Weekend Reading for Financial Planners (Feb 2-3)

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.

Edmond Walters' Latest Effort Aims To "Humanize" Estate And Legacy Planning (Sam Steinberger, Wealth Management) - At this week's T3 Advisor Technology conference, the big news was the return of Edmond Walters, the visionary advisor-turned-FinTech-entrepreneur who launched eMoney Advisor in 2000 and then sold it to Fidelity 3 years ago, who has now returned to the advisor tech scene with a new venture: a new type of "financial planning" software specifically targeted to support financial, tax, and estate planning for ultra-high-net-worth clients who are certain they have enough money to retire and live but are struggling to understand how to plan for and visualize their financial legacy after they die. What's notable, though, is not merely that Walters is back with the new venture - built from a company he's calling Apprise Labs - but that the software will be distributed in 33%/33%/33% partnership with "competitors," MoneyGuidePro and Envestnet (which makes the Logix financial planning software). Yet in reality, the new software, which has tentatively been dubbed "MoneyLogixPro" (though the MoneyGuidePro version may ultimately use a different name), is not really a competitor to MGP or Logix at all, as the whole point of the partnership is that MoneyLogixPro is being designed to serve the tax and estate and legacy planning needs of ultra-high-net-worth clientele that is not served effectively today; similarly, while many trade publications have framed the new MoneyLogixPro as an emerging competitor to eMoney Advisor itself (and that Walters is taking a shot at his former company), the reality is that eMoney Advisor has spent most of the past 3 years building downmarket into solutions for lower net worth clients in the broker-dealer marketplace, and appears to have already largely abandoned development of more comprehensive planning tools for more advanced financial planning firms serving ultra-HNW clientele. Notably, though, while MoneyLogixPro is being built primarily for serving ultra-HNW clientele - a gap that Walters saw experienced for himself after selling eMoney Advisor for $250M and seeking out a financial planner to work with his family - the more modern interface, built for everything to navigate from a single anchor screen for maximal interactivity on touch-screen mega TVs (e.g., the new Surface Hub 2), may well be emulated by other financial planning software makers for years to come.

Behind The Screen: The Top 16 Women In WealthTech (Janet Leveaux, ThinkAdvisor) - While organizations like the CFP Board, and the financial services industry more broadly, has tried (albeit with very limited success) to improve the gender diversity of financial advisors, ThinkAdvisor has highlighted the slowly-but-steadily-growing gender diversity of both advisor technology providers and enterprise technology decision-makers themselves, in this powerful profile of 16 of the top women in WealthTech. For instance, a number of broker-dealers now have women in positions of key leadership, including Raymond James (EVP of Technology & Operations Bella Allaire), LPL (EVP Kirby Horan-Adams), Commonwealth (VP of Experience Lori Yaverbaum), Wells Fargo (Chief Information Officer Cynthia Buckler), Merrill Lynch (Investment & Banking Solutions' Technology Executive Pamela Ellis), Morgan Stanley (Chief Digital Officer Naureen Hassan), as well as RIA custodians (Fidelity Institutional's Head of Platform Technology Lisa Burns and TD Ameritrade's Director of Innovation Dani Fava and Head of Advisor Solutions Platform Strategy Christina Townsend), and technology firms Envestnet (Managing Director Estee Jimerson), Fiserv (President Cheryl Nash), Morningstar (Chief Product Officer Tricia Rothschild), and Hearsay Systems (CEO Clara Shih). Though notably, the common themes amongst the women interviewed are remarkably consistent - a focus on using technology to leverage financial advisors and make them more productive, and cybersecurity and data privacy are what keeps virtually every key technology decision-maker up at night.

A New Fixed Indexed Annuity Has RIAs In Mind (Bernice Napach, ThinkAdvisor) - For decades, the biggest challenge of gaining adoption of annuities in the RIA channel has simply been that annuities pay commissions that RIAs legally cannot accept (at least, not solely with an RIA license), and in fact many RIAs sell against annuities specifically because of the drag their commissions have on prospective performance. Accordingly, DPL Financial Partners (which is developing a distribution channel for no-commission insurance and annuity products for RIAs) has worked with Security Benefit Life to launch a new Fixed Indexed Annuity for RIAs that is built to be commission-free. Similar to other types of fixed indexed annuities, the new product - dubbed "ClearLine" - will operate similar to other indexed annuities, with the choice to have returns linked to either the S&P 500 Index, or a low-volatility S&P 500 alternative, paying 100% returns up to a 7.5% annual cap (or 7% for the volatility-managed option) but with no downside in years the market is down, and an income rider that offers payouts starting at age 55. Notably, despite being a "market-linked" product, DPL suggests that ClearLine should be viewed as a bond (i.e., fixed income) replacement, with similar principal protection but more upside opportunity, and offering better participation rates and caps than competing products (that are burdened by their commission payouts to selling agents). On the other hand, it appears that Security Benefit still hasn't figured out a solution for RIAs to sweep their own fees from the annuities, either, which may still make it challenging for many RIAs to incorporate such products into the rest of their managed-account strategies.

Fixed Indexed Annuities: Consider The Alternative (Roger Ibbotson, Zebra Capital) - The promise of the Fixed Indexed Annuity is that investors can have at least a portion of the upside of the markets, but without any of the downside, theoretically creating the potential to achieve at least "most" of the market's return but with only a fraction of the market risk. For instance, a typical solution might match 100% of the appreciation in the index up to a 7.5%/year cap, or alternatively pay out 50% of the upside appreciation of the S&P 500, but in either case if the market's return is negative the annuity simply credits 0% that year instead. As a result, Fixed Indexed Annuities can produce upside in most years, but without the volatility and retrenchment of bear markets in the bad years (since at worst, the return for the year will "just" be 0%). However, the caveat is that even markets that deliver long-term average returns of 8% to 10% per year rarely do so by delivering 8% to 10% in any particular year, and instead often have big down years but also big up years; accordingly, while having a floor of no-negative-returns is very helpful, having an upside cap on returns can still greatly diminish long-term returns. In fact, Ibbotson's research finds that even without the bear markets, the upside potential of an indexed annuity is more akin to a long-term bond return than the stocks it seeks to mimic. But from that perspective, the indexed annuity can actually be quite compelling, delivering a slightly higher return than long-term government bonds (about 0.5%/year, as modeled over the past century), with a similar standard deviation, and slightly less downside risk (as bonds can have negative returns in rising rate environments, but indexed annuities do not). Accordingly, Ibbotson finds that indexed annuities may be effective as a bond substitute and replacement in a diversified portfolio, especially when faced with an otherwise-low interest rate environment. With the caveat that the exact design of the indexed annuity still matters, and that not all contracts provide the same participation rate, cap, and spread parameters that Ibbotson assumed in his study.

A Closer Look At Ibbotson's Research On FIAs (Michael Edesess & Robert Huebscher, Advisor Perspectives) - While the theory of fixed indexed annuities is compelling, the benefit of any particular product is highly dependent on the exact participation rates (percentage of index appreciation that is credited to the contract), caps (maximum appreciation credited in any particular year), and spreads (basis points subtracted from the return to help cover costs), even as all of the products are uniform in providing the same downside guarantee (that in any year the market's return is negative, the annuity's return will simply be a flat 0%). Accordingly, a recent study by Ibbotson found that when these features were combined together, a hypothetical indexed annuity outperformed long-term government bonds by about 0.5%/year with similar volatility (but no downside risk). However, Edesess and Huebscher note that Ibbotson's study was based on a hypothetical indexed annuity, which may not be available in practice, and was modeled with dynamic participation rate assumptions that arguably are important to consider (as most indexed annuities don't guarantee those features), but weren't presented with enough detail to replicate or validate whether the dynamic participation rate studies were reflective of the real world either. Which is concerning, because the distribution of indexed annuities can include as much as 12% in marketing fees (between the company licensing the product, the field marketing organization supporting agents in the field, and the agents themselves), and such fees may substantially reduce the actual returns that investors receive. And so Edesess and Huebscher replicated a version of Ibbotson's study, but with a real-world annuity (an Athene annuity), that offered either a 35% participation rate with no fees or a 65% participation rate with a 1.5% spread. Ultimately, the researchers found that the indexed annuity was able to beat long-term bonds - but only when stock returns were favorable in the first place (since the indexed annuity returns are still linked to markets), which is when it would have been better to invest in stocks directly instead. In the meantime, the researchers also found that for those who want such partial-upside-with-downside-protection, just using options strategies directly to replicate the indexed annuity (but without the marketing commissions and related costs) can better outperform the indexed annuity and bonds as well.

The Top 5 Tasks Advisors Can Outsource To Virtual Assistants (Ben Brown, Morningstar) - As a financial advisor grows his/her number of clients, eventually the ongoing burdens of managing those client relationships (and getting new ones) makes time scarce, to the point that it's necessary to begin delegating tasks to free up time. For solo advisory firms, though, hiring an entirely new staff member to delegate to is itself a challenge, as it effectively "doubles" the staff headcount (from yourself to 2!), and can be a relatively substantial cost increase. The popular alternative is to hire a virtual assistant instead, often one who can work on a part-time basis to cover certain key tasks, allowing the advisor to begin to delegate, while only paying for the tasks that can actually be offloaded at the time. For advisors who aren't accustomed to delegating at all, though, the first question that often arises is simply: what should be delegated first (or at least, most easily). Brown suggests five key areas to start: front desk support and prospect management (e.g., inbound call screening, initial responses for prospective client inquiries, scheduling initial meetings, adding contacts to CRM, etc.); custodian account maintenance and back-office support (e.g., for account opening paperwork, facilitating account transfers, etc.); Process and workflow creation (if you're not good at creating them yourself, hire someone else to help!?); bookkeeping and business accounting (where you simply review financial reports of the business periodically, but don't have to enter all the income and expenses yourself anymore); and marketing and social media management (where you may have to create the content, but a virtual assistant can help schedule posts and manage engagement). Notably, though, advisors don't necessarily have to hire one virtual assistant for all of these tasks, as the modern era of flexible virtual talent means you can use one firm as an outsourced receptionist, another firm for paraplanning support, a third solution for outsourced financial advisor bookkeeping, yet another for support on consulting support for processes and workflows, etc... each paid for the exact tasks they provide to the advisory firm on a limited basis.

5 Ways To Attract Top Talent To Your RIA Firm (Lisa Salvi, Investment News) - According to Schwab's latest RIA Benchmarking study, a whopping 73% of independent advisory firms were planning to hire a new staff member in 2018... which is great for the job prospects for new financial planners, but troubling for advisory firms themselves when an ongoing talent shortage means there may not be enough next-generation advisor talent to hire in the first place! And as advisory firms grow and compound, the challenge only becomes even more significant... as the typical $350M firm five years ago has hired 2-5 people since then, fast-growing $500M firms today may need to hire 2-3 people per year to keep pace, and multi-billion-AUM firms are often recruiting 5-10 people at a time. Which raises the question: how can an advisory firm make itself more appealing as a career destination for next-generation talent in an increasingly competitive job market? Salvi suggests 5 key areas: 1) consider developing a strong "Employee Value Proposition" (EVP), a complement to your UVP (Unique Value Proposition) for clients, but focused specifically to attract talent to work at the firm, and address such questions as, "Why would working at your firm be professionally and emotionally meaningful?" and, "Why is the culture at your firm special?"; 2) work on your web presence, as the firm's website isn't just a vehicle for generating new business from clients, it's also the place that candidates look when deciding whether to apply for a new position (including an especially video that shows what it's like to work there); 3) focus on creating a good interview process, to ensure that candidates who are considering the firm have a good experience when interviewing so they want to accept a job offer if one is made; 4) be certain your compensation is at least competitive; and 5) don't overlook the importance of the onboarding experience, from a "buddy" to walk them through their first day to frequent check-ins in the first 90 days to make sure everything is on track, as the worst part of finally getting difficult-to-attract talent is then losing it due to a bad onboarding experience!

9 Simple Rules For Spending Less Time In Meetings (Minda Zetlin, Inc) - When running a business, it's absolutely imperative to ensure that everyone is on the same page and to get input from them all before making an important decision... and yet for most, the meetings that are necessary to ensure those outcomes eventually become unproductive or outright overwhelming. Accordingly, some tips to at least manage the volume of meetings include: 1) Appropriately value other people's time (e.g., consider the total hours of everyone in the meeting, what their compensation cost is, and then ask whether it's really worthwhile and necessary to call the meeting on that particular topic or issue); 2) Consider if there's a better way to communicate the issue (e.g., if it's really an information-sharing meeting, could a well-crafted memo save everyone time instead?); 3) Invite as few participants as possible (e.g., you don't need 3 people representing a single department or area when one person would do); 4) Empower employees to turn down invitations and bow out of meetings they realize they don't really need to be in to avoid "Meeting Acceptance Syndrome"; 5) Ensure that every meeting starts on time, and ends on time (or even early), which better respects everyone's time and can condense the time of the meeting itself; and 8) provide a written agenda for every meeting in advance, so everyone knows what the subject is and can expedite the meeting time itself.

The Five Biggest Lessons I've Learned As An Advisor (Sheryl Rowling, Morningstar) - While there's a lot of education for financial advisors on the technical topics of advice, from insurance and estate planning to tax law and retirement planning, there's remarkably little on practice management to warn advisors on what it takes (and real-world best practices) to actually run an advisory firm. Accordingly, Rowling shares her top 5 lessons learned as an advisory firm business owner, including: 1) don't take on every client, as especially in the early years we tend to want to take everyone we can, and in the process can look right past red flags, such as asking why are they leaving their current advisor (are they hyper-critical of performance or fees, or did they even try to sue a previous advisor), are they bad at sticking to scheduled prospect meetings (which could signal a problematic client relationship as well), or do you just have a bad gut feeling (don't ignore it!); 2) be ready to protect your income stream, including either not relying solely on AUM fees (as your revenue drops in a bear market but your expenses remain the same or even increase, which can crush your profits!), or at least having a plan to deal with a revenue downturn; 3) be mindful of your firm's culture when hiring, and don't just pay attention to resumes or references (or you may get "good" smart people who just don't fit in, and the friction amongst employees can kill productivity and increase turnover anyway); 4) focus on doing good work rather than marketing (as great work and results are often themselves your best marketing through referrals); and 5) be true to yourself and what you enjoy doing in your business, as financial success means nothing if you are not personally fulfilled, too.

This Is Your Brain Off Facebook (Benedict Carey, New York Times) - Notwithstanding the moral outrage over everything from privacy breaches to political divisiveness, most people are still struggling to quit Facebook, which continues to grow despite 4-in-10 users saying they have at least taken long breaks from the platform. In fact, one recent study found that the average user would have to be paid $1,000 to $2,000 to stop using Facebook! To better understand what would happen if people actually did unplug, though, researchers at Stanford and New York University paid college students an average of $100 to take a 1-month break and then measured the outcomes. The most noticeable effects were immediate - more in-person time with friends and family, and an extra hour of downtime every day (which, notably, was not usually just shifted to another social media platform, but instead was time spent elsewhere). On the other hand, the prolific way that information distributes on social media was evident as well, and the results did show that those who abstained from Facebook for a month scored lower on political knowledge... though so did their political polarization. More notable, though, was simply that deactivating Facebook had a small but positive effect on people's moods and life satisfaction, though the effect was fairly consistent across all users... which suggests that, while social media may drag us down slightly, heavy social media use doesn't necessarily make us more negative and moody (and instead that more negative and moody people may simply be choosing to use social media more). Though speaking to the addictive nature of Facebook, after the study was over, 90% went right back to Facebook a week after the experiment (and 95% were back within 2 months).

What I Learned By Taking A Month-Long Break From Email (Ivan Cash, Fast Company) - Email is nearly all-consuming for most financial advisors, especially as business owners that also have employees to manage, such that it's hard to imagine life without it... and indeed, hardly anyone ever does go without it, except for perhaps the unique founders of Life Is Good (who abstained from most of their email back in 2015, albeit with 250 other employees to rely upon). But Cash decided to test the experiment for a month (this past December), setting up an autoresponder to explain that he was taking an email pause, auto-forwarding emails to his assistant (so nothing urgent would fall through the cracks), and committing to not log into his email for the rest of the month. And after completing the experiment, his key takeaways were: 1) email is addictive, but it doesn't have to be... you really can let it go, and it's amazing how much free time it creates; 2) the overwhelming majority of emails aren't really important (ultimately finding only 37 of the 1,307 emails he received that month were really necessary for him to act on); 3) others may be surprisingly supportive of taking the break; 4) email actually makes us more passive, as we become accustomed to having information pushed to us and stop seeking it out (which then just burdens us with more email to read); 5) email has become an all-in-one utility far beyond its originally intended use (as it's not just for messages and communication, but now has bill history, doctor's appointments, RSVP information, and lots of other key details); and 6) a periodic sabbatical can be a powerful reminder of how little in our email is really that life-or-death requiring the urgency we often assign to it.

It's Not Too Late To Quit Social Media (Kate Odell, Wall Street Journal) - Most people can acknowledge a certain level of toxicity with social media, from Facebook and its privacy scandals, to Twitter and the occasional "Twitter mob" that emerges and can amplify (not-always-accurate) scandals, even as we remain addicted to the platforms. Yet in the process, not only does social media have its own problems, but it causes us to lose control of our own time and attention, especially since the rise of the smartphone transformed social media from something we occasionally checked on our (desktop) computers to something we're continuously plugged into via the devices we carry with ourselves everywhere. To address this, professor and author Cal Newport has published a new book entitled "Digital Minimalism: Choosing a Focused Life in a Noisy World", exploring how we can (re-)take control of our digital lives. For which the starting point is recognizing how social media platforms feed our addictive tendencies, in often subtle ways, from having "like" and tagging features (that make us crave feeling recognized), to the fact that viral controversial "fake" news does cause us to engage more deeply with the platforms (getting frustrated and yelling at each other, but allowing the social media companies to profit from our attention and use in the process). So what now? Newport suggests it's not just about "tips to turning digital off," but a whole new philosophy if "digital decluttering," which begins by taking a digital sabbatical (turn off all the social media for a month) to have some mental time to re-prioritize your time, and discover "analog social media" (otherwise known as simply interacting with other human beings in the real world instead!). And more generally, recognize that maintaining "weak ties" connections to hundreds of others (via social media) still isn't as fulfilling as maintaining fewer deep ties to the people who really matter in your life.

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.