Weekend Reading for Financial Planners (Jan 25-26)

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 January 25th/26th:

Financial Wellness Sector Offers New Route For Young Advisers - This article highlights an interesting and emerging new trend: the growing "financial wellness" industry, focused on providing financial education rather than investment recommendations or comprehensive financial planning, which is expanding as companies add financial wellness programs to their benefits package to improve workforce financial literacy. Last year, one study found 19% of HR directors indicated their wellness initiatives included a financial component, a 2 percentage point increase from 2012, and another study found that 80% of employers plan to implement or boost their existing financial wellness programs. This kind of growth may in turn fuel new demand for financial professionals, creating an alternative entry level career track for financial planning students who wish to avoid the brokerage model of asset gathering and financial product sales. On the other hand, experienced firms may also find that newer planners coming out of a financial wellness job could be appealing job candidates, given the valuable experience for young planners interacting with people about their financial problems. Active players in this space currently include Ayco, the PriceWaterhouseCooper employee financial education practice, and independent provider Financial Finesse.

Wealthiest Investors Seek Independent Planners, Study Shows - According to a recent study from Spectrem Group, 26% of ultra-high-net-worth investors are looking to increase their usage of independent advisors (up from only 17% in 2012), while only 18% plan to increase their use of full-service brokers; there were similar (but smaller) increases towards independent advisors (and away from full-service brokers) amongst millionaires and the mass affluent that were polled as well. Broadly, the study's authors state that the results highlight investors' increasing appetite for unbiased investment advice, though notably the survey did not specifically ask about fee-only vs fee-and-commission (dual registered) advisors, so there may still be some varying interpretations about what exactly "independent advice" really means. Nonetheless, the growth potential is significant, particularly at the mass affluent level; while nearly 9-in-10 ultra-HNW investors are regularly working with advisors, and 70% of millionaires, the use of advisors amongst the mass affluent is only 23%.

Schwab's Financial Plan Production Skyrockets In 2013  - This article from RIABiz highlights a big new trend from mega-custodian and discount broker Charles Schwab: the company is beginning to deliver financial plans to clients directly for as much as $2,000, and last year delivered plans to a whopping 101,000 clients (up 84% from 2012), as it seeks to go more "upmarket" and worked with more affluent clientele. Notably, though, Schwab indicates that many of the plans are given away for free (though their paid-plan activity is growing as well), and often the scope of the plan is fairly limited to a specific goal, such as a plan for college saving. More complex issues are still referred out from Schwab to the RIAs in its advisor network. Nonetheless, the financial planning push from Schwab raises the question of how it may ripple through the industry, and what competing firms will do to respond. So far, TD Ameritrade has reiterated that its retail branches are not providing comprehensive financial planning or ongoing investment advice to retail clients, and that those who wish for such services will continue to be referred from the retail branches to the RIAs that custody with the firm (in addition to a suite of Do-It-Yourself tools for those so inclined); similarly, Fidelity also continues to rely primarily on its RIAs for financial planning for its clients. More generally, the ongoing Schwab shift towards financial planning is part of its broader strategy to shift from a transactional commission business to generating ongoing advisory fees, and of its $2.25 trillion in AUM, almost half - including $946B of its RIA institutional business and $155B in its retail advisory solutions - is now in some kind of advisory program.

Why Social Media Won't Work For You - In a world where social media adoption amongst advisors is slowly and steadily increasing, marketing consultant Kristen Luke takes a look at the reasons why social media marketing probably will not end out working for a lot of advisors, due to the way they will implement it. The key issues: canned content (advisors with limited time may resort to used cannot content posted automatically from a third-party service, yet posting generic content on social media is a waste when everyone else is doing the same thing); lack of engagement (again due to time constraints, many advisors may skip out on regularly checking in on their platforms, despite the reality that ongoing engagement on social media is crucial to success); wrong audience (advisors tend to gravitate towards communicating with colleagues on social media when they start, but what you should really be doing is establishing yourself with your target clientele); and overall lack of time (while social media marketing is virtually free, it isn't "cheap" in that it does have a cost of time and resources, and like any marketing strategy, social media requires time and effort to be cultivated effectively). Notably, Luke points out that a lower-key social media program still has some benefits, including staying top-of-mind with existing clients and providing some search engine optimization beneffits for your website; but if you're really hoping to bring in new clients, be prepared to avoid the key mistakes above.

Take the Guesswork Out of Your Marketing Strategy - This article provides a nice overview of the value of connecting Google Analytics to your website, and what kinds of data and metrics you can/should be monitoring to begin to evaluate the effectiveness of your website. The first thing to track is Traffic Origin - how did the visitor arrive at your website - and was it via a search engine result, a referral link from another website, or simply because they typed your web address into Google? From there, you can evaluate your "Call-To-Action Click-Through Rate" - in other words, where your website says "Contact Us" or "Book a Meeting" or some other call to action for visitors, how often do they actually click there and complete the process (and if it's not delivering any results, what can do you to test something else to improve it?). You should also take a deeper look at your Organic Search Traffic - meaning, the traffic that your website is getting from various search engine results - to understand what people might be searching for to find you (and craft ways to improve that visitor activity). A key in regards to this last item in particular is to try to optimize your website for better keywords; for instance, it's hard to get to the top of the search engine results for "advisor" but might be much more feasible for "financial advisors in Atlanta" so you can tilt your website to use those words more frequently (including via "title" and "meta" tags), boosting the likelihood that that particular search in Google will lead the prospect to your website. You can also test keyword strategies by trying to think about what your prospective clientele might be searching for, and even test out some of those searches yourself to see what comes up, and where there might be relatively little competition and an opportunity for you to shine.

12 Steps to Fix Your Firm's Investment Committee - From this week's AICPA financial planning conference, the "Investment Committee Doctor" Tom Brakke provides some guidance on how to improve the decision-making and execution of your investment committee. The first key is to recognize that group decision-making is different, and that good group decisions necessitate a diversity of talents, experience, and perspectives; having everyone aligned with the some thinking and approach may be expeditious, but will not necessarily lead to good decisions. Overall, Brakke offers 12 core suggestions: focus on process not performance (as a firm, and in evaluating investment managers); clearly define the investment committee role within the firm (is it governing, advisory, managing, or operating?); articulate the fundamental beliefs of the committee and ensure alignment (at the end of the day, is your firm more passive yet your investment committee tilts active?); keep the size manageable (Brakke recommends 4-6 people is the sweet spot); no observers (decision-making is hard enough without everyone feeling watched); keep the meetings face-to-face; communicate expectations of committee members clearly; make sure that committee members do their preparation work in advance (and hold them accountable to it); create a safe environment for people to constructively share their views and disagree with each other; avoid "FOG" (fact-deficient, obfuscating generalities) and be ready to challenge the "accepted obvious"; share committee decisions immediately when made; and make sure you periodically evaluate not just the outcomes but the process itself.

Reducing Retirement Risk with a Rising Equity Glide Path - In the Journal of Financial Planning, this research article co-authored by Wade Pfau and yours-truly takes a fresh look at the ideal asset allocation strategy in retirement. While the 'traditional' approach is to decrease equity exposure as clients age, the results find that this is actual less favorable than just holding a consistent asset allocation throughout retirement, and that in fact the optimal outcome is actually to increase equity exposure in retirement. Notably, though, this doesn't mean taking clients all the way up to 100% in equities throughout their retirement. Instead, the point is that cutting equity exposure lower and then slowly gliding back to the original may be better; for instance, a portfolio that starts at 30% in equities and is rebalanced for an additional 1% per year (such that it climbs to 60% in equities after 30 years) performs better than a 60/40 stock/bond portfolio that is just rebalanced to 60/40 every year, even though it has less in average equities throughout retirement and less in equities every year except the last (when it finally gets 'back' to 60%). The authors test various stock/bond return assumptions, and the benefits for this "rising equity glidepath" are modest but consistent, though the best glidepaths vary depending on return assumptions (not surprisingly, more conservative equity returns lead to lower overall equity exposures). If returns are low enough and/or withdrawals are high enough, eventually the optimal portfolio is simply to own significant equity exposure and 'pray' for a good outcome, but for those consuming at reasonable 'modest' withdrawal rates relative to their wealth and returns, the rising glidepath effect holds. The strategy is framed as a "heads you win, tails you don't lose" outcome, as in situations where equity returns are bad early on and better later the strategy wins (more conservative during the bad years, and dollar-cost-averaging into equities in the later years that are better), while if equity returns are good early on the retiree will be so far ahead that the retirement can't fail even if the bear market comes later with slightly higher equity exposure. Overall, the research implies that the optimal lifetime asset allocation may look less like a flat line or a steadily declining one, and more like the letter U where equities are higher in the early years, glide down as retirement approaches, trough at the point of retirement, and then slowly start to slide up again in the later retirement years (albeit still not as high as they were in the early years).

Is Cash Value Life Insurance Disappearing - From Research Magazine, this article by Texas Tech professor Michael Finke looks at the current trends in how consumers are using life insurance. At a high level, the trend is pretty clear: cash value life insurance ownership is falling like a rock. In 1990 nearly 4-in-5 life insurance policies being issued were of some form of permanent insurance, yet by 2002 it had fallen to about 50%, and overall from 1990 to 2009 the amount of total life coverage provided by cash value policies fell by 50%. What accounts for these drastic changes? While term insurance prices were already declining (the average price fell by 27% from 1992 to 1997), the internet, and the availability of easy-to-compare term life insurance quotes on various websites, seems to be accelerating the trend. In addition to shopping trends, the internet's providing access to various personal finance gurus - who almost universally demonize permanent life insurance - has also likely impacted cash value life insurance sales. Yet some deeper research by Finke and his colleague Barry Mulholland, suggests a more nuanced picture. For instance, while the percentage of whole life policies declined over the past 20 years, the total number of households owning insurance also declined; so it's not just that cheap online term insurance was competing against permanent, but also that more households are going unprotected altogether (which is not encouraging!). Finke suggests the problem may be that while online access to insurance pricing may have brought costs down and made it more accessible for those who are knowledgeable and know what to seek and how to shop, it also compressed the compensation for insurance salespeople who may still be necessary for educating/selling/convincing those who are less knowledgeable and must be "sold" on the product, and many/most agents may not be able to make up for lower term insurance compensation on volume alone. In turn, this means many of the most successful insurance agents have moved away from the middle market and into more "sophisticated" markets that have a greater need and ability to pay for higher-premium, higher-compensation products. Notably, the researchers also find that amongst those still buying permanent insurance today, it is the most financially sophisticated who are most likely to purchase, and that ownership of permanent insurance is positively correlated to owning large IRAs and 401(k)s as well. The end result: today's permanent life insurance marketplace is smaller, and the buyer is far wealthier, more sophisticated, and older than in the past.

How to Use Bond Ladders in Retirement Portfolios - This article by retirement researcher Wade Pfau in Advisor Perspectives looks at how to actually construct a bond ladder, which seems to be getting more popular both with growing fears of rising rates and the potential for a laddered bond portfolio to manage the risk (as the bonds can be structured to be held to maturity so they don't have to be sold at a loss), and with the growing focus on retirement income where a bond ladder can help to generate actual retirement income cash flows. In the case of the latter in particular, Pfau suggests - citing the work of Stephen Huxley and Brent Burns of Asset Dedication - that the proper way to set a stock/bond allocation in the first place is to determine the bond ladder funding necessary to cover the client's liabilities/cash flow needs, and then use whatever is left over for the stock allocation. Thus the bond allocation might not be 40% just to match a classic 60/40 portfolio, but because that was specifically the amount necessary to generate the bond ladder to cover the desired X years of spending. Of course, most clients don't have the wealth to fully bond-immunize every cash flow throughout retirement, and some retirement spending needs may vary anyway; nonetheless, clients can at least target to fund a large portion of their early retirement in this manner, at least ensuring that the remaining equity portion won't have to be liquidated for an extended period of time (providing some insulation against short-term market declines). However, this is a delicate trade-off. Pfau uses Monte Carlo illustrations to test various lengths of bond ladders using Treasury strips (notably, laddering using TIPS is harder because of the gaps in the TIPS maturities), and finds that at today's low rates increasing the length of the bond ladder increases the cost of retirement and reduces the probability of success, though in the worst scenarios (likely where stocks perform especially badly) longer bond ladders can still help.

3 Big Issues Advisors Are Missing - This article by Bob Veres in Financial Planning magazine highlights a panel from his recent Insider's Forum conference, which looked some of the important "outside-the-box" issues that advisors may soon face when providing financial planning advice to clients. The first issue regards the spending assumptions that advisors are making for their clients; while the standard is to assume that clients' lifestyle spending will increase with inflation, but when planning for younger clients that may be way off the mark, as in the earlier years clients tend to increase their lifestyle much more significantly due to their rising income and not merely as a result of inflation (e.g., is the spending of your 45-year-old clients really anything like their age-25 spending merely adjusted for inflation?). In retirement, the assumption may be better, but is still not perfect; instead of just using CPI, consider padding the number by an extra half a point (which still adds up significantly in the long run) given the various "hedonic adjustments" made with CPI that may understate actual client expenditures. Another issue are changing employment behaviors; traditional planning is built around the assumption of a steady employment income, but today's young people are likely to have far more jobs, and even several entirely different careers, over their workspan. Accordingly, the focus may shift to be less around tending portfolios, and more about integrating the portfolio into planning around the client's career/human capital itself. These trends may be exacerbated by the pace of technology itself; by some estimates, 30%-40% of careers will be marginalized or disappear in the next decade, to be replaced by 30%-40% new jobs that don't even exist today, and suggesting that career and income planning may be far more dynamic in the future. More generally, recognize that technology change can be disruptively bad but also disruptively good; for instance, it wasn't long ago predictions were that oil would go sky high, but now natural gas and other energies are booming, the government deficit is falling rapidly, and if we can ever come up with better medical solutions to handle the last 6 months of life in particular, Medicare costs could suddenly fall drastically.

Financial Advice In 2034 - This cover article from Financial Advisor magazine tries to take a look at the world of financial advice 20 years into the future. By then, there will have been a full generational turnover of financial planners, with baby boomer advisors fully transitioned into retirement and the profession dominated by Gen X and Gen Y. In turn, some suggest that a full generational change will finally allow financial advice to move to the next level, as the burst of new energy with new advisors replacing the nearly-200,000 who will have retired by then brings with it a new wave of advisor innovation. As an early glimpse, the article profiles Alan Moore, a 26-year-old financial planner who is going it alone with a practice split between Bozeman, Montana and Milwaukee, Wisconsin, who visits with most clients in a virtual relationship and advocates for the sheer efficiency of leveraging video technology to reduce 'inefficient' face-to-face meetings (and has built a practice where already half his clients don't live in either of his states). Notwithstanding the rise of independent advisors like Moore, though, practice management consultant and Pershing Advisor Solutions CEO Mark Tibergien cautions that the wirehouses won't be vanishing, even in 20 years, given their massive size and scale. But there is an emerging third tier of firms, the large multi-shareholder multi-employee advisory firms that, as in the accounting and legal professions, will be significant regional players nestled between the large national brands and the small local advisory businesses. On the other hand, improving technology, and a whole host of outsourcing partners, will help to ensure that small advisory firms continue to thrive and will not be bullied out of business either. Ultimately, consultant Chip Roame suggests that RIAs will continue to grow, wirehouses will allow their advisors to be increasingly independent to compete, and independent broker-dealers will be caught in the middle and will eventually consolidate further and act more like custodians, even as discount brokerage custodians themselves may grow larger than them all and become the dominant player. In the meantime, online advice tools will continue to grow as well, though not fully replacing humans, especially for higher net worth clientele with more complex needs and issues. The article also raises the question of whether business models themselves will shift, as younger advisors are adopting new hourly and monthly retainer models for a less-AUM-centric future (though it remains unclear whether they will become more AUM centric as their clients age and accumulate assets). In the meantime, according to financial planner recruiter Caleb Brown the advisory profession may face a dearth of new planners to fill the opportunities in the coming years, though Tibergien suggests that ultimately by 20 years from now, the imbalance will have sorted itself out if/when/as there are in fact an oversupply of clients and a lack of people to advise them.

Why Bitcoin Matters - This article by Marc Andreesen (head of the noted technology venture capitalist firm Andreesen Horowitz) looks from the technology perspective at why Bitcoin is a bigger deal than most realize (and why his firm has been investing $50 million in Bitcoin-related start-ups). Andreesen views Bitcoin in a similar context to personal computers in 1975 and the Internet in 1993 - an emerging new technology that idealists love, the establishment scorns, and technologists are transfixed by, that ultimately becomes mainstream with profound effects. To understand why, Andreesen explains why Bitcoin is such a big deal breakthrough from the computer science perspective: it solves the so-called "Byzantine Generals Problem" [BGP]. What is the BGP? It originates from a paper that examined the hypothetical problem of how in the Byzantine era generals surrounding a city could cooperate battle plans when they can only communicate by messengers, one or more of whom may be traitors trying to confuse them; in essence, the issue is how to establish trust between otherwise unrelated parties over an untrusted network, whether generals laying siege to a city or people communicating via the Internet. Bitcoin solves the BGP problem, which means for the first time, one Internet user can transfer a unique piece of digital property to another Internet user, guaranteed safe and secure, where everyone knows the transfer has occurred and no one can challenge its legitimacy. Ultimately, this could allow the transfer of significant digital property - digital signature or contracts, digital keys, digital ownership of physical assets, or digital ownership of stocks, bonds, and money - without requiring a central intermediary like a bank or broker. The removal of the intermediary matters so much not just for security purposes, but because it means all of these transfers can occur with little or no fees, in a world where existing payment systems often charge fees of 2% to 3% (think credit card interchange fees that vendors/businesses typically absorb). While so far Bitcoin has been incredibly volatile and speculative, Andreesen notes that its speculation may actually be accelerating its ability to be adopted mainstream as well, and even if it's not stable as a currency it may still be effective as a payment system, not only because it has near-zero costs, but also because it eliminates the risk of credit card fraud (for instance, the Target credit card hack couldn't have happen with a Bitcoin currency system). In addition, Bitcoin also facilitates international transactions and money transfers (the system isn't US specific), and micropayments (think $1 or even $0.01 transactions, feasible with a no-fee payment system). As Andreesen notes, there is no shortage of regulatory and other issues that still have to be addressed with Bitcoin, but the bottom line is that Bitcoin is a way, way bigger deal than "just" about some new speculative digital crypto-currency.

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 new Bits & Bytes weekly video update on the latest tech news and developments, or read "FPPad Bits And Bytes" on his blog!

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!