Weekend Reading for Financial Planners (Feb 8-9)

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 February 8th/9th:

CFP Board launches latest TV commercial to build CFP brand - This week, the CFP Board unveiled the latest ad it intends to use for its ongoing $10M/year public awareness campaign. Described as "fun, edgy, and creative", the ad shows a series of 'average' investors who go to see a professional-looking financial 'advisor' who turns out to be a local club DJ who had simply cut his dreadlocks short and dressed up in a suit; in turn, the ad then suggests that "If they're not a CFP pro, you just don't know. Work with the highest standard." The ad will run on CNN, Fox News, MSNBC, ESPN, BBC America, AMC, and other networks through tax season, along with advertising on NPR and various websites, and is targeted to those with $100,000 to $1M of investible assets between the ages of 35 and 64. The ad is the next extension of a public awareness campaign that began almost 3 years ago, which the CFP Board renewed last year after finding that the public awareness campaign was working so well that the original 4-year awareness increase goal had been in just the first 2 years. For those who are interested, you can see a sample of the CFP Board's commercial on YouTube.

New CFP Board Chairman Stands Firm On Fee-Only Definition, Sets Goals For Group's Growth - This week, incoming CFP Board chair Ray Ferrara officially took on his new role as chair, and in his first interview discussed some of the current issues and focus of the CFP Board. The organization aims to grow the ranks of CFP certificants to 81,000 by the end of 2017, up from approximately 69,000 today, with a strong focus on getting more college students in particular to sit for the exam (both to grow the total number of CFP certificants, and to offset the flow of retiring CFPs). Regarding the CFP Board's recent controversy regarding fee-only compensation definitions and disclosure, Ferrara stated that the CFP Board believes its current rules are "clear" - notwithstanding its recent imbroglio regarding the definitions - and that the proper definitions are in place. This is notable, as NAPFA continues to use its own definition of fee-only, with an estimate that approximately 5% of its members are running afoul of the CFP Board's rules, even as the organization requires members to hold the CFP marks. While Ferrara suggests that it's acceptable for a certification body (CFP Board) and a membership organization (NAPFA) to use different definitions, NAPFA has still not responded to the implication that its position amounts to an endorsement for certain NAPFA members to openly violate the CFP Board's fee-only definitions.

Will SEC Spend 5 More Years Mulling Fiduciary Rule? - While the Department of Labor continues with its target of a reproposed fiduciary rule in August, the SEC said on Monday in its agency strategic plan that it will "continue to analyze" over the next five years whether to write a rule to put brokers under a fiduciary mandate, suggesting that if the SEC gets to actual rulemaking at all it will not be anytime soon and the DOL's proposal will come first. On the other hand, some have suggested that the DOL will ultimately be forced to postpone its rule as well, as the August release date may be "too soon" to the midterm elections to gain momentum given how controversial the rule is perceived to be, and even if it is issued it must then be evaluated by the Office of Management and Budget (OMB) which in turn may or may not move quickly on the rule. While it's still possible that the SEC may act within the time frame, it's also still unclear whether or to what extent it will focus on fiduciary rulemaking in particular, versus a broader effort on rules harmonization between brokers and investment advisers.

Road Warrior Advisors--Keep Your Data Private - For advisors who spend a lot of time on the road with a laptop, there's often a concern about client privacy - not just that someone might steal the device, but that people standing, sitting, or walking nearby might be able to just look at the screen and see private information. But advisor tech guru Bill Winterberg points out that this concern can easily be addressed: you can buy a 3M Laptop Privacy Filter - a layer of plastic you place over your monitor that allows it to still be clearly seen straight-on, but anyone who tries to view it from a more-than-60-degree angle to either side will be unable to see what's on the screen. The filter does reduce the brightness of the screen a bit, so you may need to otherwise turn up the computer's screen brightness, but Winterberg noted that the battery impact on his Macbook Air was not noticeable. The privacy filter is applied either by using a light adhesive from the filter itself directly onto the screen, or by using a set of small plastic tabs that are attached to the outer edges of the laptop screen that hold the filter in place (if you don't want to apply any adhesive to your screen itself). Ultimately, it's still important to protect the laptop information itself in case the laptop is stolen, but if you're concerned about prying eyes in public places, a Laptop Privacy Filter is a relatively inexpensive easy solution.

Do-It-Yourself Practice Valuations - Industry commentator Bob Veres notes that merger and acquisition activity in the RIA space appears to be picking up, but the greatest challenge to getting deals done seems to be unrealistic expectations and valuations. To help address this, Veres reviews a "do-it-yourself" valuation tool created by financial planner Roger Pine that he and his wife used when they purchased their current practice, after finding that industry 'rules of thumb' like 2X revenue or 10X profits did such a poor job in making either side (buyer or seller) feel satisfied with the deal. While the tool works best with detailed numbers, a buyer with even just rough estimates of the inputs can approximate a fairly accurate projection of the revenues (if you want to go deeper, you can use the tool to list out all clients, their AUM, their fee structure, their ages to approximate life expectancy, etc.). Ultimately, though, a good valuation will need to take into account expenses as well (which generally would require the current owner to open the books a bit more). With the combined revenue and expense projections, the firm can then estimate a valuation by discounting the anticipated profits over time. Notably, though, the discount rate itself is crucial to the calculation, and is one of the most ambiguous numbers to agree upon; experts generally agree that an appropriate discount rate should be something in the 20%-25% range, though buyers and sellers may debate the number heavily (as it impacts the final valuation quite significantly). Pine notes that part of the virtue of going through this kind of valuation process is not just that it's more accurate than a rule of thumb, but that talking through the individual levers and adjustments to the projection can make the negotiation process less emotional and more productive.  In the meantime, if you want to check out a copy of the spreadsheet itself, you can download it here.

The Value For Clients - From the blog of UK advisor consultant Brett Davidson, this article makes the key point that the value advisors provide can be broken into three core groupings: the initial work in analyzing the situation and providing recommendations, for which the planner can charge planning/"strategy" fees; putting all the recommendations into action, for which advisors earn implementation fees; and the ongoing effort of monitoring and reviewing, for which advisors earn review/service fees. Notwithstanding the wide range of value that advisors provide - including not only particular technical expertise, but also a variety of other ways, from saving clients time, to cutting through jargon and giving them a clearer understanding of their choices, to helping them identify goals to work towards, and more - Davidson suggests that when determining what to charge, advisors should always come back to focusing on charging around these three key points: planning, implementation, and monitoring. By doing so, the costs will be aligned to the ways that creates are provided value, and can make it easier to charge clients incrementally as services are provided.

How To Craft A Better Client Experience - This article looks at how a financial advisory firm can craft a better client experience, viewed from the perspective of Walt Disney, a company well known for its focus on creating happiness in its customer experience, from personal service to helping take pictures of your family so you can be in the picture. So how might these concepts apply in the context of an advisory firm? The first is just to reinforce to every team member the importance of providing clients with a memorable experience, from going out of your way to recognize important milestones like a birthday or a new house or a wedding present to giving gifts that are unique to the client. The experience can also be improved in the financial planning process by focusing on how to make the complex into something simple; for instance, estate plans can be presented as a color-coded flowchart, and diagrams and graphics should accompany text to be easily understood. Documents themselves put in front of clients should be aesthetically pleasing and follow a consistent template. And every process should be systematized, as that allows staff to focus less on the process itself and more on the client experience that surrounds it (in other words, systematic processes actually allow for a more customized and positive client experience!).

IRS Grants Reprieve for Late Portability Elections - While the new portability rules allow an unused estate tax exemption amount to carry over (or "be portable") to a surviving spouse, the rules stipulate that portability only applies if a Form 706 Federal estate tax return is timely filed for the decedent's estate (generally within 9 months of death, plus a 6-month extension). Even if no Federal estate tax liability was otherwise due, the filing requirement is still there, just to establish the portability amount. However, in the first two years that the portability rules took effect - 2011 and 2012 - they were temporary, and as a result many people did not file estate tax returns, either because they were skeptical the rules would last, or alternatively because the rules were simply so new they were unaware of the need to do so. Accordingly, in Revenue Procedure 2014-18, the IRS has granted relief, offering a chance for anyone who didn't file an estate tax return  because no tax was due to go back now and file an estate tax return retroactively to claim the portability election (or for same-sex couples where the spouse/marriage itself was not recognized until the IRS acquiesced last fall after the Supreme Court DOMA decision); the rules apply for deaths that occurred between December 31st 2010 and December 31st of 2013, and the deceased must have been a US citizen or resident who was survived by a spouse, and the estate tax return for portability under these rules must be filed by December 31 of 2014.

Tax Court Ruling Clarifies IRA Prohibited Transactions - In Financial Planning magazine, IRA expert Ed Slott highlights a recent U.S. Tax Court case that illustrates the potential problems of using an IRA to purchase/own shares of a business associated with the IRA owner. The case revolves around the taxpayer Darrell Fleck, who along with a lawyer associate named Lawrence Peek, were looking to purchase Abbott Fire Safety, a company that specialized in providing alarms and fire protection systems. The brokerage firm selling Abbott introduced Fleck and Peek to a CPA who introduced them to a strategy for using IRA funds to buy the company; Fleck and Peek set up a new corporation, then established self-directed IRAs to capture rollovers from their existing employer retirement plans, and ultimately used the funds in the IRAs to invest into their new corporation, which in turn purchased Abbott. Because there was $600,000 in total cash in Fleck and Peek's IRAs, and the total purchase price of Abbott was $1.1M, they utilized some outside funding for the rest of the purchase, including importantly a promissory note for $200,000 that was personally guaranteed by Fleck and Peek. In the years that followed, Fleck and Peek converted their IRAs to Roth IRAs, and ultimately sold their new corporation (which owned Abbott) for $1.7M years later. However, the IRS determined that the personal guarantees on loans attributable to IRA assets represented a prohibited transaction between Fleck and Peek and their respective IRAs, which invalidated their IRAs going back to the original transaction; as a result, Fleck and Peek were then obligated to pay capital gains taxes on all the appreciation in Abbott - since the holding in the Roth IRA was no longer valid - resulting in a $250,000 tax liability to each man, along with almost $50,000 in accuracy-related penalties for each. While Fleck and Peek challenged the IRS ruling, the Tax Court ultimately sided with the IRS, and noted that because the loan guarantees remained in place until the company was sold, the statute of limitations remained open throughout as well, and because Fleck and Peek relied on the tax advice of the CPA who was associated with the strategy itself, and not an independent tax professional, the accuracy-related penalties would not be waived, either. To say the least, the ruling is a strong warning about the complications of using IRA assets to buy shares of the IRA owners' own company or newly formed corporation, and that getting third-party independent tax counsel is crucial to protect against potential penalties.

October 2015: The End of the Swipe-and-Sign Credit Card - For all those advisors and their clients fearing the rise in credit card fraud, a change coming soon may help to reduce the problem: by October of 2015, Mastercard and Visa are aiming to convert the US credit card system from the currently familiar swipe-and-sign process, to a system known as "EMV" that will rely on an individual-specific PIN number, along with a security chip embedded into the credit card. In point of fact, the approach is already used in most of the rest of the world where transactions occur with the use of a PIN number, but the US has been slower to adopt and make the transition (in part because the robustness of our systems made it less necessary, though rising fraud has now pushed the issue). Technically, the October 2015 deadline date is actually for face-to-face transactions that occur at a merchant's location, and although vendors will be able to continue to use the 'old' technology the liability for credit card fraud will shift - after October 2015, the liability for credit card fraud can shift to the vendors if they're still using 'older, lesser' technology (or to banks if they don't have the systems to facilitate the new technology). Much of the technology to facilitate the new transactions has already been deployed, though consumers will increasingly see new credit cards over the next 18 months being issued in the "security chip" variety, so that they'll be able to utilize the chip-and-PIN system once it's fully live. Notably, the new system will ultimately also be able to better facilitate other forms of credit-card-based payment systems, such as using a smartphone for payments.

A Proper Apology - From the Journal of Financial Planning, this article takes a fascinating look at how to truly make "a proper apology" in the event that something goes wrong with a client... an inevitable reality in any field of human services, including financial planning, from account transfer errors to a mistake in implementing a planning strategy or a trading error that results in a client's financial loss. Notably, most mistakes aren't a result of unethical behavior, and instead may simply be due to carelessness, miscommunication, or a misunderstanding (though covering up a mistake that caused harm is unethical behavior). So when a mistake does happen, how best to apologize to fix the mistake and retain/repair the relationship? Drawing on research from the health care profession - where mistakes can have serious life-and-death consequences and were traditionally hidden as long as possible - the authors provide suggestions about how to resolve such situations, noting that research in the medical field has found that these stonewalling strategies may actually increase the risk of being sued and triggering litigation. So what should you do? Ultimately, there may be two paths to an apology - depending on whether the client informs you of the mistake, or you realize it yourself - but all proper apologies should focus on communicating clearly to clients what actually happened, make it clear that you're focused on resolving their situation and not holding back, communicate what you will do to repair the situation so they can evaluate whether it's fair, and demonstrate that you have done what's necessary to ensure the mistake will not happen again. Our natural response when receiving a complaint is to become emotional and/or defend ourselves, but the key of an effective apology is to avoid doing so, especially early on when it's most important to just understand and make the client feel heard; too much denial early on can just exacerbate the situation by making the client feel they aren't being heard/understood and/or that you're avoiding responsibility. Be certain to take clear notes along the way - both for legal/risk management, and simply so that you are certain you capture all the details as you come up with a resolution plan in the future. Responses should be rapid, but don't have to be immediate; it's ok to take a day or two to arrive at a proper resolution. And in the end, the authors suggest that the apology itself should occur three times: once when the error is revealed, again at the end of the first conversation, and one final time as you begin the second call/meeting to engage in a resolution.

20/20 Vision: Why You Can't Rely Only On A Visionary - From Investment Advisor magazine, this article by practice management consultant Angie Herbers looks at the book "Traction" by Gino Wickman, which as the name suggests is focused heavily on how to gain growth traction in your own business, with an approach similar to Dan Sullivan's "Strategic Coach" philosophy. Herbers focuses on the part of the book that looks at how to staff your firm, and the importance of getting the "right" people, which Wickman defines first and foremost as those who share your company's core values and fit and thrive in your culture. Of course, the caveat is that an advisory firm has to first identify and be able to articulate its core values, in order to find staff members that are aligned. Once the right employees are found, the next key step is to put them "in the right seat" - meaning, a job that's aligned to their skills and passions that takes advantage of their unique abilities. In the context of advisory firms, Herbers notes how important this is, especially as firms grow and employees that start out in generalized roles (when there's an everything-does-some-of-everything environment) need to become more specialized and focused over time. To drive the organization, though, Wickman suggests that ultimately the accountability at the top requires two key roles: an 'integrator' who manages key functions, and a 'visionary' who are very creative and can solve big ugly problems (but may struggle with little practical ones); the visionary has the ideas that keep the company growing, but notably those visionary ideas go nowhere without an integrator. In fact, Herbers suggests that one of the key problems for many advisory firms is that in the end, they are founded by visionaries who lack the integrators that can bring those visions to life, especially as the firm grows to a point of complexity that cannot be managed by the visionary alone. On the other hand, for a firm that does take on a strong integrator, the greatest challenge in the long run may actually be replacing the visionary, allowing the business to continue to grow and innovate beyond its founder.

I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!

In the meantime, if you're interested in more news and information regarding advisor technology I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read "FPPad Bits And Bytes" on his blog!