Weekend Reading for Financial Planners (Jan 4-5)

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.

Small RIA M&A Firm Files Anti-Trust Lawsuit Against Schwab/TD Ameritrade Merger... And Is Promptly Denied (Oisin Breen, RIABiz) - When the news broke in November that Schwab was acquiring TD Ameritrade, the immediate concern in the advisor community was whether the "Schwabitrade" merger would lead to too much industry concentration in the world of RIA custodians. As while relative to the retail brokerage marketplace (even a combined Schwab and TD Ameritrade may only have barely double-digit market share), estimates are that in the channel of 'purpose-built' RIA custodians, Schwabitrade may control as much as 50% to 75% of the entire RIA custodial marketplace. Raising questions of whether the proposed merger would eventually spawn anti-trust scrutiny from the Department of Justice, or an outright anti-trust legal challenge from the industry itself. And sure enough, the first such challenge came to light this week, as BlackCrown (an M&A firm that works in the RIA and FinTech world, with leadership formerly of the AppCrown Salesforce CRM overlay provider, which has a deep relationship with many TD-Ameritrade-custodied RIAs) filed an anti-trust challenge against the Schwabitrade merger in the Southern District of New York, claiming that the merger would allegedly "disenfranchise a great segment of the industry" and "have a significant impact on innovation", and suggesting that the courts should require TD Ameritrade to divest its custodial business to BlackCrown to maintain industry competitiveness (as forced divestiture is often the mandated solution to such anti-trust concerns). However, it's not entirely clear whether BlackCrown aims to be a serious contender for a TD Ameritrade divestiture, or if the lawsuit is simply a PR stunt, especially since the challenge was filed pro se (i.e., with BlackCrown founder Franklin Tsung filing on his own, without an attorney, on behalf of BlackCrown), and in fact the Federal judge hearing the case has already denied and dismissed the case (given more than a century of precedent than an individual cannot personally represent a corporation in such matters). Though it remains to be seen whether BlackCrown's foray into raising anti-trust concerns about the Schwabitrade merger was just a flash in the pan, or a harbinger of more challenges to come in the coming months?

Vanguard Latest To Offer Zero-Commission Stock Trades (Andrew Welsch, Financial Planning) - This week, Vanguard announced that its direct-to-consumer brokerage platform was expanding from already-commission-free ETF trades to also offer commission-free stock and option trading as well, matching the "ZeroCom" shifts of Schwab, TD Ameritrade, Fidelity, and other retail brokerage firms in recent months. On the one hand, the Vanguard change may largely be perfunctory and simply to 'check the box' alongside other retail brokerage platforms as, in practice, investors on the Vanguard platform are far more likely to be buying Vanguard's own index funds than doing much individual stock and options trading. On the other hand, the Vanguard change is arguably the capstone of a major industry shift over the past two years, starting in the fall of 2017 when TD Ameritrade unceremoniously dropped most Vanguard ETFs from its no-transaction-fee platform in lieu of State Street ETFs (after what was reportedly an unwillingness of Vanguard to pay for NTF platform access as State Street was), which in turn caused Vanguard to respond in the summer of 2018 with its own NTF ETF platform for virtually all ETFs (and not just those ETF providers willing to pay-to-play), subsequently leading Schwab to match Vanguard's no-transaction-fee platform for ETFs and expand to all stocks and options this fall... destabilizing TD Ameritrade's own trading revenue and fomenting the proposed Schwabitrade merger. Which means, in the end, the real significance of Vanguard's transition to zero commissions isn't simply that it is matching competitors, but that the move is a capstone to what appears to have been a series of industry shifts that Vanguard spawned specifically so that higher trading commission charges couldn't be used against the firm to put it at a disadvantage for being unwilling to engage in pay-to-play distribution (and that TD Ameritrade's effort to buck the trend and fight Vanguard may have led to its own demise?)?

The New MACRA Medigap Deductible Rules Are Here (Allison Bell, ThinkAdvisor) - Back in 2015, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) altered the rules for what Medigap supplemental insurance policies may cover, specifically eliminating the ability of such policies to cover the Medicare Part B deductible of $198/year. The reason for the change is that, under the original Medicare system, it was intended from the start to be a cost-sharing program as a means to discourage 'unnecessary' use of care, and the original Medicare designers had assumed that most patients could use their own savings to take care of routine medical bills. However, the rise of Medigap supplemental policies - which now cover an estimated 35% of the 38.4M people enrolled in traditional Medicare - and particularly the Medigap "Plan F" coverage (which pays all Medicare cost-sharing amounts, including the Part B deductible), effectively eliminated this cost-sharing by allowing those insured by Plan F (an estimated 52% of all Medigap policyowners) from any upfront costs at all. Accordingly, MACRA mandates the elimination of Medigap coverage for the Medicare Part B deductible, effectively forcing even those with supplemental insurance to still have exposure to the deductible. In practice, this means that (for those who become newly eligible for Medicare coverage on/after January 1st of 2020), Plan F Medigap policies will no longer be available, and new enrollees will have to buy Plan G instead (which does not cover the $198 Medicare deductible), and Medigap Plan C (which were less comprehensive but also covered the $198 Medicare deductible) will also no longer be permitted. Notably, though, individuals who already have Medigap Plan C or Plan F policies are grandfathered and can keep their no-deductible coverage, as well as those who first became eligible for Medicare prior to January 1st of 2020 (e.g., because they had already turned age 65 but put off actually enrolling in Medicare) even if they had not yet bought a Medigap Plan C or Plan F policy.

What The Critics Get Wrong About Reverse Mortgages (Wade Pfau, Advisor Perspectives) - In recent years, industry research has shown that - despite negatives in the consumer media - there are a number of effective retirement planning strategies that incorporate reverse mortgages. The caveat, though, is that reverse mortgages do still have a non-trivial upfront and ongoing cost, much of which can be (negatively) amortized into the loan itself but still impacts the long-term household balance sheet with accruing interest costs. The caveat, though, is that to the extent that using the value of home equity (via a reverse mortgage) reduces the need for portfolio withdrawals, and portfolios on average earn more than the borrowing costs of the reverse mortgage, it can still be a financial positive to keep growth assets invested while borrowing at lower fixed costs (not unlike the traditional approach of keeping a mortgage in retirement while also maintaining a portfolio). And the strategy may look especially appealing in situations where there is a shorter-term need or desire to not draw heavily on the portfolio (e.g., when the market is down, or during the 'bridge' years when retirement has begun but Social Security payments have not). Particularly since reverse mortgages are simply 'borrowing' and are not the same as withdrawals, which therefore don't trigger taxation as would occur when withdrawing from an IRA or liquidating a taxable investment account (reducing how much needs to be drawn against the reverse mortgage in the first place).

An 'Annuity Hater' Revisits SPIAs (Allan Roth, Advisor Perspectives) - While the realm of sometimes-high-cost deferred annuities has been the subject of considerable debate over the years about whether the costs are really worth the retirement income guarantees provided, when it comes to the Single Premium Immediate Annuity (SPIA, which typically has modest, if any, upfront commissions) the academic research has long been supportive of their efficiency in supporting retirement income. For instance, a 65-year-old male today can purchase a $100,000 SPIA and receive a payout of $570/month (or $6,840/year) for a single-life payout from a highly-rated insurance company, equivalent to a 6.84% payout rate. Of course, the caveat is that if an individual passes away, the payments stop altogether (with a single-life-only payout), which means it's necessary to stay alive and receive 15 years' worth of payments just to break even. However, for those who live a long time - e.g., to age 100 - the implied annualized return of 34 years of payments is equivalent to an annualized return of 6.09%/year (even after accounting for the initial recovery of principal), and even with just an 'average' life expectancy (of 23 years) the internal rate of return is 4.36%. By contrast, it would take $109,200 to build an equivalent bond ladder with Treasury bonds, or $92,400 with corporate bonds (arguably more similar to taking on the corporate credit risk of the insurance company, though annuities do have an additional layer of state guaranty protection), and of course the bond ladder payments would go to $0 for anyone who lives to the 24th year (while the SPIA may continue to pay out for years or even decades further). For those who buy an inflation-adjusting SPIA, the payments would be $404/month (instead of $570/month), which would require $95,000 in TIPS to purchase an equivalent bond ladder to life expectancy... suggesting that there is a premium on the cost of inflation protection (the $14,200 difference in the cost of an equivalent government bond portfolio). Nonetheless, relative to available bond yields - and without the risk of outliving the bond ladder - Roth notes the relative competitiveness of single-life SPIAs (albeit they are still inferior to the implied rates of return of simply delaying Social Security to age 70 first!).

What's Holding Advisors Back From Effective Marketing? (Elizabeth Brigham, Morningstar) - Morningstar's 2019 Advisor Insights Survey evaluated the main business priorities of financial advisors and found that the top priority is growing the business with more clients (followed by growing the business with additional assets from existing clients)... while at the same time, the top-ranked challenge for financial advisors was cited as the difficulty in acquiring new clients (followed by hiring additional advisors for the practice to service those new clients). At this point, though, the research also showed that the primary strategy for growth is simply getting referrals from existing clients, while only about 1/3rd of advisors are actually looking at doing any new marketing activities to acquire new clients... raising the question of why, exactly, advisors are so uninterested in marketing when their priority is growth and their primary challenge is that they're not getting enough new clients already? Morningstar suggests that the problem may lie in a mismatch between what advisors are marketing as valuable, and what consumers actually want from an advisor. For instance, a separate study from Morningstar on the Value of an Advisor from earlier this year found that advisors ranked "understanding the client and their needs" as their top value, while consumers merely ranked it 7th (out of 15); similarly, while advisors ranked maximizing returns as 14th, consumers ranked it 4th; and while advisors ranked "helping clients stay in control of their emotions" as 11th, consumers ranked it dead last (by a significant margin!). In essence, Morningstar's research suggests that advisors may either be overweighting the significance of client-specific behavioral coaching and underestimating how much good old-fashioned returns still matter... or at the least, that advisory firms are still not finding a way to effectively communicate the value of their behavioral advice (and thus may be struggling in their marketing accordingly).

For Financial Advisor Ads, A New Frontier? (Steve Garmhausen, Barron's) - With the news last month that the SEC is looking to overhaul its RIA advertising rules (for the first time in nearly 60 years!), potentially allowing both testimonials, the use of third-party advisor review sites, and even (a limited amount of) investment performance in ads in the future, the industry is abuzz over how financial advisor marketing may change in the coming years. The upside of the proposals is that advisors will finally be allowed to highlight real-world success stories with clients and how they've been able to help, along with finally unlocking the world of financial advisor review sites (that heretofor have struggled due to the inability of advisors to proactively link to or cite such reviews, or even ask clients to post reviews). The newly proposed regulations would also significantly relax restrictions around online and digital marketing and the use of social media. The caveat, though, is that not every advisor necessarily wants to advertise their investments' performance, clients may not always be willing to give testimonials (either because they just don't want to share their experiences, or because they're concerned that highlighting their work with a high-profile advisor will be an indicator of their wealth and make them a target for identity thieves and scammers), and if the testimonials are still laden with disclosures, such disclaimers may undermine the credibility and value of the testimonial more than the actual testimonial enhances it. Nonetheless, with a final version of the advertising regulations overhaul expected later in 2020, it's anticipated to spur significant changes in how financial advisors approach advertising in the future!

Not Creative? How To Market Your Financial Planning Firm Anyway (Carolyn Dalle-Molle, XY Planning Network) - For some advisors, the biggest challenge in marketing is simply that they don't feel like they're 'creative enough' to come up with good marketing strategies in the first place. Though as Dalle-Molle notes, just writing a sentence on a piece of paper, taking a picture, or saying something to another person, is a 'creative' act, which means saying "I'm not creative, so marketing is hard" requires some further diagnosis about what the real blocking point is. The starting point is to better understand the symptoms - which means writing down what, exactly, are the marketing blocking points (e.g., "If someone points a camera at me, I become so awkward" or "when I look at 6 logo options, I have no idea which one to pick"). Of course, not every symptom even can be treated, but it only takes a few positive steps to begin a marketing program, so target the areas that feel most solvable (e.g., "I will treat 'I procrastinate about writing blog posts and feel guilty about it' and 'I can't stop thinking about my niche and changing it every few months'"). From there, decide whether you'll try to solve the symptom yourself (a "DIY" approach), or by outsourcing to an outside professional (e.g., I will buckle down and decide on a niche to stick with, but I will outsource writing blog posts because I can't stop procrastinating about the writing myself). For DIY "treatments", Dalle-Molle suggests two primary approaches: either invest in yourself to acquire the new/necessary skill and practice it, or impose a useful time limit (e.g., "I will do this by next Friday" or "I will time-block next Tuesday from 9AM to 9:30AM to focus and get this done"), to help stay motivated and focused. In essence, the key point is that when you're feeling stuck or overwhelmed by marketing and not feeling creative, substitute a process for 'not creative', with a focus on the most solvable areas of your marketing struggles... and then get it done!

Seven Small Things People Use To Decide If They Like You (Travis Bradberry, Forbes) - The human brain is hardwired to judge others... a part of our evolved survival mechanism to interpret the behavior of others to assess whether they are a friend or a threat. In fact, we are actually so attuned to judging others that one study found individuals could accurately assess someone's personality traits (e.g., extroversion, agreeableness, conscientiousness, etc.) simply by looking at pictures of their shoes. The significance of these cues (and their impact) is that it's important to be cognizant of what those cues are, or risk giving off unwittingly bad impressions by not being mindful of how one's sometimes-subtle actions are being interpreted by others. Some notable cues include: how you treat waiters and receptionists (so common as an indicator of your personality makeup that it's often used as an interview tactic to assess whether the interviewee is merely putting on a good face for the interview or treats everyone positively); how often you check your phone (as looking away at the phone mid-conversation is often received as a lack of respect, attention, listening skills, or willpower); nervous repetitive habits (e.g., touching nails, picking at skin, etc.) which may indicate you're feeling overwhelmed or not in control; how long it takes you to ask questions in a conversation (versus just talking about yourself); your handshake (which isn't entirely predictive of outcomes, but firmness of handshake is associated with those who are more extraverted, less shy, and less neurotic); tardiness to meetings (which may be interpreted as a lack of respect, a tendency to procrastinate, or being lazy or disinterested); and (failure) to make eye contact (as failing to do so often signals disinterest, shyness, or embarrassment... though the recommended eye contact is for roughly 60% of a conversation, as 100% eye contact may be perceived as aggressive or outright 'creepy'!).

Fearless Forecasts For Financial Advisors In The 2020s (Bob Veres, Inside Information) - Looking back over the past decade, and comparing the world of today to what it was in 2010, provides a stark reminder of just how much everything can change in the span of 10 years (even if the incremental year-to-year change seems slow). Accordingly, Veres looks forward to what may change in the world of financial advisors in the coming decade, recognizing how such change may seem slow in the short term but can compound dramatically by the end of the 2020s. Key forecasted changes include: financial planning will emerge out of the asset management cohort into a standalone domain of its own, and actually begin to subsume it (where instead of viewing financial planning as a subdomain and extension of investing, the investing will become a subdomain and extension of financial planning); the landscape of investment options (stocks, bonds, mutual funds, ETFs, alternatives) will winnow down to fewer better solutions, making the investment process simpler and faster and easier to manage; the fiduciary fee-compensated advisors will continue to take market share from the brokerage firms, alongside a continued shift away from the AUM model and towards various fee-for-service models (e.g., quarterly flat fees, hourly fees, subscription fees, etc.); the SEC will create a new division to regulate financial planning advice as distinct from investment-related activities (that may rely more on peer review than centralized regulatory examiners); and the rise of regulation of financial planning itself will lead to "financial planner" finally becoming a regulated title, and the educational/credentialing requirements to hold out as such will be lifted from the current Series 65 exam.

A View Of The Planning Profession In The Year 2030 (Bob Veres, Advisor Perspectives) - As a part of the recent celebration of the 50-year anniversary of financial planning, the CFP Board convened a think-tank of 80 people from across the profession and its key associations to try to define the current challenges of the financial planning profession, and what issues the profession itself must tackle in the coming decade. Key themes included consumer confusion around regulations, designations, and titles; the lagging of ethnic diversity of financial planners to match the growing ethnic diversity of America itself; how consumer technology companies (e.g., Amazon and Google) are lifting client expectations of service from financial advisors (who are struggling to keep up with slower technology evolution within our own industry); and misalignment between the predominant fee structure (AUM) and the value of financial advice itself... not to mention the challenge of a financial services product manufacturing and distribution industry that thrives on these issues remaining ambiguous and problematic. Other notable themes in the future of financial planning, from a consumer perspective, included: life expectancy potentially extending out to 120 years old on a consistent basis; uncertainty around Social Security's solvency; reinventing "retirement" itself as a phase of life; the risk that the next market collapse could threaten consumer trust in financial planners along with financial institutions in general; and a major consumer brand becoming a provider of financial advice. Notwithstanding these challenges, though, it's important to recognize how far financial planning has come already, including popularization of the concept itself and awareness of the CFP marks as a real financial planning designation, rising standards of practice (as 'fiduciary' was nearly unheard-of 20 years ago), the emergence of financial planning academics and an increasingly defined body of knowledge, the rise of institutional custodians and an independent advisor ecosystem of support, increasingly sophisticated software tools, and more women and advisors of color than there were 30 years ago (even if still lagging behind the trends in the general population). Ultimately, the gathering aimed to create a Mission Statement of what would come from this 2019 meeting, to mirror the original mission statement from 1969 that spawned financial planning itself, and concluded that in the end, 2019 may become the crossing point where multiple organizations - including not only the CFP Board, but also the AICPA, the CFA Institute, and the Investments and Wealth Institute - came together for the sake of the profession and agreed to harmonize towards a path of professional recognition for those in the business of providing comprehensive financial planning advice.

Ten Ways The Wealth Management Industry Won't Change In The Next Decade (Jonathan Durocher, Globe And Mail) - One of the fundamental challenges with predicting and forecasting change in the coming decade is that not only is it difficult to do so, but it's even harder sometimes to figure out how to position an advisory business to take advantage of those trends (that may or may not play out). Accordingly, Jeff Bezos is known for suggesting that sometimes the best path forward is not to focus on trying to figure out what will change in the coming years, but instead to figure out what won't change and anchor your long-term bets there instead. So what's most likely to not change in the world of wealth management in the coming decade? Durocher has several suggestions, including: advisors with high emotional intelligence will continue to do a better job with clients (so invest into yourself, and your communication and empathy skills); business development skills will remain crucial for those looking to grow (another opportunity to invest in yourself and your sales-training skills); investors will continue to think too short-term and have a tendency for loss aversion (which means behavioral management will still matter); younger investors will continue to say they have no money to invest at their current stage of life (which means focusing on other services of relevance and value); diversification will continue to work (and be driven by asset allocation), but will always have something underperforming (the epitome of true diversification!)... which means helping clients be more patient with their investments and stay the course will never become outdated or made irrelevant by technology!

I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!

In the meantime, if you're interested in more news and information regarding advisor technology, I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors as well.