Executive Summary
Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big 2013 annual advisor tech survey, with some interesting results showing that advisors are starting to really shift to the cloud (and show a preference for cloud-based solutions). There's also an interesting bit of news about Fidelity announcing that it going forward it will charge more to purchase Vanguard and DFA mutual funds (and a few other low-cost providers) compared to the other 99%+ of the marketplace.
From there, we have a number of technical planning articles, including a discussion of how clients who use the Social Security "file and suspend" strategy can actually undo it years later, a look at some of the rules for 529 plans that are relaxed when a beneficiary designation change occurs, a harsh look at whether nontraded REITs are really all they're cracked up to be, and some recent research from the Journal of Financial Planning about how to achieve higher withdrawal rates using a standby line of credit via a reverse mortgage.
We also have several practice management articles, including a bit of a point-counterpoint discussion about the how easily advisors can get started with blogging, but a note that just because advisors can blog doesn't mean they should unless their practice is really focused and specialized enough to create content that has unique value from all the other "tripe" being pushed out (spammed out) to consumers. There's also a discussion of how some advisors have struggled with the execution of website re-design projects (though most seem happy with the final outcome, even if the process of getting there was a challenge!).
We wrap up with three interesting articles: the first is an interview with financial planner, blogger, and speaker Tim Maurer about the wide range of activities he's involved with and his secret for how he's achieved such good relationships with the media (hint: give it away); the second is a look at some of our behavioral biases in making decisions as advisors, and how we can better navigate our own decision-making challenges; and the last is an interesting look at how, despite all the negativity about the state of the US these days, we've actually made astonishing improvements over and above the days-gone-by when we already said times were great (which means we should be even happier now, right!?). Enjoy the reading!
Weekend reading for December 7th/8th:
What's New in Advisor Tech? - This cover story to Financial Planning magazine is their annual tech survey written by advisor technology consultant Joel Bruckenstein. The big trend this year appears to be the movement to the cloud; Bruckenstein reports that in one category after another, cloud-based software providers are gaining over desktop-based products, and hosted outsource providers are gaining where cloud software is unavailable. Advisors are allocating more spending to their technology budgets, as nearly 1/3rd of advisors expect to spend more on technology next year (and most of the rest intend to at least maintain the same spending); the ramp-up is most noticeable for firms with $50M to $100M of assets, where advisors often hit a wall and invest in technology to get over it. In terms of CRM, cloud-based solutions like Redtail, Salesforce, and Tamarac Advisor CRM are up, while legacy providers like ACT! and Goldmine are down; desktop-based Junxure and ProTracker slipped as well, though both are about to release new cloud versions of their software that may help them recover. Notably, while the most commonly reported CRM is still Outlook (which Bruckenstein notes is not a 'real' CRM system!), its share fell dramatically in the past year, from 35% down to only 22.2% of advisors. In terms of rebalancing software, adoption continues, with the number of advisors using such software up from 31% last year to almost 40% this year (and the bigger the firm, the more likely the software is used); the most popular solution is Morningstar Office, albeit with limited functionality, and the most popular 'robust' solutions are Tamarac and iRebal, but generally only once firms cross about $100M of AUM. Use of mobile devices continues to grow as well, with almost 59% of advisors using tablets for business (up from 50% last year) and 87% using a smartphone (up from 80%); Apple devices are most popular, but Android devices are used as well (more for phones than tablets) and a number of advisors are trying out Windows tablets. The survey found social media adoption appears to be plateauing - usage statistics are similar last year to this year - although a finer slicing of the data found social media is significantly more likely to be used by the smallest firms than the larger ones. Other highlights of the study include financial planning software (the leader is MoneyGuidePro, followed by eMoney, then MoneyTree and the NaviPro Planning Suite), portfolio management software (one of the most competitive categories, with Morningstar and Albridge dominating the rankings, and PortfolioCenter and Advent Axys amongst fee-only advisors), and operating systems (sadly, Windows XP from a decade ago is still as popular as Windows 8, though the former is falling).
Fidelity Investments Soon To Jack Up Commissions On DFA And Vanguard Group Mutual Fund Trades - This week Fidelity announced that it will be cutting the transaction fees from $40 to $30 per buy/sell trade for virtually all of its mutual funds starting on January 1st... except the costs for funds from DFA, Vanguard, Dodge & Cox, Sequoia, and CGM, where fees for purchases (but not sales) is being increased to $50 instead. Why the disparate treatment? The issue is that these low-cost funds do not include 12(b)-1 fees that can be paid to Fidelity, a stark contrast to most other funds that provide a highly lucrative fee-sharing arrangement of up to 40 basis points to get onto the Fidelity platform. Most firms will find their overall client costs go down - given that 99%+ of mutual funds will enjoy the fee cuts, not increases - but those focused on using primarily these fund families, especially DFA-centric investment firms, may not be as happy (though notably, Schwab still charges $49.95 for its transaction fee funds as well, for both buying and selling). On the other hand, given that firms using DFA and Vanguard and the others often have lower turnover and trading activity anyway, ultimately the client impact may not be huge. Some commentators suggest the real issue going on is a "spat" between Fidelity and Vanguard, though it still looks awkward for advisors caught in the middle when it appears as though Fidelity is trying to steer advisors and clients in a certain direction by charging more for advisors to buy Vanguard than most other funds (including Fidelity's own).
How To Hedge Bets When Claiming Social Security - This article from Social Security expert Mary Beth Franklin looks at a unique version of a Social Security strategy for those who want to "undo" a prior decision. Notably, the Social Security Administration eliminated the "withdraw [and reapply]" strategy several years ago, and now limits those who want to undo their previous benefits election to only those who applied in the past 12 months. However, in the situation where someone has gone through the "file and suspend" strategy at full retirement age, the client can later change their mind and get a retroactive lump sum for all the foregone payments. For instance, if the husband was entitled to $2,400/month at age 66 but chose to file and suspend, and two years later decides he wants benefits, the husband has two choices: he can collect his larger benefit of $2,784/month (increased by 2 years x 8% = 16% for delayed retirement credits), or he can request retroactive benefits with a lump sum check for 24 x $2,400 = $57,600 to make him whole going back to age 66 and then receive $2,400/month going forward. This may be appealing for someone who has changed their mind about the situation, including perhaps a client who has a change in health and decides that the benefit of delaying wasn't going to be worthwhile after all. Notably, though, this option only applies for those who did a file-and-suspend and delayed benefits past full retirement age in the first place, and the retroactive lump sum can only go back as far as full retirement age (66) itself, not earlier.
The Magic Of Beneficiary Changes [For 529 Plans] - From college savings guru Joe Hurley, this article looks at the ways in which changing a 529 plan beneficiary can "work magic" but allowing exceptions to the otherwise-restrictive rules for 529 plans. The first beneficial situation is where someone wants to make investment changes to the 529 plan; normally, investment changes can only be made once per year, but a beneficiary change resets the clock and allows for a(nother) investment change. Second, a beneficiary change also makes the once-per-12-month rollover restriction disappear, allowing a rollover change to another 529 plan even if another rollover had already been done recently. The third scenario is a "trick" for those who have taken a 529 plan withdrawal by mistake and want to get the funds back into the plan. There is a 60-day rollover rule, but that only works if the funds are moved into another state's 529 plan; however, if there is a beneficiary change, the money can go back into the same original 529 plan (or another plan within the same state). The bottom line: if you're looking to make one of these changes anyway, consider a beneficiary change to accompany it, especially if the current beneficiary has a sibling (as changing beneficiaries to a parent and back to the child could potentially be treated as a new gift). In all circumstances, to be eligible for the favorable treatment, the new beneficiary must be a qualifying member of the old beneficiary's family.
Should Advisors Offer Nontraded REITs? - In his monthly column for Financial Planning magazine, industry commentator Bob Veres looks at the landscape of nontraded REITs, after a prior column which questioned whether they would still be used absent generous commissions generated some "forceful" feedback. For those who aren't familiar, nontraded REITs are generally blind pool accumulations of capital that will be invested in real estate, with shares sold by advisors for upfront commissions that can add up to as much as 10% of the money raised (between the amounts shared with advisors and various payments to broker-dealers); one estimate puts the size of the nontraded REIT marketplace at a whopping $62.4B of total value earlier this year. While Veres notes the commissions themselves are a concern - setting clients 10% in the hole right out of the gate - ultimately there are three bigger problems to be cognizant of: 1) illiquidity, which is concerning since investors are captive to the investment sponsor, who not only invests the money but typically manages the property and pays itself to do so (and may also receive incentives to choose certain vendors when repairs are necessary); 2) uncertain liquidation, as while in theory nontraded REITs are sold with the idea of eventually liquidating the properties, there's not much incentive to do so when they're enjoying the "gravy train" of ongoing property management fees they set and pay themselves!; and 3) opacity of performance, as it's not always clear whether distributions are being made based on real income/earnings, or just out of a cash account that makes the offering look more appealing than it really is (while that structure may collapse later, it gives the sponsor a "good track record" to promote more nontraded REITs in the meantime, and raises question of the credibility of the track record for current providers). While Veres notes that certainly not all nontraded REIT operators will necessarily to do (or even any) of these things, the limited partnership providers of decades past insisted on the same thing, and it turned out when the opacity cleared that all of these inappropriate behaviors were occurring.
Increasing the Sustainable Withdrawal Rate Using the Standby Reverse Mortgage - This article from the Journal of Financial Planning looks at the retirement strategy of establishing a reverse mortgage line of credit to using it to fund retirement in years where an investment portfolio declines below a certain threshold (80% of the balance necessary to fund all future retirement goals), subsequently repaid in bull markets once the portfolio recovers. A version of this approach was studied in the Journal last year, but this latest version looks specifically at the maximum safe withdrawal rate that can be sustained by the strategy, and is updated for the latest reverse mortgage rules that took effect this fall. Using reduced market expectations (relative to historical standards), the results show a significant improvement in safe withdrawal rates (in the neighborhood of 5% even with lower return assumptions) under the standby reverse mortgage scenario, driven in part by the favorable liquidation effects and in part simply because the strategy taps home equity and introduces additional assets to the retirement balance sheet. Notably, though, the reverse mortgage benefits are diminished by almost half in a high interest rate environment compared to a low one, due to the impact of interest rates on the maximum size of the available line of credit. However, this is based primarily on interest rates at the time of origination; accordingly, clients who wish to implement the strategy should look at establishing the line of credit sooner rather than later (while interest rates are still low), even if there is no intention to borrow until an extended period into the future (to reduce the risk that rates will be higher and borrowing limits will be lower if the client waits until funds actually need to be used).
Conquer Social Media, It's Like Falling Off A Blog - This article from financial advisor and social media/blogging extraordinaire Josh Brown looks at the "how" of successfully establishing a personal online presence as an advisor. Brown notes that while a lot of advisors have been focusing around social media, the real core to an advisor's online gameplan should be a blog, and all social media activity should be built around it (i.e., the blog is the torso and networks/social media sites are the appendages attached to it). The blog is where you share information on topics and issues that are important to you, record your thoughts, and showcase your skillsets and knowledge; it's a trophy case for who you are, what you've accomplished, and how seriously you take your profession, as well as being a living library for all the information you find compelling enough to fill it with. Yes, you can also do a lot of this information sharing by posting directly to Facebook or LinkedIn, but by doing so you're creating content for Facebook or LinkedIn, not for yourself. In addition, with social media content has a very short lifespan as it gets pushed along for the next bit of information shared, while with a blog you can control the speed at which new content is released and old content rolls off (as well as highlighting certain important articles you want to keep top-of-mind). Ultimately, you can always take your blog articles and upload them in part or in full to other social media sites, but the fact remains that it should all originate from your home base blog (which, notably, is probably better from a compliance standpoint anyway). To get started, Brown suggests waiting on hiring IT people and consultants, and instead recommends just buying a domain (a mere $13 or less!), setting it up with a basic WordPress account, and just start writing and creating content for a few months before you worry about whether anyone is going to find it. Make a mess while no one is looking, find your voice, improve your writing chops, and let it evolve over time.
Anybody Can Have A Blog But Not Everybody Should - Contrasting the prior article on blogging (literally, it was written as a response), this article by Matthew Halloran makes the point that while many/most/all financial advisors can have a blog, not everyone should have one. Instead, Halloran suggests that a blog will only add value if the advisor has something unique to say, beyond the overgeneralized "tripe" that every other advisors is writing about. After all, if you keep sending more communication to a client but it's not actually special and focused on the things that matter to them, it's just spam. Accordingly, Halloran suggests that the best kind of blogging isn't something that is supposed to be generally applicable to the masses of society, but instead should be focused around a specific specialty or niche. If you have a clear focus on who you work with, what kinds of clients you're focused on, and what their special/unique needs and issues are, then you will have identified a target audience that you will write to and have a voice to share with them. Halloran also notes that it's much less about frequency than quality; if you force yourself to write when you have nothing to say, it's just "tripe" again, and you won't be writing something that's good, focused, and specialized that can separate you from the herd of advisers who put out the same stuff every week that clients don't read.
Advisers Whipped By New Website Projects - This article provides some guidance on the ways advisors are having difficulties with website (re-)design projects, and how to avoid them. Active financial advisor and blogger Jeff Rose of Good Financial Cents found it difficult to get a site designer who was both affordable and understood the message he was trying to get across, turning what he hoped would be a 1-month project into a 4-month experience that ultimately cost about $7,000 (and a lot of time in thinking through how to communicate the marketing messages of the site). Some advisors hire more people to help - such as a content editor for the material and a technical person to get it all working - but managing and coordinating the team of people can also be taxing. The challenges can be worse without using outside experts, though, as advisors not trained in marketing and branding may spend even more time and still fail to communicate effectively. Notwithstanding the challenges, though, given that websites are often the key first impression a prospect sees, all of those interviewed appear happy with the outcome (or at least don't regret having done it!), and many are already looking at further enhancements going forward.
Tim Maurer On Client Service, Managing Social Media, And Becoming A Media Source - This article is a "10 Questions" interview with financial planner, blogger, and speaker Tim Maurer, who authored the client-friendly "The Ultimate Financial Plan" with Jim Stovall. An advocate that "personal finance is more personal than finance", Maurer runs client meetings by always having a senior planner and an associate in the room, both to present a team approach to the client, and to ensure that nothing slips through the cracks by having two sets of eyes on everything (with one planner primarily focused on the client and the engagement, and the other on the tangible information-collecting), starting with a "Financial Physical" for $1,000 that focuses on a few initial red flag areas for clients. Beyond his planning practice, Maurer co-hosts a weekly radio show, "Money, Riches & Wealth" in the Baltimore area, is an adjunct faculty member at his alma matter (though when he attended "just" 15 years ago as a finance major, there was not a single personal finance course!), co-authored a book with best-selling author Jim Stovall (though Maurer suggests that writing a book should be primarily about the benefit of going through the writing process, not a vision of book sales results), blogs regularly at both Forbes.com and his own website, and is active on social media (though he strongly prefers Twitter and has actually quite Facebook altogether). Maurer also emphasizes that financial planning - including communication about it from the firm - needs to be more personal, which means advisors need to step back from theiR "white tablecloth professionalism" and interact with clients as a real human. In terms of how Maurer has achieved all the media success he's had, his advice is simple: give it away, and by giving away your knowledge, and expressing your passion in an articulate way, you can reach and build relationships with reporters and the public they serve.
Who’s the Easiest Person to Fool? - This article by Bob Seawright looks at the challenges we all face as advisors in making decisions, and succumbing to behavioral biases known as "motivated reasoning" and its counterpart confirmation bias. The latter is our tendency to notice and accept things that fit within our preconceived notions and beliefs (we are also more likely to recall supporting rather than opposing evidence for our beliefs), while the former is our complementary tendency to scrutinize ideas more critically when we disagree with them than when we agree. These cognitive biases - along with others - are a constant threat to our decision-making, and it doesn't help that we also essentially have a bias against believing we're biased in the first place (though we generally have no trouble recognizing when others are biased!). Unfortunately, many of these biases are so hard-wired into us, they're difficult to avoid, but Seawright does provide a few suggestions about how to navigate the challenges. The first is to have a clear process and method for decision making; in essence, one of the reasons why the scientific method works as well as it does (albeit still with challenges), is that it actively encourages researchers to look at negatives and alternatives (and consider the options to overcome them), although unfortunately history is rife with examples where even scientists rejected results and data due to their own biases. Another solution is a "devil's advocate" kind of approach, with someone taking the opposite side of a position, as Seawright notes that organizations are more likely to overcome bias than individuals due to the breadth of resources analyzing a decision and their ability for 'adversarial collaboration' where ideas can be constructively challenged by one another (especially important since we're so poor at self-criticism as individuals). So when you're considering an important (business) decision, do you have a devil's advocate or accountability partner?
Everything Is Amazing and Nobody Is Happy - This article from The Motley Fool makes the interesting point that while by almost any real measure, living standards are significantly better in the US than they were a decade or few ago, we're remarkably unhappy about our current situation. For instance, the media has focused on how average household incomes have declined since 2000, adjusted for inflation; yet the year 2000 was arguably bubble-inflated, and the reality is that families are earning more than they did in 1995, a time where the country was prosperous, consumer confidence was near a multi-decade high, and we were proclaiming our economy the healthiest it had been in 30 years! Yes, the growth in real inflation-adjusted income since 1995 has been fairly mediocre (it hasn't done much more than "just" keep pace), yet should we really be all that upset that we've "merely" kept pace and that "we aren't richer than we were when we were already rich and felt like kings" in a world where 2.8 billion people still earn less than $2/day? In addition, the author points out that while households may only earn slightly more take-home pay since 1995, total real compensation per hour - which includes things like health insurance and 401(k) matches - has done great for the past 40 years, and is up more than 20% since 1995! Beyond this, we're continuing to increase life expectancy, and while we continue to worry about the "looming 'retirement funding crisis'" the reality is that the entire concept of retirement is a wonderful new phenomenon and extension of what was formerly two stages of life: work and death. And the reality is that while we lament our retirement struggles, 100 years ago almost 60% of those over age 65 were still working and looking for work, while it was only 40% by the 1960s and is barely over 20% today, and poverty amongst the elderly has plunged as well (more than 25% in the 1960s, and less than 10% today). In addition, the workplace is safe (injuries on the job cut by over 50% in the past 30 years), work/life balance is better (average work week was 10 hours per day, 6 days per week, in the early 20th century!), and the list of improvements goes on and on. The bottom line: yes, there may still be inefficiencies, injustices, and inequalities in the world today, but we've always had some, and by comparison, we are still living in one of the most prosperous times in the history of the world.
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. You can see below his new Bits & Bytes weekly video update on the latest tech news and developments, or read "FPPad Bits And Bytes" on his blog!
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!
An observation and a question about the social security redo option if an individual files and suspends at age 66. First, this indicates that everyone who is planning to wait until after 66 to take benefits should file and suspend rather than just wait. If circumstances change, the redo option is only available to those who have done so. It ought to be recommended as a standard procedure. Second, what if the individual who files and suspends at age 66 with plans to start benefits at 70 starts taking their spousal benefit at age 66? I assume all of the spousal benefits would need to be repaid if the redo option on the individual benefits is used?
Rick,
If someone files and suspends, they suspend ALL their benefits, including their spousal benefits. So you couldn’t implement this strategy AND file a restricted application to collect spousal benefits; the former would cancel out the latter.
Your comment about making file-and-suspend as opposed to just waiting a “standard” is an interesting one though. Going to have to think more about that, but you have a good point here…
– Michael
Michael:
Thanks. I’m not an advisor, just an interested consumer. It seems to me that this new fact complicates the bet hedging involved in selecting a starting time for individual benefits. I’m not asking for personal advice, but I’ll explain my situation as a starting point for your thinking about how this complicates individual decisions. I’m in good health, turning 66 soon, still working full time, do not need the social security income. At 66, I now have four options: (1) start benefits, because there is no longer an earnings test, (2) wait until later, ideally 70, to file for maximum benefits, (3) file and suspend and then wait for later (it does appear that option 2 no longer makes any sense), or (4) file a restricted application for spousal benefits as soon as my wife files for her benefits (we are doing it this way because she is subject to the WEP and GPO and I am not). Until reading your column, option 4 was the easy answer. I am betting that health remains good, and I get the spousal benefit as a gift while waiting, which reduces the size of the bet on continuing good health. Now, the spousal benefit is not free. It has a cost, which is that I give up the option of the much larger individual benefit I could get if I used the file and suspend strategy and my health situation changes.
As if it were not already complicated enough…. and by the way, thanks for your hard work on this great blog.
Rick
Rick,
Filing a restricted application for your wife’s benefits still allows you to generate the delayed retirement credits on your own benefit (that’s actually the whole point of restricted application). Which means regardless of whether you do nothing, a restricted application, or a file-and-suspend, if you don’t start your personal benefits until you turn 70, you’ll get the same increased personal benefit. The only difference is what happens in the meantime. If you wait entirely, you get nothing. If you file and suspend, your WIFE can get 50% of YOUR benefit (though if she’s subject to GPO, that’s a losing proposition as it will be reduced mostly or entirely anyway). So it would appear that the restricted application produces the best result of the three?
– Michael
Michael:
Let’s reduce the issue I’m trying to address to the fewest possible variables: For arguments sake, say that when I turn 66, I have a PIA of $2000 and a potential spousal benefit of $500. Let’s also assume delayed retirement credits of 8% per year and my health takes a serious turn for the worse at age 68.
(1) At age 66, I file a restricted application and take spousal benefits. At age 68, I have collected $12,000 in spousal benefits, and then, because of illness and reduced life expectancy, file to start my benefits of $2333 ($2000 x 1.08 x 1.08).
(2) At age 66, I file and suspend, based on this new option that I learned of from your blog today. At age 68, I file for the suspended benefits ($2000 x 24 months = $48,000) and then continue. Obviously, if I do not ask for the suspended benefits, I get the delayed retirement credits and start getting $2333. I assume that one consequence of asking for the $48,000 in suspended benefits is that I lose the delayed retirement credits, so I start getting $2000.
In case (1) I received $12,000 from age 66-68, and in case (2) I get $48,000 that had not been paid between 66-68. That’s a big difference, if at age 68, I discover that I might have 1 or 2 years to live. Other permutations based on benefits amounts, ages, etc. will vary greatly, but the bet hedging one makes based on the uncertain assumption of continuing good health is more complicated because of this newly recognized option.
Rick,
Your comments are correct, with the caveat that if you pursue option #2 and you DON’T have an adverse health event in the time window, you simply left all the “free” spousal benefits from option #1 on the table. So presumably, you’d really only go the second route if you had some inkling that there was a material health risk.
But if you suspected a health risk, the real best option would be #3 – to simply start benefits now, where you not only get the $2,000/month for the next 24 months, but also the economic value of using/investing the money (if you file at age 68 to recapture the $2,000 x 24 months = $48,000, there’s no interest credited on your behalf).
So it feels like option #2 is still a bit of a no-man’s land. Yes, if you have a rapid change of health in a limited time window it will be superior, but if that doesn’t happen option #1 will be best, and if you anticipate that likely to happen then option #3 is best. Option #2 only works in scenarios where you don’t think the risk is high but choose to hedge against it anyway and then the risk really does manifest (which can happen, but still seems suboptimal to plan for it that way?).
Certainly an interesting scenario-planning exercise that this “new” option adds though!
– Michael