Weekend Reading for Financial Planners (July 1-2)

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 July 1st/2nd:

DoL Releases New Fiduciary Rule Request For Information (Melanie Waddell, ThinkAdvisor) - Yesterday, the Department of Labor issued a new Request for Information regarding the fiduciary rule, regarding both the potential to delay the full applicability and enforcement date of the Best Interests Contract Exemption even further beyond January 1st of 2018, and whether the DoL should change or expand its available exemptions under the fiduciary rule. Of particular note is the potential for a new streamlined DoL fiduciary exemption, akin to the Level Fee Fiduciary exemption, that might become available for so-called "clean shares" that do not involve the payment of any upfront commissions (only an ongoing levelized commission set by the broker-dealer, roughly akin to an AUM fee), along with a discussion of whether PTE 84-24 should remain only for fixed annuities or once again cover variable and indexed annuity contracts as well. It's further notable that the RFI does not appear to be soliciting information about whether to "kill" the fiduciary rule, further suggesting that the fiduciary rule is here to stay, but that the final version could still be modified before it becomes fully applicable. Although the DoL also indicated on whether/how it should coordinate with the SEC in issuing coordinated guidance, suggesting that the SEC may soon be moving forward on its own version of a fiduciary rule. And in the meantime, firms are now struggling to figure out whether to move forward with implementing their new policies and procedures for the existing DoL fiduciary rule (as written today), and the DoL still has to contend with the fact that the prior proposal to delay the DoL fiduciary rule attracted a whopping 193,000 comments, of which 178,000 opposed any regulatory delay... which means the DoL still faces substantial scrutiny in how it changes the fiduciary rule from here, or risk facing a lawsuit from fiduciary advocates for failing to follow the Administrative Procedures Act. Nonetheless, the comment periods are now open – 15 days for the potential further delay, and 30 days for the remaining potential modifications – which means newly proposed rules won't likely be out until late summer or early fall.

Growth Continues To Slow At Brokerage Firms As Industry Shifts To Fee-Based Compensation (Ryan Neal, Wealth Management) - Industry analyst firm PriceMetrix recently released its latest "State of Retail Wealth Management" study, which analyzes industry trends across two dozen major brokerage firms in North America. The most observable trend is the industry's major shift from purely transactional accounts to fee-based revenue, as the number of fee-based accounts per advisor is up from 66 to 96 in the past 3 years, with fee-based revenue up from 40% to 54% of total revenue. At the same time, though, the majority of households are still in transaction-only accounts, and fee-only or a combination of fee-and-transactional accounts are still only about 1/3rd of total households. When it comes to fee-based accounts, though, competition is reigning in advisory fees, as the average fee for households with $1M to $1.5M of assets slipped to 1.13% (from 1.16% in 2013), and the average fee on new accounts (opened in the past 12 months) fell to 1.07% (down from 1.15% in 2013). Notably, though, this average fee is still above 1%, implying that the rule-of-thumb 1%-of-AUM fee may still be holding, but that advisors who charge more than 1% are feeling pressure to bring their fees down to 1% (especially since other studies still show that the median advisory fee on a $1M account has remained precisely at 1%, without changing, for 5+ years now). Though the shift from commission-based to fee-based accounts has slowed the growth in revenue per advisor, which is up slightly from 2013 but down from 2014 (although the rising portion of fee-based revenue suggests that revenue per advisor could soon begin rising again as advisors complete their transition). In the meantime, advisors do appear to be working with fewer new households, as the average number of new clients per advisor feel from 8.3/year in 2013 to just 7.5/year in 2016. And thus far, advisors still show no sign of shifting to younger generations, as a whopping 90% of advisor AUM is still held by Baby Boomer or Greatest Generation clients (with only 8% of AUM held by Gen X clients, and 2% of AUM with Millennials).

Tech-Savvy Advisors Are Outperforming Their Peers (Ryan Neal, Wealth Management) - In its newest white paper, "Setting the Pace: How eAdvisors Elevate the Client Journey and Outperform Peers", Fidelity finds that the number of advisors deeply leveraging integrated technology tools is up 10% since 2014 (albeit rising from "just" 30% of advisors up to 40%). In terms of business results, though, the gap between these tech-savvy "eAdvisors" and the rest is widening rapidly – as the eAdvisor firms are averaging 42% higher AUM and 35% higher AUM per client (i.e., more affluent and high-net-worth clients), leading to an average of 24% higher compensation, and also have younger average client ages as they serve more Gen X and Millennial investors. Other key insights from the Fidelity eAdvisors report includes: clients who receive a formal financial plan taking into account all of their assets and liabilities are on average 7 times happier with their advisor, and 87% of eAdvisors are using data aggregation tools to support the process; advisors using digital tools, including e-signatures and emailed statements and reports, as well as communicating via email, text messages, and video conferencing, are more likely to recommend/refer their advisors; and eAdvisors even report higher job/career satisfaction than less-tech-savvy advisors!

What Are The 4 Ls Of Retirement Income Planning (Wade Pfau, Retirement Researcher) - The process of making good retirement recommendations requires helping clients balance and make decisions amongst a wide range of sometimes-competing goals. Pfau suggests that one way to frame the different categories of goals are to segment them into the four Ls: Longevity goals (the ability to cover at least your core/essential retirement expenses for your lifetime, however long that may be); Lifestyle goals (which are how you want to live your retirement lifestyle, above-and-beyond the bare essentials, including travel and leisure, self-improvement activities, and even helping other family financial needs); Legacy goals (which focus on what you want to leave behind at the end, to subsequent generations, other heirs, or charities); and Liquidity goals (how much cash on hand you want/need to have in order to be able to handle emergencies, and to sleep well at night). The key point in framing goals in this manner is to recognize how they may compete with each other – for instance, better securing longevity goals (e.g., with an immediate annuity) can reduce the upside potential of lifestyle goals, increasing the allocation to liquidity goals can also constrain the growth necessary to support higher lifestyle goals, while higher lifestyle goals can impinge on the available capital for legacy goals. In other words, the point is to recognize that, implicitly or explicitly, clients will need to make some prioritization decisions amongst the competing four Ls... and the first step is to define and recognize the competing interests of those goals, to help clients evaluate the ramifications of their trade-off decisions.

Military Benefit Allows Widows To Put $500k Into Roth IRA At Once (Jeff Benjamin, Investment News) - The standard annual contribution limit to a Roth IRA is $5,500 in 2017. However, under the Heroes Earning Assistance and Relief Tax (HEART) Act of 2008, the entirety of the up-to-$400,000 Servicemember's Group Life Insurance (SGLI) policy, plus an additional $100,000 "death gratuity" that is paid in the event of a combat-related fatality, may be rolled over directly into a Roth IRA, effectively allowing for a whopping $500,000 Roth contribution. In order to take advantage of the rule, though, IRC Section 408A(e)(2) requires that the rollover into the Roth IRA must occur within 1 year of when the death benefit is received. Notably, the rules also allow the SGLI death benefit to be rolled into a Coverdell Education Savings Account as well. Unfortunately, though, because the SGLI rollover benefit is relatively uncommon, advisors may need to help explain the rollover option to the Roth IRA custodian – and why the rollover is permitted – as the general customer service representatives at even many large financial institutions may not be aware of the rules offhand. And once the dollars are rolled into a Roth IRA, they are still subject to the standard rules for Roth IRAs, including that principal may be withdrawn tax-free and penalty-free, but that growth may be both taxable (if the 5-year rule isn't satisfied) and subject to potential early withdrawal penalties.

Beating Conventional Wisdom Using Roth IRAs (William Reichenstein & William Meyer, Financial Advisor) - The conventional wisdom is that retirees should draw first on their taxable accounts, then their pre-tax IRAs, and lastly their Roth IRAs, under the implied belief that funds growing in a tax-deferred account are less valuable than those in a Roth IRA. However, this traditional sequencing approach fails to account for how the pace of liquidations amongst the various accounts can impact the tax rate on IRA withdrawals, which can make pre-tax IRAs less or more valuable than just allowing a Roth to grow the longest and be liquidated last. The starting point is to understand that a traditional IRA is effectively like a "partnership account" with the government, where Uncle Sam owns 25% of the account (at a 25% tax rate), and the retiree owns the other 75%. Which means if you can time the withdrawals from your IRA to reduce the average tax rate, you effectively shift a portion of Uncle Sam's share back to the retiree; in this context, part of the value of a Roth IRA is not just to leave it to the end, but to use it to help shore up the needed retirement cash flows to avoid needing to withdraw from an IRA at higher tax rates (which rise the more that is taken from the IRA, thanks to our current progressive tax rates). Thus, a retiree who systematically withdraws just enough to fill up the 15% or 25% brackets, but then taps a Roth (or brokerage account) for the remainder, can end up with an overall retirement portfolio that lasts several years longer than just spending the IRA first and the Roth second. In a follow-up article, Reichenstein and Meyer also note that because the IRA's long-term value is so sensitive to the marginal tax rate on withdrawals, anything that impacts marginal tax rates can impact the relative value of taking IRA withdrawals sooner or later; for instance, the phase-in of taxability on Social Security benefits can cause the marginal tax rate to rise as high as 46.25%, making it especially problematic to take IRA withdrawals for retirees who are in the midst of the phase-in zone.

The Top 3 Questions Every Breakaway Advisor Asks (Matt Sonnen, PFI Advisors) - For many brokers at wirehouses, the environment may not be ideal, but they have found a way to make it work, and the amount of money they earn isn't worth the headaches of making a switch. For a subset of wirehouse advisors, though, there's a desire to switch to a more independent model... with the caveat that making the change raises lots of questions. The first is simply deciding what kind of "more independent" model they actually want to be a part of, which can range from starting an RIA, joining and "tucking in" to an existing RIA, becoming an employee advisor at a larger RIA, or joining an RIA "platform provider" (e.g., HighTower or Dynasty). For some, it's preferable to still maintain some connection to the broker-dealer environment, and instead seek to join an existing independent broker-dealer (and perhaps opening/becoming a new branch for them), though doing so means still being subject to broker-dealer and FINRA compliance rules. Still others choose to make their transition to independent their "liquidity event", and turn to RIA aggregators (or if they're large enough, private equity firms) to buy them out on the transition. Of course, all of this presumes that the wirehouse advisor wants to make a transition to independence, and that they're ready and willing to step away from having a large brand behind them (although some brokers feel that their wirehouse brand asset has turned into a liability, given the challenges of Merrill Lynch's ownership by Bank of America, Morgan Stanley's cultural integration with Smith Barney, UBS' foreign ownership, and Wells Fargo's retail banking fraudulent-account-opening scandal), and being beholden to the wirehouse management setting everything from their payout rates and compensation to their permitted (and not permitted) technology solutions. By contrast, going independent gives the advisor the opportunity to build his/her own brand, and make his/her own decisions about everything from staffing and reinvestment to technology and more... with the caveat that the owner of an independent advisory firm has to be responsible for those decisions (so don't leap unless you're really ready for the business management responsibilities it entails!).

150 Calls In 48 Hours: What It Takes To Transition $600M From A Wirehouse (Andrew Welsch, Financial Planning) - Making the switch from a wirehouse to an independent RIA or broker-dealer can be stressful, not just with the volume of decisions to be made in setting up the new business and deciding how it will be run, but in the actual transition process of the clients themselves. Because technically, as long as an advisor still works for the wirehouse, it's a breach of their employment contract to solicit their clients for their new firm (or even mention it); instead, the departing advisor can't actually solicit clients under the Broker Protocol until after handing in his/her resignation letter... and of course, as soon as that happens, the wirehouse has an incentive to get every other broker in the branch on the phones to try to retain "the broker-dealer's clients" from the departing advisor. Which means those who are breaking away often do so at the end of the day on a Friday afternoon – leaving the broker-dealer as little time as possible to respond once most people in the office are gone for the weekend – and then must spend the weekend rapidly calling all of their (former) clients, inviting them to make the switch, and sending them all the requisite paperwork to do so. Welsch's article highlights one recent wirehouse breakaway, who went through a flurry of 150 client calls in the first 48 hours after handing in her resignation letter, in a mad scramble to retain clients the moment she was "independent" and eligible to solicit them to switch and come along (as otherwise the client may simply hear who another broker at the wirehouse on Monday who just says "your former advisor left"). Nonetheless, the appeal of independent on the other side of the transition means that more and more advisors are breaking away from wirehouses, especially as post-financial-crisis retention contracts come to a close, and a growing crop of support platforms have emerged to help breakaway wirehouse advisors handle the transition as smoothly as possible.

Wirehouse Training Programs Are Back (Bruce Kelly, Investment News) - In the distant past, major wirehouses were known for running large (and expensive) training programs that brought in thousands of young brokers and taught them the industry. Now, as the competition of paying outsized recruiting bonuses has diminished the benefits of attracting brokers from competing firms, wirehouses are once again reinvesting into their training programs. And the shift is being driven not only by the limited opportunity for the wirehouses to profit at the current payout rates on retention deals (especially since DoL fiduciary limited their ability to use "safer" back-end bonuses), but also because the average age of a wirehouse broker continues to climb, and wirehouses are recognizing that they need a large influx of younger talent in order to survive and thrive in the long-term future. Thus, for instance, Wells Fargo has implemented both a mentoring program to train and support new advisors, and opportunities for salaried positions in bank branches where they work with mass affluent households. Merrill Lynch has also reinvested into its training program, which currently has about 3,500 trainees in 2-3 year salaried programs in their branches. And Morgan Stanley recently announced a program where it will hire up "digital advisor associates" to support (and mentor under) existing veteran advisors, while also helping those advisors become more tech-savvy in the process. Of course, the caveat is that in the past, wirehouses ultimately struggled with the fact that many trainees would learn to be advisors, and then leave to work for competitors (e.g., independent broker-dealers), and it's not entirely clear whether it will be any different this time around, especially as competition for young advisors is getting fiercer. Nonetheless, it seems that the advisory industry has little choice but to try to attract more young people, and then work as hard as they can to retain them.

7 Tips To Harness The Power Of Your Own Mastermind Group (Bill Cates, Referral Coach) - The concept of having a "Mastermind Group" comes from the famous Napoleon Hill book "Think And Grow Rich", where Hill first observed that "when two people get together to brainstorm solutions to problems, it creates a third mind" with ideas that wouldn't have come to the individual on their own. Others call the approach of collecting peers together a "study group" instead, but either way, the point is the same – to have a dedicated group of trusted colleagues to whom you can bring your business problems for brainstorming ideas and solutions. For those who want to try to form their own Mastermind Group (or better leverage the one they're in), Cates provides several "best practices" tips for mastermind groups, including: Mastermind groups can work with all people in your industry, or with outsiders, as long as they come with fresh perspectives and are willing to provide you constructive feedback and ideas; the ideal number for a Mastermind group is about 5-6 (though some are a little smaller or larger), to allow enough time to "go deep" on each member's situations; in-person meetings are the best, although many do a combination of in-person and on-the-phone meetings; you should talk about everything from recent wins and challenges, to sharing actual revenue goals and results (so your group can hold you accountable!), and setting specific actions to accomplish between meetings; and most groups will run at least a full day (necessary if each of 5-6 people will get 60-90 minutes to go in depth into their current situation).

Happiness Research Shows The Biggest Obstacle To Creativity Is Being Too Busy (Emma Seppala, Quartz) - The traditional view of the creative artist is one tortured by creative angst, but in researching her book "The Happiness Track", Seppala has found that the biggest creative breakthroughs are actually driven by relaxation. For instance, Tesla first intuited the idea of rotating magnetic fields (which ultimately led to today's alternative current electronic mechanism) while taking afternoon walks to recover from an illness, Friedrich Kekule (a renowned organic chemist of the 19th century) discovered the ring-shaped structure of benzene while daydreaming, and Albert Einstein was famously known to turn to music (particularly Mozart) when he was grappling with complex problems and needed inspiration. In other words, creativity happens when your mind is able to be unfocused, daydreaming, or idle (which is why we have so many "aha" moments in the shower!). Of course, the problem with today's modern working world is that we rarely have the opportunities to let our brains go idle... because either we don't have any downtime, or if we do, we fill it with our mobile phones or binging on Netflix. Which means supporting creativity – whether artistic, or to drive forth new ideas for your business – requires establishing new habits that can support creativity, such as: make long walks (ideally without your smartphone) a daily routine (as Charles Dickens and J.R.R. Tolkien were known to do); force yourself out of your comfort zone by trying out a new skill or class; or just outright make more time for fun and games, which really can free up your mind to wander (even if it wanders back to creative business ideas!).

Why The Most Successful People Just Say No (Lucy Kellaway, Financial Times) - The traditional view of growing a business is that you should always say "yes" and try to take on any/all new opportunities as they come along. But in recent years, the "traditional" advice is giving way to a newfound recognition that saying "yes" to everything just means saying "no" to whatever opportunities can't be taken because there's no remaining time... which means it's still inevitable that you'll have to say "no" to something, but that it may be far less strategic. Arguably, the problem is especially insidious in roles like financial planning, where we often take the job precisely because we want to help people, which makes it especially hard to say "no" to them. Yet the fact remains that because we're all limited by the same 24 hours in a day and 168 hours in a week, we can't say yes to everything, so it pays to at least be more decisive about what you're saying "no" to (by choosing it, instead of letting it be whatever comes after you've already said "yes" too many times). In fact, a recent Harvard Business Review article went so far as to suggest that we should actually celebrate when we say "no", just to start building the habit. And it's important to recognize that just as saying "yes" too much means you'll be stuck saying "no" to whatever you run out of time for, saying "no" proactively gives you the flexibility to say "yes" to what you really want to do (e.g., spending more time with family), even as it gives more junior people in the business an opportunity to step up (and fill the void by taking on at least some of what you said "no" to). In fact, Greg McKeown's recent book "Essentialism" suggests that the best strategy is to rank everything you're thinking about doing on a 1-10 scale... and say "no" to everything that isn't a 9 or a 10. Even with this strategy, you'll be surprised to find that you still end up filling the time anyway... but with an effective filter, your time will be spent on more things that really are your highest and best (and most energizing and engaging) use.

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.