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.

The Work Ahead For Skip Schweiss Taking The Helm As FPA Chair (Michael Thrasher, RIA Intel) - On January 1st, Skip Schweiss became the new volunteer president of the Financial Planning Association's board of directors. When first announced in 2019, Schweiss was a controversial pick for leadership, as the first non-CFP to be elected to lead the FPA Board, and the first to come directly from a major corporate sponsor of FPA (as a Managing Director of TD Ameritrade, which, at the time, was one of just two "Cornerstone" $200,000+ sponsors of the FPA). In the time since, though, Schweiss admirably took the time to actually study and earn his CFP marks (having just passed the latest November CFP exam), and in the lead-up to the Charles Schwab acquisition of TD Ameritrade last year announced that he was moving on from TDA to take "a little break". Which means in practice, Schweiss comes into his FPA leadership role as a newly minted CFP professional, with more time flexibility than the typical FPA president (which historically has usually been a CFP practitioner who has to balance the demands of their own clients and advisory business with their FPA duties), and what is arguably the most executive leadership experience of any prior FPA board president at the very time that the FPA is making a transition to a new CEO and trying to turn around a multi-year (and multi-decade) decline in membership. In addition, Schweiss was in charge of Advisor Advocacy for TD Ameritrade's Institutional business, and notes that he anticipates industry advocacy to become an increasing focus of the FPA, from the potential for title reform (e.g., regarding who can and cannot hold out as a financial advisor or financial planner), and the enforcement of Regulation Best Interest. However, the core challenge of FPA - and its ongoing membership woes - is the changing nature of membership associations themselves and the role they play, as more and more other organizations also offer CFP CE (historically a key pillar of the FPA), and the nature of forming community with other advisors is also changing (from the rise of social media to the shift to virtual networking events in the pandemic). Though ultimately, FPA notes that it still sees itself as being active in the domains of both CFP CE and building community, but with an ever-broadening scope of the 'full range' of an advisor's career (from becoming a planner to getting deeper into the career, managing a practice and ultimately exiting it), and a broadening range of ages as the FPA highlights the growth of its NexGen community and recent Externship event as well, all under the aegis of trying to strengthen its member value going forward and turn around its membership growth.

Why Invest In Bonds Today? (Jon Luskin) - With interest rates scraping ever-lower record lows, edging closer and closer to the zero bound, the question for advisors is increasingly: "Is it even still worth it to own bonds for clients?" Since, at best, bond returns are meager and barely better than cash, at worst are actually yielding less than cash after the advisor's own fees, and either way may feel more difficult to justify in a client's portfolio when there isn't much yield to squeeze out of bonds in the first place (i.e., "why don't I just put my fixed income into a CD and let you manage only my equities instead?"). Yet as Luskin notes, in practice the case for bonds (or not) really starts with the intended purpose of bonds to begin with. Traditional, bonds were a fixed income for investment - and for retirees, in particular, were very literally a fixed-income investment, where the purpose was not the return, per se, but quite specifically the yield, and to the extent that bonds are intended as a return driver, they're clearly far less appealing at low yields (with the aforementioned concerns of "why bonds" at all, or why not other alternatives in lieu of bonds that have more return potential, from dividend-paying stocks to the entire "alts" category?), especially when there is not much room for bonds to appreciate with further decreases in interest rates either (given how close to 0% yields they are already). Of course, the reality is that as trading commissions go to zero, it is increasingly feasible to simply own more in stocks and generate "income" from a total return portfolio that simply sells whatever it needs to generate the cash at the time (at no trading cost, and with potentially more favorable taxation in the form of long-term capital gains than the ordinary income tax brackets that apply to traditional bond income). Yet the caveat of "just own more in stocks" is that the additional equity exposure also entails additional risk and foregoes the other key benefit of bonds - that they're less volatile and offer more safety of principal (at least when investing in high-quality bonds). In fact, Luskin argues that, in the end, it's the stability of bonds and their buffer against the volatility of stocks that is their true value in a (Modern Portfolio Theory) portfolio, and that as a result, it's just as relevant to hold bonds at today's yields than it ever was (because it's not about the low yield on bonds, but their continued ability to buffer against the volatility of stocks, which is just as prevalent a risk as it ever was).

Finding Guaranteed Returns In A Low-Yield Environment (David Blanchett & Michael Finke, Advisor Perspectives) - With Treasury Bills providing a mere single-digit-basis-point yield, money market funds paying so little that most have had to waive some or all of their internal fees to avoid having a negative yield (or have outright closed to new investors), and CDs yielding little more, there is a growing pressure on advisors to find alternatives to provide a higher level of yield (at least for clients who specifically want to invest for income yield). For independent RIAs, in particular, one key option that is often overlooked is the use of the 'traditional' fixed annuity... specifically, the kind that pays multi-year guaranteed rates, often called MYGAs (Multi-Year Guaranteed Annuity) for short. As in practice, many MYGAs are still paying yields as high as nearly 3%, while even longer-term 5-year CDs are yielding barely over 0.3%. Of course, the reality is that annuity yields aren't fully guaranteed, in that there's a credit risk of the annuity company itself - and a not-surprising risk-based tendency that higher-quality insurers pay lower yields, while the lower-credit-quality (i.e., higher-risk) annuity carriers are the ones offering the highest near-3% yields. Still, though, Blanchett and Finke note that, in practice, insurance companies have additional backstops (e.g., state guaranty associations), can actually benefit from their illiquidity (i.e., annuities with surrender charges or similar exit fees may be unappealing for some, but actually help 'lock-in' the money for the insurance company to be able to offer higher yields, akin to the higher yield for longer- versus shorter-term CDs). And MYGA yields still exceed yields from corporate bonds with similar credit ratings and maturities. Which may be even more appealing if yields on MYGAs can inch higher as new PLRs allow RIA advisory fees to be paid pre-tax directly from non-qualified fee-based annuities?

Repositioning SPIAs In Retirement (Peter Hofmann, Advisor Perspectives) - The traditional view of Single Premium Immediate Annuities (SPIAs) is that, as a vehicle that turns a lump sum into a fixed and guaranteed (but otherwise illiquid) stream of monthly payments for life, they are best used for retirees that are focused entirely and solely on generating steady guaranteed income in retirement (to the point that they're willing to give up the liquidity and any portfolio upside potential). And in practice, that trade-off isn't actually very popular for most, with LIMRA statistics showing meager adoption of SPIAs (compared to other annuity alternatives), with sales that actually fell dramatically in 2020 (despite the market volatility and what is otherwise usually a flight to safety during times of market fear). Yet Hofmann notes that the value of SPIAs isn't just their lifetime guarantee, but the fact that SPIAs are a "fixed income" vehicle that pays not only principal plus interest like a bond but also a "mortality credit" (the benefit of pooled longevity reduced by the insurance company's own expenses, otherwise known as the portion of annuity payments that are shifted from those who pass away early to support the continued payments to those who live longer), which may be trivial early on but after 25 years (for a 65-year-old annuity purchaser) can amount to 17% of their ongoing payments (and by age 100 rises to almost 39% of their cumulative payments). Which means another way to view an SPIA is not as a guaranteed income vehicle for retirement lifestyle spending, but essentially as a bond alternative that, once annuitized, is then reinvested into equities as the payments are received and the annuity effectively self-liquidates. The appeal of such a strategy is that it both helps to mitigate sequence of return risk (by buffering the early years of volatility with the guarantees of the annuity payment), helps to ameliorate what is otherwise a significant inflation risk of SPIAs (as the payments aren't there to maintain purchasing power, but to reinvest back into equities that grow to maintain purchasing power over time), and provides more flexibility (as it doesn't entail fully liquidating the portfolio but simply carving off a portion of it) while providing a better outcome for those who live the longest (and get the most mortality credits to out-compound the return of just buying bonds alone).

Why I've Changed My Mind On Bitcoin (Nick Maggiulli, Of Dollars And Data) - For years, a debate has raged about whether Bitcoin (and cryptocurrencies in general) are really a new investing asset class, or simply a short-term fad... a concern that was only stoked further when Bitcoin had a sharp 2,000%+ upswing in 2017 (from under $1,000 to nearly $20,000), only to crash by more than 80% over the subsequent year, leading many to suggest that Bitcoin had experienced the full cycle of a Dutch-tulip-style bubble that had come and burst. But now, with Bitcoin skyrocketing again - surpassing and now nearly doubling its 2017 peak with a spike to more than $40,000 - Maggiulli acknowledges that when Bitcoin manages to more than completely recover from its 'deemed' fad bubble, it is emerging as a bona fide asset class unto itself. Of course, the reality is that Bitcoin is still phenomenally volatile - far more than what most financial advisors are comfortable holding - and could well still crash again. Though when it has seen highs as high as $40,000, future crashes still aren't likely to go as low as in the past because buyers remember the prior peak which is exactly how a new asset class builds a pattern of higher highs and higher lows and gains increased adoption over time. However, the debate remains about what kind of asset class Bitcoin really is, as it certainly doesn't behave like a currency or a traditional 'store of value' (given the volatility), and in practice appears to be operating as some combination of a gold 'last reserve' alternative, an inflation hedge, and a sheer speculative investment (that follows the traditional 'risk-on, risk-off' investing correlation). Which means at best, Bitcoin might still only be a very small (e.g., no more than 2%) allocation to a client portfolio. And it is still in practice difficult for most advisors to invest in (though a growing number of AdvisorTech firms are now eyeing the potential to solve that challenge at least and make Bitcoin accessible to RIAs that want to invest in it for their clients). Nonetheless, the key point is simply that for all those who said Bitcoin was a fad and a bubble - particularly in 2017 when it skyrocketed upwards and crashed thereafter - when Bitcoin entirely rebuilds itself and makes new highs, at twice the level of the old one, it may be time to acknowledge that it's not just a fad anymore.

Introducing A Hierarchy Of Financial Wellness (Chris Heye, Journal of Financial Planning) - While "financial planning" is on the rise (and has been for many years), the irony is that when a label becomes too popular and widely adopted, it eventually can become meaningless as a differentiator which leads to the introduction of new terms and labels for those who want to distinguish further... of which the latest jargon-du jour appears to be "financial wellness". Yet Heye notes that beyond just being industry jargon or a marketing slogan, there is real value in financial wellness both as a marketing slogan and a label for something more holistic (as literally, financial planning is simply about the planning, but financial wellness implies a more holistic combination of health functions beyond just financial projections). Accordingly, Heye suggests that financial wellness can be viewed as a series of Maslow's-hierarchy-style needs to build upon, including: Organizational wellness (i.e., the household's financial organization and 'good financial management' foundation, from recordkeeping of the household's financial expenses, to the implementation of key foundational documents like Wills and Powers of Attorney); Physical wellness (what's the point of having more money if you can't use it to stay healthy, if only so you can be around longer to enjoy it, which helps to explain why health-related events are persistently the #1 fear in retirement); Cognitive wellness (where money makes it possible to spend more time with family and friends, engage in creative work, and have purpose and focus, not to mention being prepared for the hazards of cognitive decline in our later years); Behavioral wellness (being able to engage in the behaviors that maintain and support the rest, and avoid behavioral biases); and Holistic wellness (an overall roll-up of the wellness functions, including being prepared to manage threats to the other parts of the pyramid).

How Stories Drive Financial Behavior—and What to Do About It (Sarah Newcomb & Samantha Lamas, Morningstar) - As human beings, we interpret the world around us through stories, which provide the framework and mental models that are used to make future decisions. Which means to understand a client's decisions - in the past and how they may behave in the future, from why they want to put their money into cash or into the next speculative investment - it's crucial to understand the story in their mind that's implicitly guiding that decision. Because even if multiple clients have the same end goal - e.g., to retire - it's the stories they've learned over time that are used to formulate the strategy they pursue to achieve that goal (e.g., the retiree who once saw a family member go bankrupt in a market crash and thus is especially fearful of market crashes, to the treasured Uncle who was the family exemplar of a comfortable retirement but managed to do so by eschewing a portfolio and investing only in CDs and 'taught' the family that was the path to financial success). Accordingly, Newcomb and Lamas suggest that it's crucial to ask questions that delve into a client's 'money stories', such as "Can you give me an idea of your financial life up to this point?" or "Beginning in childhood, what have been the major financial events that you think have shaped your life the most?", as well as "When you think about difficult financial times in the past, how well have you 'bounced back,' financially and/or emotionally?" And as clients share their stories, be certain to listen for the type of story - is it a story of redemption (e.g., "I was going along just fine, then BIG UGLY THING HAPPENED, and it forced me to grow and evolve. Now, I’m a better person and my experience adds to my uniquely valuable perspective.") which suggests that even if they do face a challenge in the future, they'll be more likely to stay the course and overcome, or is it a story of contamination (e.g., "I was going along just fine, then BIG UGLY THING HAPPENED, and it contaminated my life. Now things are not what they could have been as a result") that they'll need to "edit" and change. Which can entail further conversations and questions to challenge the client's thinking, such as "Imagine a time traveler (alien, angel, or other) appeared to you and told you that this exact financial situation becomes one of your proudest transformative moments. How would you imagine that plays out?" or "If you knew this moment was the opportunity to make one major change to your financial life, what change would you make?"

The Financial Therapists Helping Wealthy People Cope With Change (Madison Darbyshire, Financial Times) - When the dotcom bubble burst in 2000, the sheer magnitude of the run-up and the severity of the subsequent crash (with some high-flying popular stocks falling as much as 98%) led many investors to become depressed or outright suicidal... leading to not only a challenge for many advisors to help their clients stay the course but a burst of "financial issues" into the world of psychologists who were fielding calls from patients whose mental health concerns were rooted in money issues. In the two decades that followed, there has been an emergence of "Financial Therapist", now with their own Financial Therapy Association, and an increasing convergence between the fields of psychology and financial planning. At its core, the issue is simply that our psychological emotions, attitudes, and beliefs can (and often do) get in the way of our rational thinking about money... to the point that just saying "be more rational" isn't a viable solution, and instead, it's necessary to actually tackle those attitudes and beliefs and change them in order to change the outcome. Which has created fertile ground for both a growing number of psychologists and therapists to cross over into the world of financial therapy and work with financial advisors and also for financial advisors to seek out training in financial therapy (as the Financial Therapy Association launches its own Certified Financial Therapist designation to support). In fact, the new approach is becoming so popular - especially with affluent clients that have a lot at stake and may find it especially difficult to find others to talk with about their financial anxiety because the presumption is that they're so wealthy they "shouldn't" have anything to financially fear - that some financial therapists are charging as much as $1,000/hour for a session. Though at its core, the reality is that given how our mental models, mindset, and the stories we tell ourselves can influence our decision-making, arguably we might all be in need of at least a little financial therapy?

Four Things That Make Money Meaningful (Jacob Schroeder, Incognito Money Scribe) - In the famous "Man's Search for Meaning", Viktor Frankl shares the story of his physical and spiritual survival of the Nazi death camps, and the lessons he gleaned in seeing how, even in the darkest moments, human beings can find at least fleeting moments of laughter and joy, stating "[A] human being is not one in pursuit of happiness but rather in search of a reason to become happy…through actualizing the potential meaning inherent and dormant in a given situation." Which raises the question of whether, if there is meaning to be found in everything... does that even include money? Schroeder suggests that ultimately, it's not money itself that can bring meaning, per se, but it can help connect us to the things that create more meaning for us in our lives, from Family (where money not only helps us support our family, from a fully stocked fridge to a home in a safe neighborhood to a college fund and a weekly movie night, but also the potential for 'financial freedom' to spend more time with our family), to Helping Others (as giving to others has long been found to promote happiness, and one Age Wave/Merrill Lynch study found that retirees were three time more likely to say "helping people in need" brings them happiness in retirement than "spending money on themselves"), to Experiences (with numerous studies showing that we glean more happiness by spending money on experiences than just 'stuff'), to even Work (particularly when we reach the point of financial independence, where work is no longer about what we do to generate a paycheck, but what we do to generate meaning in our lives).

3 'Must Ask' Questions To Guide Your Strategic Planning In 2021 (Angie Herbers, ThinkAdvisor) - For many businesses, the annual strategic planning process entails the use of a worksheet or similar template that helps the firm owner walk through their vision and mission, their core values, and their business goals and objectives for the coming month/quarter/year. And while there's nothing inherently wrong with using such a framework to flesh out the business's goals and objectives for 2021 and a planned pathway to achieve them, Herbers suggests that in practice such exercises often jump too quickly to 'solving' for the next steps to take, and doesn't spend enough time really considering what the business' true strategic goals are, why those are the stated goals (and whether the business may actually want to move in a different future direction instead), and what is actually really the most pressing issue that the business is facing. Accordingly, Herbers suggests that the best starting point is not a visioning exercise or template, but in looking backward at the firm's Key Performance Indicators (KPIs), and identifying which is the most important lever to move in the first place (e.g., is it about increasing revenue, or the number of leads, or the close/conversion rate, or reducing expenses, or reducing attrition, etc.?). Because by focusing on the KPI that needs to be changed, it gets easier to think more broadly about the solutions; after all, if the goal is simply "revenue growth", it's not even clear if the best approach is to increase lead flow, or close rates, or reduce attrition (so there's less business going out the door as new clients come in), or simply to expand existing relationships with existing clients. The more specific you can get about the key metrics to improve, the easier it becomes to figure out the next single/simple step to take to start making it happen.

A 7 Point Checklist For Improving Your Marketing In 2021 (Maribeth Kuzmeski, Red Zone Marketing) - As 2021 kicks off, many advisory firms are focusing on how to (re-)ignite new growth in the new year, and figuring out what the best advisor marketing strategies are to get growth going again. Based on a broad survey of advisors, Kuzmeski highlights a number of the most popular strategies advisors are looking to in 2021, including: Adding a virtual entertainment event (from virtual bingo to virtual wine tasting or virtual cooking classes) as pandemic-driven shutdowns continue into Q1; using the LinkedIn Sales Navigator to proactively network via LinkedIn's platform; rebuilding the advisory firm's website as the "home base" for the business (especially as consumers both increasingly search for new advisors online and even referred clients often check out the advisor's website before contacting them); for advisors with strong websites, reinvesting further into fresh content targeted to their ideal client that helps them to better connect with prospects who do visit the website; proactively reaching out to existing clients to (re-)connect with them and potentially drive more referrals; or trying to upgrade the advisor's client experience for existing clients in order to make their offering more "referrable" in the first place!

The State Of The Profession—And What To Look For In 2021 (Bob Veres, Advisor Perspectives) - Despite the tumult of a remarkably unexpected - and for so many, remarkably challenging and stressful - series of events throughout 2020, the financial advisor community was remarkably calm (especially compared to prior bear market and recession cycles), with phone calls from clients somewhat limited (even in the midst of the March volatility), and most advisory firms are still higher as they enter 2021 than they were in 2020. Of course, much of the economic damage of the pandemic remains, and there's no telling whether 2021 will experience yet another downturn (if only for an economic reckoning of what remained a stunningly strong 2020 recovery despite a precarious economy), which suggests that there is certainly no time for complacency. Still, though, Veres suggests that with the isolation of the pandemic, in particular, human beings long for connection more than ever, which is only even more of an opportunity for financial advisors to connect with clients in the months to come, even as those connections are increasingly virtual in a Zoom-based world. This itself is quite freeing, because the en masse shift to Zoom suddenly means that financial advisors will no longer need to be constrained to "local" clients they can meet with in person, and instead can have "face-to-face" (albeit through a video webcam) relationships with clients anywhere, dramatically expanding for many their marketing opportunities, and making it even more appealing to focus into specialized niches (that may be relevant to clients with a unique set of needs, regardless of where they are located around the country). Other notable trends for the year include an ongoing shift in how advisory firms are managed, as it's no longer about "how much time did the employee spend in the office?" but instead "how much are they actually getting done, day to day and week to week?"; the potential for a new Biden tax plan looms (especially as the Senate turns 'blue' with the Democrats winning both seats in Georgia), bringing a new wave of 2021 tax planning; and the advisory industry will continue to shift towards alternative fee-for-service models to expand into the growing blue ocean of non-AUM clients who are willing to pay (outright) for financial advice.

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, and Craig Iskowitz's "Wealth Management Today" blog as well.