rule To Allow Testimonials In RIA Advertising (Mark Schoeff, Investment News) - After a temporary delay made some worry that its update would not be passed at all, the SEC this week formally announced a new "Investment Adviser Marketing" rule that will, for the first time, allow Registered Investment Advisers (RIAs) to use endorsements and client testimonials as a part of their marketing communications (albeit with clear disclosure of whether the individual is a client, or paid endorser, or neither). In addition, the new RIA marketing rule will also allow RIAs to advertise their performance results (albeit with limitations that advertisements of gross performance returns must also be accompanied by returns net of fees as well), to leverage third-party ratings platforms (e.g., Yelp and the like), and substantively updates the SEC's guidance when it comes to social media marketing. In addition, the new advertising and marketing rule takes a substantively more "principle-based" approach, which should allow the SEC more leeway for interpretation in the future as the world of digital marketing and advertising continues to evolve (though it also may create more ambiguity in the meantime as RIAs wait for further guidance from the SEC on practical implementation requirements?). And ultimately the SEC is providing an 18-month transition period from its initial effective date until the "compliance date" when RIAs are expected to fully comply with the new rule and its associated record-keeping requirements (though it appears that RIAs can choose to adopt and comply with the rules sooner rather than later, for those that wish to utilize client testimonials in their marketing in 2021). Notably, because the rule has just now been finalized - which means it will go into effect 60 days after it is formally published in the Federal Register - there is a risk that an incoming Biden administration could delay the rule, though the fact that it was adopted with a unanimous vote of all 5 SEC commissioners makes a delay or unwind of the rule unlikely (though Democrat SEC commissioners did raise concerns about certain elements of the final rule, most notable the removal of a provision that would have required RIAs to review advertising for compliance before disseminating it, and a carve-out for communication about hypothetical performance in response to unsolicited requests or for one-on-one communication with private fund investors).

Coronavirus Stimulus 2.0: Analysis & Planning Opportunities In The Consolidated Appropriations Act of 2021 (Jeff Levine, Nerd's Eye View) - After months of debate about providing additional economic relief in response to the coronavirus pandemic, Congress agreed this week to pass 'Coronavirus Stimulus 2.0', a $900B stimulus package that was attached to the separate nearly-$1.4T Consolidated Appropriations Act of 2021 (otherwise known as the legislation that approves funding for the Federal government to keep it running). The hot-button issue of the pandemic relief legislation has been a fresh round of stimulus checks, which Republicans and Democrats had compromised at a payment of $600 per person, but President Trump indicated mid-week he would like to see adjusted to a higher ($2,000/person) amount, raising some questions of whether the legislation would be enacted as is. Nonetheless, given the unpopularity of a potential government shutdown - which would occur on Monday if the legislation is not passed this weekend - expectations are still that the President will ultimately sign, either the original version or a quickly-compromised alternative that increases the size of the stimulus checks (and the current version has already been flown to the President in Florida for signature this weekend). Beyond the stimulus checks, though, are a wide range of other notable planning provisions for advisors and their clients, including a number of additional relief provisions for small business owners from a new Paycheck Protection Program opportunity (dubbed "PPP2", but limited to businesses that had at least a 25% decline in revenue in any quarter), a new employee retention tax credit (limited to businesses that had at least a 20% decline in revenue in any quarter), and a 2-year reinstatement of the meals-and-entertainment deduction at 100% (as opposed to the prior 50% limitation) but limited to expenditures that occur at restaurants (in an effort to reinvigorate the restaurant industry). Other notable provisions include an extension of the 100%-of-AGI limit on cash contributions to a charity, a permanent change in the Medical Expense deduction threshold to 7.5%-of-AGI (down from 10%-of-AGI in recent years), the elimination of the Tuition and Related Expenses deduction in lieu of an even-more-generous Lifetime Learning Credit (now with higher income thresholds for eligibility), and a reworking of the FAFSA form for student financial aid that will take effect in the coming years.

What Advisors Need To Know About The New DoL Fiduciary Rule (Emile Hallez, Investment News) - Last week, the Department of Labor announced its newest iteration of the fiduciary rule, to be published soon in the Federal Register and taking effect 60 days later. The most controversial part of the rule is the issuance of a new Prohibited Transaction Exemption, that would for the first time allow ERISA fiduciaries to receive a wide range of commission-based compensation, as long as the firm an otherwise demonstrate that the recommendation was in the Best Interests of the customer (akin to and intended to align with the SEC's Regulation Best rule for broker-dealers receiving commissions for advice recommendations). In addition, the updated DoL fiduciary rule formally reinstates the prior "five-part test" under the original ERISA rules for what triggers an ERISA fiduciary obligation, which most notably included a requirement for ongoing advice that effectively allowed a wide range of one-time sales recommendations to retirement plan participants to escape ERISA fiduciary obligations altogether (because one-time recommendations did not constitute ongoing advice). The controversial nature of these provisions, which fiduciary advocates have noted will effectively weaken the ERISA fiduciary standard (by allowing commissioned-based advice recommendations) and also narrow its scope, means a high likelihood that the Biden administration may delay or ultimately kill the new rule (as with a 60-day effective date, it will not be enacted until after the new administration takes office, allowing the incoming President to pause the new rule before it ever takes effect, as any changes after that date would require going through an entirely new and lengthy rulemaking process). However, in its guidance on the new rule, the Department of Labor also announced that it was withdrawing a 2005 advisory opinion known as the Deseret letter, which will cause all recommendations to roll assets out of a 401(k) plan in the future to be deemed the beginning of an advice relationship (regardless of whether the advice is given via the plan or from someone externally), which similar to the prior DoL fiduciary rule may capture additional brokerage and insurance agent recommendations to roll assets out of a 401(k) and has been viewed as a positive by investor advocates. Which raises the question of whether the Biden administration may ultimately allow the latest DoL fiduciary rule to stand and simply attempt to modify it in the future, rather than pause or eliminate it altogether. We'll see in the coming weeks as the deadline to the 60-day effective date approaches?

How Online Meetings Will Evolve In 2021 (Dan Smaida, Advisor Perspectives) - With a COVID-19 vaccine steadily being distributed to the public, it's only a matter of time before in-person meetings with clients return, but the broad success of meeting with clients virtually in 2020 suggests that at least some client meetings will likely stay virtual in 2021 and beyond. Which raises the question, if virtual meetings are here to stay, of how they will evolve from here in the year(s) to come? Smaida suggests a number of key areas where virtual client meetings are likely to evolve further, including: Security will continue to improve (not just to prevent "Zoom bombing" but to ensure that screen-shared information is transmitted securely); Compliance protocols will become more established (e.g., do Zoom chats need to be archived, can PDFs and screenshares be annotated like a sketch on a "legal pad" that doesn't need compliance pre-approval); scheduling to facilitate "quick" connection meetings will improve (e.g., online scheduling apps to facilitate everything from discovery meetings and approach talks to quick-turnaround issues for clients); and the use of video broadcasts, from webinars to 'online seminars', live Office Hours community conversations, and more, will increase as we collectively determine how best to implement them to facilitate advisor-client connections (and more generally, as the use of online and video extends from "1:1 meetings" to "1-to-many" instead).

What The Research Says About Engaging Prospective Clients (Dan Solin, Advisor Perspectives) - The traditional approach of an approach talk with a prospective client is for the financial advisor to share their story, from what they do for clients, to "Why" they do what they do, their services and costs, and what makes them different and unique. In part, this is simply because the advisor wants to explain what they do, why the prospective client should hire them, and how they'll bring value for the fees they charge; but it's also simply because the research shows that we derive a positive intrinsic reward in our brains when we talk about ourselves (it literally feels good to talk about who we are and what we do!). Except Solin notes the reality is that if we want a prospective client to leave the initial meeting feeling good about the opportunity to work together, then it's the prospect who needs to leave with that feeling - not the advisor. Which means it's not about the advisor telling their story, but getting the prospective client to tell their story instead; or stated more simply, it's not about "Let me tell you about who we are and what we do" but instead saying to the prospect "Tell me about yourself" instead. Or even better yet, ask more specific questions that invite prospective clients to open up further; for instance, simply asking "What was your favorite vacation and why" can quickly get someone talking, providing not only insights about them and their preferences... but also keeping them totally engaged in the meeting because the reality is that when you're listening (e.g., as the prospect to the advisor) it's hard not to let the mind wander, but when you're talking (as the prospect) the mind stays focused and fully engaged in the meeting (which ultimately improves the prospect's feeling of connectedness, and increases the likelihood that they become a client!).

Why Business Development Success Starts With Personal Energy (Shauna Mace, Advisor Perspectives) - Traditional advice about how to become more effective at sales and business development starts with the "right" shows to show up physically (e.g., professional attire), the "right" things to say (e.g., the best questions to ask to engage prospects), and being a "good" listener so prospects feel heard and understood. But Mace cites author Gary Klein (of "The Power Of Intuition") in noting that in the end, most people - including prospects - make their decisions using their intuition. And the intuition in deciding who we're going to work with draws from being in a state of "coherence" - when our heart, mind, and emotions are in alignment and cooperation. Which matters because the energy we bring to our meetings with clients and prospects is a key driver of the connectedness that they feel; after all, it's hard to feel much connection and rapport to someone who has very low energy in a meeting (even if all the other details seem to be right). So what can you do to be sure that you show up "energetically"? Mace suggests a number of tips, including: make sure you are physically prepared (from staying hydrated and fed, to getting sleep and exercise); be emotionally ready (and if necessary, consider a brief mindfulness exercise to get focused and in the right mindset before the meeting starts?); consider time blocking to set sales meetings to particular times of the day or days of the week when you're most energized (especially if you find sales conversations deplete you); give yourself the space to be able to show up well (e.g., buffers between meetings if necessary!); and take a moment at the end of each week to reflect back on the energy you brought to the week, what your energy high points were, where the low points were... and what you might adjust in the week(s) to come to increase your energy further?

How To Gather Client Feedback (Crystal Butler, Advisor Perspectives) - Financial advice by its very definition is focused on helping clients achieve their desired goals and outcomes, and the advisory business is a very relationship-based business. Yet the irony is that while most advisors are skilled at engaging with and listening to clients to understand their goals and preferences in order to craft the best advice, few are effective at creating the feedback loops necessary to determine if their services to clients need to be adjusted or improved. As a result, most often the way advisors discover that they're not doing something well is when a client leaves and they realize the problem that needs to be fixed. So how can advisors go about collecting (more) client feedback? The first key is to recognize when it comes to feedback, regular and consistent is most important (even if it's relatively simple; if there's a problem, you can always delve further then to figure out what the issue is!). Accordingly, a starting point is simply that when the firm is thinking about a new service or offering, shoot an email out to clients (or at least a subset whose input you'd most like) and ask them (and prompt them to reply and share their thoughts). Another option is to simply pick up the phone and make a call; most clients will simply appreciate the check-in and additional touch (especially if it's outside the usual meeting cycle), and the fact that you're making an (additional) outreach communicates positively to them that you're really interested in what they have to say to make the service better. For those who want to go even deeper, the next step is to conduct a client survey (e.g., using solutions like Nexa Insights), which can be done either annually, or more "real-time" when clients reach a major milestone (e.g., right after the onboarding process is complete, send out a brief survey to ask clients how it went). The key point, though, is simply that if you don't have a system to collect regular feedback, you won't have any way to make regular improvements that iteratively take your business to the next level!

Use A Client Feedback 'Scorecard' To Make Your Practice More Profitable (Mike Kaminski, ThinkAdvisor) - Receiving criticism is hard for anyone, and especially when you're a business owner who has poured their heart and soul into their offering for clients. But in the end, clients who aren't happy with the services they receive eventually do give the "ultimate" criticism... in the form of leaving the advisor altogether and choosing a new one. And in turn, Kaminski notes that one of the best ways to avoid the most negative criticism of a client who leaves is to invite criticism - in a more constructive manner, and earlier on in the process when there's still time to actually do something about it! Accordingly, Kaminski suggests that it's critical to proactively reach out to clients for feedback, culminating their responses into a form of "Scorecard" for the business that it can track over time to understand how it's doing. Ideally, the Scorecard feedback questions should be no more than about a dozen, and frame questions in a way that they can be 'scored' and tracked for changes over time. Potential questions might include everything from "On a scale of 1-10, how would you rank your experience with our firm?" (and track the average score over time), to "Do you feel our fees are reasonable, yes or no?" (and simply count the percentage of clients who answer "yes" over time), or "Which of the following is most important to you?" (and see how they rank the firm's various services over time). Notably, though, a key part of the feedback process is to communicate to clients what is being done with that information they communicated, showing them that their feedback has been heard and considered by actually enacting changes to address the biggest issues they raise... which in turn makes them even more willing and interested to share additional feedback to make the firm even better in the future!

Getting Client Input On Sensitive Subjects (Steve Wershing) - One of the most difficult aspects of soliciting feedback from clients is bringing up topics that the advisor knows in advance are 'sensitive' issues, either for clients themselves, or for the business itself. For instance, Wershing cites the story of one advisor who had identified, hired, and begun to groom her prospective successor... but dreaded having the conversation with clients about her impending retirement, out of fear of how they might react, only broaching the conversation with her client advisory board when there was 'just' a year to go until her retirement, and the discussion simply couldn't be put off any longer. Yet as Wershing notes, clients are smart and often recognize the key issues of the business as well; for instance, it's not really news that their advisor won't be working as an advisor "forever" and that at some point, a new successor advisor will take over. In turn, that means often addressing the "elephant in the room" really just conducts a conversation about an issue already on the minds of clients, and having the conversation often makes them feel better to know that the issue is (finally?) being addressed, that the resolution is clearer... and even providing clients the opportunity to give input about what the solution should be (e.g., announcing the new advisor via a Town Hall meeting to all clients and not via email, including a reminder on the meeting agenda that the new advisor will be sitting in, etc.). The key point, though, is simply to understand that even if issues seem scary to bring up with clients, giving them a chance to be a part of the conversation virtually always results in a better outcome, if only because if clients really are not happy with the matter, soliciting their feedback provides an opportunity to change the plans and outcome for the better!

Giving Billions Fast, MacKenzie Scott Upends Philanthropy (Nicholas Kulish, New York Times) - In a recent post on Medium, MacKenzie Scott (the author and philanthropist who, in a high-profile divorce last year from Jeff Bezos, received a 4% stake in Amazon then valued at $37 billion) highlighted that in response to the pandemic's "wrecking ball [effect] in the lives of Americans already struggling", she had made recent gifts to a series of 384 charitable organizations across the US... with the cumulative gifts amounting to a whopping $4 billion in unrestricted no-strings-attached donations. The donations went to both non-profit organizations focused on fulfilling basic needs (e.g., food banks), as well as those targeting longer-term problems from education for historically marginalized and underserved people to civil rights advocacy groups, a number of community development financial institutions (mission-driven financial institutions that serve underserved communities), and several historically black colleges and universities (including a $40M donation to Howard University, the largest gift from a single donor in the school's history). What's notable, though, is the way that Scott and her advisors engaged in the effort of rapid gifting, utilizing a data-driven approach to identify organizations with strong leadership teams and results, coupled with a particular focus towards areas of priority to Scott (e.g., communities facing high projected food insecurity, high measures of racial inequality, high local poverty rates, and low access to philanthropic capital). Coupled with gifts earlier in the year, Scott's cumulative donations amount to nearly $6 billion in just 2020 alone, estimated to be the most ever handed out directly to charities in a single year by a living donor (i.e., not simply as a deathbed charitable bequest). Though notably, Scott has not used a private foundation to make the gifts - which would require public reporting - and instead separately announced the gifts on Medium, as she has been utilizing the Fidelity donor-advised fund to conduct her gifting expeditiously.

Should You Broadcast Your Charitable Side? (Deborah Small, Jonathan Berman, Emma Levine, & Alixandra Barasch, Behavioral Scientist) - Doing good for others feels good, and it's a good feeling that we often want to share with others. Yet in the extreme, sharing our good deeds with others - particularly in the social media era - can seem empty and hollow, a form of "virtue signaling" where we're not just sharing our personal experiences or gratitude, but (intentionally or unwittingly) drawing attention to what we've done. In recent years, researchers have actually delved into the question of whether virtue signaling is in fact a positive, or instead may be viewed as hollow or too self-promotional. In practice, it turns out that virtue signaling actually triggers two separate effects at once. The first is simply spreading the word about the good deed in the first place, which is generally positive; after all, if you did something good, it should reflect well on you, and if no one knows the virtuous thing you've done, there's no way to get credit. The second, though, is the dynamic of trying to take credit for what's happened... which can imply that the efforts of the good deed may not have been entirely pure in motive in the first place (and instead may have been done partially or fully for self-promotional purposes). Ironically, then, it turns out that virtue signaling is often most effective for those who do not already have virtuous reputations - in essence, helping to substantively change the perception of others to see that individual as more virtuous. In fact, one study found that people responded more positively to an investment banker sharing their virtuous deeds, than a social worker's, under the presumption that the latter was already a do-gooder but the former not too much (given the unfortunate reputation of the financial services industry!?). More generally, though, the key point is simply that people loathe insincerity and hollow claims of virtue; so if you are going to highlight a good deed, avoid trying to celebrate 'cheap' acts of virtue (which come across as more insincere), and instead stay focused on those that are more substantive and really worth highlighting. (And try to focus on the cause itself, not your own contributions to it!)

Billionaire Chuck Feeney Achieves Goal Of Giving Away His Entire $8 Billion Fortune (Rupert Neate, The Guardian) - For the past 38 years, Chuck Feeney, who made billions from a duty-free shopping empire, has been making charitable gifts with the goal of giving away the entire fortune that he amassed while he was still alive to see its impact. And now, at the age of 89, the charitable foundation he originally set up in secret in 1982 to give away all of his wealth has finally run out of money and been formally dissolved... which Feeney himself announced from his small rented apartment in San Francisco, along with some advice to other billionaires: "To those wondering about Giving While Living: try it, you’ll like it". More generally, while Feeney has not been one to criticize others for not giving more, he does urge that at some point, you have to wonder "how many yachts or pairs of shoes do you need" and instead suggests "what is all that wealth about if you’re not going to do good with it?" and that instead, it's better to "pick a global problem that interests you and invest your wealth and get involved", having been influenced himself by Andrew Carnegie's "The Gospel of Wealth", with its declaration that "the millionaire will be but a trustee for the poor". Though in practice, Feeney was unique in living a particularly frugal life - especially as a billionaire - not owning a car or home, only one pair of shoes, a $10 Casio watch, and being known for flying in economy class (even if family or colleagues were in business class on the same plane). In fact, it was Feeney's generosity that ultimately spurred Bill Gates and Warren Buffett to establish the Giving Pledge, under which the world's richest would commit to giving away at least half their wealth to charity.

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, and Craig Iskowitz's "Wealth Management Today" blog as well.