Executive Summary
Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a look at what kinds of retirement-related legislation and regulation may emerge in 2015 as the Republican leadership takes control of key committees in both the House and now the Senate. In addition, there's a glimpse at the quiet launch of President Obama's new myRA accounts, which are now available to investors.
From there, we have a few practice management and technology articles this week, from a nice To-Do/New-Year's-Resolution list for advisors from practice management consultant Angie Herbers, to a discussion of the ongoing rollout of the new cost basis reporting rules, a review of the latest technology and upcoming developments from the four major RIA custodians, and a profile of the newly expanded Indexing 2.0-style service from Wealthfront (their initial version, rolled out just a year ago, is actually responsible for nearly 1/3rd of the company's AUM now!).
We also have several estate planning articles, including: a look at the rise of online-based attorneys that prepare client estate plans but work virtually (an alternative to do-it-yourself document services like LegalZoom); a discussion of the rise of perpetuity trusts, and whether they may actually be unconstitutional under most state laws; and a discussion of the recently passed "Uniform Fiduciary Access to Digital Assets Act" that should spur state legislation on digital assets in the coming year.
We wrap up with three interesting articles: the first looks at the question of whether Google might someday enter the financial services business (or become a robo-advisor in particular), after rumors that Google had hired a consulting firm to scour the industry for potential opportunities; the second is a review of the interesting new book "The Deluge: The Great War, America, and the Remarking of the Global Order, 1916-1931" by Adam Tooze that looks at how the actions of the United States in the aftermath of World War I supported its rise as a global economic superpower but may have sowed the seeds of World War II in the process; and the last is a glimpse at an interesting new study that reveals reading on a bright screen before bed (e.g., on an iPad) produces an effect equivalent to a 1.5 hour jet lag, disrupting melatonin production and REM sleep, and implying that perhaps we should all consider going back to good 'ole paper books (or at least, a non-light-emitting Kindle Reader) before bed!
Enjoy the reading!
Weekend reading for December 27th/28th:
Congressional Changes Raise Prospects For Legislative Action [On Retirement Issues] (Hazel Bradford, Pensions & Investments) - As Republicans gained control of both houses of Congress for the first time since 2006, changes in leadership at the Congressional committee level are expected to increase the likelihood of new retirement-related legislation. Potential legislative proposals include Senate Finance Committee Chairman Orrin Hatch's "SAFE Retirement Act" which would expand the use of multi-employer plans, allow defined benefit pension plans to purchase private annuities, and create a "starter 401(k) plan" for small private-sector employers. Senator Hatch is also expected to play a key role in protecting tax preferences for retirement savings as Congress considers broader tax reforms. Other potential proposals in 2015 include: more automatic enrollment and automatic escalation in defined contribution plans; expansion of cash balance pension plans; and further efforts to shore up the PBGC. Expect action at the regulatory level as well, including the Department of Labor's reproposal of its controversial fiduciary rule, potential enforcement crackdowns on alternative investments, and increased compliance for hedge funds and privacy equity firms. Also notable in 2015 may be the resolution of the Supreme Court case of Glenn Tibble v. Edison International, which may expand fiduciary obligations and expectations of 401(k) plan sponsors and advisers in conducting due diligence around 401(k) fund and service providers, especially surrounding revenue-sharing agreements.
Signups Begin For New 'myRA' Retirement Accounts (Karen Damato, Wall Street Journal) - With little fanfare, signups have begun for the new myRA retirement accounts, the "starter retirement account" solution that President Obama announced in his State of the Union address at the beginning of 2014. The initial rollover is a pilot program to a small group of employers, including the U.S. Office of Personnel Management, but technically eligible workers at any company can fund a myRA as long as the employer offers direct deposit and is able to direct a portion of the paycheck to a myRA account. To sign up and manage the account, users to go a separate myRA website managed by Comerica (the third-party provider hired to initially manage the program). Notably, the myRA is technically nothing more than a Roth IRA, where savers contribute after-tax dollars and have the opportunity for future qualifying distributions to be tax-free, though contributions to the myRA are limited to a single investment option, a new type of government bond issued by the Treasury that will pay a floating rate bond-like returns but have a principal guarantee (similar to the G Fund in the government TSP). As a Roth IRA, those looking to contribute to a myRA will still face the standard Roth IRA contribution income limits.
A Six-Point Advisor To-Do List for 2015 (Angie Herbers, ThinkAdvisor) - 'Tis the season for New Year's resolutions, and accordingly Angie Herbers offers up her own suggestions for what advisors should be focusing on for the coming year. The key "to-dos" for 2015 include: rediscover a cohesive vision (when advisory firms reach a new level of success, they tend to lose focus, which ultimately results in a loss of momentum unless they re-focus on a [new] vision); get hiring help (if you're growing fast, keep focused on your growth, and get an advisor recruiter to help fill those positions as the advisor labor market gets tighter and more competitive); have an M&A strategy (as many advisors are finding such opportunities fall into their lap, but without a clear plan there's no filter to determine whether it's a good match or not); find a compliance consultant (as both the SEC and FINRA are stepping up "enforcement" activities these days); create a marketing plan (the best opportunity for growth will be after the next bear market, but you have to sow the seeds for that marketing plan now, rather than starting in the midst of the next crisis); and start stockpiling cash (we're probably closer to the next market downturn than the last one, so be certain you have cash available to not only weather the storm, but be ready to reinvest for growth at the bottom).
Cost Basis Reporting: The Gift That Keeps On Giving (Dan Skiles, Investment Advisor) - The slow rollout is continuing for the rules requiring custodians and broker-dealers to track and report (to the IRS and the investor) on the cost basis of investments. The tracking and reporting rules started in 2011 for stocks, in 2012 for ETFs and mutual funds, and this past year (2014) the rules were implemented for options and "simple" bonds (i.e., those on a single fixed payment schedule, most original-issue discount bonds, and many types of callable bonds). The significance of the rollout for bonds is that there are several choices available regarding how cost basis is determined for bonds (e.g., how the market discount on a bond is accrued, how bond premiums are amortized, etc.) and if advisors and their clients want to use something different than the default method of accounting, the custodian/broker must be notified by December 31st. More generally, Skiles notes that because there are now many different types of investments for which cost basis is tracked, and each has their own rules, making cost basis elections is now becoming a key consideration any time a new brokerage account is created; in addition, it now becomes more important than ever for advisors to ensure that their own portfolio performance reporting software is properly synchronized with the custodian's cost basis tracking (as the custodian's tracking will now become binding on taxpayers). In the meantime, the next stage of the rules is coming in 2016, when "complex" debt instruments (e.g., physical bond certificates, foreign debt, bond strips, convertible bonds, etc.) will become subject to the cost basis tracking rules as well.
Custodians Serving Up Advisor Tools (Joel Bruckenstein, Financial Advisor) - The major RIA custodians continue to roll out technology improvements to make advisors' lives easier. At Schwab, the focus is on recognizing that while technology was once a "back-office" issue to improve productivity, it's now also a "front-office" issue for how clients see, perceive, interact with, and experience the advisor's firm. Accordingly, Schwab recently rolled out a system for electronic authorizations of many types of transfers, including wire transfers from mobile devices in 2014 (with e-signature for all Schwab forms already available), and in 2015 it will expand to include e-authorizations for checks, journaling funds from one (Schwab) account to another, and later will expand further to other alterations that currently require a "wet" signature (e.g., address changes). Schwab is also working on the development of its "next generation" portfolio management solution, now called Schwab Advisor Portfolio Connect (or "PM2"), which will have deep integrations to Schwab itself (most relevant for Schwab-only advisory firms), and an end-client portal, and the buzz this fall was the announcement of Schwab's own "robo-advisor" solution, Schwab Intelligent Portfolios, to be available in 2015. At Fidelity, the big focus right now is on automation of the client on-boarding process, allowing clients to open and fund accounts in minutes, and also reducing NIGO (not in good order) errors; soon, the onboarding system will integrate directly into third party software as well (e.g., Salesforce CRM). Mobile check deposit has also been a big success at Fidelity, and the company is preparing tools that inform advisors which clients are still mailing in paper checks so they can be encouraged to adopt the system as well; in 2015, Fidelity is looking at creating money movement APIs to make some of this functionality available through third-party platforms as well (e.g., broker-dealers and perhaps some mobile apps). Continuing the robo-advisor trend, Fidelity also had its own recent announcement in this category, a partnership with Bettermetn Institutional beginning in 2015. At TD Ameritrade, the company is working on a new advisor dashboard, and will ultimately include deep integrations with a wide variety of third-party providers through its VEO open access platform (though the intiail rollout will have only a handful of integration partners); the dashboard will have a great deal of flexibility through a wide range of customizable widgets (with third-party integration partners able to create more new widgets over time). At Pershing, the last of the big-4 custodians, the 2015 focus is a total revamp of its technology ecosystem; having just completed its new NetXInvestor client portal, the platform will have a wider range of integrations, and the NetX360 advisor portal has also just received a big makeover, with more integrations planned for 2015. Pershing is also looking to improve its digital client onboarding experience as well. Overall, Bruckenstein notes that the big theme for 2015 seems to be improving user experience, both for advisors and their clients, and also improving the digital client onboarding and paperwork process.
Way Ahead Of The Industry's Clock, Wealthfront's High-Net-Worth Cat Leaps Out Of The Bag (Sanders Wommack, RIABiz) - This month, "robo-advisor" platform Wealthfront expanded its Direct Indexing solution, which allows higher-net-worth investors to replace their index funds by owning directly the underlying stocks that comprise the index, which both saves on ETF or mutual fund expense ratios, and allows for a greater level of tax loss harvesting transactions. Notably, Wealthfront already had a version of the program out - called the Wealthfront 500 that tracked the S&P 500 - but the new solution is optimized against the Vanguard Total Stock Market Index (VTI) instead, and has a lower $100,000 minimum. And the article notes, Wealthfront's direct indexing solution has already been extremely popular; in fact, almost 1/3rd of its AUM (over $500M) is in its existing WF500 solution, despite only being out for a year and having a $500,000 minimum. On the other hand, the reality is that Wealthfront is not entirely new to the direct indexing space; competitors at companies like Parametric and Aperio have implemented similar strategies for years for high-net-worth investors (Parametric has $48B of its $138.9B in tax-loss-harvesting strategies with a $250k minimum and a 35bps fee). While Wealthfront is bringing minimums lower (and charging a lower fee of 25bps), competitors also note that Wealthfront's 1.73% tracking error for its direct indexing solution is also high, producing a material risk that return differences could mostly or entirely overwhelm any tax-loss-harvesting and cost savings. On the other hand, if Wealthfront can continue to refine the strategy further, it creates the potential for Wealthfront to move even further into the mass market and high-net-worth investor landscape.
Making the Online Estate Planning Process Work (Randy Gardner & Leslie Daff, Journal of Financial Planning) - Non-attorney estate planning document services like LegalZoom have been available online for years, although many criticize that do-it-yourself estate planning has resulted in clients that don't understand their documents, plans that don't work as intended, or even estate plans that are just outright missing some key documents. But recently, a number of estate planning firms with actual attorneys are beginning to offer their services online and virtually, often attached to a limited scope/limited services agreement - for instance, the attorney commits to understanding the client situation and drafting a customized set of estate planning documents, but the client is still responsible for the execution. Evaluating such providers should still start with an evaluation of the attorney's experience, and advisors are also counseled to verify that the attorneys use the same quality documents for online clients as they do in their offices for in-person clients (apparently, not all do), and look to the kind of education the attorney (or his/her website) provides about the documents and how to execute/fund them. Since online estate planning often involves clients inputting their own financial information, which saves input and drafting time for the attorney - along with online educational content to cut down on meeting times - the fees for online documents should be lower than in-person attorneys as well. Ultimately, the article notes that using lower-cost online attorneys with the effort spearheaded by the financial advisor may be a great way to save clients money while validating the advisor's own value proposition, though truly complex situations will likely still merit the engagement of a full-service (in-person) law firm.
The Ins And Outs Of Trusts That Last Forever (Paul Sullivan, New York Times) - Historically, charitable trusts have been allowed in perpetuity, but trusts for individuals have had a limitation to their term of 21 years beyond the life span of the people alive when it was created (e.g., which means few would last beyond 100 years), and after that point the trust must be liquidated. But in recent years a number of states have been relaxing their laws and allowing "perpetuity" trusts for individuals that have no end limit (or in the case of Wyoming, a maximum term of "just" 1,000 years); such trusts are popular for both estate planning purposes and also creditor protection for heirs. While some have criticized perpetuity trusts as just being bad public policy, a recent academic law paper by Harvard Law Professor Robert Sitkoff (and co-author Steven Horowitz) makes the case that such trusts are actually unconstitutional under the state laws of many states that currently permit them, which means there is danger than in the event of a lawsuit, creditors could try to challenge the constitutionality of the trust as a means to lay claim to the funds inside. And even if the trust is legal in the state in which it's created, if the lawsuit is brought in another state where such trusts are unconstitutional still raises the question of whether the veil of trust protection could be pierced (and/or whether the beneficiary could be liable for the trust assets, even if access to them is limited). Alternatively, Sitkoff also notes that future descendents who want to get access to the money could potentially try to breach the trust themselves on the grounds that restricting their access to the money is unconstitutional under the applicable state law. Supporters of perpetuity trusts still argue that the states that have created such trusts will act to defend themselves, at least for the subset of states where there is no conflict with the state Constitution and especially if the trust (and beneficiaries) have no ties to other state jurisdictions.
Planning Implications of New Legislation for Digital Assets (William Bissett & Andrew Blair, Journal of Financial Planning) - Over the past decade, online accounts and "digital assets" (from a business website to emails to online financial account information and family photos and digital music) have become a greater and greater part of our lives, but estate administration laws have lagged the technological developments, resulting in significant challenges in resolving users' accounts and the associated digital assets after their death. In 2014, the Uniform Law Commission created the Uniform Fiduciary Access to Digital Assets Act (or UFADAA) to address the issue by creating a template of legislation that states can adopt. The primary purpose of UFADAA is to allow a third party - such as the executor of an estate, a conservator for incapacitated individuals, agents acting pursuant to a power of attorney, or trustees of a trust - to access an account holder's digital assets so the fiduciary can perform their legally required duties; without the legislation, such individuals have been limited by the Terms of Service and User Agreements for various sites, which often strictly limit access to the account to the original account holder (and technically, "breaking into" the account, even after death of the account holder, could subject the fiduciary to liability for violated electrnic privacy and anti-hacking laws!). The legislation is limited to only giving fiduciaries the authority over the assets they need to perform their duties, and the fiduciaries do not receive any more power over the digital assets than the original account holder had in the first place. Although 7 states already have at least some laws in place already pertaining to digital assets, many are limited (e.g., only executors, and not trustees or conservators) or outdated with respect to the technology; the most recent to pass legislation was Delaware, which introduced its law as the Uniform Law Commission was finishing UFADAA and contains many similar provisions. Ultimately, expect 2015 to be a year with a lot of legislative activity as state legislators begin to consider whether to adopt UFADAA in their own state, although notably some technology companies themselves (e.g., Yahoo) have been objecting to the legislation, claiming it still presents privacy concerns.
Is Google Gunning For RIAs, Custodians And Robos Alike? (Evan Simonoff, Financial Advisor) - Earlier this year, the Financial Times ran a story that Google might enter the investment advisory business, and that the company had hired a consulting firm to scour the industry for opportunities. While nothing has happened - yet? - some industry participants are reporting that they have been contacted by Google executives, with questions about things like the fees mutual funds pay to market their funds on custodian platforms. Yet some suggest that Google could go so far as to launch their own robo-advisor, given the penetration that Google already has to consumers, especially millennials who are viewed as most likely to adopt such platforms, and that the company has more than enough in deep pockets to either build a platform or buy an existing robo-advisor player. Yet the reality is that the robo-advisor business may not actually be all that attractive; many of the more "successful" robo-advisors still have very little in the way of revenue, and the online-advisor concept has been around for a decade or two already, from Financial Engines founded in 1994 (and still growing today), to the early "robo" venture NetFolio that launched in 2001 and died just months later. In addition, financial services - even as a "robo" solution - is still generally more service-intensive than traditional tech companies (by comparison, WhatsApp had 70 employees servicing 400 million users when Facebook purchased it), so it's not clear that companies like Google will want in.
The Real Story of How America Became an Economic Superpower (David Frum, The Atlantic) - This article is a fascinating review of the recent new book "The Deluge: The Great War, America, and the Remarking of the Global Order, 1916-1931" by Adam Tooze, which explores the economic history of the US and the world in the aftermath of World War I, and makes the case that the rise of the US really began not after World War II, but in the midst of World War I. Notably, at the time, the United States struggled due to challenging politics, a dysfunctional financial system, and violent racial and labor conflicts. However, Europe's ongoing struggle with World War I left it no choice but to rely on the US for larger and larger war orders for supplies, funded by larger and larger (dollar-denominated) bond issuances from Britain and France; by the end of 1916, American investors had plowed $2B into such bonds (equivalent to a whopping $560B in today's money!), effectively putting the U.S. into a position where its commitment was "too big to fail". Yet while the U.S. did end out supporting the victorious side of World War I, Tooze makes the case that the U.S. did not do enough to stabilize the global system with its emerging new role, resulting in subsequent tumult that led to the Great Depression and World War II; in particular, Tooze notes that the U.S. pushed for France to relent on the debts owed to it by Germany after World War I, but refused to relent on the even-larger debt that France itself owed to the U.S., and when the U.S. experienced its own recessions in 1918 and again in 1921 (after post-war military contracts were cancelled en masse) it blunted demand for German exports that the country needed to right itself, and kicked off currency depreciation in Europe especially for those countries that lost the war (for which the countries could either accept severe deflation themselves, or re-peg their currencies). And in turn, these severe economic conditions of the Great Depression toppled many governments, setting the stage for World War II, though ultimately Tooze shows that due to the sheer size of the U.S. economy over Germany's, there was little chance for Germany to keep pace with the U.S. war machine.
Want To Fall Asleep Faster? Don't Use An iPad Before Bed. (Susannah Locke, Vox) - A whopping 90% of Americans are estimated to frequently use electronic devices right before bed, and a recent study tried to analyze the impact by recording and comparing the sleep cycles for two weeks of participants who read for several hours before bed using either an iPad or a paper book. The results revealed that those using the iPad before bed reported feeling less sleepy, took longer to fall asleep, and felt less alert in the morning. Overall the iPad users didn't sleep less in total, but they did spend less time in the crucial REM sleep stage, and the study found iPad users had a shift in their melatonin cycle equivalent to about a 1.5 hour jet lag! Prior research has suggested that the bluish light from devices can also impact sleep cycles, but this study did not determine whether it was the bluish tint in particular or just the overall screen brightness (although some apps exist to adjust the blue tint of the screen later in the evening specifically to help offset this potential impact anyway). Although not specifically tested, the researchers do note that reading using a non-light-emitting device - such as a Kindle reader - would presumably be like reading a paper book, and not have the harmful effects of the iPad brightness (although this wasn't specifically tested).
I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!
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.
ICYMI: Weekend Reading for Financial Planners (Dec 27-28) – http://t.co/uLbMgYWqlg