Weekend Reading for Financial Planners (Jan 9-10)

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 9th/10th:

FINRA’s New Target: Broker Culture (Kenneth Corbin, Financial Planning) – This week, FINRA issued its list of regulatory and exam priorities for 2016, which in addition to the “usual” slate of regulatory concerns around broker-dealer supervision, investment liquidity, suitability of sales to elderly clients, and the rising concern of cybersecurity, also included a new addition: the culture of many broker-dealers, and their failure to establish a “compliance-driven ethos” that works to minimize conflicts of interest. Of course, culture itself is a very fuzzy concept for a regulator to measure, and FINRA acknowledges that it will be difficult to formalize a methodology to assess a firm’s compliance culture. Nonetheless, when combined with FINRA’s ongoing exam sweep looking at how firms are managing conflicts of interest, FINRA noted that it aims to focus on several key criteria around a firm’s (compliance) culture, including: whether control functions are valued within the organization; whether policy or control breaches are tolerated; whether the organization proactively seeks to identify risk and compliance events; whether immediate managers are effective role models; and whether the firm has sub-cultures that do not conform to the overall firm culture (e.g., a problematic branch office or a trading desk).

Social Graces (Wade Dokken, Financial Advisor) – Social media adoption amongst advisors is on the rise, but with a very noticeable age skew, with those under 30 using social media 50% more in their practice than those over age 60. Still, a recent survey by Gainfully and Wealthvest found that the subset of advisors generating more than $1 million in annual revenue were 40% more likely to use social media than lower-producing advisors. In other words, social media isn’t just being adopted more by young advisors than older ones, but also more by the most financially successful advisors over the rest. And while it’s not entirely clear whether social media makes those advisors more successful (or whether more successful advisors just happen to also use social media more), advisors active on social media were more likely to report increasing clients and AUM from their social media efforts. Notably, the biggest uses of social media were simply to improve professional brand and share relevant news and content with clients, in addition to attracting prospects and networking with peers. In terms of platforms, the most popular amongst advisors remains LinkedIn and then Facebook, with Google+ and Twitter barely registering with advisors. Notably, though, the survey finds that the greatest sticking point for most advisors remains the creation of the content that they would share on social media, with a growing number expressing interest in third party content/platform solutions (in which the study’s authors have a vested interest as Gainfully is a social media marketing platform for advisors).

Why Email Is The King Of Financial Advisor Marketing (Phil Rogers, Blueleaf) – While there’s been an explosion of buzz around financial advisor adoption of social media, Rogers makes the case that “old-fashioned” email still works better than any other marketing channel. The primary reason is that email can still be very personal (we bring it with us on our smartphones wherever we go!), even as it also has a better-than-ever “return on time” thanks to the availability of low-cost email automation tools. And the automation is critical, as one recent Morningstar study found that almost 1/3^rd of clients prefer weekly emails from their advisor, and another 1/3^rd expect at least monthly, as long as the content itself is relevant and useful. Managing such a volume of email will likely require the development of a “client communication calendar”, so you can plan out what will be sent and when. But as your email list grows, you can even make tweaks and adjustments to further optimize the results. For instance, finding what kinds of email subject lines your clients and prospects respond to; are they more likely to open an email from your address than a generic “[email protected]”, and more likely to open and click an actionable subject line like “Check out our quarterly insights” over just “Our Latest Quarterly Newsletter”? When (i.e., what time of day) they are most likely to open and read the messages, so that you can time when you send accordingly? In addition, you can further segment your list into sub-categories for prospects and clients (and even different types of prospects), to provide them the most targeted and relevant information. Because when the information is highly relevant, they’re more likely to forward it along to their friends and family, which of course just grows your email list even further!

Keeping Employees On Track (Kelli Cruz, Financial Planning) – For advisory firms to succeed and grow, they must be able to set goals for their teams and have a method for managing performance. Yet Cruz notes that few firms really have a rigorous process for setting and evaluating performance. The starting point is to set goals, both for the firm, and for individual employees (in a manner that aligns to the goals of the firm), that fit the “SMART” goal framework – an acronym for goals that are Specific (employees know exactly what is expected), Measureable (have a reasonable way to be evaluated), Achievable (goals should be attainable, albeit with a bit of a stretch), Relevant (to what the employee’s role is in the firm), and Time-bound (deadlines create urgency for completion!). Once goals are set, Cruz emphasizes that they must be monitored on an ongoing basis – not just every few months or once a year, but informally on a weekly basis. The weekly check-in process helps ensure that employee discussions stay forward-looking on what to do next, where coaching and guidance is most constructive, and don’t get mired in backwards-looking fixes to correct what already happened (but shouldn’t have). Informal weekly meetings can then culminate in quarterly meetings that are more formal, where results are evaluated more directly, and constructive feedback can be provided (focusing on what has been learned, and what still needs to be learned). And ultimately, be certain that compensation ties into the achievement of goals – because it’s crucial for employees to know that meeting and exceeding performance expectations will be rewarded (through raises, bonuses, or perks like flexible schedules or time off) to ensure they feel incentivized.

RIA Custodian Technology Roundup (Joel Bruckenstein, Financial Advisor) – As technology for consumers continues to improve across all industries, so too are consumers expecting more and more of the technology from financial advisors. Yet with the average advisory firm far too small to develop their own solutions, Bruckenstein notes that in practice it’s been the RIA custodians that increasingly have been either the developers of technology solutions for advisors, or at least the aggregators of packaged (third-party) technology bundles for advisors. Accordingly, Bruckenstein highlights some of the technology solutions – and differentiation – across the various RIA custodian platforms. For instance, Fidelity is working on an advice-agonistic (same on desktop or mobile) HTML5 unified platform of its current Streetscape and Wealthcentral platforms, and further integrating its investment management tools with its recently acquired eMoney Advisor financial planning software. Fidelity is also building out its digital on-boarding – i.e., “robo” – capabilities, including ways for advisors to bulk-process account opening requests (e.g., for clients opening multiple accounts at once), as well as a broader digital advice platform for its advisors. TD Ameritrade also continues to expand its technology platform, including beta testing its new “Veo One” next-generation advisor workstation (ultimately expected to facilitate over 90 vendor integrations, in addition to deep integrations to TD Ameritrade-based tools like iRebal). Veo One is expected to simplify workflows and manage your entire day of asks within one platform, as well as business intelligence capabilities to track Key Performance Indicators for the advisory firm. The third RIA custodian Bruckenstein highlights is LPL, which is usually thought of as the country’s largest independent broker-dealer (which it is), but it is also the fifth-largest independent RIA custodian. LPL’s next generation advisor platform is called “ClientWorks” and is in the process of being rolled out, with an increasing emphasis on integrations with third-party solutions (e.g., both Redtail and Salesforce for CRM, Albridge and Morningstar and Orion for portfolio management). An expanded practice management dashboard is also expected to roll out in the first half of 2016, and LPL has indicated it’s also working on some form of “digital advice” offering for its advisors as well.

The Art Of Self-Management (Deena Katz, Financial Advisor) – Tactics for improving time management and personal productivity are popular these days, but Katz quotes management guru Peter Drucker’s famous reminder “There is nothing so useless as doing efficiently that which should not be done at all.” In other words, the real key to personal efficiency is not just doing tasks more efficiently, but figuring out which tasks shouldn’t be done at all. For instance, are you trying to figure out how to scan/file documents that realistically don’t need to be kept at all? Do you write long emails for what could be resolved in a quick call phone (or alternatively having long phone calls for what could be done in a quick email?)? Are you having client meetings because you said you’d have them even though there’s nothing relevant to talk about or do with/for the client at that meeting? Katz cites a book called “Procrastinate On Purpose” by Rory Vaden for some further tips about how to refine not just your efficiency process, but figuring out what should be jettisoned altogether. The first key is just recognizing that it’s OK to say “no” to some things – in fact, it’s essential, or you’ll find yourself struggling for time when the real problem is that you lack control over what you’re spending your time ON (and the “control” is up to you!). In fact, Katz cites Vaden as saying ultimately, there is no such thing as “time management” at all – it’s really just “self management” about what you agree to spend your time on and what will be prioritized, which is a significant but meaningful shift in mindset!

The New Tools To Measure Risk In Your Portfolios (Michael Edesess, Advisor Perspectives) – Given the challenges in recent years of “traditional” portfolio risk metrics like standard deviation or value-at-risk (VaR), Edesess highlights how software tools like HiddenLevers (others in the category include Rixtrema, Bloomberg, and RiskMetrics) are using a scenario-driven approach to portfolio risk analysis instead. The basic idea is that just using standard deviation assumes that all the investments in the portfolio will maintain steady relationships with each other, while a scenario approach might recognize that the dynamics will be different in varying scenarios. For instance, rising rates driven by economic growth may be good for commodities and equities, while rising rates due to unexpected inflation may still be good for commodities but bad for equities. In essence, the idea of the scenario approach is to “stress test” the portfolio – selecting scenarios that would knowing be problematic for the portfolio, but with consideration of how the interrelationships amongst the portfolio investments might vary from one scenario to the next (which could be done with a forward-looking hypothetical view, or looking historically at how those relationships occurred in the past in similar environments based on regression analyses). Notably, a key benefit of the approach is the realization that portfolios that seem well diversified against “some” problems are overexposed to others, as illustrated back in 2008 when previously “diversified” low-correlation portfolios saw those correlations change in the crisis (with most asset classes going to a correlation of 1.0, but long-term Treasuries shifting to a negative correlation instead).

Not Your Grandfather’s Irrevocable Trust (Martin Shenkman, Financial Planning) – Historically, an irrevocable trust had a single trustee (or possibly a co-trustee) to implement all of the essential oversight and management of a trust and its financial affairs. Now, however, the key roles of a trust are increasingly being subdivided amongst a number of different people, each of whom serves a specialized function. For instance, there may be a general or administrative trustee that handles basic tasks like maintaining records and filing tax returns, and then a separate investment trustee responsible just for the investment management of the trust’s assets. Beyond that, a trust might also have a ”distribution committee” – a separate group of fiduciaries who are empowered to (just) make decisions about distributions to the beneficiaries (who gets what, under the terms of the trust and the available discretion of the committee). And some trusts even have a “trust protector” as well, who has the power to fire/replace trustees or change the location (and legal jurisdiction) of the trust, but holds no other powers as well. Other positions associated with some irrevocable trusts include: a loan director (who decides if/whether trust assets can be loaned to the settlor, which may be done to trigger grantor trust status while keeping the trust assets out of the settlor’s estate); a substitutor (who can swap property from the trust to the settlor, allowing low-basis assets to be shifted back to the settlor to get a step-up in basis at death); and a charitable selector (who can add charitable beneficiaries). Other popular new tactics for irrevocable trusts include decanting (where the income of a trust is “poured” into a new trust to shift the assets over time without violating the original trust), changing situs (to shift to more favorable tax rules), and powers of appointment to create additional flexibility about who gets what assets (and potentially trigger a step-up in basis opportunity). Notably, though, not all of these unique roles and tactics are permitted in all states, so it’s important to verify that the role is permitted in the particular state in which the trust will be based.

Costs And Incidence Of Long-Term Care (Wade Pfau, Retirement Researcher) – While many statistics are thrown about regarding the likelihood that someone needs long-term care, the actual empirical data is still remarkably limited. Pfau notes one leading study in 2005 by Kemper, Komisar, and Alecxih that estimated (based on prior data and forward-looking trend analysis) that 58% of men and 79% of women aged 65 or old would need long-term care at some point, with average lengths of care at 2.2 years for men and 3.7 years for women. Notably, not only were men less likely to need care, but their typical stays were also shorter; of those who do need care, the research estimates that fewer than half of men requiring stays above 2 years, compared to almost 2/3rds of women staying that long (in part because the men are more likely to have a spouse to help care for them, while women are more likely to be widows needing extended assistance). Of course, not all of those people will need full-time nursing care (which the Center for Retirement Research estimates will only be necessary for 44% of women and 58% of women); many will simply receive care at home instead. Costs associated with care also vary; Genworth produces a widely cited annual Cost of Care Survey every year which finds median annual costs in 2015 of $43,200/year for assisted living, $80,300 for a semi-private room in a nursing home, and $91,250 for a private nursing home room (which would be nearly $500,000 cumulatively for a 5-year stay). Costs are higher in the northeast and west coast, and also more remote areas like Alaska and Hawaii, and concerns remain that even with more facilities being built, the looming demand from a wave of baby boomer retirees may accelerate cost increases even more in the future.

Are Data Aggregators Really Data Aggravators (Chris Cumming, Financial Planning) – From the consumer perspective, Personal Financial Management (PFM) tools that aggregate account information into a single dashboard are a helpful solution to manage their finances. From the perspective of banks, though, account aggregators are becoming “account aggravators” that due to their sheer volume of usage and requests are overwhelming banks’ servers and slowing the service for the bank’s direct customers. In response, some banks last fall began to restrict access to account aggregation tools and throttling their usage, but commentators suggest that it won’t be viable for banks to turn the spigot off entirely, risking both consumer backlash and conflicts since some banks actually use the account aggregation tools for their own customers as well. In point of fact, at least some data aggregators are already trying to coordinate with banks to avoid overwhelming bank servers (e.g., not updating information as rapidly when the banks are doing their own website maintenance or already having high traffic). But ultimately, the problem really appears to be that the information-sharing process needs to be updated, with financial institutions improving the way data is made available and data aggregators collecting it more efficiently, which would improve the computer workload on both sides. The trickier solution is figuring out how to ensure the security of client data, especially since banks are highly regulated with their data but the account aggregators themselves are not; on the other hand, aggregators point out that most don’t actually store login credentials for client accounts anyway (instead licensing the information flow from larger players like Fiserv or Yodlee), which significantly reduces the risk of data breach. In the long run, the final solution, as proposed by groups like the Financial Services Information Sharing and Analysis Center, is to create a central database into which all banks can feed customer data, and from which the aggregators could safely pull the appropriate information for consumers.

How Economics Went From Theory To Data (Justin Fox, Bloomberg View) – A subtle but significant shift has been underway in economics research over the past 20 years: while the majority of research in the 1960s, 70s, and 80s was all about theory (or theory with a hypothetical simulation), since the 1990s a growing volume of published studies are actually focused on analyzing real-world empirical data. The shift appears to be driven in large part by the availability of the personal computer, which starting in the 1980s made data-crunching directly accessible for the typical economics professor, and has accelerated over the past decade as the internet is making more and more types of data available to number-crunch. And a small but growing number of studies are actually beginning to analyze bona fide experiments, albeit based in campus “labs” of college students, that are uncovering new insights about how individuals actually behave (financially and economically). Of course, the caveat is that more data still doesn’t necessarily provide definite insight; in fact, the National Bureau of Economic Research (NBER) originated in the “economics empirical heyday” of the 1920s and 1930s, but still did little to help economists figure out the Great Depression. Still, today’s economists, that are looking to data and trying to align theory to fit it, are arguably learning more than ever before about how the economy really works, with the potential to become better at designing good economic policy in the future.

Becoming A Client Can Open An Advisor’s Eyes (Dave Grant, Financial Planning) – In this article, Grant shares his experience in seeking out a financial planner for his own family, and how the experience as a prospective client is far different than from the advisor’s perspective. For instance, Grant noted that the breadth of industry models is great flexibility but also makes it very challenging just to find the right advisor. In addition, despite being a NAPFA fee-only advisor himself, Grant and his wife found themselves gravitating to planners based on the advisor’s personality and he/she engaged them (and whether the planner was really a CFP), not necessarily their compensation model. Other observations that Grant had from his experience included: gathering together insurance and estate documents really is a pain, and the data gathering process is far more burdensome for new clients than he ever realized and has significant room for improvement (but is a huge value for clients once they actually get organized); while there were some time efficiencies in meeting virtually, Grant found the personal preference for himself and his wife was to find a planner they could meet locally; helpful follow-up to clients to help them follow through is essential, as even well-intentioned clients may get overwhelmed by everything else going on in their lives; and the real value is not just having someone help get everything done up front, but to be an ongoing guide in the future as well. The bottom line - if you've never been through the financial planning experience as a client, it's something you might consider trying, not only to get the benefits of a financial planner for yourself and your family, but also to gain insight and ideas about how to better serve your own clients as well.

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.