Weekend Reading for Financial Planners (Jan 15-16)

Authors:

Ben Henry-Moreland

Team Kitces

Ben Henry-Moreland is a Senior Financial Planning Nerd at Kitces.com, where he specializes in writing and speaking on financial planning topics including tax, practice management, and technology. He also co-authors the monthly Kitces #AdvisorTech column. Drawing from his experience as a financial planner and a solo advisory firm owner, Ben is passionate about fulfilling the site’s mission of making financial advicers better and more successful.

Read more of Ben’s articles here.

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Adam Van Deusen, CFP

Team Kitces

Adam is a Financial Planning Nerd at Kitces.com. He previously worked at a financial planning firm in Bethesda, Maryland, and as a journalist covering the banking and insurance industries. Outside of work, he serves as a volunteer financial planner and class instructor for local and national non-profits.

Read more of Adam’s articles here.

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Inflation Hits 39-Year High Of 7%, Sets Stage For Fed Hike (Reade Pickert, Yahoo News) - In the 1970s and 1980s, inflation was considered a grave threat to the health of the U.S. economy and the wellbeing of its people. Inflation rates, as measured by the Consumer Price Index (CPI), reached double digits in some years, and eroded people's wealth and income faster than portfolio gains and wage growth could keep up. As a result, the Federal Reserve Bank under chairman Paul Volcker took aggressive (and controversial) action to fight inflation, significantly and repeatedly increasing the Federal Funds rate, at the cost of driving the country into a recession. But whatever the cost, the strategy worked, and since the early 1990s inflation has hovered in the 2%-3% range, making high inflation feel at times like a distant afterthought. In 2021, however, that all changed: inflation rose to levels unseen for decades, and the final numbers for 2021 show that the CPI increased by 7% during the year – its highest increase since 1982. A combination of factors may be to blame for the surge, from supply chain issues to scarcity of housing and shelter to more consumer spending power resulting from government pandemic aid. Notably, inflation could have been even higher if not for lower-than-anticipated energy costs resulting from a warmer-than-average fall and winter. On the plus side, a tight labor market and low unemployment rate is causing wages and salaries to rise along with prices – meaning a lot of workers have been able to keep pace with the rising prices – but for workers who have not seen their income increase, and for retirees relying on annuities and fixed income, the increased cost of living has been enough to make a palpable dent in their lifestyles. So, with the current spike in inflation persisting longer than many experts anticipated, the Fed has signaled that it will once again step in to raise interest rates… which, as in the 1980s, could potentially cause a significant cooling-off of the economy, and increased volatility in the stock and bond markets. So for financial advisors, it could be valuable not only to talk to clients about strategies to navigate higher-than-expected inflation – like using Series I savings bonds to hedge against the inflation rate or adjusting spending levels based on updated Monte Carlo projections – but also to prepare them for the possibility of volatile markets (since, after two years of high equity returns, many investors might not perceive the risk they are really taking in the market until after the volatility actually hits).

What Inflation Will Do To Your 2022 Taxes (Laura Saunders, Wall Street Journal) - There are plenty of reasons to be concerned about the current high levels of inflation, most notably the erosion in purchasing power of people's income and savings and the risk that it poses to the ability of retirees to meet their spending needs. But there are also some potential silver linings which, though perhaps not fully offsetting the impact of inflation, can at least serve to offset the amount that it eats into our savings and spending. For Social Security recipients, one such silver lining is a 5.9% cost-of-living adjustment, the highest increase in 40 years. And for many others, one place where inflation will quietly manifest itself in a positive way is in the taxes we pay. As the majority of the components in the Federal tax system are indexed to inflation (albeit at a slower rate than the headline inflation numbers). For example, the marginal tax brackets that dictate the percentage of tax we pay on different levels of taxable income are adjusted each year for inflation, meaning that many people could see a small bump in take-home pay in the new year as their tax withholdings are tweaked to account for the adjustment. Other notable adjustments for 2022 include the Social Security tax wage cap (which increases from $142,800 to $147,000), the elective deferral limit for 401(k) plans (from $19,500 to $20,500) and the limits on SEP and solo 401(k) contributions (from $58,000 to $61,000). But not everything is linked to inflation: the current SALT deduction limit of $10,000, the $250,000 per person exemption on capital gains for a primary residence, and the $200,000 (single)/$250,000 (MFJ) threshold for the 3.8% surtax on net investment income are all fixed at their current levels. Which means that, with real estate and stock market prices booming in the past two years, higher-income taxpayers could see a greater tax impact from selling those assets – making capital gain management strategies, like loss (and gain) harvesting, donating appreciated securities, and simply holding appreciated securities until death (at which point they will receive a basis step-up and be subject to the estate tax exemption, which is indexed to inflation), all the more essential.

Rejoice: Inflation And Omicron May Be Peaking At The Same Time (Josh Brown, The Reformed Broker) - For the past several months, the news on inflation has sounded like a broken record, with each month bringing a new, higher level, culminating in this week’s announcement of the highest yearly inflation rate since 1982. But hidden in the ever-increasing numbers is a tiny glimmer of hope: though the inflation rate itself rose from November to December, the rate at which that rate changes actually decreased from the previous two months. Meaning that a leveling off and eventually a decline in the inflation rate could be in the foreseeable future. Furthermore, the change could come quickly, as the seasonal drop-off in demand allows the supply-chain issues contributing to persistent inflation (which were exacerbated by the run-up in demand going into the holiday season) to work themselves out. And even though prices are still more likely to rise further than to decline to their previous levels – a decrease in inflation, or deflation, is not the same as disinflation where the pace of inflation simply slows – a leveling-off could at least be a sign that the current spike in inflation is “transitory” as was originally predicted, and that there may be less of a need for heavy-handed (and market-roiling) intervention by the Fed to tamp down inflation when it might end out correcting itself in the end. At the same time, those who are worried about the explosion of Omicron-variant COVID cases in the United States can also glean hope from the news from South Africa and the United Kingdom, both of which saw their case rates decline as quickly as they had increased after hitting their respective peaks. In both cases, there are reasons to be cautious: inflation is notoriously difficult to predict and can take on a life of its own even after the underlying causes have dropped away, and persistently low vaccination rates create the opportunity for other new COVID variants to emerge and spread through the population. But for those searching for hope amidst the barrage of worrying news, it is looking increasingly probable that the twin surges of inflation and Omicron could soon be in the rear-view mirror.

Startup 'Choir' Aims To Diversify Finance Conferences With Certification (Michael Thrasher, RIA Intel) - The financial industry has long been plagued by a lack of gender and racial diversity. On the whole, financial advisors skew overwhelmingly white and male: as of 2019, women made up only around 18% of financial advisors (and just a slightly higher 23% of CFP certificants), while nonwhite advisors comprised less than 12%. And, with individuals tending to find more connection with (and therefore being more likely to work with) advisors who share similar backgrounds, cultures, and experiences, the clientele served by advisors slants the same way, limiting the overall reach of the industry and its ability to serve more types of clients. One way to improve the diversity of the financial industry could be to increase the representation of women and people of color at financial conferences, where a keynote speech or a spot on a panel can give an advisor a chance to demonstrate their expertise among their peers and potentially lead to greater future career opportunities, in addition to providing more diverse role models for up-and-coming diverse advisors. And while inertia and structural barriers often keep diverse voices from being represented at conferences (an issue that is far from being limited to just the financial industry), conference organizers can take proactive steps to recognize and eliminate the barriers that exclude women and people of color, ensuring that those voices are included. So, seizing an opportunity to improve the conference landscape – and anticipating a desire for conferences to promote their own diversity efforts – Sonya Dreizler (a financial industry consultant and speaker) and Liv Gagnon (a branding and communications expert) launched Choir, a “diversity-tech platform”, which will begin to offer a new certification for financial industry conferences. The diversity-tech part of the process involves scoring conferences using an algorithm to evaluate the prominence of women, people of color, and non-binary people on those conferences’ stages (giving higher scores to more visible positions like keynote speeches, sessions that offer CE credit, and sessions occurring without other competing events happening concurrently) and distilling those data points into a score from 0 to 100. Conferences with a score above 60 then can receive Choir’s Diversity Certification at either a Bronze, Silver, or Gold level. Notably, for a conference to become Choir certified, it is also required to engage with Choir’s consulting service, which uses the evaluation from the scoring process to offer help with improving the conference’s diversity and connecting organizers with a network of diverse presenters – a service that can cost upwards of $15,000. Still, with conferences trying to lure attendees back in 2022, and increasingly shifting to learning- and community-focused events (rather than simply trying to get advisors in a room with the vendors who want to sell to them), diversity certification could be a way for conferences to differentiate themselves to the types of attendees that they want, while (gradually) pushing the industry towards greater diversity and inclusion.

Financial Designations: Possible Gateways To CFP Education For Diverse Professionals? (David Mannaioni, Aman Sunder, and Rebecca Henderson, College for Financial Planning) - In recent years, CFP Board has published several research studies and white papers detailing the need for – and barriers to – gender and racial diversity in the financial planning profession. Central to these publications is the finding that, out of over 90,000 CFP certificants, only 3.5% identify as Black or Latino, and CFP Board makes the case that mentoring and advocating for people of color, and learning and practicing allyship in daily interactions, are key to increasing diversity within the profession (and can help to maintain its sustainability as older planners retire and the overall demand for financial planning rises). But one major barrier to having more women and people achieve CFP certification could be CFP Board’s own education requirement, which requires completing a CFP Board-registered educational program typically comprising six or more college-level courses, often taking one year or longer to complete. As a result, the researchers suggest that the high cost and length of the education requirement represent a barrier for some candidates who may be unsure of their ability to achieve CFP certification (or who may just want to “test the waters” to see if the financial planning profession is really right for them). Which is important because, as the first step towards CFP certification, the education component serves as the beginning of the pipeline for aspiring CFP certificants, and so ensuring that more candidates from diverse backgrounds reach that pipeline (and succeed once they get there) increases the possibility for greater diversity in the financial planning profession at large. In this study, the researchers explore the idea that shorter and less-costly designation courses – like the Accredited Asset Management Specialist (AAMS), Chartered Retirement Planning Counselor (CRPC), and Accredited Portfolio Management Advisor (APMA) – could serve as “gateways” to CFP certification as a way for candidates to gain knowledge and confidence before committing to a CFP education program. And though the study’s authors are affiliated with the College for Financial Planning (which sells exactly the aforementioned pre-CFP designations that the research promotes), the paper lays out a good case that students who succeed in pre-CFP designation programs (which generally have a more diverse cross-section of students than CFP education programs) also tend to do well if they choose to move on to CFP coursework. Meaning that designation programs can potentially serve as an effective “feeder” into CFP programs of students who are not only more diverse than those who go straight into CFP coursework, but also more likely to succeed—since those who move on to CFP programs are more likely to have done so once they were already successful in the designation program.

Kamila Elliott Becomes First Black Chair Of CFP Board (Mark Schoeff, InvestmentNews) - On January 1, Kamila Elliott began serving her one-year term as CFP Board chair, which her colleagues elected her to in the summer of 2020. She is an experienced advisor and executive, having spent 17 years at Vanguard as well as working at Dimensional Fund Advisors, and she currently serves as President of Grid 202 Partners, a boutique RIA in Washington, D.C. In the upcoming year, one of Elliott’s main priorities will be to continue the CFP Board’s work towards enforcing the new Code of Ethics and Standards of Conduct that were implemented in 2020, and in particular finalizing the proposed disciplinary procedures for CFP certificants who fail to report information about potential misconduct – because, in her words, “We can’t say we are the ‘Gold Standard’ and have CFP professionals acting unethically”. Additionally, Elliott will work to continue promoting the value of CFP certification and the financial planning profession to recruit younger and more diverse voices into the field, focusing on high school and college students who may know little about financial planning or the CFP marks. Much of the attention around Elliott’s election has focused on her becoming the first Black female chair in CFP Board’s history. And the achievement is remarkable: a Black woman rising to a prominent leadership role in the financial industry, which (despite increasing calls for more diversity) still skews predominantly white and male, represents a positive sign for where the future of the industry could lie. But Elliott is an accomplished professional in her own right without factoring her race and gender into the equation. So while her milestone can and should be celebrated, the fact remains that the financial industry has a long way to go towards becoming more inclusive for women and people of color, and the CFP Board already faces more than enough priorities to keep Elliott busy throughout her one-year term without burdening her with the expectation of solving the industry’s diversity problems on her own. Meaning that, for the next year and beyond, it will be incumbent on the entire industry – from trade organizations to conferences to education programs to firms and individual advisors – to work proactively to promote its underrepresented voices and push the financial planning profession toward a more diverse and inclusive future.

Why My Retirement Won’t Include A ‘Bucket List’ (James Kerr, MarketWatch) - Many workers view retirement as an opportunity to have experiences they did not have time to fulfill during their working years. One popular formulation of this tendency is the ‘bucket list’, where an individual writes down everything they want to do before they ‘kick the bucket’. Kerr suggests that this concept is too morbid (who wants to see their death approaching as they check off boxes on the list?), and instead created a ‘challenge list’ for himself. This list includes a mix of experiences, activities, and goals that will push him in new directions and includes a cross-country RV trip, publishing books and articles, sharpening his photography and design skills, and starting a yoga practice, among others. Of course, no two individuals will have the same ‘challenge list’, and financial advisors have the opportunity to help clients consider what they want their retirement to look like, which could be as simple as thinking of the things they would like to do less, and what they would like to do more as they transition into retirement. And for some clients, retirement might not be an abrupt end to working, but rather a period of ‘semi-retirements’ or multiple ‘temporary retirements’ that allow the client to take on activities they want to do (perhaps from a newly created ‘challenge list’) while maintaining ties to their career. In the end, the key point is that the concept of retirement is really about financial independence and the benefits it brings, including the option to work… and the opportunity to take on the items on a ‘challenge list’!

Retirees Aren’t Spending Enough Of Their Nest Eggs (Neal Templin, Barron’s) - When planning for retirement, individuals are often concerned that they will not have enough in savings to last throughout the rest of their lives (which is what drives many to seek the assistance of financial advisors!). At the same time, much of retirement planning on the advisor’s side considers this same question, including the potential downsides of sequence of return risk to permanently reduce a client's safe spending rates for the remainder of their retirement. However, recent research suggests that the opposite might be true in many cases and that some retirees are not spending as much as their portfolio and other income streams could support. For example, a study by the Employee Benefit Research Institute found that more than 75% of their retirees between age 62 and 75 saw their portfolios stay the same or increase in retirement (either because they were limiting their spending or because their portfolios grew thanks to the upside potential of sequence of return risk). One potential reason for some retirees’ reluctance to spend is that many of these individuals were used to saving during their working years and are reluctant to draw down on their portfolios (perhaps because of the negative psychological effect of seeing their balance decline or because they worry about their uncertain longevity or potential long-term care costs). In fact, retirement researchers David Blanchett and Michael Finke found that spending in retirement was greater for individuals who received a larger portion of their income from ‘guaranteed’ sources (e.g., defined-benefit pensions, Social Security, or annuities) than those whose wealth consists of non-annuitized (i.e., portfolio) assets. Ultimately, the key point is that an advisor’s role can not only be ‘defensive’ (ensuring that a client has sufficient assets and income to last throughout their retirement years), but also be ‘offensive’ as well in helping clients get the maximum life satisfaction from the wealth they have created!

The Effects Of Retirement On Sense Of Purpose In Life: Crisis Or Opportunity? (Ayse Yemiscigil, Nattavudh Powdthavee, and Ashley V. Whillans, Psychological Science) - Retirement is often seen as a time of freedom and opportunity after a lifetime of work. But while research has shown that retiring can lead to gains in life satisfaction and decreases in depression, retirement has also been shown to reduce an individual’s sense of purpose. This makes intuitive sense, as an individual who saw their work as contributing to society might feel a reduced sense of purpose after leaving their job. With this in mind, Yemiscigil, Powdthavee, and Whillans used survey data to consider whether socioeconomic status has an impact on one’s sense of purpose after retiring. Contrary to the broader finding of a reduced sense of purpose, the authors found that retirement had a positive impact on the sense of purpose of individuals with low socioeconomic status, who more often reported having a job that was not satisfying and providing a sense of purpose in the first place. This suggests that being free of an unsatisfying job and having the opportunity to pursue more meaningful activities can improve the sense of purpose for these individuals, even if it means living on a reduced income compared to when they were working. On the other hand, the research does also affirm that individuals who do have a career that contributes to a sense of purpose need to consider how they will replicate that feeling in retirement. These individuals could consider a series of 'temporary retirements' over the course of their career (where they take time away from work but return after the sabbatical) or 'semi-retirement', where they work part-time (helping to maintain the sense of purpose) while also expanding their opportunities for leisure (which can improve their overall wellbeing), and their advisors can help plan their finances accordingly. In the end, individuals across the wealth spectrum are searching for a sense of purpose, but while retiring from an unsatisfying job might open up new opportunities for some individuals to create this feeling, those who felt a sense of purpose in their jobs might want to consider how they will maintain that sense as they transition out of their career (or whether they would actually be happier sticking with it, perhaps simply at reduced hours to promote their work-life balance?)!

Why Commitment Is Undervalued (David Perell) - For most of human history, individuals had few choices in terms of where to live, who to marry, and where to work. And while this might be seen as limiting, it could also create a strong sense of community and a feeling of place. Fast-forwarding to the 21^st century, individuals have an almost unlimited number of options for how to conduct their lives, with technological advancements even allowing for people to live and work in different places, something that would have been unheard of in years past. Yet, the wide range of options can create anxiety (the so-called ‘Paradox of Choice’) and a hesitance to commit (because a better option might be just around the corner!). Another consequence of the abundance of options is a shortening of time horizons, whether it be switching jobs every few years or moving to a new city, activities that were less likely in the past and can also cause anxiety. Perell argues that in the current world of optionality, commitment is undervalued and that individuals can improve their own lives by holding more long-term commitments, whether in their job, locality, or relationships. For example, an individual is likely to benefit more from a long-term, unconditional friendship than from a more ephemeral relationship with a coworker at a job that they are planning to leave within the next couple of years. The benefits of commitment extend to the broader community as well, as individuals who are committed to a certain place are more likely to make sure it is well maintained and that others living there are cared for. The key point is that while having options can feel like an enrichment of one’s life, commitment can provide stability and meaning that is harder to find in temporary engagements!

Progress Isn’t Linear (Brett McKay and Kate McKay, The Art Of Manliness) - In an ideal world, progress in one’s career or portfolio would advance along a straight line, without bumps along the way. Of course, while progress is rarely linear in the real world, it can still be hard to stay the course during the inevitable downturns that come in life (or the pullbacks in the stock market!). Sometimes the break from linear growth is a mere slowdown after an initial burst; for example, while a weightlifter might be able to make significant initial gains in how much they can lift, after a certain point each incremental gain takes a longer period of work. Similarly, these concepts also apply to the growth of a financial advisory firm. For example, an advisory firm might see significant revenue growth in its first few years before it hits a ‘capacity wall’ when the founder has hit their limit in terms of what they can manage. Moving beyond this phase requires hiring staff and building the firm’s infrastructure, which can boost revenue but ultimately reduce the happiness of the firm owner (who can gradually move away from working directly with clients and into a management role as the firm grows larger). After another period of significant revenue growth, the firm can hit a ‘size wall’, when it needs to invest in additional marketing and business development to sustain the same rate of growth before it can ultimately achieve scaled marketing and grow well into the future. So when progress slows down, whether in completing a New Year’s Resolution or growing a business, it is important not to panic, but rather recognize that growth does not happen linearly, and that the current situation is quite possibly just a temporary setback on the path to continued growth that may accelerate once the current wall is eventually climbed!

Just 5 Years Can Change Your Life (Nick Maggiulli, Of Dollars And Data) - When reading a profile of someone who has found business or personal success, it can seem like their success happened overnight, or was the product of a lucky break. However, most progress, whether it is career development or a growing portfolio, comes incrementally and takes time. In Maggiulli’s case, it took five years of writing to turn his blog, Of Dollars And Data, into a profitable business. He initially had few readers and spent more than 1,500 hours writing with no financial return, but through continued effort (as well as creating an email list and implementing an SEO strategy) he was able to grow the popularity (and revenue generation) of the blog. Similarly, this kind of discipline and persistent effort can lead to success in a financial advisory career. Initially, this can include the months or years spent getting the education needed to become an advisor, to the hours spent studying for the CFP exam. After landing a job with a financial advisory firm (perhaps in a paraplanner role), it can take years of work to develop the skills and gain the credentials needed to become a lead advisor. At that point, some advisors might consider starting their own firm, which can mean starting out with few clients and limited revenue before gaining momentum and developing a profitable business. Ultimately, the key point is that success generally comes after years of hard work and persistence, and it can be useful to remind oneself that some of the most well-known advisors also have taken a similarly long and winding path to find their ultimate success! The key is not to be too focused on the progress being made over just a few months or a year at a time… as we often underestimate just how much small changes can and do compound to very meaningful improvements over 5+ years.

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.