Weekend Reading for Financial Planners (July 12-13)

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 12th/13th:

RIAs See Record Profits, Growth - Schwab Advisor Services has released the latest 2014 version of its annual RIA Benchmarking Study, which shows that amongst the 1,132 advisory firms surveyed overall profits for RIAs are at the highest levels on record since the study began in 2006. More than 1/3rd of firms have doubled their AUM and revenues in the past 5 years, and most of the rest are close given median annual compound growth rates of 12.8% on AUM and 13.6% on revenue. Median revenue for the firms sampled was up to $3.3M, and 1/3rd of the firms earned more than $5M in revenues in 2013. Key common strategic initiatives by advisory firms reflected in this year's survey include focus on referrals from clients and other business partners (though 80% of firms already reported that referrals are their top source of new clients), enhanced focus on strategic planning and execution (61% of firms have a written strategic plan, up from 52% the year before), implementing a client segmentation plan, and recruiting more staff (including CPAs and JDs, as well as professional advisors) as some firms continue to struggle with turnover and larger firms in particular (more than $1B of AUM) are using equity participation as a means of long-term retention to address this.

Schwab Private Client Edges Its Fee Closer To The Classic RIA Standard - This article from RIABiz notes that Schwab is raising the first tier of fees of its Schwab Private Client service (for clients with more than $500,000 of AUM who want deeper services from this affiliated-RIA offering) from 0.75% to 0.90% (fees are on a declining scale at higher AUM thresholds). Schwab Private Client started in 2002 as more of a standalone managed account offering, but has increasingly evolved towards a more advice-centric offering; in fact, at this point Schwab's advisors created 30,000 "financial plans" in the first quarter (up 30% from last year), and the Private Client unit now has a total of $58B of AUM and 440 employees. Schwab downplays the significance of its price change as a routine reassessment of its overall price structure; nonetheless, in an environment where trading fees have persistently declined, and a new crop of "robo-advisors" have been threatening to do the same to RIAs, the confidence of Schwab to move its pricing for Schwab Private Client in the opposite direction is notable. Combined with the recent shift of Vanguard to also offer financial planning advice in recent years, the article suggests an emerging trend that, finally, large firms are really recognizing the value of fee-based financial planning advice.

A Year After Supreme Court Ruling, A Rundown Of What’s Changed For Same-Sex Couples - This article from the Washington Post Wonkblog provides a nice summary for advisors who work occasionally (or more frequently) with same-sex couples about where all the rules stand now that a year has passed since the Supreme Court's decision to strike down a key section of the Defense of Marriage Act in the case of United States v. Windsor. For Federal tax purposes, same-sex couples are now able to (and in fact, must) file jointly as a married couple as long as their marriage was legal in the state that it was celebrated/performed; however, if the couple currently resides in a state that doesn't recognize their union, they may still be required to file as single for state tax purposes. For Social Security benefits, same-sex couples living in states that recognize their marriage (or more recently that allow civil unions or domestic partnerships) are eligible for spousal and survivor benefits; however, if the couple was married in a state that recognized the marriage but now lives in a state that does not, they are not currently eligible for spousal and survivor benefits. Similarly, the department of Veteran Affairs also bases spousal benefits on the laws of the state where the same-sex couple currently resides, potentially limiting benefits for same-sex couples living in a state that doesn't recognize their marriage. And the rules for family leave and a requirement to offer health benefits to same-sex spouses also depends on where the couple lives (though a recent Department of Labor proposal would open up the rule for family leave regardless of where the couple currently lives). For couples looking to immigrate to the United States, the Department of Homeland Security has announced that same-sex marriages will be recognized as long as it was valid where it took place.

A New Challenge To HUD's Reverse-Mortgage Program - From the "Mortgage Professor" Jack Guttentag, this article highlights a new change coming next month to the Home Equity Conversion Mortgage (HECM) reverse mortgage program offered by HUD. To set the context, the problem of the past is that because reverse mortgage borrowing limits are based on the age of the youngest borrower, some married couples have strategically only included the older spouse on the reverse mortgage to enable greater borrowing (or because a younger spouse under age 62 isn't eligible at all); however, the caveat for a reverse mortgage is that upon the death of the last (or in this case, only) borrower, the reverse mortgage comes due, requiring the non-borrowing surviving spouse to come up with the liquidity to repay the mortgage, or risk being evicted as the house is foreclosed upon. While in some cases this might be a deliberate strategy - akin to choosing whether to select a single or joint annuity for a retirement pension - there have been concerns that some nonborrowing spouses may be unaware of the requirement, or have been outright deceived by reverse mortgage loan officers who did not disclose this possibility. To protect some of these abusive situations, AARP sued HUD to limit the eviction of nonborrowing spouses, and HUD has responded with a new rule change effective August 4th: in situations where there are two owners to a house but only one borrower, the "nonborrowing spouse" (NBS) will be protected and cannot be evicted from the home. However, in order for tenure to be protected for under-age-62 spouses who cannot be borrowers, the terms of the reverse mortgage have to be adjusted to account for the longer time horizon, which can further reduce the borrowing power of the older borrower. Guttentag suggests that these changes were unnecessary and may further throw "sand in the gears" of HECM loans, and that instead HUD should have focused on better disclosures and even a requirement that nonborrowing spouses acknowledge in writing of the potential requirement to vacate the property if the spouse predeceases... but leaving couples the option if it's been their plan all along that the nonborrowing spouse wouldn't continue to live in the house after the death of the borrowing spouse anyway.

The Crisis in Retirement Planning (free registration req'd for full reading) - This article in the Harvard Business Review by Nobel Prize winner Robert Merton takes an interesting look at the current landscape of retirement planning in the US, as we continue to progress from a defined-benefit to a defined-contribution world... a transition that Merton suggests was hastened in the early 2000s as the stock market decline and falling interest rates magnified pension liabilities of a number of already-shaky companies (especially in the steel and airline industries) and likely accelerated their paths to bankruptcy. Merton suggests the problem with this is not merely that investors must now fend for themselves in growing their retirement savings - a challenge given our behavioral biases, not to mention financial illiteracy - but also that it is leading to an increased focus on account balances, volatility, and returns, instead of the "real" concern of how much income those assets can produce to live comfortably in retirement. After all, when consumers think about things like pensions and Social Security, they don't talk about the account balance of what it's worth, but the amount of income they'll receive; and the exercise is not merely intellectual, because when we focus on account balances instead of (ensuring) income, assets that are "safe" from an income perspective (e.g., TIPS and inflation-adjusted annuities) look "risky" (due to interest rate risk in the short term) while assets that are "safe" from an asset perspective (e.g., Treasury Bills) are "risky" from an income perspective (potential loss of purchasing power and/or danger that yields fall and retirement income is now insufficient). Accordingly, Merton suggests that retirement planning and saving should shift to a more income-centric focus, with an investment process that targets how to create the desired income in the most efficient manner, and decisions about how much to save would be framed in terms of how much income it could produce in the future; for instance, a saver that has a 54% chance of achieving a desired retirement income could then adjust how much she plans to save, how long she plans to work, or how much risk she takes, to optimize that goal. Ironically, Merton's prescription sounds awfully similar to how many financial planners do retirement planning today, though Merton notes that ideally the entire system needs to be structured in this manner, as not all employees will be able to afford a relationship with a financial advisor.

5 Places To Look For And Find Your First Clients - For advisors who are starting their own practice, there are a lot of upfront decisions to make, from CRM to compliance to website design; once all of that is done, though, the real question that quickly emerges is how you will actually find clients to serve with the business being created! In light of the reality that, unfortunately, starting an advisory firm is not an "if you build it, they will come" kind of thing, this article from the XY Planning Network provides some key tactics that new advisors can pursue to get going on finding their first few clients. The 5 suggestions to get your first clients are: 1) Send a launch e-mail to your (very extended) circle of friends, family, old-co-workers, and anyone else in your e-mail address book to share with them how excited you are about your new venture, when you're launching, why you're launching, how it's unique, and where they can go for more information (and start building your mailing list for the future as well!); 2) Get to know other advisors in your industry, especially those who serve/specialize in different types of clients than the ones you plan to target, which creates cross-referral opportunities (e.g.,  a new advisor might get referrals that don't meet the minimums of some larger more established firms in the area); 3) Your natural market, which are the people/groups to which you already have connections, that can become the target of your niche (e.g., if you're former military, you might specialize in working with soldiers where you already have connections and know the issues); 4) Social media can be a great place to build a presence and begin to engage with others, given not only the potential for clients, but also the opportunity to build relationships with reporters and media publications that could provide you more visibility and credibility; and 5) Family and friends can be a great potential source for new clients, not necessarily because you're aiming to work with them directly, but simply because they'll give you the opportunity to talk about your new business, who you want to work with, and the value you deliver, which can then lead to referrals of people they know who might want to work with you.

Solo RIA: Lessons From Year 1 - This article is from financial advisor Dave Grant of Finance for Teachers who launched his niche advisory practice just over a year ago, and shares some of his tips and insights about what the experience has been like as a "solopreneur" for the first year. First and foremost is to recognize - especially if you've previously been in a larger firm with other team members - that everything comes back to you as the advisor, from getting on the phone with tech support for a software problem, to doing whatever it takes to quickly gather, organize, scan, and return paperwork to clients. Some of Grant's other lessons include: 1) Be ready to be flexible, and recognize that you may have to adapt the plans for your business as you find out what your clients really want from you (for instance, Grant discovered that his working-teacher clients prefer to meet at their homes instead of an office, which costs Grant more evenings than he anticipated but saves on the expense of office rent!); 2) Plan your time, as the to-do list when starting up can feel like a never-ending treadmill, and setting clear goals of what you're going to do (and not going to do) is essential to keep from being overwhelmed (and as Grant found, getting an intern to share a bit of the load can help a lot, too!); 3) Expect to hustle, with the possibility you'll have to take on side gigs to make ends meet (especially with a family to support) while trying to bring in enough clients to make a livable income; 4) Know your emotions, and that the challenges and stresses of starting a firm can be even harder without office mates to turn to; 5) Have a technology plan, and recognize that you may need to test a lot of software tools to find something that's right for you; 6) Prepare your spouse, as the early instability of growing a business and income can be stressful for both of you; and 7) Appreciate the freedom, as starting a business may often require even more hours than a corporate 9-to-5 job, but also provides a great deal of flexibility to spend time with family not around the corporate work schedule but your own.

How Advisers Will Communicate With Clients In Five Years - In a recent survey to both advisors and investors, Investment News explored how communication with clients may change in the coming years, especially with the rapid rise of smartphones and mobile technology in recent years. The results suggest that advisors are anticipating some shifts, most notably a significant decrease in telephone usage, and modest decrease of in-person meetings, and a significant jump in the use of video conferencing. These results line up mostly, but not entirely, with the results of investors segmented by age. "Older" investors (age 55+) still project more telephone use than advisors anticipate, while younger investors project even less; conversely, younger investors anticipate more use of video conferencing than age 55+ investors in 5 years (though both groups still expect to use video less than what advisors appear to anticipate), and anticipate using text messaging (e.g., for quick confirmations, alerts, and short messages) far more than any other group (and more than their advisors). On the other hand, advisors are projecting the use of social media for direct, personal communication far more than any client group, suggesting a mismatch between the expectations of advisors and their clients about the relevance of social media (or at least, how it should be used). The results here were a subset of a larger "Business Model of the Future" survey conducted by Investment News that will be reported further in the coming weeks.

Personal Capacity: How Many Clients Can You Really Manage? - This article from industry consultant Julie Littlechild looks at the important question for advisors of personal capital... just how many clients can a single advisor really manage? Littlechild's experience in consulting with clients suggests that many may already be over capacity, leading them to feel out of control, like their business is running them (which was reflected in the FPA's recent Advisor Time Management study as well), eventually causing damage to the client relationships as well as emotional stress to the advisor. So how do you determine your "real" capacity? Littlechild suggests first reflecting on how many hours per week you really want to work, how many of those hours can really be dedicated to client activity (versus other business/professional development), and how many weeks per year you expect to be putting in those client-related work hours (cutting out vacation weeks, conferences, etc.). Going through the math of this process gets you to the total amount of client time you'll have, and you can then continue to work backwards from there to reflect on how much time it really takes to service each client, given the scope of what you provide to clients, how often you meet/contact them, what you can/cannot delegate, etc. To help make these assessments, Littlechild provides two spreadsheets as well; the first helps to carve up the amount of time spend on clients (by segment from your "A" clients to your "D" clients) to determine what it actually costs to service clients, and the second calculates how many clients can be supported given these time commitments (and how much capacity to add clients given what you have already).

How to Get Less Stupid at Investing - This article from Morgan Housel at The Motley Fool looks not just at the "dumb mistakes" we make in investing but how to actually help save ourselves from our own "stupidity" (and biases). Housel suggests that, based on some of the research around decision-making, one of the best solutions is to deliberately surround yourself with people who disagree with you and/or are in different emotional states than you are. The key here is that by default, we tend to surround ourselves with people who agree with us, a form of confirmation bias that can blind us to real problems that may lie ahead; hanging out with people who think differently helps us to realize some of the mistakes in our own thinking. Unfortunately, though, incorporating outside information can be difficult for us as well; more commonly, when someone disagrees with us, we assume it's because they're ignorant (lacking information), or idiots (can't put the information together correctly), or have their own biases (deliberately/malevolently distorting information). Nonetheless, if you don't put yourself into a situation where you can be disagreed with, there's almost no chance of avoiding the blind spots. Housel notes that this is fundamentally why the process of scientific discovery is so valuable and effective; because it systematically encourages doubt, skepticism, and questions. For instance, Charles Darwin wasn't necessarily the brightest of scientists, but he was relentless in his objectivity and his efforts to disconfirm his own ideas, leading him to become a first-class scientist in the process; Charlie Munger of Berkshire Hathaway notes that he applies the same principles to his investing process. In the end, Housel suggests that what all this means is not only should we be seeking out the opinions of people who might/will disagree with us to test our own beliefs, but that the stronger we believe in an investment idea, the more important it is to do so.

The Broker Who Saved America - Celebrating last week's Independence Day, this article from the blog of "Reformed Broker" Josh Brown tells the story of Haym Solomon, a Polish Jew who ultimately was the key financier that allowed the U.S. to continue to field the Continental Army and win the Revolutionary War. Solomon was born and raised in Europe, and spent his early years in the banking and finance capitals in western Europe, before coming to the U.S. and New York City shortly before the revolution to start a merchant financing business. After getting caught up with a group called the Sons of Liberty, who tried to burn down much of New York City in the summer of 1776 as a means to deny shelter to the British army stationed there, Solomon was held by the British for 18 months, tortured as a spy, and ultimately released only by convincing the British he could be more useful as a translator between English officers and Hessian mercenary soldiers. Instead, Solomon used his position to undermine German support for the British, was arrested again, but bribed a guard (with a gold coin sewn into his clothes for that purpose!) to escape and went to Philadelphia to set up his merchant finance business again. This time, though, Solomon began to funnel his personal profits from the enterprise directly to the revolution, extending no-interest loan (many never repaid) to James Monroe, Thomas Jefferson, James Madison, and more, as well as becoming the paymaster to the allied French military forces in North America, and the negotiator who brokered loans from the French, Dutch, and Spanish governments to finance the American Revolution. In fact, George Washington was only able to lay siege in the key battle of Yorktown after Solomon managed to broker a hasty $20,000 loan to finance food for marching the troops to the city (for which it's rumored [but perhaps an urban legend] that Washington arranged the thirteen stars of the colonies on the Great Seal of America in the shape of the Star of David). Ultimately, Solomon died of tuberculosis in 1785 with an estate worth $350,000 but an additional $600,000 of principle and interest owed to him that was mostly never repaid. Given his significant impact as a key financier for the emerging United States when capital was scarce - and representing what "Wall Street" and financiers can do when their purposes are well directed- Brown dubs Solomon "the broker who saved America."

7 Ways To Retire Happy - This article is a review of the recent new book "You Can Retire Sooner Than You Think" by financial advisor Wes Moss, who surveyed more than 1,200 retirees and near-retirees to ask questions about their happiness and the details of their assets and wealth, and their spending habits. The results revealed some interesting glimpses about the connection (though in some cases it's more of a disconnect!) between retirement wealth and happiness. For instance, retirees did tend to report that they were happier at higher wealth levels, but only up to a point; increasing net worth from $100,000 to $500,000 at retirement led to a significant increase in happiness, but further increases in wealth beyond that point did not correlated to higher levels of happiness. Similarly, those who spent less than $3,000/month in retirement were far less happy than those who spent at least $4,000/month, but there were only marginal increases in happiness as monthly spending proceeded to $4,500/month and higher. In terms of retirement activity, Moss found that most happy retirees fill their time with three or four "core pursuits" (or as Moss puts it, "hobbies on steroids") while unhappy retirees averaged less than 2 core pursuit; happy retirees also tended to pick more socially engaging core pursuits, such as volunteering with nonprofits or sports. Other notable trends from the research results: happy retirees were nearly four times more likely to be close to paying off their mortgage (and living in a home valued only slightly above the national average); happy retirees tended to have 2-3 different sources of income (e.g., Social Security, investment income, real estate income, a pension, or part-time work); happy retirees tended to have more modest shopping tastes (Kohl's and Macy's over Neiman Marcus or Saks) though they weren't shopping at thrift stores either; and happy retirees were more likely to be married and spend at least 5 hours a year planning for retirement.

I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!

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. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read "FPPad Bits And Bytes" on his blog!