Weekend Reading for Financial Planners (Jan 31 – Feb 1)

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 31st/February 1st:

Obama Relents on Proposal to End ‘529’ College Savings Plans (Jonathan Weisman, NY Times) - President Obama's recent State Of The Union address included a number of potential tax reforms, including an immediately-controversial proposal to end the tax-free-growth benefit on Section 529 plans (for all future contributions) and turn it into a "merely" tax-deferred (but taxable upon withdrawal) account. Facing significant opposition from both Republicans and leading Democrats, though, White House officials announced this week that the proposal would be dropped, while still vowing to push for a larger package of education tax relief and reform. Notably, the original intent of the proposal was that the implied "cost" of tax benefits for 529 plans would be shifted to broaden other educational tax benefits for the middle class (primarily the American Opportunity Tax Credit), but the controversy around the proposal hinged on what constitutes "middle class" in the first place. Given median household income of $53,046, economists tend to define the middle class as income ranging from approximately $35,000 to $100,000, and supporters of the President's proposal point out that about 80% of the tax benefits for current 529 plans go to households with income above $150,000. However, when measured by the number of accounts, more than 70% of the total number of 529 plans are owned by households below $150,000. Still, because the majority of 529 accounts are "smaller", the actual tax savings for households below $150,000 of income is limited (as those with higher incomes tend to have larger account balances), and most such households actually would mathematically benefit more from the higher education tax credit than the tax-free growth; nonetheless, the 529 proposal is "dead", at least for now.

ETFs’ Future Debated by Top ETF Players (Gil Weinreich, ThinkAdvisor) - This week was the Inside ETFs Conference, and the buzz from the conference was that as large as the ETF industry has become already, there's still ample room for more growth and increases in market share. In fact, overall the estimate is that ETFs have only reached about 10% investor penetration, but that once investors use an ETF for the first time, they're much more likely to do so again in the future, implying that market share could not only grow but accelerate from here, especially as demand increases from retail investors. However, given the breadth of ETFs already in the marketplace - given a total market cap of about $2 trillion - the expectation is that growth in ETFs from here will be driven more and more by specialized and targeted ETFs (e.g., instead of another broad-based international ETF, more ETFs on a country-by-country basis), allowing ETFs to be increasingly used as vehicles for active management rather than just pure broad-based indexing. ETF innovation is also expected to drive new active ETFs, and more ETFs using derivatives that can replace the use of futures and swaps (by institutions). Notably, the panelists of the future-of-ETFs session also predicted that the rising "robo-advisor" trend may accelerate retail adoption of ETFs, given how most robo-advisor platforms are offering asset-allocated ETF solutions.

Edelman Says Robos Will Devastate Most Advisory Firms (Jeff Schlegel, Financial Advisor) - The Inside ETFs conference this week included a panel "debate" on the "man vs machine" future of financial advice, with financial advisor Ric Edelman (CEO of the $13B AUM Edelman Financial) representing the "humans" and Adam Nash (CEO of robo-advisor Wealthfront) representing the machines. Yet what was most notable about the session is that while Nash suggested that robo-advisors weren't really a threat to traditional advisors (as their average client has only $90,000 of AUM, well below the threshold for most "traditional" advisors), it was actually Edelman who suggests that companies like Wealthfront would soon devastate most advisory firms - if not Wealthfront in particular (which Edelman notes still may or may not effectively 'survive' a bear market, and still isn't actually turning a profit as its revenues are exceeded by its startup operating costs), then the "robo" competitors that will follow as larger companies throw their hat into the ring in the coming years (as has already begun with Vanguard, Schwab, and Fidelity). Edelman was especially negative for those who try to compete on price and performance, noting that most advisors individually can't/don't deliver higher performance, and cannot compete on cost alone with pure technology platforms that are commoditizing basic asset allocation and portfolio design; as a result, the (only) advisors who survive will be those who offer something else as a value proposition, like focusing on comprehensive financial planning instead.

Navigators: How to Guide Clients Through Big Life Changes (Olivia Mellan & Sherry Christie, Investment Advisor) - Virtually all clients will face a significant financial transition at some point in their life; in fact, financial planners often position themselves to be engaged during these times of change, from retirement or inheritance, to death of or divorce from a spouse, to the sale of a business. Yet the reality is that the financial planner education and training focuses far more on the numbers than on how to actually help clients through such transitions. To address this gap, advisor Susan Bradley founded the Sudden Money Institute, and has now created the "Certified Financial Transitionist" (CFT) to help train advisors in how to effectively deal with the challenge of helping clients managing big life changes and transitions. For instance, Bradley notes that during times of stress, clients can regress on their communication skills, which means advisors may need to adapt how they communicate with and interact with clients (even long-standing existing clients); more generally, to help clients in transition, it's especially important for advisors to learn and understand what makes the client feel comfortable, and what the client needs in order to be productive and make a good decision (e.g., some clients may want all the details up front before a meeting, while others may want to talk at a high level during the meeting and then take information home afterwards to digest). Also important for helping clients through transitions is to help them prioritize what really needs to be addressed now, what just needs to be handled "soon", and what can really be deferred until later, recognizing that most transitions take years for clients to really get through and that they might even need "no-decision" breaks along the way. As of now, there are an estimated 120 advisors who have gone through the CFT program, and even more who are using the Sudden Money Institute tools with their clients; some advisors are even using the tools and the designation program as a means to differentiate themselves and specialize their practice.

How to Keep Client Data Safe From Online Attackers (Maddy Perkins, Financial Planning) - Financial advisors are a potentially lucrative target for thieves who want to steal data, given the relatively affluent clientele of the typical advisor. As a result, it's crucial to have at least the basics in place for protecting client data in an increasingly mobile and cloud-based world. Key issues to consider include: for your mobile devices, are they password protected, do you have a service to find the device if lost/stolen (e.g., Find My iPhone or Android Device Manager), and do you have a way to remotely wipe/erase the device if you can't recover it; do you have a 'strong' password that would be difficult to guess but is memorable enough for you to recall it without needing to write it down somewhere that it could be stolen (one tip: pick four random common words, put them together into mnemonic device that abbreviates them, making it look random to an outsider); make sure passwords are changed regularly; beware emailing secure financial information (even if your computers are secure, it doesn't mean all the servers between your email and your client's computer are secure), and consider posting important material to a secure client vault where clients can go to download instead; and beware of "social engineering" (where you or your staff are manipulated into divulging confidential information, such as a data thief calling in and posing as a client who urgently needs a wire transfer).

Why Do So Many Owners Resist Revenue Bonuses For Employees? (Angie Herbers, ThinkAdvisor) - It's a struggle sometimes to get employees properly motivated and compensated, and practice management consultant Angie Herbers recommends that staff compensation include a bonus that is based on the revenue of the firm - which helps to incentivize employees to grow the business by allowing them to enjoy some benefits from doing so. However, in practice Herbers finds that many advisory firm owners resist the approach; for some, it may simply come down to not wanting to share in the wealth of the firm (despite the fact that by sharing, employees may help to grow it even bigger!), but more often Herbers notes that the objection comes down to whether people are really properly motivated with money in the first place. And to some extent, Herbers agrees that money actually is often a poor motivator; future raises are too distant to incentivize much, and employees who ask for more money often do so because there is something else already wrong with the work environment or situation. Nonetheless, Herbers advocates using revenue-based bonuses, because the point is not purely about "just" motivating with money, but more effectively aligning the interests of employees and the firm and making the rewards for their efforts to help the business grow more tangible and immediate. In other words, revenue-based bonuses are essentially a form of rewarding employees for thinking and acting like owners, but without actually transferring equity in the firm - and in practice, Herbers states that "without exception" implementing revenue-based bonuses have been highly effective at changing/improving employee attitudes and work ethic.

The Small Decisions That Lost A $5M Account (Dan Richards, Advisor Perspectives) - When clients are trying to make a decision about an intangible service like financial planning, which is impossible to really measure/assess in advance, the decision can be impacted by surprisingly "trivial" factors as clients seek to evaluate the advisor with whatever cues they can find. To illustrate the point, Richards tells the story of a grad student of his - "Marci" - who inherited a $5M estate in her early 30s, didn't want to work with her parents' old advisor, and went in search of her own wealth manager. A request for referrals went to the parents' prior accountant and prior lawyer; both replied promptly, but the accountant passed along the information internally to the firm, while the lawyer invited Marci out to lunch first to try to better understand her situation, and the deeper connection had Marci leaning towards the lawyer's firm. After a series of two introductory meetings with each, though, Marci ultimately went with the accountant's recommendation instead. The key distinction was that with the lawyer's firm, the meetings were in a conference room, but at the other firm the meetings were actually in the advisor's office, which included pictures on the walls that led to discussions about families and a deeper connection. In addition, the latter firm included each of the team members in the second meeting, allowing Marci to better see and connect with all the people on the team she'd be working with. As Richards notes, the distinguishing factors between the firms were ultimately rather trivial, as both were highly professional and capable... but with an intangible service, and especially when both firms are so capable in the first place, it's the small differences that end out becoming the key differentiators that drive the prospective client's decision. So be certain you're really paying attention to the little things, like the promptness of communication, making a personal connection, introducing team members, and creating an office environment that truly makes prospect clients comfortable.

The Wonderful Thing That Happens When You Tell The Truth [About Yourself] As A Financial Adviser (Tim Maurer, Money) - For financial advisor Tim Maurer, the most important event of his life was one that he long kept an ashamed secret: as an irresponsible 18-year-old, he was in a horrific car accident (falling asleep at the wheel), resulting in a broken leg, a broken pelvis, a collapsed lung, a medically-induced coma for 5 days, and a chance-of-survival of less than 10%. Obviously (and fortunately!) Maurer survived, but given that the event was not some random bad luck but a result of his own poor decisions, he spent a long time ashamed to admit to others what had happened, and instead focused on showing outwardly that everything was 'great'. Yet ultimately, Maurer notes that once he sought out help to work through the issues (including panic attacks and other lingering symptoms of PTSD from the traumatic event), and was willing to become vulnerable to clients in admitting his past mistakes, it was a breakthrough for building trust with his clients. By sharing and being vulnerable with his clients, his clients were more willing to share and be vulnerable with him in return (a story echoed by financial planner Carl Richards, who shared - in the New York Times - his biggest financial mistake that led to a short sale of his overmortgaged house).

The One Best Predictor of [Advisor] Success (Julie Littlechild) - Last year, practice management expert Julie Littlechild did a survey of nearly 700 successful financial advisors, looking at what it was that made them successful. In addition to their engagement with clients and employees, Littlechild's research found that the advisor's personal engagement and their passion - and specifically, what advisors called their "mindset" - that drove their success. Yet what exactly does "mindset" mean? Littlechild suggests that ultimately it comes down to "grit" - defined as "perseverance and passion for long-term goals" in the defining research paper on the topic, or more simply the characteristic that helps us stay focused during tough times and bounce back after setbacks. Yet knowing that grit is a driver isn't necessarily helpful, unless people can "learn" to be gritty (as opposed to just being born that way). To dig further into this issue, Littlechild interviewed positive psychologist Caroline Miller, who notes first and foremost that grit can be measured relatively easily (Miller offers a 12-question "grit" assessment tool), and points out that current research suggests grit can be learned (although some are definitely born more or less 'gritty' than others). Activities that can support grittiness include meditation and exercise (think learning to train for a marathon/ironman), spending time with other people with grit (at West Point, those with low grit are roomed with someone who has more grit - in the advisor context, create a mastermind/study group with others who have grit), and working with a coach to practice a more positive mindset. Littlechild also recommends checking out Miller's TedX speech, "The Moments That Make Champions".

Is State Regulation the Future of Financial Planning? (Bob Clark, ThinkAdvisor) - Given the lack of progress on Federal regulation for financial planning in the aftermath of the financial crisis and since the passage of Dodd-Frank, a number of advisors are beginning to push for a structure of state licensing of financial planning instead. In point of fact, the discussion of potential state regulation of financial planning is not new; when the CFP Board was formed 30 years ago, it was considered at the time as well, but the decision was that licensing in each individual state would be burdensome and have few advantages over a centralized credentialing body - and thus, the "ownership" of the CFP marks were transferred into the newly created CFP Board, with the hope that it could someday fulfill that regulatory role. Yet with the ongoing blunders that the CFP Board has made regarding enforcement in recent years, the question arises as to whether state regulation might be the better path after all, especially since it may be more politically and administratively feasible to persuade state (as opposed to Federal) legislators to support a regulatory initiative. In point of fact, Clark notes that a coalition of Florida FPA chapters is beginning to pursue this exact strategy in the state, building on the relationships the chapter leaders have already built with regulators and legislators there (e.g., the Florida FPA Council recently got Florida regulators to create a new type of insurance license for those financial planners who are providing insurance advice but not selling insurance products). On the other hand, it's notable that while the Florida FPA Council makes its efforts towards state regulation, the national FPA organization and the Financial Planning Coalition have not actually come out in support of state regulation of financial planning (at least, not yet?), and the chapters may ultimately find themselves in conflict with the CFP Board if state regulation becomes a viable alternative path to the CFP Board itself.

Why I Want You To Steal My Ideas (Seth Godin) - In the industrial economy, there is a mentality that what's yours is not mine (and vice versa); if everyone comes to the factory to take a free sample, the factor runs out of the product and the company goes bankrupt. But when it comes to the world of ideas, the situation is different. If everyone takes a common idea and uses it, the world gets richer as the idea is built and expanded upon; ideas only get bigger when they're shared, and cross-pollination can happen. This doesn't mean that we shouldn't protect our intellectual property, but Godin makes the case that ultimately what we need to protect is the specific execution of useful innovations, not the underlying ideas themselves (unlike many patent trolls, who try to patent and profit from vague ideas and may stifle innovation in the process). Similarly, Godin notes that while we all benefit from the spread of good ideas, that doesn't mean it's appropriate to pass off someone else's idea as your own; now you're not just "stealing" an idea worth spreading, you're stealing their implementation of the idea, and that's a problem; contributing synthesis while crediting an original source is good, but corrupting the work by (inappropriately) claiming authorship is not. The bottom line, though, is simply to recognize that ideas worth spreading shouldn't have walls around them; in fact, our goal should be a relentless drive to find new ideas to "steal", give credit, and synthesize something better for us all in the process.

Why You Should Tell Your Children How Much You Make (Ron Lieber, NY Times) - This column, an adaptation of Lieber's upcoming book "The Opposite Of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money", looks at the impact of parents' typical silence about money. By not discussing money issues, the subject of money is often shrouded in mystery for children, who may understand that money has some kind of power, but don't really understand it, leading to "tough" questions like why people have different sized houses, whether they are rich or poor, why they can't have all the toys they want, etc. Of course, there are often good reasons for parental silence, from fear of being called out for our own financial mistakes, to shielding children from what is a stressful subject for many, but Lieber makes the case that the silence can be even more dangerous, leading children to grow up with an ignorance about money that leads to a lack of financial literacy, debt problems, and more. Not that parents would necessarily share every financial detail right away, but children as young as 6 or 7 can begin to understand things like the grocery bill, how it consumes a portion of the monthly budget; at slightly older ages, children can be made aware of things like the cost of extracurricular activities, and the potential trade-offs (not eating out means more money for the Disneyland vacation). Eventually, though, Lieber suggests that children should be made more aware of the family's overall income and net worth situation, as many will start to figure it out anyway - especially when they start going online, discovering the value of their home just by typing their address into Google, and starting searching for more financial information, not to mention that children may already be more aware than they're given credit for anyway (as they witness parents' spending behaviors first hand!), and many will ultimately know all the details as soon as they apply to college (and the family completes the FAFSA to apply for financial aid). Ultimately, though, the point of this sharing of information is really about trying to help children better understand money and what it means, instill lessons of fiscal responsibility and financial literacy, and ideally help them begin to make connections between money decisions and the family's values.

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!