Weekend Reading for Financial Planners (December 9-10)

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.

Weekend reading for December 9th – 10th:

Merrill Lynch To Remain In The Broker Protocol For Recruiting Agreement (Bruce Kelly) - The big news this week in the ongoing saga of the unraveling Broker Protocol was the announcement that Merrill Lynch intends to remain in the Protocol. At least, for now. Notably, the "announcement" was not actually a formal public statement from Merrill Wealth Management head Andy Sieg, but instead a "leak" from his recent senior management call, who stated that Merrill is not currently making plans to leave the Protocol. However, that does still leave the door open for Merrill to change its mind sometime in 2018, especially with no formal statement on the record to affirm their ongoing commitment to remain in the Protocol indefinitely. In fact, skeptics have suggested that Merrill may have leaked the statement simply to stem the tide of departing brokers until it can complete a departure from the Protocol, which may be delayed because Merrill is still actively recruiting from the other remaining wirehouse that is still a Protocol signatory: Wells Fargo. In turn, there was also buzz this week that it might even be Wells Fargo that is next to step away from the Protocol, especially since the availability of its quasi-independent FiNet channel means it could leave the Protocol and still have an "independent" option for its wirehouse brokers who want more control and flexibility (while keeping them captive to the Wells Fargo platform). In the meantime, though, more and more recruiters are starting to develop "post-Protocol world" breakaway strategies (first key point: read your employment agreement and its non-compete and non-solicit terms in detail!), even as a recent study affirmed that keeping the Protocol in place would be better for clients (and ultimately for firms in the aggregate), raising the question yet again about whether the SEC or FINRA will ultimately get involved to formally codify the Broker Protocol as a regulation anyway.

Power Tools: How New Tech Will Upend Wealth Management (Harry Terris, Financial Planning) - This is the recap of Financial Planning magazine's annual Advisor Tech survey, though unfortunately while the FP survey was one the industry's leading for advisors, in recent years the magazine is actually reporting less and less of its results, which makes this year's results of very limited value... especially with advisor tech guru Joel Bruckenstein no longer writing up and reporting on the results anymore to give deeper context (as this year's results recap was written by FP staff instead). Nonetheless, there are a few notable data points included, from the fact that a good client portal is now the #4 most important tool for financial advisors (beyond the core 3 of the advisor technology stack: CRM, financial planning, and portfolio management tools), to the revelation that despite all the buzz only 18% of advisory firms have even adopted a "robo" solution (albeit not entirely surprising given that most firms lack a marketing strategy to attract digital clients anyway). A frustratingly-limited slideshow at the beginning also provides popular charts of leading providers in various key categories, including that CRM is dominated by Redtail and Salesforce (with Wealthbox CRM a distant third, and all other providers at 3%-or-less market share), Morningstar Office still dominating the world of portfolio management along with Envestnet and Albridge (with Orion and Black Diamond coming up in the RIA channel), MoneyGuidePro still holding a commanding lead over eMoney Advisor in financial planning software (but with MoneyTree, NaviPlan, and other newcomers like Advizr and RightCapital only holding a 4%-or-less market share), and Riskalyze dominating the risk assessment category (with FinaMetrica a distant second, and Pocket Risk and others holding a 2%-or-less market share). Notably, the FP survey does not provide any indication of advisor satisfaction with their technology, either, unlike the recent Technology Tools for Today Advisor Tech Survey, nor does it provide much depth in the listings for each category. On the plus side, the 2018 edition of the T3 tech survey is expected to be released at the upcoming T3 Advisor Technology conference in February, and the survey itself is open now for advisors who wish to participate.

Citi Exec 'Accidentally' Invents Cash Arbitrage Robo-Advisor That's Rolling With RIAs (Oisin Breen, RIABiz) - Gary Zimmerman was a Citibank investment banker back during the financial crisis, who experienced first hand the fear that much of the cash he had stashed in bank accounts with his employer could go up in smoke because he exceeded the FDIC's $250,000 insurance limit. In the aftermath, he created a company called MaxMyInterest, a "robo" tool designed specifically to help consumers spread their cash across multiple banks to stay below the $250,000 FDIC limits of each, effectively facilitating protection for several million dollars of bank deposits. In addition, the software also monitors the available yields at each bank, and automatically shifts money from one savings account to another - while staying under FDIC limits - to maximize the yield. In exchange for this service, Max charges a simple fee of 8bps, which for some clients is simply a convenience fee to ensure they maximize FDIC protection (which Max tries to simplify with a single uniform application to open accounts at five Internet banks), and for others may be more-than-made-up simply by automatically shifting cash to banks that have higher yields in the first place (and Max has used its growing size to negotiate yields as high as 1.42% at some banks). And while consumers can use MaxMyInterest directly, the platform has experienced the bulk of its growth as a MaxForAdvisors solution that reportedly has about 400 independent RIAs using the tool with their clients (particularly affluent clients who have enough cash to care about FDIC limits, although some simply use it as a tool to maximize cash yields). From the advisor end, the appeal of the platform is not merely as a value-added service for clients, but also the fact that as clients link bank accounts to facilitate transfers, the advisor also gets better perspective on held-away cash and additional asset management opportunities as well.

Custodians Offer High Tech Goodies (Christopher Robbins, Financial Advisor) - In the world of broker-dealers, it's common for the technology line-up to be dictated by the home office, while independent RIAs are more known for their flexibility to choose their own technology tools. However, in practice, RIA custodians still heavily influence the advisor technology roadmap, and many RIAs rely mostly or fully on their custodians for their core technology stack, which in turn is colored by the type of target advisor they're aiming to serve. For instance, Charles Schwab is the largest RIA custodian and has the widest range of firms, and thus has targeted tools for everyone from small practices to megafirms - with the former tending to rely on Schwab Advisor Center (its proprietary solution that has a small curated list of deep integration partners), while the latter typically develop their own integrations with outside tools and leverage Schwab APIs. TD Ameritrade, on the other hand, is known for its very open-architecture RIA platform through its "Veo One" technology hub, which allows advisors to launch multiple integrated technology tools from one central dashboard, as well as TD Ameritrade's own tools (e.g., iRebal). Fidelity is building what is arguably the most all-in-one suite, through its Wealthscape platform, which integrates not only trading and portfolio reporting tools, but also financial planning software (thanks to Fidelity's purchase of eMoney Advisor), and its upcoming "robo" tools through Fidelity's Automated Managed Platform (AMP). Pershing's RIA division is focused specifically on larger and rapidly growing advisory firms that target high-net-worth and ultra-HNW clientele, and is aiming in 2018 to launch its newest NetX360 Wealth platform for RIAs, with a deep integration to Salesforce (the most popular CRM amongst larger advisory firms), in addition to deepening its bank-related capabilities through its BNY Mellon parent company. By contrast, Folio Institutional is an RIA custodian that was built as a technology firm first (rather than adding technology to an existing custody and clearing platform, like the others), and as a result is built more heavily for automation and scale in its core investment management platform.

Model Portfolios On The Rise (Michael Thrasher, Wealth Management) - With the ongoing commoditization of asset-allocated portfolios and a shift towards more holistic advice, the financial advisory industry is increasingly shifting towards outsourcing investment management to third-party strategies and model portfolio providers, from TAMP providers to home-office model portfolios to the recent emergence of so-called "Model Marketplaces". In fact, a recent survey from Cerulli found that, by some means or another, 74% of advisors use some kind of model portfolios, with RIAs most likely to build standardized internal model portfolios, wirehouses most likely to use in-house models, and independent broker-dealers slightly more likely to use outsourced models (e.g., TAMPs) instead. In turn, only about 26% of advisors are building their own custom portfolios for every client individually, and the number appears to be declining. In part this may be driven by sheer efficiency, although a recent Envestnet study also found that third-party managed portfolios also simply tend to perform better and more consistently than advisor-managed portfolios. Either way, though, large firms are increasingly partnering with and offering more model portfolios, while independent advisors are increasingly adopting technology (e.g., rebalancing software) to help build and scalably implement their own. Which is also driving major asset managers like Vanguard and Blackrock to begin to offer inexpensive or outright "free" model portfolios, which gives them the opportunity to have dollars in those model strategies invested into their own (low-cost) ETFs.

The Trials Of Converting To New Financial Planning Software (Matt Cosgriff, Investment News) - With the increasingly rapid iteration of advisor technology comes more and more new tools that advisors can implement in their practices for the benefit of their clients. With the caveat that adopting new technology comes with a conversion away from the old technology, and for established firms, it's the complexity of conversion and the substantial "soft costs" of switching that are becoming a barrier to new technology adoption. Which is not only about the financial cost of new training and data migration, but managing the emotional stresses of change in the advisory firm - in other words, getting buy-in from the entire staff about why it's so important to make a technology change (and do the work that goes along with it) is just as important as planning for the costs associated with the change. And the problem can be especially acute with financial planning software, which has limited to no ability to port client data out in a useful format that can then be imported into another tool, which means getting buy-in to change software means getting buy-in to do a lot of manual re-keying of data into new tools! At Cosgriff's firm, they tried to facilitate this by doing everything from having a "Launch Party" to try to build momentum for the software change, to building a dashboard that they could use to track progress (which was then used as a form of scoreboard to gamify the effort of seeing who was most efficient at switching all their clients over!). In fact, the firm had to use a process of weekly emails (with the updated scoreboard) and weekly meetings just to keep reiterating and communicating all the necessary information to support the transition, and solve the inevitable spate of problems that cropped up along the way (from different assumptions on Social Security inflation, to best practices in doing life insurance analyses or college funding projections in the new software versus the prior one).

Year-End Tax And Financial Planning Ideas (Tim Steffen, Advisor Perspectives) - End-of-year tax planning is a ritual exercise for financial advisors, but the looming potential for tax reform has brought even more focus on tax planning this December. And while it remains to be seen whether the legislation ultimately passes, and how the differences between the House and Senate versions are reconciled (which could subtract provisions from one or the other at the last minute), some high-level tax planning opportunities remain clear. First and foremost, all the tax reform impetus is towards fewer deductions and lower rates, which makes it especially appealing to accelerate deductions into this year (given that they might not even be available next year!), and defer income into 2018 (at a potentially lower rate). Other end-of-year strategies to consider include: if clients are in the bottom two tax brackets, don't harvest capital losses, take advantage of harvesting capital gains at 0% rates instead (while higher-income clients would continue to harvest losses, while navigating the wash sale rules), though don't forget about the potential impact of end-of-year mutual fund distributions; if clients borrow to invest, be certain to generate enough investment income for the investment interest to be offset against (or make the election to forgo favorable treatment on qualified dividends and long-term capital gains to have it apply against invest interest instead); evaluate the timing of 4th quarter estimated taxes, particularly at the state level (as clients may not get the deduction this year if they're subject to AMT, but may lose it next year anyway if State And Local Tax [SALT] deductions are eliminated); consider the range of charitable vehicles available for December giving, from donor-advised funds for highly appreciated securities to Qualified Charitable Distributions from IRAs for cash contributions (if over the age of 70 1/2); don't forget end-of-year gifting for those who want to take advantage of the $14,000 annual gift exclusion; and consider using the end of the year to review other tax-impacted financial planning issues as well (e.g., estate planning documents, or at least confirming the beneficiary designations on life insurance policies and retirement accounts are set properly).

Estate Tax Strategies To Help Avoid Nasty Surprises (Martin Shenkman, Financial Planning) - With the buzz that the estate tax could be repealed entirely (as proposed under the House GOP tax plan), or at least further limited with an increase in the estate tax exemption to $10.98M per person (which would be $21.96M for a married couple with portability), the question arises as to whether or how relevant estate planning will be for most clients in the future, and how necessary it is to stay apprised of the latest complex strategies. Yet the reality is that even if the estate tax exemption is increased (or repealed), there's always a risk it could be decreased in the future, there is still no proposal to repeal the gift tax (which limits many family planning strategies). Thus, if an affluent family wants to shift assets to the next generation, whether to minimize future exposure to the estate tax (in case the rules change again), or simply to shift income tax liabilities within the family, it's still necessary to navigate the rules for proper valuation of assets (especially closely held businesses), and may be appealing to leverage the value of strategies like Family Limited Partnerships and GRATs. In fact, some estate tax practitioners have become so focused on potential valuation issues - specifically, what happens if the IRS invalidates the valuation and retroactively tries to apply gift taxes to a higher-than-originally-valued transaction - by creating strategies that would revert part of the excess gift back to the donor (which doesn't actually work for tax purposes according to recent IRS and Tax Court guidance), or including a "price adjustment" clause that if the valuation comes in higher the recipient must pay back the excess value (with a reasonable rate of interest), or simply committing to transfer a fixed value but making the number of shares variable based on the final valuation (a technique called the Wandry method), or simply stipulating that any excess above a defined value will be sold to a third party. Of course, the final legislation may or may not actually alter any of the rules... but again, that just further emphasizes the relevance of estate tax planning for high-net-worth clientele.

8 Ways To Create Tax Alpha (Allan Roth, Financial Planning) - Given the concrete hard dollar cost of taxes, engaging in tax-saving strategies for clients are especially appealing, particularly when they can be done without distorting the underlying portfolio itself (a form of free "tax alpha" on after-tax returns). Roth suggests a series of investment-related tax alpha strategies, including: be cognizant of embedded gains in mutual funds, especially for actively managed funds with higher turnover, that could distribute substantial gains (attributable to prior years) even if the market is not up next year; leveraging "asset location", where high-return efficient investments (like index ETFs) go in brokerage accounts but high-yield bonds and high-turnover stock funds go into tax-deferred accounts, can increase after-tax wealth without changing the portfolio at all (just by locating the right assets in the right accounts); taking advantage of the modest-but-positive value of tax loss harvesting where available; managing tax-efficient distributions (and even partial Roth conversions) against multiple account types for retiring clients; engaging in multiple Roth conversions into parallel accounts, with the plan to keep the best-performing and recharacterize the rest (at least until Congress ends the ability to do Roth recharacterizations, as proposed in the House GOP legislation!); using an HSA as a retiree medical savings account for accumulators to get the upfront deduction now and tax-free distributions later in retirement; and using muni bond funds to get tax losses by buying premium bonds that will compel the fund to distribute more than its current SEC yield (with the rest rolling down as a small taxable loss to the fund's NAV).

How Digital Tools And Behavioral Economics Will Save Retirement (Shlomo Benartzi, Harvard Business Review) - In the 1990s, Shlomo Benartzi and Richard Thaler first developed the concept of a "Save More Tomorrow" program, which invites employees to commit to gradually saving their raises over time to lift their overall contributions (which over the past 20 years, may have positively impacted as many as 15 million Americans). The problem, however, is that it takes a long time to reach so many people in the first place, and Benartzi suggests that in the future, such "nudge" strategies may implement more rapidly and effectively through the use of technology instead. In part, this is simply because "digital nudges" can be researched and tested much faster. But more broadly, it's because technology is so scalable that efficient tools can rapidly impact a wide range of consumers. For instance, one recent study tested how sending an email to potential enrollees that provides simple actionable steps and a projection of how small contributions can grow over time was able to nearly double the enrollment rate in the retirement plan (for a mere cost of about $5,000 to develop and send the email to 800,000 military service members). In another test, Benartzi worked with colleagues and digital startup Acorns to try to help encourage users to enroll in an automatic deposit savings program, and just by shifting the way the enrollment questions were framed, were able to lift the enrollment rate. And a third study found that the mere use of the Personal Capital dashboard, which helps people track their spending behaviors by category, automatically, was able to help the average user decrease their monthly spending by a whopping 15.7%, simply by providing effective real-time feedback for them to moderate their own behaviors! More recently, Benartzi is now working with the Voya Behavioral Finance Institute for Innovation, where they are testing uses of Big Data to see whether someone makes decisions based on fast instincts or careful research, and then evaluate how nudges might be further customized to individuals. The fundamental point, though: the more we use digital tools to navigate our financial world, the more opportunities there are to nudge us towards better financial habits and outcomes.

The Professors Revolutionizing Financial Planning (Maddy Perkins, Financial Planning) - The CFP Board has been registering academic programs to provide the CFP educational curriculum for 30 years, but over the past decade degree-based financial planning programs are becoming increasingly numerous and influential. In fact, at this point a majority of the 310 board-registered programs are degree-based (as opposed to adult education certificate programs). Although notably, despite the rise of financial planning academics, a substantial number of financial planning degree programs are being led by former practitioners, who "went back to school" to develop programs that can better prepare students for the needs of the financial services industry today (bringing a desire to teach combined with the perspective of having actually worked with clients for years or decades). Notably, though, while financial planning programs are increasingly degree-based, they're housed in a wide range of college programs; while a few are based in business schools, some like Kansas State University are based in its College of Human Ecology (and consequently features heavy coursework in family studies and financial counseling and therapy). More broadly, the growth of financial planning degree programs sets the stage for what may eventually be a requirement to have a college degree in financial planning in order to obtain the CFP marks (akin to how CPAs must have an accounting degree). Although already, large firms are increasingly going directly to financial planning degree programs to recruit young talent to become future financial planners (though opportunities remain to engage more students into financial planning after graduation). Nonetheless, the point remains that as financial planning academia gains momentum with degree-based programs, especially with the volume of practitioner-based professors, so too is there a growing depth of connection between financial planning academic and the needs of practitioners and the industry at large.

The SEC's Regulatory Nonsense (Bob Veres, Inside Information) - There is a growing fear in the advisory community that as the SEC begins to talk about establishing a uniform fiduciary standard for all advisors (at broker-dealers and RIAs), that FINRA will manage to position itself as the regulatory body to oversee all financial advisors (subjecting a slew of small RIAs to FINRA's rules-based compliance purview, in a world where the organization is already highly criticized for creating compliance rules that favor large firms and squeeze out smaller competitors). Yet Veres notes that even as the RIA community clamors to retain having the SEC be its overseer, it's worth noting that the SEC's regulatory record isn't much better. First and foremost, there's the unfortunate fact that the SEC doesn't even enforce the existing rules under the Investment Advisers Act of 1940, which stipulates that anyone in the business of providing advice for compensation that is more than solely incidental to the sale of brokerage products should already be registered as an RIA and be subject to the fiduciary standard (yet large swaths of the brokerage industry hold out to the public as being primarily financial advisors without being required to register and subjected to that RIA fiduciary duty). In addition, the SEC's actual enforcement of an RIA's fiduciary duty is arguably overly lax, as historically fiduciaries have been required to eschew untenable conflicts of interest, while the SEC has adopted a policy that virtually any fiduciary conflict of interest can simply be disclosed away on Form ADV (including "hat-switching" from fiduciary to non-fiduciary duties). And of course, there's the SEC's "success rate" (or lack thereof) in its own core domain of overseeing the securities industry, where major firms both purveyed securitized junk in the years leading up to the financial crisis, and then actually taking investment bets against their own clients... and nobody ever went to jail as a result. Not to mention the SEC's time-intensive examiner process that is known for sucking up substantial time and resources from RIAs on wasteful and unnecessary questions... even as the SEC failed to actually detect real fraud by Bernie Madoff with that same exam process. Which means that while the SEC may still arguably be better than FINRA as the overseer for all financial advisors, it's important to recognize whether or to what extent the SEC, too, has become too beholden to the brokerage industry and its own bureaucracy than actually protecting the end investor.

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.