Weekend Reading For Financial Planners (December 30-31)

Nothing Beats Owning The S&P 500 This Year

(Vildana Hajric and Emily Graffeo | ThinkAdvisor)

Investors and financial advisors came into 2023 with a lot of uncertainty. At the end of 2022, there were major questions revolving around the Federal Reserve's continuing struggles to keep inflation under control, most notably how far interest rates would need to be hiked in order to quell rising prices and whether the rapid pace of rate hikes would inadvertently tip the U.S. economy into a recession. And so there were a wide range of expectations for how equity markets would perform this year, which were only stoked further early in the year when a banking crisis erupted that ultimately ended in the collapse of Silicon Valley Bank, First Republic, and Credit Suisse.

Fast forward to December of 2023, however, and the predictions of the U.S. economy's demise – and of another rocky year for U.S. equities – were proven to be premature. While inflation has continued its steady decline from its peak in early 2022, economic growth has still chugged along in defiance of expectations, with U.S. GDP gaining at a 2.3% rate in the first 3 quarters and on pace to continue its expansion through the rest of the year. And although borrowing money became more expensive for both businesses and individuals this year – resulting in both a high rate of failures among cash-burning startups as well as a housing market that seized up amid mortgage rates exceeding 8% - consumers kept up their spending all the while. Which at the end of the day, meant that corporate profits on the aggregate beat their modest expectations for the year, with stock prices rising in turn.

And so the S&P 500, after posting an 18.1% decline in 2022, is on pace to bounce back with an approximately 24% increase for 2023. Notably, the S&P outgained many of the asset classes that were considered safer bets at the beginning of the year in anticipation of high volatility and persistent inflation, including the energy and utilities sectors, dividend-paying stocks, and options-selling strategies.

On the one hand, the S&P 500's run this year highlights how hard it is to predict market behavior in the short term, since a year that seemed like it would be about weak growth and economic uncertainty ended up very nearly achieving the 'soft landing' that represented the best-case outcome for the Federal Reserve's rate hiking strategy. But on the other hand, for investors who were diversified into other asset classes beyond the S&P 500, such as U.S. bonds and emerging market equities (which respectively have returned 'only' around 5% and 8% year to date), the continuing dominance of U.S. large cap stocks – which has persisted going back to the end of the 2008-2009 global financial crisis - makes it more difficult to stay the course. But as history has shown, even long periods of outperformance can ultimately reverse themselves, meaning that although it may be tempting to put all of one's eggs into the S&P 500 in recent history, a more diversified approach can help avoid the unpredictable reversals that markets are known for in the long run.

Insurance Industry Seeks Carve Out From Massachusetts' 'Junk Fees' Proposal

(Mark Schoeff | InvestmentNews)

When buying a product or service, few experiences are more annoying than being made to jump through numerous hoops to simply find out exactly how much the thing will cost. It's a problem that's gotten particularly bad in the age of online shopping, where a listing page for a hotel room, rental car, or concert tickets will show one price, but upon reaching the checkout page a host of additional fees and charges will appear that inflate the actual price far beyond what the buyer expected. But despite consumers greatly preferring to know what they're paying before they go through the next steps of buying a product, many companies still employ the practice of tacking on additional charges at the last second, once the consumer has already committed some time to the process (and may be less likely to go back to the beginning to find another vendor) or they've already gotten an email address or phone number from the customer that they can use for future marketing campaigns.

Consumer advocates have taken at these so-called 'junk fees' over the years, which result in a final price that is higher than the one originally advertised, and have pushed for more transparent pricing so consumers aren't tricked and/or coerced into paying higher prices for products or services based on deceptive marketing practices. And recently, the state of Massachusetts released a new proposed regulation that would require companies doing business in the state (across any industry, not specific to financial services) to advertise only the "total price" of any product (including any additional fees or charges, but excluding taxes or shipping costs), and prohibiting them from collecting any personal or billing information from customers prior to disclosing the product's cost, in an effort to prevent companies from quoting one price initially and then substituting in a second higher price after the prospective buyer begins the sales process and provides their personal information.

Which makes sense in the aggregate, since overall fee transparency can be good for both consumers and businesses alike. However, at the same time there are certain products where having at least some of the customer's personal information is necessary in order to give them a full and transparent price. For example, since individual life insurance policies are specifically underwritten to have accurate pricing based on the insured's age, and health status (including weight, smoking habits, medical history, and so on), it would be difficult for an insurer to provide an accurate quote for a policy without first collecting that highly personal information. And so in response to Massachusetts' proposed regulation, life insurance industry groups – including the Life Insurance Association of Massachusetts, the American Council of Life Insurers, and the Insured Retirement Institute – wrote a comment letter requesting an exemption from the prohibition of collecting personal information before providing a price for the product.

At a high level, it makes sense for a rule intended to curb deceptive pricing practices to provide exceptions for cases when there is truly a need for a business to collect personal information from the customer in order to quote an accurate price. And notably, while the Department of Labor's fiduciary proposals have also taken a swing at "junk fees" – particularly what the regulator has implied are 'excessive' costs associated with certain annuity contracts – the purpose of the Massachusetts proposal is not to attack any particular products for being 'excessive' in their pricing, it's simply to limit companies from quoting one price initially and substituting in a second higher price after a consumer begins the purchasing process (which wouldn't impact how annuities are sold anyway, as for better or worse, the price and the premium is what it is and doesn't change after the application process).

More broadly, though, the proposed Massachusetts rule might be relevant for financial advisors themselves, and particularly those who use complexity-based fee schedules, which typically require collecting some client information in order to give them a quote. Which ultimately might come down to what information – net worth, income, marital status, etc. – is considered "personal" information that would be covered under Massachusetts' proposed rule, which might require a similar carveout (or else cause issues for advisors who use those models in quoting their fees, unless they build self-directed calculators for consumers to obtain their own quote based on anonymized informaiton they input about themselves?).

State Regulators Rule That Insurers Are Responsible For Their Vendors' AI Technology

(Allison Bell | ThinkAdvisor)

Insurance companies have potentially much to gain from the use of AI technology that can scan through reams of data and identify patterns that can help it predict certain events – e.g., estimating a person's mortality risk based on specific health characteristics or behaviors – in order to better price insurance policies and manage their own risk. However, life insurers are prohibited from discriminating between customers based on certain characteristics like race, while in its short history AI has been plagued with issues of racial bias based on flawed or biased data being fed into its models. And so while AI presents a significant opportunity to life insurers based on the big data insights it can deliver, there's also a significant risk of liability and even criminal prosecution if the AI leads the insurer (even unintentionally) to discriminate in its underwriting practices.

And so it's notable that this month the National Association of Insurance Commissioners – a group of state insurance regulators that sets model policies for individual states to adopt on their own – has issued a new Model Bulletin on the Use of Artificial Intelligence Systems By Insurers, which affirms that underwriting decisions made with the use of AI will be held to the same standards as the insurer itself. Or in other words, if an insurer uses AI technology to make underwriting decisions, and the technology results in racial discrimination or any other violation of insurance laws, the insurer will be held liable as if they had made the decision themselves without the use of AI.

The NAIC's model rule mirrors the rules for Registered Investment Advisers, who are held to a fiduciary standard for their advice regardless of whether that advice is developed or given through the use of technology. And as with RIAs, the burden under the model rule will be on insurers to understand the workings of their technology and its output well enough to ensure they can be in compliance with the rule, e.g., that it doesn't result in bias along racial lines. Which ultimately raises the question of whether insurers will be as likely to embrace AI technology, given how it's often impossible (or at the very least, impractical) to really understand its inner workings, which in the end might make complying with AI-related regulations as much (or more) of a burden than it would be to not use the technology in the first place?

Leadership Means Taking A Hard Look At Real Problems

(Angie Herbers | ThinkAdvisor)

Leaders of advisory firms face a nearly endless stream of decisions day in and day out, from questions about long-term strategy to hiring and retaining talent to all of the day-to-day problems that crop up in the course of running a business. And so there's a constant demand for practice management solutions from consultants, industry studies, and financial advisor blogs. The caveat, however, is that in every firm with more than one person, implementing any change requires getting other people on board, then training and potentially managing around whatever was changed. 

In other words, while anyone can seek out and decide on a practice management solution, actually seeing it through in practice requires leadership. And when promising practice management ideas fail to work out in practice, it often means that the firm's leaders haven't tackled some deeper issue that results in the change failing to take hold. The issue could be disagreements among the firm's partners, a lack of effective communication between firm leadership and employees, or high staff turnover that results in shifting responsibilities. In any case, unless the leader is able to clearly see the real problems at play, any solutions they might try to implement to improve things amount to simply throwing stuff at the wall to see what sticks.

The key point is that in an industry awash with solutions, it's more productive for firm leaders to focus first on identifying their problems. Leaders often feel pressure to know all of the answers and to always have a solution at hand, but to do so before identifying the real problem is to put the cart before the horse – instead, real leadership is often about asking questions and listening to understand what issue really needs to be solved, rather than jumping on a solution aimed at solving a problem that may or may not actually exist. 

Does Everyone Deserve A Bonus?

(Beverly Flaxington | Advisor Perspectives)

The end of the calendar year often comes with discussion around compensation and bonuses, as firm and individual employee performance for the year comes into clearer focus. And after what was a successful year for many advisory firms – with market growth raising advisors' assets under management, and many firms also increasing their fees on top of that – leading to higher take-home profits for firm owners, there may be questions about whether it's appropriate to share some of that windfall profit with non-owner employees. Which can ultimately lead to disagreements in firms with multiple partners, since some may take the view that employees whose work helped the firm reach higher levels of profitability deserve to share in that success; while others argue that, because they aren't actively involved in bringing new business to the firm, those employees' already-agreed-on salaries are sufficient to compensate them for their work.

Questions of compensation are often loaded topics, and the feelings of fairness and equity that they touch on can lead to heated discussion between business partners who don't see eye to eye on the issue. As Flaxington writes, in these cases, it's often best for each partner to write down their viewpoint and to have everyone review each response in advance of the in-person discussion, which can avoid having 1 or 2 people dominate the conversation and preventing other perspectives from being heard. It can also allow each person to carefully consider their language as they formulate their own arguments, since overly loaded terms and phrases can easily cause people to lose sight of the argument itself.

Ultimately, while different firms will go in different directions on whether or not it's fair to share profits after a successful year, having a system for employees to share in the firm's success can still be a key part of a compensation plan that helps to attract and retain talent. For which the best practice may be to have a defined set of metrics that determine whether (and what level of) a bonus is paid, which incentivizes employees to work towards the firm's success and allows them to participate in that success – while eliminating the need for an ad hoc profit sharing discussion between partners after every profitable year.

What Future Clients Really Want

(Philip Palaveev | Financial Advisor)

It's usually considered a best practice in the advisory industry to collect feedback from clients in order to help determine in which areas a firm is serving its clients well and where it might need improvement. And so many firms send, at minimum, a once-per-year client feedback survey requesting thoughts from clients on their experience; additionally, other tools like Absolute Engagement Engine seek to embed client feedback throughout the year.

But in either case, client feedback surveys have a key limitation for advisory firms: While they may do a good job in assessing the satisfaction of current clients, the fact that they only survey the clients that the firm is currently working with means that they don't gather the opinions or perspectives of people that the firm wants to be clients – but who aren't clients today. And so although firms that do client surveys may have a good idea of how to keep their own clients happy (which may result in some referrals, if the happiest clients are also engaged enough to become the firm's promoters), they don't often know what they need to do to attract more of the kinds of clients that they want.

Palaveev's consulting firm The Ensemble Practice spent some time polling individuals based on whether they work with an advisor, have not yet worked with an advisor, or who have terminated an advisor and don't plan to hire another. And what's notable about what they found is that in general, what matters most to potential clients are the advisor's experience, whether or not they hold the CFP certification, and their investment performance history; while other traits – such as the advisor marketing themselves as "independent", or the advisor being the same gender of the client, or publishing or personal hobbies – were rated as far less important. Additionally, when looking at different age groups' relationships with financial advisors, retirees were more likely to say they would never work with a financial advisor than younger consumers – which suggests that perhaps having had a bad personal experience with an advisor might be enough to persuade people to swear off ever hiring another one.

Ultimately, while seeking out experienced CFP certificants suggests that clients value experience and expertise first and foremost, the emphasis on investment returns indicates that the popular perception of financial advisors is still as someone who is focused around investments rather than more holistic financial planning. Which doesn't necessarily mean that advisors should go out and start advertising their investment returns, but rather suggests the opportunity that's in demonstrating the advisor's value beyond the investment portfolio, and how the advisor's experience and training can help them add value amid the ups and downs of the financial markets through tax, insurance, and estate planning (among many other areas).

Why It's So Hard To Stay Retired Once You Retire Early

(Financial Samurai)

During one's working years, retirement often feels like primarily a financial consideration: It seems like once there's enough money saved to live off of for the rest of one's life, one can simply choose whether to keep working (to build in more of a cushion, or simply because of enjoying one's job), or to ride off into the sunset.

But for people committed to retiring by a certain date, more considerations begin to roll in like a rising tide as that expected retirement data approaches. Some of which may be financial: What if a market downturn hits at the same time I want to retire, forcing me to draw down a reduced portfolio? Or what if higher-than-expected inflation or increased lifestyle expenses mean my savings won't go far as I thought they would? But as the retirement date approaches, more and more of those second thoughts are non-financial in nature. A job can be a daily routine that is often hard to break out of, particularly if that routine is a satisfying one. Staying productive can also help people get through periods of boredom, depression, and anxiety. And sometimes, work opportunities can just seem to come out of the woodwork as former colleagues ask for help in various ways.  

Ultimately, however, the paradox of early retirement may be that in order to build up the kind of savings needed to retire at a young age, a person needs to be highly entrepreneurial and motivated to make money – which isn't a trait that can simply be switched off once they do retire. And so even though money considerations might serve as a useful pretext to delay retirement (despite money being less and less the real issue), the real fact might be that many those who retire early never really end up retiring to begin with, since working and entrepreneurship is often a core part of their personality that won't turn off as long as there are opportunities out there to keep making money.

The Evolution Of Retirement

(Ben Carlson | A Wealth of Common Sense)

Retirement is a massive business today. People plan and save for retirement with the help of financial advisors, retirement plan providers, and insurance companies, in the hopes that they can stop working with many healthy years left to enjoy themselves without the burden of working for a living. And once they do retire, everyone from retirement communities to golf courses to healthcare systems compete for their dollars.

It's easy to forget, however, that for all the emphasis placed on achieving retirement (and all of the businesses focused on catering to those who want to get there), for most of human history, the concept of retirement was associated not with sun and leisure, but with irrelevance and considerable economic uncertainty. Until the advent of public and private pension plans, and ultimately Social Security, in the late 19th and early 20th centuries, there was no real concept of voluntarily quitting work and living off one's savings, at least for all but the very richest people. Instead, people simply worked until they were no longer physically able to, and then scraped together to make ends meet, often by living with extended family. But by the middle of the 20th century, as a retirement age in the mid-60s became increasingly ingrained in popular consciousness, retirement communities had sprung up in sunny parts of the country, while insurance companies increasingly began to offer individual annuities from the 1930s onward, and the rest, as they say, is history.

Ultimately, while it's common to look back on earlier eras in history with rose-colored glasses, and while planning for retirement may cause a lot of anxiety because of the high degree of uncertainty involved, the reality is that for most people, from a historical perspective there really hasn't ever been a better time to retire than in the last 60-70 years. Which may not lessen the 'work' of retirement planning today, but it does give some perspective on how lucky we are to have a retirement to look forward to!

Will You Have "Retirement Regret"?

(Khe Hy | RadReads)

Financial advisors often stress the time value of money – that is, $1 today is worth more than that same $1 will be in the future. And much of the art of retirement planning is predicated around this concept: It isn't enough to simply stash more and more money into a savings account at a bank, because those savings will ultimately lose value due to inflation. Saving need a baseline level of growth just to hold their spending power, and more growth on top of that to leverage the amount of money available to save today into an acceptable level of income replacement in the future.

However, money isn't the only thing that can lose value over time if neglected. There are also periods of life when one's time is more valuable than in others – particularly during one's 30s and 40s where work demands compete with spending time with young kids and aging parents. Too often, work takes precedence over those moments with family, in the name of setting one's self up for a stable retirement. And yet depressingly often, the actual hours that people spend in retirement – the ones that were earned at the cost of time spent with loved ones – are filled mostly with TV, sleep, and just sitting around.

Just as people sacrifice the use of their money today in order to save and grow it for future use, they also sacrifice their time today to work, in the hopes of creating more time for leisure and enjoyment in the future. But given how valuable that time can be today – before the kids have school and activities keeping them busy all the time, while parents are still alive and healthy, and while friendships are still close-knit – It's much harder to trade it for time in the future in a way that makes us happier in the long run.

So while early retirement isn't necessarily the answer (or achievable for most people), it can still be worth careful consideration of ways to free up more time today, whether that's a sabbatical, or a temporary pause on the hectic pace of career advancement that can involve long and demanding hours in favor of a slower-growth trajectory. Because even if doing so means working more years in order to achieve the same level of retirement security, it could still be worth it if those hours of leisure time are more enjoyably spent today than they would be later in retirement.

The Business Case For Love

(Marcus Buckingham | Harvard Business Review)

We're all used to seeing customer engagement surveys asking us to rate our experience on a 1 to 5-star scale. Businesses (including many financial advisors) use these ratings to quantify their customers' feelings about the business and look to find ways to move customer ratings up the scale over time. In reality, though, the standard linear 5-star rating system doesn't effectively capture which customers are most happy with their experience – that is, those who, when asked about how they felt about it, would say "I loved that". Because the "love" category is so far above 1- through 4-out-of-5, and even some 5-out-of-5 ratings, it's almost a category unto itself, but because the 5-star system doesn't treat it as such, there's no way of knowing which customers might actually really love their experience.

And knowing which customers felt the "love" is important, because according to at least some research, that feeling is a much more powerful and predictable driver of future behavior than any of the other satisfaction rankings – and it's not even close. Customers with the feeling of loving their experience are more likely to repeat their business and talk about it with others. The effect also extends to employees: Those who have something that they "love" about their job feel less stress and are more likely to stick around longer than even those who are merely "satisfied".

And as it often is in life, the businesses who get love from their customers and employees are those who give love in the way they go about their business. Rather than being transactional, systematized, and bottom-line oriented in all manners of business, companies that show "love" focus on each person as a human, giving each one personal attention, while also being unafraid to have a set of company values that defines how they do business. Which helps people from fast food to financial services to healthcare feel as though they're getting an experience that's designed for them.

Even though it's not possible for a business to literally express love, the people who lead it and define how it does business can do so with a commitment to be loving in what they do. And as more and more of the world becomes optimized for efficiency, reducing humans to a set of numbers on a chart or figures on a net worth statement, the companies who do still treat their customers and employees with love will stand out all the more.

Work That Matters Is Difficult

(Brett Davidson | FPAdvance)

When viewed from the distance of memory, life often seems to take the shape of a fairly linear path that in some ways seems almost predestined. Making friends, getting a job, getting married, buying a house, having kids, getting a better job, retiring, and so on – in retrospect many of those events seem like they were bound to occur.

However, many of these events feel much different in the midst of when they're happening. They involve emotional highs and lows, false starts and anxiety, and above all, a whole lot of work. Relationships almost always undergo rocky patches, especially in the early going. Friendships often fade away and reappear, and take constant work to maintain as the demands of work and family pile up. And in work and business, failure is almost a prerequisite for eventual success, as people often lack the skills or knowledge to be successful right away but, with persistence and the willingness to learn from early mistakes and keep trying, it becomes possible to overcome challenges that might have proven insurmountable earlier on.

And so it's worth remembering, when facing challenges with trying to grow in life and work, that nothing is predetermined in life, even though it may often feel like it in hindsight. Rather, almost everything in life that matters to us takes work to achieve. To that end, it can be helpful to spend some time thinking about what has already been accomplished and the struggles that went into that, in order to gain some perspective on the challenges being faced today. Because ultimately, no matter the accomplishment, it likely involved at least some of the same traits of patience, learning, and perseverance that will be necessary for more growth in the future.

If You Want To Achieve Your Dreams, You Have To Be A Little Crazy

(Darius Foroux)

Almost everyone has hopes and dreams that they want to achieve in their life. For some people, those dreams are relatively simple: They want a stable life, with a job they enjoy (or at least tolerate) and a roof over their heads. Others, however, have more far-reaching dreams. They want to be the best in their field at whatever they do, or they want to make enough money to retire at 35, or they want to found a business that one day goes public. These are the future entrepreneurs, professional athletes, and Fortune 500 CEOs, who are willing to aim for things that most people consider too high, and work fanatically to get themselves there.

The caveat, however, is that for motivated, high-aspiring people, there often isn't just one goal that they're aiming for. They may want to build a successful business and climb mountains and write a novel and learn six different languages. And though a few people might actually be able to do all of those things, for most people (even some of the most highly motivated) the result of chasing too many dreams can be burnout and failure to achieve even one of the things that were hoped to be accomplished.

As Foroux writes, then, achieving 'crazy' dreams is all about narrowing the scope of what you want to do, in order to be as ambitious as possible with the thing you do want to achieve. Which means narrowing down which 1 or 2 goals really matter the most to be worth all of the effort needed to achieve them. Or in other words, a little bit of practicality – by narrowing focus and eliminating distractions that could potentially steal resources from the main goal – can help you really the "crazy" that's needed to achieve the goals that really matter.

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We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in a future column!

In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "Wealth Management Today" blog.