Weekend Reading for Financial Planners (January 13-14)

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 13th – 14th:

'Fiduciary Rule' Poised For Second Life Under Trump Administration As SEC Prepares Proposal (Dave Michaels, Wall Street Journal) - Throughout the battle over the past 6 years regarding the Department of Labor's fiduciary rule, opponents have insisted that any fiduciary rulemaking should come from the SEC, and not the DoL... in part because the DoL's fiduciary rulemaking jurisdiction is limited to "just" retirement accounts (which means it problematically cannot apply a fiduciary rule uniformly to taxable investment accounts as well), and in part because the belief of Wall Street lobbyists is that they may have more control over (and potentially be able to water down) an SEC fiduciary rule. Now, it appears that we may find out, as the WSJ reveals that the SEC has accelerated work on its version of a fiduciary rule, which could come as soon as the second quarter of 2018, given that the agency is now finally adding two new commissions to fill its core leadership positions. The core question at hand is whether it will be at least as stringent as the Department of Labor's rule - as anything less will likely face a lawsuit from fiduciary advocates, but anything more will face withering opposition from Wall Street firms, as companies like Fidelity are already urging the SEC to just focus on more lenient disclosure requirements for fiduciary rulemaking rather than actually requiring firms to mitigate and avoid conflicts of interest. On the other hand, it's also possible the SEC will take an entirely different tack, as at least one SEC Commissioner (Michael Piwowar) has advocated for applying the fiduciary duty based on how the advisor holds out, requiring brokers who advertise themselves as financial advisors to be fiduciaries, while ostensibly allowing those who avoid claiming they provide financial advice to similarly avoid a fiduciary duty (a sales-vs-advice approach that has long been advocated for on this blog as well). Of course, the DoL's fiduciary rule remains looming in July of 2019, even as the SEC's rulemaking process begins, which also raises the question of whether the DoL will subsequently create a new DoL fiduciary exemption for those who meet a new SEC fiduciary rule instead, which would be simpler than trying to more broadly reform the DoL fiduciary rule to align with whatever the SEC proposes.

CFA Institute Asks SEC To Set Limits On Advisor Titles (Kenneth Corbin, Financial Planning) - As the SEC prepares its fiduciary rulemaking process, the CFA Institute has submitted a letter to the SEC suggesting that proceeding on the fiduciary rule shouldn't just be about harmonizing standards of care for advisors and brokers, but also include a focus on titles and how advisors hold themselves out to the public, and reinforce the delineation between what services brokers versus investment advisers are allowed to provide. In other words, the CFA Institute is suggesting that those who provide advice would/should be required to register as Investment Advisers, and eliminate (or at least narrow) the exemption that allows brokers to avoid becoming RIAs by claiming their advice is "solely incidental" to their sale of brokerage products through additional administrative guidance (rather than an entirely new rulemaking process). In fact, the CFA Institute notes that financial services product companies have so widened their use of "financial advisor" titles that consumers are already reasonably interpreting their services as advice... which means requiring those "advisors" at broker-dealers to register would, again, simply be consistent with the Investment Advisers Act of 1940 as it is already written.

Bill Requiring Fiduciary Disclosure Reintroduced In New Jersey (Mark Schoeff, Investment News) - A rising trend over the past 6 months has been that, as the industry fights back to delay the Department of Labor's fiduciary rule, individual states have been taking up the charge with their own state-level fiduciary proposals. First was a state fiduciary rule from Nevada last year, then Connecticut, then a proposed fiduciary rule in New York just a few weeks ago in both the state legislature and from the state's Financial Services regulation, and this week New Jersey state Senator Patrick Diegnan proposed a new fiduciary disclosure rule in New Jersey. Notably, in this case, the rule would not actually require brokers to become fiduciaries, but it would require them to provide an explicit disclosure that "I am not a fiduciary, and therefore I am not required to act in your best interests" and go on to further disclose potentially relevant conflicts of interest. Notably, a version of the proposal was made in the past as well, following on efforts by the local New Jersey Financial Planning Association, and was not passed; it's not entirely clear that the newly refiled version will gain more traction, either. Nonetheless, the New Jersey proposal marks another reminder that even as Wall Street tries to fight a national fiduciary rule, momentum is growing for alternative fiduciary solutions at the state level – which, ironically, can be so difficult to comply with on a state-by-state basis for large firms, that ultimately they might find a national fiduciary rule would be preferable after all!

Advisers at Leading Discount Brokers Win Bonuses to Push Higher-Priced Products (Jason Zweig & Anne Tergesen, Wall Street Journal) - The so-called "discount" retail brokerage firms like Schwab, Fidelity, and TD Ameritrade, have become popular in part because they advertise how they have rejected the "traditional" Wall Street model of paying their financial consultants based on commissions. Yet the Journal notes – based on interviews with both former employees, and the firms' own disclosures – that in reality, the discount brokers are still using internal bonus structures that can incentivize their advisors to steer clients towards more-expensive solutions. Or stated more simply, the fact that their advisors don't work on commission don't mean their advisors don't have conflicted compensation incentives. For instance, Fidelity representatives are paid 0.04% on assets invested in mutual funds and ETFs, but up to 0.10% on choices that generate higher fees for Fidelity (e.g., managed accounts, annuities, or even referrals to Fidelity's RIA network). Similarly, Schwab employees can also win awards, including trips to Florida or Hawaii, with qualifications measured at least in part by sales volume in certain products. And in point of fact, the most lucrative compensation is often for steering clients towards managed accounts or advisory (i.e., advice-oriented) solutions, for which ongoing AUM fees can be even more profitable for the large firms than commission-based transactions. On the other hand, the firms themselves maintain that these conflicts of interest are being managed, that they have extensive policies and procedures and other internal controls in place to ensure their financial consultants act in their clients' best interests, and that the allegations are simply gripes from disgruntled former employees and not a widespread problem. Still, some of the firms' compensation plans, from the Fidelity "Achiever" program to Schwab's "Chariman's Club" appear to provide substantial compensation increases for relatively small levels of additional product – due to the use of qualifying "tiers" (where even $1 over the tier earns the entire bonus) – which, not coincidentally, is the exact type of conflicted compensation that the DoL fiduciary rule has proposed banning because it can encourage pushing clients to invest more or in a certain way before a bonus tier closes, and/or to "sandbag" client needs until the next quarter for those who already cleared the incentive hurdle.

New Cybersecurity Platform For Advisors Takes Financial Data Off The Internet... For Safety (Craig Iskowitz, WM Today) - Given our direct connection to money, the financial services industry is targeted more often than any other industry, leading regulators including both the SEC and FINRA to increasingly caution advisory firms about their own cybersecurity protections... including both in-office protections for data and access to it, and also how that information is transmitted over the open internet. The ideal alternative would be to establish a closed network, where all data is encrypted between participants, who have been verified as secure before participating. And now, a new non-profit company called cleverDome claims to have created such a solution for financial advisors. In essence, cleverDome is a secure communications network that can be used to transmit information safely, where each participant is vetted before participating in the network (and is required to demonstrate their end-point protections). However unlike today's availability of Virtual Private Network (VPN) systems, cleverDome uses a network of VPN systems (by establishing a Software Defined Perimeter through a security software platform called NetFoundry), which allows data to be routed more efficiently (increasing performance speed by reducing latency). The virtue of this approach is that it's easier to keep a closed network secure where the community-based participants are vetted, rather than trying to establish trust (i.e., to block hackers) on an open network. The caveat, however, is that the approach only works in the community buys in and participates; thus far, broker-dealer United Planners has taken the lead, and is bringing Riskalyze, Redtail, Orion, and TD Ameritrade "under the dome" with them. Still, the question remains about whether cleverDome can successfully scale up the network if the volume of participants do increase, and how to scalably vet and onboard new firms (since the whole point of cleverDome is to ensure that each participant has due diligence vetting before joining, and must use a solution like Entreda or Financial Computer to ensure end-points are secure). Notably, the cleverDome entity itself – which was originally a cloud-based document management solution that has pivoted to a cybersecurity platform – has itself been structured as an Arizona Benefits Corporation and a B Corp, and is being structured as a non-profit co-op to support the financial services industry. From a pricing perspective, wealth management firms will simply pay a flat fee of $10 per advisor per month (plus endpoint protection costs) to participate, while vendors themselves that serve advisors and operate through cleverDome will have a more expensive pricing structure (including both setup and ongoing charges) that may be as much as $40,000 to $80,000/year to participate (in exchange for being able to establish themselves as being more secure and hopefully attract more users). The full cleverDome product will launch later in this first quarter of 2018.

Major Flaws In Computer Chips Should Really Worry Financial Advisors (Joel Bruckenstein, T3 Tech Hub) - Last week, a team at Google identified two major computer chip vulnerabilities, dubbed Meltdown (which impacts Intel chips), and Spectre (which impacts almost all computer chips from major PC manufacturers, as well as tablet and smartphone chips), and can impact chips going back years or even decades. Meltdown and Spectre are vulnerabilities aimed at the "kernel" of your computer (the part of your computer's operating system that is the go-between connecting all your applications and parts of your computer), which is important because the fact that they occur below the visible operating system means they can't even be detected by antivirus software or tracked in system logs. Fortunately, Meltdown can be countered by patching the operating system and are already being deployed by Intel, although patches for Spectre must occur in the code for the chips themselves, which means solutions will only come piecemeal over time. As long as computers are vulnerable, though, it's a risk both to any individual computer, and also cloud-based servers, which again raises questions of what else the industry can do to make itself more secure (including the aforementioned cleverDome solution from the preceding article), and also whether industry vendors themselves should restructure to better segregate private data (i.e., Personally Identifiable Information, or PII) from other software interactions through two tiers of APIs. The bottom line, though, is that Bruckenstein urges all advisors to proactively patch all their computer equipment (and keep checking for new patches) as soon as possible, ask vendors whether they have properly implemented available patches as well, and stay tuned for more information on initiatives like cleverDome.

Technology Is Streamlining The Process Of Issuing Life Insurance Policies (Greg Iacurci, Investment News) - While the robo-advisor phenomenon of recent years has focused attention on how technology can refine and improve the onboarding process for investment accounts, the life insurance industry is undergoing a similar technology renaissance as it transitions from paper-based applications and manual underwriting processes, to more technology-driven alternatives. The end result is that life insurance applications which once might have taken months to get underwritten (especially when there was a requirement for a full medical history) are now being issued in 1-2 weeks, and some companies are providing immediate issuance life insurance policies (at least up to $1M of coverage) for low-risk individuals with "accelerated underwriting". The key transition is not just that applications themselves are shifting from paper to paperless, but that insurance companies are beginning to use computer algorithms and artificial intelligence to expedite the underwriting process (either to fully underwrite the policy, or at least flag which ones need further review), even as they also collect more and faster data from an increasingly large number of online third-party data sources (e.g., prescription drug history, credit history, and data about driving history from the state's Department of Motor Vehicles). And the process improvements are not only making it easier to apply for and get insurance, but are also starting to bring premiums down, as the cost to actually issue coverage is reduced. Early players thus far include Haven Life (a subsidiary of MassMutual), and Protective Life.

Advyzon: One Of The Industry's Best Kept Secrets (Joel Bruckenstein, T3 Tech Hub) - While most solution software for financial advisors require a piecemeal integration of each component, a few more all-in-one oriented solutions exist. Historically, though, most have struggled to be competitive with available best-in-class solutions in each category. However, Bruckenstein suggests that a current standout is Advyzon, which for investment-oriented advisors is an appealing combination of portfolio management and reporting, along with CRM (along with calendaring and email synchronization to Microsoft Office 365 or G Suite) and a client portal. The software allows for a wide variety of customization settings, from the look and feel of the interface, to systemwide defaults for key aspects like model portfolios, benchmarks, billing conventions, and fee schedules, along with report configurations. Overall, Bruckenstein notes that the software is relatively easy to navigate and use, although notably its goals-based planning module is very light for planning-oriented advisors (though a MoneyGuidePro integration is available), and the software doesn't yet have automated rebalancing capabilities. Still, for what it offers, Advyzon is priced well at $6,000 for a single advisor (including both the software and support for reconciliations). And notably, Advyzon was founded by Hailin Li, who previously had a nearly-15-year career at Morningstar, including as the Technical Lead for Principia, leading the launch team for Morningstar Advisor Workstation, and as Product Manager for Morningstar Office... suggesting that he knows how to build and iterate on software solutions for financial advisors (which bodes well for Advyzon's additional capabilities that may roll out in the coming years!).

Bloomberg Terminal Alternatives Popular With Advisers (Ryan Neal, Investment News) - The Bloomberg Terminal has long held dominance as the data feed of choice in the investment community, but its long reign, combined with its high price point, have led a number of startups in recent years to try to capture at least some of the Bloomberg market share. For instance, YCharts is a web-based financial portal for professionals that now has more than 3,000 advisors (most commonly from the independent RIA community, with partnerships through both Dynasty Financial, Fidelity, Schwab's Openview Market Square, and TD Ameritrade's Veo Open Access). Other less-expensive-than-Bloomberg competitors in the space also include Sentieo, FactSet, and Money.net (which is aiming to provide more of a Bloomberg-style news feed, beyond just data/analytical tools), as well as free tools like FinViz.com or Yahoo Finance. Of course, the reality is that competitors have been gunning to compete against the Bloomberg Terminal for years, with limited success. Nonetheless, the startups do appear to be capturing some market share in the independent advisor community, driven both by the fact that the sheer volume of information available in a Bloomberg Terminal is overkill for many/most independent financial advisors actually need, and that Bloomberg itself has continued to focus primarily on the enterprise marketplace of larger investment firms (leaving the RIA and independent broker-dealer communities underserved).

Finding The Best Time Of Day To Do Things (Eric Barker, Barking Up The Wrong Tree) - As the saying goes, "timing is everything", and a growing amount of research is showing that timing really does impact everything from our personal productivity, to the likelihood of a successful marriage. In his new book "When: The Scientific Secrets of Perfect Timing", Daniel Pink shares a wide range of research on the impact of timing, including: 1) it's best to do the "Think-y" stuff in the morning (as most people better process information, and make better decisions, in the morning, which means that's both the better time to make important management decisions rather than check email, and perhaps the better time to ask clients to make their key financial decisions); 2) we're more sluggish in the afternoon (which leads to everything from worse decisions to higher accident and professional negligence rates), but that sluggishness actually means we tend to be more creative as well (sometimes known as the "inspiration paradox", that we're actually more innovative and creative when we're not at our productive best!); 3) while most people have a peak-trough-recovery cycle through the day, some people really are Night Owls, and their productivity peaks are exactly the reverse with a recovery-trough-peak cycle instead; and 4) if you know you have to do something important during one of your trough (or at least, not-peak) time periods, take a "vigilance break" where you really pause and take a moment to review what needs to be done and how you're going to do it, before any kind of high-stakes meeting.

Why Time Management Is Ruining Our Lives (Oliver Burkeman, The Guardian) - 10 years ago, as most workers began to really notice how overwhelming the volume of email was becoming, personal productivity expert Merlin Mann popularized the "Inbox Zero" movement, a system of habits in how to manage email to get "unstuck" and quickly trim your inbox all the way down to zero. Yet ultimately, even as there is now more and more focus on personal productivity, arguably the real issue is not just the emails, per se, but what they represent – a kind of infinite "to-do" list that the entire world keeps adding to our collective plates. As a result, even as we get more productive and efficient, we don't seem to feel any better and happier – because it just ends out creating room for even more "stuff" to pile up instead. In fact, Mann himself was contracted for and then eventually scrapped a project to write a book about Inbox Zero, recognizing that he was missing out on his own mornings with his 3-year-old daughter because of the time he was spending working on a book about how to better manage time at work! Which means the real issue is not about how to manage time, per se, but more proactively identifying what you really, truly, want to and should be spending time on in the first place, and figuring out how to say "no" to the rest. Which, of course, isn't new – the problem of how to lead a personally fulfilling life has been the subject of philosophers for more than 2,000 years. Which means today's struggles in a world of email and time management problems is really just a modern iteration of the same age-old problem.

Never Say "No" But Rarely Say "Yes" (Jason Cohen, A Smart Bear) - One of the fundamental challenges of running a business is that the conventional advice for success has a challenging paradox: on the one hand, the key to success is supposed to be all about focus and saying "no" to anything that distracts you from your goal/vision/strategy, yet it's equally crucial as a business to test, pivot, innovate, and try new things in order to grow (something that most of us enjoy in our personal lives as well). So how do you find new things to say "yes" to when you're supposed to say "no" to everything outside your current focus? Cohen advocates a strategy of never saying "No", but carefully qualifying the limited instances that you ever say "Yes". For instance, in his early days, Cohen did small computer programming jobs for $25/hour, and got an opportunity to do a project that he wasn't sure would really be a good fit... but instead of saying "No", he simply gave them a quote to do it for $100/hour (at four times his normal rate). Except, as it turned out, the client said "Yes", and it turned out to be an incredibly lucrative project and learning experience (that at $100/hour was well worth his while). More generally, the fundamental point is that if you get an opportunity that perhaps doesn't quite perfectly fit your focus,  you don't have to say "No", but be certain that if you say "Yes" it's priced in a manner that ensures it will be valuable for you to spend your time even if it's outside of your core focus. Of course, how you qualify your "Yes" is up to you – maybe it's a big project that allows you to hire an additional team member, or extends the runway for your startup, or funds development for something you were thinking about doing anyway, or will help you afford some other new marketing effort. But the bottom line is that, at worst, you'll get paid well for your time. And at best, you might even open up a new avenue – but on your own terms, and in a way that is profitable and doesn't undermine your already-successful core. And if they say "no", then you simply won't do something that you probably shouldn't have been doing (at least not at your normal price point) anyway!

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.