Weekend Reading for Financial Planners (Dec 28-29)

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Read all of Michael’s articles here.

SECURE Act And Tax Extenders Create Retirement Planning Challenges & Opportunities (Jeff Levine, Nerd's Eye View) - While the big industry news last week was that after months of being bandied about, the SECURE Act was finally being passed into law, this week the industry focus has been dissecting what's actually in the new law and figuring out what to actually do about it (or not) going forward. From the advisor perspective, arguably the biggest change in the SECURE Act is the elimination of the so-called "Stretch IRA", to be replaced with a new "10-Year Rule" that requires beneficiaries to liquidate the account by the end of the 10th year after death; notably, though, the new rules will only apply to those who die with a retirement account beginning in 2020 and beyond (i.e., those who inherited a retirement account into 2019 or prior get to keep the 'old' stretch rules), and certain "Eligible Designated Beneficiaries" actually will still be permitted to stretch going forward, including spousal beneficiaries, disabled or chronically ill beneficiaries, those who were not more than 10 years younger than the decedent, and minor children of the original account owner (but only until they reach the age of majority, and then the 10-year rule will still come into play)... necessitating client reviews of all retirement account beneficiaries in 2020 (and especially those using a trust as beneficiary where it's no longer clear whether/how the "see-through trust" rules will operate). Other notable financial planning changes in the SECURE Act include: the RMD age is being increased from 70 1/2 to age 72 (for all those who were not already age 70 1/2 by the end of 2019), though the QCD trigger age remains 70 1/2; traditional IRA contributions are now permitted beyond age 70 1/2 (akin to all other types of retirement accounts); there's a new exception to the 10% early withdrawal penalty for up to $5,000 for a new child (whether by birth or adoption); qualified plans get numerous new tax credits and incentives to set up plans, and a new Multi-Employer Plan (MEP) structure to aggregate plans together for hopefully-lower costs; new safe harbor provisions will make it easier for qualified plans to offer lifetime income annuities inside the plan (though it's still not clear whether plan participants will choose to buy them); and the new Kiddie Tax rules that were put in place under the Tax Cuts and Jobs Act of 2017 to tax kids' unearned income at trust tax rates are now repealed (reverting back to the 'old' rules where kids' unearned income is taxed at the parents' top marginal tax rate, and giving parents an option for 2018 and 2019 to file under the 'old' rules or file or amend a prior filing to use the new-and-prior-to-TCJA rules instead).

Dimensional Fund Advisors Makes Unprecedented Slash Of Fees Across All Its Mutual Funds (Lisa Shidler, RIABiz) - In recent years, Dimensional Fund Advisors (DFA) has been viewed as a last bastion of resistance against the downward pressure on asset manager fees, stubbornly holding the line on its mutual fund expense ratios and still succeeding in drawing in advisor assets thanks to DFA's unique story and differentiated offering (and outright strong performance, with 85% of DFA's equity and fixed-income funds beating their benchmarks over the past 20 years since 1999). Which makes it all the more notable that "even" DFA has now announced a decision for across-the-board fee cuts, leading with its US large-cap fund that will drop the most (by 40%, from 20bps to 12bps), and what will amount across the board to an 8% cut in fees on an asset-weighted basis (with most fund expense ratios being cut by 1-8 basis points). The shift appears to be driven in part by the fact that even "DFA adherents" are less concentrated in DFA funds than they once were, where a decade ago a DFA-approved firm typically used 95% DFA funds but now averages only 60% (which means, in essence, that as DFA firms grow, they're adding assets outside DFA, whether to other 'smart beta' factor-based competitors or simply 'cheap beta' core funds for a portion of the portfolio), even though DFA is already cheaper than an estimated 90% of all other funds in its categories. In addition, the recent breakaway of former DFA co-CEO Eduardo Repetto to form Avantis, which is reportedly aiming to create "DFA 2.0" with a similar factor-based approach but launching in ETF format, is also reportedly adding competitive pressure to DFA. In fact, DFA has indicated that it may even consider launching ETFs to compete more directly against Avantis and other smart beta ETFs, after having held out for years against the trend.

How Do Your Financial Priorities Stack Up? (Christine Benz, Morningstar) - For years, the U.S. Department of Agriculture published a "food pyramid" to help people prioritize how to structure their meals throughout the day, with a 'foundation' of breads and grains (6-11 servings/day), followed by fruits and vegetables (2-4 services/day of each), then meats and fish and dairy (2-3 services/day each), and finally fats and oils (to be used "sparingly"). While the food pyramid itself and the priorities it espouses have evolved over time (it's now a square food plate dubbed "MyPlate" with different allocations), the essence of a pyramid to understand (dietary or other) priorities is still a powerful way to visually show where to spend the most time and focus and what's less important (higher up on the pyramid) to prioritize. In this context, Benz suggests an "Investment Pyramid" to guide the focus and priorities for investors, starting with "Having A Goal", followed by "How Much You Save", then "Your Asset Allocation", then "Your Own Behavior", "Being Tax Efficient", and finally your "Investment Selection" at the top. As with the food pyramid, the point of the structure is to emphasize how it's crucial to build a foundation first, as it's hard to focus on saving until you have a goal to save towards in the first place, there isn't much value to asset allocation until you're spending less than you earn and have money saved to allocate in the first place (and similarly, even after retirement, your ongoing spending rate is still crucial for ongoing retirement success!), you can't minimize bad investment behavior by changing your portfolio until you have an asset allocation to behaviorally deviate from (or ideally, a portfolio that's well-diversified enough that there isn't much need to make changes and deviate!), being tax-efficient doesn't matter until you have your behavior under control (or you'll keep turning over your investments anyway), and only at the very end does it really matter what investments, in particular, you select (as with a reasonably diversified portfolio, the bulk of long-term returns come from the 'beta' of the market anyway, not the individual performance of any one stock or other investment in particular!).

Don't Make Things More Complicated Than Necessary (Trent Hamm, The Simple Dollar) - There is a tendency in the world of personal finance (and alas, often also in the world of financial advisors) to talk about detailed and often-complex strategies to enhance wealth and financial security. Which doesn't necessarily make them 'bad' strategies, but it can often be overwhelming, to the point that in the end the advice and recommendations may not be taken because it simply feels like too much to digest in the first place. Accordingly, though, Hamm suggests that it's important to remember that while advanced and more complex strategies can help at the margins, the bulk of the opportunity is in getting the big and 'simple' stuff right first, including: what matters the most, in the long run, is simply that you're consistently spending less than you earn (far more than the decision of whether to 'save' the money or use it to pay down debt instead); having more (and a growing amount of) money in the bank is more important than particular investment decisions or taking advantage of particular tax-preferenced college or retirement accounts; having less debt is good not just because of the burdens of debt payments themselves but also because it affords more choices and flexibility for the future (and similarly, being wary about hamstringing yourself with any big bills that will be difficult to pay); and the less you spend on 'foolish' things each month, the easier it is to earn more than you spend (whether to pay the bills, pay down debts, avoid more debt, or put money in the bank), which doesn't mean living like a pauper but that it's worth trying to find some things that are free or at least cheap that entertain you and fill your time. As in the end, the sad reality is that the vast majority of people don't even handle these 'basics' very well, and until these simple steps are mastered, the more complex strategies aren't going to help anyway.

Does E-Money Make You Spend More? (Lu-Hai Liang, BBC) - As the digital world unfolds, more and more countries are starting to entirely shun physical money in lieu of 'e-money' instead, raising the question of whether the countries that lag (including, notably, the US) are simply stuck in the past, or are actually wise to stick with physical cash instead? For instance, in Beijing, virtually everything (from restaurants to shops to convenience stores) is paid for via the smartphone that debits money directly from an e-wallet, without any need to fumble for cash nor even to swipe a plastic card, Canada has the highest rate of cashless spending, and in Sweden, just 13% of the population reported using cash for a recent purchase (down from 40% in 2010, and compared to what is still a 70% rate in the US). The concern, though, beyond general fears of the digital security of e-money, is whether losing the "friction" of paying with cash may make it too easy for us to part with our money, effectively losing control of our spending as the costs become less and less salient. On the other hand, the reality is that the move to money (and away from systems of barter that exchanged our own goods or services for another's) arguably was already one level of abstraction towards being less aware of what something costs (e.g., we'd probably be even more cognizant of the cost of a high-end smartphone if it wasn't just $1,000 of cash but calculated as 5, 20, or 50 hours of work for the transactional exchange). And "credit" has existed going back for centuries, with the credit card just the most recent version of the transaction (first used primarily for traveling salesmen to use on the road, and then going more mainstream in subsequent decades). Still, research has shown that we as human beings are 'loss averse' and react more negatively to money we part with than positively to money we gain, and other studies have shown that we do appear to be more willing to spend profligately with a credit card than via cash... yet arguably the subsequent pain of what happens when the credit card bill arrives may already be driving a voluntary shift towards "less-painful" (i.e., more easily managed real-time) debit cards. Which suggests that the rise of e-wallets may not actually be problematic, as the real 'value' of transacting in cash is the pain of seeing the money vanish immediately... which doesn't happen with credit cards, but would happen with e-wallets and online banks where the payment is subtracted immediately from the account?

Why Financial Advisors Should Never Buy Email Lists [And How To Build One For Free Instead] (Samantha Russell, Iris.xyz) - Most advisors have had the experience of email overwhelm, yet the reality is that from a marketing perspective, email is not 'dead', and in fact, the majority of marketers still state that email is their biggest source of Return On Investment (if only because the ROI on alternatives like social media is worse because such platforms are even more overwhelming). The caveat, however, is getting a list of people to send emails to, where the most popular approach of just buying a list is very problematic (both because the highest quality email lists usually aren't for sale, people on a purchased list may not be a good fit for or interested in your business anyway, trustworthy email marketing services generally don't let you send emails to lists you have purchased, and you may be violating GDPR compliance rules). So what's the alternative? Simply put, to build your own email list... using techniques not unlike what advisors did in the past to build their (physical print) newsletter lists, simply re-adapted to the modern era. The starting point is to recognize that getting someone's email address requires giving them something in return - e.g., an e-book, an infographic, or some other kind of promised-and-valuable-to-them content. To the extent you have your own blog or active advisor website, you can include a "Call To Action" (CTA) that invites people who have enjoyed the content to sign up for more, either at the bottom of the article or even via a "pop-up" that appears (you may think pop-ups are annoying, but when well-targeted, they actually have very high conversion rates!). As you develop your mailing list, you can then segment the list to further target messages based on their interests or profile, and then queue them up to a webinar to learn more about your expertise!

How Advisor Brand Archetypes Can Transform Your Marketing Strategy (Eric Lee, ModelFA) - The concept of Archetype Theory is based on the work of Swiss psychiatrist Carl Jung, who explained the importance of archetypes as "forms or images of a collective nature which occur practically all over the earth as constituents of myths and at the same time, as individual products of unconscious". In other words, there are naturally and commonly occurring images, patterns, and behaviors that appear to be ingrained into our collective psyche as human beings, that guide our actions in remarkably consistent ways. Marketers Margaret Mark and Carol Pearson later brought the context of archetypes into the marketing world with their book "The Hero and the Outlaw: Building Extraordinary Brands Through The Power Of Archetypes", with a series of 12 marketing archetypes: the Sage (helping the world gain wisdom and insight); the Innocent (just wants everyone to be happy, strives to be good); the Explorer (fulfillment through discovery); the Ruler (creating order from chaos by helping people to be more responsible and get organized); the Creator (to create something with meaning and enduring value); the Caregiver (to care for and protect others); the Magician (making dreams come true or creating something special and unique); the Hero (helping to improve the world); the Outlaw (breaking the rules and fighting authority); the Lover (creating intimacy and inspiring love); the Jester (bringing joy to the world); and the Everyman/Everywoman (helping everyone to connect with others and feel like they belong). The significance of these archetypes - which can apply to major national brands (e.g., Disney is a Magician, Campbell's Soup is a Caregiver, Lego and Crayola are Creators, Red Bull is an Explorer, and Harley-Davidson is an Outlaw), but also to advisory firms - is that people respond to them best when the brand consistently remains within the archetype (e.g., Disney doesn't promise to break rules and fight authority, Ben and Jerry's doesn't strive to help the world gain wisdom and insight). Notably, though, any business can succeed with any archetype if they wish - i.e., it's not automatic to be the "Sage" archetype as an advisor, as you might be a Caregiver brand working with doctors and nurses, a Ruler archetype working with business owners, or a Hero archetype working with the military or athletes. The key, though, is to be clear on what your archetype is... and then begin to filter your messaging, marketing, and client interactions through that lens!

Reach Is Overrated (Seth Godin, Seth's Blog) - The conventional view of marketing is that having 'reach' is crucial, which makes channels like the Super Bowl, Google, or Radio so important and popular. Yet as Godin notes, in practice having more reach often just means literally reaching more people, but says nothing about expanding connections with the right people (i.e., those with whom you might be able to do business). Thus in the logical extreme, you could use a giant radio telescope to broadcast your firm's marketing messages to the billions of aliens that may live in other solar systems... but exponentially increasing your reach (at least, if aliens do exist!?) still won't do anything to advance your business itself. The key distinction, then, is that effective marketing isn't about reaching more people in general, but specifically to interact more with people who care about what you have to say and what you offer. In that context, not only is broadcasting a wider reach not necessarily helpful - if it simply reaches more people who don't care about you - but arguably it's a good idea to save money by not trying to expand reach, and alternatively try paying extra in marketing to target more effectively and to reach "precisely the right people" instead.

Picture One Person Your Work Will Help (Susan Weiner, Investment Writing) - It's a common challenge in both writing in particular, and marketing in general, to get 'stuck' in the creative process, overwhelmed by the number of different paths that might be followed to the point of not being certain which to pursue and writing/marketing/doing 'nothing' instead. One way to overcome this challenge, from Daniel Pink's recent book "When", is to try picturing one person in particular who will benefit from your writing/business/efforts, and then dedicate the writing or marketing messaging to that person in particular. The benefit of this approach is that not only is it motivating to literally imagine a specific person you're helping (inspiring the motivation to actually help them), but getting specific down to an individual also makes the solutions or answers of what to say, write or market about, and focus on, far more tangible and 'real'. (It's the same reason that crafting specific marketing personas is also effective as a marketing strategy.) And as an added benefit, your writing or marketing will also be more likely to convey the messages in a useful and relevant way to the targeted reader, as envisioning one specific person being helped also makes it easier to refine the way the concepts are explained to be more understandable for that particular person (and thus, ideally, everyone else like them that you're trying to reach as well!).

5 Common Mistakes That Cause New Habits To Fail (James Clear) - Depending on the research study being cited, somewhere between 81% and 92% of all new Year's Resolutions end out failing, as we 'inevitably' fall back into our old habits rather than stick with the New (Year's resolution) behavior we're trying to change. Yet the reality is that failing New Year's resolutions doesn't have to be inevitable, and instead is the result of common problems in how we set up ourselves for change. The first is that we often try to change 'everything' (or at least, too much) at once, whereas the behavior change research suggests that instead, it's better to focus on changing more incrementally (e.g., trying to change no more than 3 tiny habits at a time, such as flossing at least one tooth, doing one push-up per day, or just saying "It's going to be a great day" when getting up in the morning), ideally by anchoring around a "keystone habit" (a behavior or routine that everything else in your life shapes around, such as a habit of going to the gym and planning the rest of your life around that regular gym habit). The second similar challenge is trying to change a habit that is 'too big', which similarly makes it extremely challenging to change, requiring far more mental willpower to engage in big habit-forming changes; by contrast, the easiest and most straightforward new habits should be simpler and 'non-threatening', such as doing 5 push-ups per day (even if the goal is 50), or committing to reading just 2 pages every night (if the goal is to read far more books in total). Other keys to habit change include: seeking a ritual instead of a result (i.e., we don't get results from the goal, we get results from the new lifestyle rituals that emerge, so focus on changing your rituals, not the results themselves); and recognize the role that your environment plays (e.g., if you want to eat healthier, be certain you're not surrounded by unhealthy food, and if you want to gain a more positive attitude, don't surround yourself with negative people, and if you want to be more focused, don't keep a smartphone nearby that bombards you with text messages, emails, and notifications). Also remember that habits, like saving and investing, compound in the long run, so often all you need for life-changing improvement is to 'just' get 1% better each day (and let a year of compounding work for you!).

The Problem With "Smart" New Year's Goals (Alice Fleerackers, Nautilus) - The sudden motivation we often find at the beginning of the New year to make changes in our lives is actually a known psychological effect - dubbed "the fresh start effect" - and research has shown that people feel more committed to pursuing their goals after "fresh start" moments (from the start of the new year to the start of a school year, or even your birthday) because they create new mental accounting periods that allow us to move on from our past failures. Yet ironically, the problem with the fresh start effect is that it often inspires us to dream too big and set our hopes too high, making our New Year's resolutions too unrealistic of a dramatic change to actually accomplish. Instead, it's better to break down big goals into smaller "SMART" goals (short for goals that are Specific, Measurable Attainable, personally Relevant, and Time-bound). Unfortunately, though, when it comes to New Year's resolutions that are typically about behavior change, even SMART goals are prone to fail, because we're not really trying to achieve a short-term objective but build a new habit that can be sustained over time (in which case a SMART goal just makes it easier to know when we 'failed' and then give up for failing). Instead, researchers suggest that for long-term goals, it's better to build longer-term aspirations into the picture, as such "superordinate goals" that focus on how we want to be in the world (e.g., wanting to be healthier, or more generous), and then focus on whether we're engaging in tasks that move us incrementally towards that vision (which allows more room for the inevitability of relapse without feeling like we've 'failed' so we can stay on track in the long run).

6 Tips To Getting Things Done In 2020 (Tim Herrera, The New York Times) - In the age of the smartphone and being 'always on', time management is a growing struggle for many, but Herrera suggests that the real issue isn't "time management" but instead "attention management" (for which our smartphones are an eternal attention-distractor). The significance of shifting mentality from "time management" to "attention management" is that it recognizes we still get to choose what we decide to pay attention to or not. After all, our struggles with procrastination usually aren't about an inability to find the time to do something, but our tendency to get distracted and put our attention elsewhere (until the last minute when we have to get it done, and then find the ability to focus our attention as necessary!). In a world of "attention management", though, the focus becomes how to focus our attention - at least, when we need to - better enabling us to do "Deep Work" that takes more mental energy, and recognizing that even just a quick glance at an email inbox or the smartphone can reduce our performance by distracting our attention. Or stated more simply, it's hard to get anything done when we're half-paying attention, causing everything to take more time; which means the solution isn't to try to improve our "time management" skills, but instead our "attention management" skills so that when it's time to work, we focus on getting the work done (and then find the improved time efficiency of doing so may leave more time for play, too!).

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.