Weekend Reading for Financial Planners (Feb 19-20)

Study Finds Americans Ditched High-Tax States During Pandemic

(Gabriella Cruz-Martinez | Yahoo News)

One of the dominant narratives to emerge from the COVID-19 era has been that the accelerated shift to remote work at many businesses has given workers – untethered by physical proximity to their workplace – new flexibility to live where they want. And while it is still debatable whether this will result in a wholesale relocation of significant parts of the population, it is at least true that many more people today have the ability to choose where to live based on non-work factors that matter to them.

According to a new analysis from the Tax Foundation, one of those factors in 2021 may have been a preference for lower state and local income taxes. The analysis, based on population data from the U.S. Census Bureau data, as well as moving data from U-Haul and United Van Lines, found that in 2021, states with lower personal income tax rates saw higher population growth, while higher-tax states largely declined in population. Furthermore, the data showed that the places with the highest tax rates overall – New York, California, Illinois, and Washington, D.C. – saw some of the biggest declines in percentage terms, while states with very low or zero income taxes like Texas, Florida, and Idaho, saw the biggest increases.

Notably, the data doesn’t necessarily show that tax rates were the sole reason for people to move. Most higher-tax states also tend to have a higher cost of living in general, so many people may have moved in order to reduce their overall cost-of-living spending (regardless of who was its ultimate recipient). And the data also mirrors a pattern that has persisted for decades, in which people have migrated from Northern and Eastern states to Southern and Western states in pursuit of more living space, better weather, and an overall sense of greater opportunity (with California’s 2021 population decrease being the only notable reversal of this trend).

It remains to be seen how, once the pandemic is fully behind us and businesses solidify their remote work policies, workers with a newfound flexibility to relocate will choose where to go (or whether they will decide to move en masse at all). But it seems as though the migration that does happen will continue to trend towards the South and West, and – either as a feature or by coincidence – towards cities and states with lower tax rates.

CFP Board Issues Ethical Guides For Financial Planners

(InvestmentNews)

On June 30, 2020, the CFP Board began enforcing its new Code of Ethics and Standards of Conduct which took effect in October 2019. The biggest impact of the new Code and Standards was that, for the first time, it required all CFP certificants to act as fiduciaries at all times (whereas previously the fiduciary duty was only triggered when certificants were actually doing financial planning, not just by being a CFP certificant, which opened the door to potential conflicts of interest that the new Code and Standards were developed to address).

But at the time they were released, the CFP Board’s requirements were notably light on guidance in some areas, meaning that despite being subject to new, stricter rules of conduct and duty of care (and the potential for censure, suspension, and/or revocation of one’s CFP marks for violating the Code and Standards), CFP certificants may have been unclear about what to do in certain situations to comply with the new standards.

Since then, the CFP Board has released additional guidance and case studies to help CFP certificants understand the obligations of the new Code and Standards, and on February 9, they issued three new guides to address areas that have lacked clarity up until now.

The first is a Guide to Satisfying the Duty of Care when providing “Financial Advice” to a client, setting forth a seven-step “Duty of Care Process” for certificants providing Financial Advice (essentially, any recommendation for a financial course of action that does not comprise the entire integrative Financial Planning Process), which closely parallels the seven-step Financial Planning process.

Second is a Guide to the Financial Planning Process, which is in essence a case study for solo financial planning practitioners on how to follow the seven-step Financial Planning Process and comply with the Code and Standards in a hypothetical client scenario.

Third is a Guide to Managing Conflicts, which lays out a three-step process of disclosure, obtaining client consent, and managing Material Conflicts of Interest to prevent conflicts from compromising the certificant’s fiduciary duty to their clients.

The key takeaway from the new guides is that complying with the new Code and Standards is not simply an abstract matter of “acting in the client’s best interests”, but a process of specific actions meant to ensure that the standards are really being met. And while the new actions and steps to perform may seem burdensome to some, in practice they can actually make it easier to comply with the CFP Board’s standards by outlining a systematic financial planning process that aligns with the Code and Standards.

The new guides are hosted on the Compliance Resources section of the CFP Board’s website, which includes guidance in various forms (including videos, FAQs, checklists, sample documents like engagement letters, and additional case studies). For any CFP certificants who were unclear on their duties of care upon the Code and Standards’ initial rollout, or for whom the new standards were buried among other priorities as their initial enforcement coincided with the height of the early pandemic, the page has an increasingly complete wealth of information to lay out the processes required of certificants and how to apply them in real-life scenarios.

Financial Education Classes In High School Ineffective In Boosting Retirement Savings: Study

(InvestmentNews)

Financial literacy education in K-12 schools has long been a topic of debate. On one hand, personal finance is undoubtedly a real-world skill that most people need to learn at some point, and in theory, it is best to learn the basic principles – such as the mechanics of budgeting, debt, compounding, and investment risk – before reaching adulthood, when the cost of making mistakes in any of these areas can be substantial. On the other hand, the evidence that early financial literacy training actually results in better outcomes is mixed, leading some to argue that financial literacy, though important, could be more effectively learned outside of the K-12 classroom.

In essence, the concern is that financial literacy that is taught too early quickly loses its efficacy and is effectively forgotten by the time the student needs to apply it in the real world. Another more skeptical interpretation of the data is that much of what passes for financial literacy education is provided by financial institutions who are more interested in reaching potential new customers than actually providing a quality education (which does at least imply that financial literacy could be useful if taught by well-trained instructors without conflicted motivations, notwithstanding how the curriculum is currently failing on that front).

A new study commissioned by TIAA adds to the argument that financial literacy education has, at best, a limited effect on financial outcomes. Comparing data from FINRA’s National Financial Capability Study in the 24 states that require some degree of financial coursework in high school with the states that have no such requirements, the study concludes that personal financial education in high school has no significant impact on an individual’s retirement savings or likeliness to own a home.

However, the study does note prior research that suggests that high school financial education does improve students’ credit and debt behaviors. And given that teenagers are more likely to have experience with spending (including with credit cards) than with saving money, this finding lends credence to the idea that financial literacy is most effectively taught “just in time” – that is, just before it’s actually needed – suggesting that perhaps budget- and debt-focused financial education could be effectively taught in schools, while savings- and retirement-focused training should perhaps fall to another entity nearer to when the individual has the ability to save (such as employers and career or vocational training programs).

Do Planners Rate Their Communication Skills Higher Than Their Clients Do?

(Jennifer Lea Reed | Financial Advisor)

Financial advisors often pride themselves on being skilled communicators. Building trusting long-term relationships with clients is one of the foundational concepts of providing fiduciary advice, where understanding a client’s goals and needs is needed in order to deliver recommendations in their best interest, and many experienced advisors consider themselves experts at the types of communication (whether in the context of client meetings, digital communication, or simply asking good questions) that foster close client relationships.

Yet, according to an extensive new study from FPA, financial advisors may have different perceptions of their communication abilities than their clients. The study, which revisits prior FPA research from 2006, surveyed advisors and their clients on the advisor’s use of various communication tasks, involving both quantitative topics (like financial and investment recommendations, investment performance, and financial education) and qualitative issues (like discussing the client’s values, personal goals and needs, and considering all areas of the client’s life when creating a financial plan). And in both areas, advisors rated themselves far higher than their clients rated them, suggesting a disconnect between the views of advisors and clients in how they perceive the state of the relationship (and perhaps indicating that many clients may not be as attached to their advisors as the advisors like to think?).

The most surprising part of the study’s conclusion is that it marks a stark difference from FPA’s original 2006 study, in which clients and advisors were largely in agreement about the advisor’s communication skills (and advisors even underrated themselves in some categories). As for what has happened in the intervening 15 years, the study says that more research is needed to determine whether advisors have grown overconfident in their own abilities, or if clients’ expectations have increased to the degree that advisors are no longer doing enough in the ways that matter to the client (even though, in a previous era, those efforts would have been perfectly satisfactory).

For now, the study recommends advisors take a systematic approach to both quantitative and qualitative data gathering to ensure that the advisor discusses the holistic values, priorities, and goals of every client, improving the likelihood that the advisor and client will see eye-to-eye on what really matters to the client (and the ability to build a trusting, long-lasting relationship based on the foundation of effective communication)!

Do You Want To ‘Be Connected’ Or ‘Be Right’ With Clients?

(Julia Kramer | Rethinking65)

A common frustration of financial advisors occurs when clients fail to act on the advisor’s recommendations. Advisors are often greatly motivated by their ability to help people, and have accumulated a great deal of expertise that they can use to help clients make better choices, so they naturally may perceive that they have failed in their goal in some way if they make a recommendation that the client resists or outright refuses to follow.

But despite the advisor’s good intentions, it may be the case that the problem the client wants to solve and the problem that the advisor addresses are not one and the same. Because, as Kramer states, regardless of how the advisor thinks the client ought to behave, what really matters is that the client finds their own authentic way to behave with money. And the advisor’s actions can either help or hinder the client’s progress on that journey.

The Six Stages of Change identified by psychologist James Proschaka are key to understanding what may keep clients from acting on financial advice. According to Proschaka’s model, three stages – Pre-Contemplation, Contemplation, and Preparation – precede an individual being truly ready to act to make a change in their life. A client may therefore not be ready to change their behavior because they have not yet progressed to the “action” stage – and in these cases, pushing for action too soon could actually delay the process.

So for advisors, it may be better to view resistance to a recommendation not as a personal slight or a barrier to break through, but as a signal of where the client is on their path to change; and instead of pushing back or arguing, working to understand the client’s resistance to change without judgment in order to stay “connected” in the short term (and increasing the chances of guiding the client towards the “right” behavior in the long run).

Evolving Client-Adviser Conversations And The Future Of Advice

(Alexa Balmuth, Lauren Cerino, Julie Miller, Adam Felts, and Joseph Coughlin | Journal of Financial Planning)

Traditionally, retirement planning conversations between advisors and clients have revolved around concrete financial information and assumptions like investment returns, spending levels, and inflation, without straying very deeply into the client’s larger life goals (aside from a few key topics like housing, healthcare, and long-term care that have major financial implications for many retirees).

But in recent years, advisors have increasingly included a broader range of topics in their planning, such as those who practice “longevity planning” and now tackle topics like aging in place, encore careers, and transportation. However, while incorporating these elements can help the advisor create a more fully comprehensive plan in connection with the client’s unique complexities and life goals, expanding the conversation beyond strictly financial topics can risk turning “too” personal for clients – particularly if they don’t expect the advisor’s role to diverge from the management of finances.

In this study, researchers from the MIT AgeLab asked clients and advisors about the roles of the “Ideal Advisor”, and their willingness to discuss topics outside of the client’s immediate financial situation, to understand where the boundaries for advisor-client conversations may lie.

Though the most agreed-on “Ideal Advisor” roles for both groups were financial in nature (helping clients identify/manage risks, helping clients see and plan for their futures, and providing financial education), the least agreed-on role for both groups was “Just managing money”, suggesting that advisors and clients both see a place for the advisor to have greater involvement with the client’s life than simply managing an investment portfolio. Likewise, both groups expressed at least a willingness to have conversations outside of financial topics (though, as the study notes, that willingness should not be mistaken for a desire to have these conversations by some clients – just that they are open to having them).

Ultimately, it appears that while some clients may be prepared to discuss more broad and personal topics as part of the financial planning process, the majority still see the advisor’s role as focusing primarily on financial topics. Yet even this represents a shift from the predominant view of client-advisor relationships of the past, which were most often purely transactional in nature, with little or no discussion about even broader financial topics like estate or tax planning. And so it is certainly foreseeable that the field of advice could continue to evolve beyond the boundaries of client’s financial lives in the years ahead – though to do so today requires putting in extra work to set up the client’s trust and expectations to make them feel comfortable enough to move the conversation towards the personal side.

Does Spending Decline In Retirement?

(Monevator)

For financial advisors working with retirees and near-retirees, one of the major questions to consider is how much income the client will need to meet their spending needs in retirement. Of course, this will depend on each individual’s spending habits, but because it is often difficult for individuals to predict their future preferences, it can be worthwhile to step back and consider how spending changes during retirement across the broader population.

And so, a 2015 longitudinal research study among retirees in the United Kingdom demonstrates that, on the whole, real spending declines (i.e., does not even keep pace with inflation) over the course of retirement. The result was found for both high- and low-income retirees, suggesting that while wealth and income levels can impact the base amount of spending, the annual decline in spending occurs for retirees across the wealth spectrum. Further, despite the growing concern of longevity risk as life expectancy increases, older retirees were actually less likely to report that they had too little money to spend on their needs than those in younger age brackets (perhaps as a result of their real spending declining over the course of their retirement years!).

Studies in the United States have found similar results, including retirement researcher David Blanchett’s “Retirement Spending Smile”, which showed that while real spending declines throughout retirement, the declines are less dramatic late in life (perhaps because of heath and long-term care related costs for the oldest retirees). The concept that real spending declines throughout retirement has major implications for advisors, as portfolio Safe Withdrawal Rate analyses (such as the “4% rule”) typically assume that retirees will want to maintain stable, inflation-adjusted spending in retirement (suggesting that the safe withdrawal rate for a given client could actually be larger than estimated, though research has shown that decreasing retirement spending in the later years still only slightly increases it in the early years when sequence of return risk is still most present).

The key point is that while some clients might think their spending in retirement will increase or at least remain steady with inflation adjustments, the average client’s real spending is likely to decline during their retirement years (and advisors can consider adjusting their analysis accordingly!).

The Secret Tax Planning Superpower Of The Mini-Retirement

(Josh Overmyer | JoshOvermyer.com)

The concept of retirement often conjures images of days spent on the golf course or relaxing on the beach in one’s later years after several decades of work. But the reality is that individuals have other options for planning their working and retirement years, particularly if they want to have periods away from work during their traditional working years (when they are likely to be in better physical health to travel or take advantage of other opportunities as well!).

One option is to take several temporary retirements, or sabbaticals, during the course of one’s career. And not only do sabbaticals offer the opportunity to travel, take classes, or engage in other activities, but they can also create tax opportunities as well, given that income is likely to be much lower than normal in these years.

For example, during a mini-retirement, capital gains harvesting allows individuals to take advantage of the 0% long-term capital gains rate for those in the 10% and 12% tax brackets (and can be optimized by using direct indexing to create additional opportunities for realizing gains!). In addition, some individuals might want to take advantage of the low-income years to complete Roth conversions (as the benefit of Roth conversions is greater when the individual’s tax rate is lower).

And so, advisors working with clients interested in taking a sabbatical or multi-year mini-retirement can help analyze whether capital gains harvesting or partial Roth conversions are more valuable, and also support cash flow planning for the period to ensure that these actions are coordinated to prevent them from entering a capital gains bump zone. In fact, the irony is that mini-retirements can not only create opportunities to take a break from work, but also significant tax planning opportunities that can even help offset the cost of that time off from work in the first place!

10 Lessons I've Learned From 10 Years Pursuing (Early) Financial Independence

(Aussie Firebug)

While many people plan to retire sometime in their 60s or even beyond, others want to leave the working world as soon as possible. The Financial Independence Retire Early (FIRE) movement embodies this concept, with its followers attempting to create enough passive income to support their lifestyle well before traditional retirement age, allowing them to cut back on their work hours or even leave the workforce completely.

And because FIRE is just an accelerated version of the traditional retirement savings cycle (which is really ultimately about achieving financial independence), many of the strategies and behaviors of those pursuing FIRE use can apply to others as well. On the financial side, these include starting savings early to benefit from compound interest, avoiding excessive risk when choosing investments, and keeping expenses restrained (which creates a dual benefit of being able to save more while working and needing less income in retirement).

In addition, different mindsets and behaviors – such as not comparing your own situation to others (crucial for those living more frugally to FIRE early) and recognizing when you have ‘enough’ (to set more realistic FIRE goals) – can lead not only to better financial outcomes, but a more fulfilled life (because your targets will be internally rather than externally driven).

Advisors can play an important role for clients who are planning to retire early (or otherwise), both on the technical side (by ensuring they have sufficient assets to last through an extended retirement period) and in their behavior (by helping them reshape their goals to transition from accumulating assets to spending them down). The key point is that while early retirement has its own planning challenges, the behaviors that can make it happen can be valuable to all clients who expect to retire one day!

How Experiencing Sadness, Anxiety, And Stress Can Make You Happier And Smarter

(Jeff Haden | INC.)

Just about everyone wants to be happy in life, and it would seem logical that the best way to achieve happiness is to maximize the number of positive experiences and minimize the negative ones. However, research has shown that experiencing negative emotions (e.g., sadness, anxiety, and stress) can actually improve happiness.

In fact, one study found that experiencing a range of emotions on a regular basis leads to better overall mental and physical health. This could be because having the occasional bad day can help make you appreciate positive experiences even more (absence makes the heart grow fonder?). Further, separate research showed that engaging in a variety of experiences (that could expose you to the full range of emotions) led to increased levels of happiness and life satisfaction (perhaps because learning how to deal with negative emotions can make it less likely that future adverse events will have a strong negative emotional impact). And it turns out that experiencing a range of emotions can also make you smarter. A 2018 study found that having the ability to put emotions in perspective improves the ability to keep a relatively level head and make smarter decisions (and advisors who are able to keep a level head will be better prepared to help clients avoid emotionally driven decisions!).

So while having positive experiences is an important part of living a joyful life, avoiding experiences that could lead to negative emotions might actually be counterproductive in the pursuit of happiness! After all, as the saying (and song!) goes, sometimes “you don’t know what you’ve got ‘til it’s gone”.

We Fear The Known, Not Uncertainty

(Darius Foroux)

Change in life is inevitable. From getting a new job to starting a friendship to moving to a new city, many changes can be exciting. On the flip side, change means an uncertain future, which can also create fear in many of us.

However, Foroux notes that ultimately, change also means the loss of something (i.e., whatever is ending), and that much of our fear of change may not actually be a result of the uncertainty, but pre-emptively mourning and fearing the end of the current and known.

The significance of this distinction is that it means instead of trying to do everything possible to reduce uncertainty surrounding change, because change and loss are inevitable, it is better to learn to accept that what you currently have will someday end… which can free you from this fear.

This impermanence occurs in the broader world as well. For example, what seems like cutting-edge technology today is likely to be obsolete within a few years. Just think of the different ways people have listened to music over the past several decades, from vinyl to cassettes to CDs and now digitally. And while it’s easier to accept changes in how you listen to music, it is even more important to accept that what you have in your own life will end at some point as well. But this doesn’t have to be a negative; in fact, by embracing endings, you no longer have to live in constant fear that what you have will no longer be there one day. And can instead be better prepared to enjoy whatever comes next.

And financial advisors can play a role in helping clients overcome the fear of loss as well; by understanding the roadblocks to change, they can better help them implement the changes they need to make to realize their financial goals. The key point is that change isn’t just about the uncertainty of an unknown future, but the end to a known past, and that while there’s often not much we can do to reduce future uncertainty, simply learning to get more comfortable with the end of the known can ultimately lead to experiencing less fear and making better decisions!

'No Regrets' Is No Way To Live

(Daniel Pink | The Wall Street Journal)

Regret for something you did (or did not do) in the past can be a terrible feeling. And so some people deal with regret by trying to pretend like it doesn’t exist and trying to erase those painful memories from the past.

However, research suggests that this can be counterproductive, and that regret is healthy and can actually make us better people if dealt with correctly. In fact, by acknowledging past regrets, we can avoid future ones. But doing so requires a systematic process to process and evaluate what caused the regret in the first place.

The first step is to reframe the regret. By acknowledging that nobody is perfect, you can better acknowledge that the action you took (or didn’t take) was not necessarily an inherent character flaw, but rather part of the bumpy road of life. Next, it is important to disclose your experience, whether to another person or just putting it down in writing for yourself. Describing the regret in words can convert the abstract, negative feelings in your head into concrete words. Finally, you can extract a lesson by ‘self-distancing’ and attempting to view the situation as an outsider. Just as it’s often easier to give advice to a friend rather than make a decision for yourself, by pretending to act as a neutral expert it could be easier to discover a lesson or future actions you will take in response to what caused the regret.

The key point is that while regret can be an uncomfortable feeling, addressing it, rather than ignoring it, can lead to growth… and perhaps fewer regrets in the future!

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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, as well as Gavin Spitzner's "Wealth Management Weekly" blog.