Weekend Reading for Financial Planners (July 20-21)

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.

CFP Board Delays Standards Enforcement But Says Fiduciary Rule Is Ironclad (Ann Marsh, Financial Planning) - After a fresh wave of pushback that emerged after the SEC finalized its new (non-fiduciary) Regulation Best Interest rule, the CFP Board has announced that it won't punish CFP professionals for failing to follow its new fiduciary standard for the first 9 months after it rolls out... effectively allowing a 9-month transition period from when the new rules take effect on October 1st, until enforcement will begin in earnest after June 30th of 2020 (which, not coincidentally, is the SEC's effective date for Regulation Best Interest as well). From the industry's perspective, the delay in enforcement date allows broker-dealers, in particular, to adapt their policies and procedures for their CFP professionals' fiduciary obligations alongside a broader rewrite of their policies and procedures to comply with the partially-but-not-completely-overlapping Reg BI; in other words, by delaying, the CFP Board is arguably making it easier for broker-dealers to eventually enshrine their new fiduciary rules into broker-dealer oversight. Accordingly, the CFP Board maintains that it is not being "led" by the actions of the SEC, but isn't ignoring them either (and instead is acknowledging the challenges of asking firms to implement two different changes in two different standards that don't align in their enforcement dates). Notably, though, the CFP Board is not actually changing the new fiduciary standard itself, which will still take effect (albeit unenforced) this October, and going forward, will teach that fiduciary standard as part of its Ethics continuing education requirement. Still, critics suggest that the CFP Board is giving too much leeway to brokerage firms, that already had nearly 15 months to adapt from when the original new CFP standards were announced... even as CFP Board chairwoman Susan John maintains that the CFP Board believes the "short-term" enforcement delay is the best path to having the most CFP professionals under the CFP Board's fiduciary duty in the long run.

Salesforce To Offer New Low-Cost Financial Services Cloud Bundle To (Newer) Financial Advisors (Joel Bruckenstein, Technology Tools For Today) - This week, Salesforce announced a new "lite" version of its Salesforce Financial Services Cloud, dubbed "Grow Client Relationship Fast Start," that will package together a custom offering from Skience that supports data aggregation and a custodial integration feed from (just) one of the four major custodians, along with third-party service and implementation support. In addition, the new Salesforce offering will include financial planning software integrations with MoneyGuidePro and eMoneyAdvisor, with additional data feeds, integrations, and construction of dashboards available for a separate (additional) cost. Pricing for the new Salesforce offering has not yet been provided, but is expected to be "competitive," in an environment where historically Salesforce has struggled for adoption with small-to-mid-sized independent firms because its pricing is substantially higher than solo/small-firm advisor CRM competitors like Redtail and Wealthbox. Ultimately, though, Salesforce maintains that, in the long run, its value-add will be what it can accomplish beyond just "CRM" alone, including leveraging artificial intelligence for better data analytics... though it remains to be seen whether small-to-mid-sized advisory firms even have enough "big data" to be effectively analyzed in the first place?

Form CRS: What Advisors Need To Know (Jessica Mathews, Financial Planning) - Under the newly issued Regulation Best Interest, advisory firms will have until June 30th of 2020 to create their new 2-page "Form CRS" (which for RIAs, will become a new Part 3 of Form ADV), providing "plain English" details on everything from the firm's registration details, conflicts of interest, disciplinary history, and relevant disclosures. Ironically, though, the emerging concern now is whether the SEC is expecting too much to be delivered in such a short form, especially when a portion of the document will be taken up by required "conversation starter" questions that must be included, where there is still immense pressure on advisory firms to properly and fully disclose all relevant details and not providing materials that could be deemed "misleading" by SEC examiners in the future. Still, though, with regulator concerns that consumers don't understand the breadth and volume of disclosures they currently receive from the industry, the SEC maintains that the shorter Form CRS is necessary to provide a base level of explanation to consumers, and in fact must be provided to all retail investors the firm interacts with (regardless of net worth or investment sophistication) before or at the time they enter into an agreement with the client (and again when opening a new account for clients or rolling over assets from a retirement account).

Client Data Privacy Is An Advisor's Business (Sheryl Rowling, Morningstar) - With more and more client data now held on cloud servers that are accessed through web-based products, there is a growing regulatory focus on how clients' Personally Identified Information (PII) is being kept private, and the extent to which advisory firms are doing due diligence on their vendors' client privacy policies... which is important not only with respect to cybersecurity (and whether client data is at risk of being hacked), but also simply what the companies themselves are doing with the data, and whether/how they are sharing it or otherwise profiting from it. For instance, Junxure CRM (now part of AdvisorEngine)  states that "We do not sell, rent, or otherwise share your personal information with any third parties except to persons assessing our compliance with industry standards..." and only permits data sharing within its "corporate family" for marketing purposes. On the other hand, eMoney Advisor's privacy policy does allow for some additional sharing of information (after being rendered anonymous), stating that, "Except as described in this Policy, eMoney will not give, sell, rent or loan any personally identifiable information to any third party. Personally identifiable information does not include 'Usage Data' which we define as encoded or anonymized information or aggregated data (such as IP addresses) we collect about a group or category of services, features or users, which does not contain personally identifiable information. … We may share Usage Data with third parties, including our customers, partners and service providers, for various purposes, including to help us better understand our customers' needs and improve the Site as well as for advertising and marketing purposes." And Riskalyze's privacy policy similarly states that "Riskalyze may also collect user information on an aggregate or anonymous basis, which shall not personally identify you, and disclose the aggregate or anonymous data to prospective partners or other outside parties for their use." While some companies like Envestnet go even further, stating in their privacy policy that "Envestnet collects information about you … and may include information included on your Client Profile and related forms—such as name, address, Social Security number, date of birth, assets and income—along with 'personal information about your account activity, including your transactions, balances, positions and history'... For financial professionals utilizing our technology platform, Envestnet may make available your business contact information and information regarding the use of their investment strategies to third-party investment managers and exchange-traded funds, mutual funds, and similar investment vehicles." (And as Rowling notes, the fact that Envestnet will share personal advisor contact information with outside providers caused them to stop doing business with Tamarac!) Ultimately, though, the key question is simply where you as an advisor draw the line on what is "acceptable" use of client (or even advisor) data... and whether you are doing due diligence on the vendors you use to know what their privacy policy is in the first place?

Texting Your Clients? Read This First! (Dusty Russell, Investment News) - Sending text messages has quickly become one of the dominant forms of communication today, with text messaging now the most prevalent form of communication for adults under age 50, and even those over age 55 averaging 500 text messages per month. From the advisor perspective, though, texting is not so simple due to the compliance obligations for capturing, archiving, and reviewing all advisor communication (including text messaging), which was specifically reinforced in a recent SEC Risk Alert. Accordingly, it's crucial that if any text messaging occurs with clients - either sending text messages to clients, or receiving text messages from them - it must be done via a compliant texting platform, and/or while using a system that can capture and archive those text messages. In addition, it's important to note that for an advisory firm, the obligation to oversee text messaging applies not just to the advisor themselves, but the advisory firm's staff, too... which means it's important that compliant text messaging policies (or alternatively, a ban on client text messaging if it can't be overseen properly) must be communicated to the entire advisory firm. And of course, be mindful that while text messaging in practice is often a more "casual" medium for communication, that text messaging with clients is still part of the professional advisor-client relationship... and that "recommendations" made via text messaging are taken just as seriously by regulators as recommendations made in any other advisor-client context.

Top Solutions For Securely Exchanging Client Files (Ben Brown, Morningstar) - Financial advisors typically handle and interact with a lot of client information and data, from account statements they manage directly, to estate planning documents and tax returns, not to mention a wide range of personal client information including addresses, telephone numbers, and Social Security numbers. In the past, clients typically brought such information to the advisor's firm in physical form, and/or send it via postal mail... but now in the digital age, the information itself is increasingly digital, and the transfer of the data occurs online. Which raises the question of how best to transfer such private data securely in the first place? The good news, though, is that a number of secure file-transfer software tools have emerged in recent years, and advisory firms now have several choices available about how to manage file-sharing with clients in the first place. For instance, one option is to offer a secure client portal (typically built directly into financial planning or portfolio performance reporting tools) and have clients upload their documents securely and directly into the shared document vault (which can then leverage multi-factor authentication to further manage secure access to the files). Another option is to use a separate file-sharing service, such as Dropbox (or Google Drive or Microsoft OneDrive, though Brown notes that the latter two have fewer secure-sharing options than DropBox, unless bolstered with an external plugin like File Request Pro), with individual folders shared directly to each client (which is often more expeditious than requiring a login to a client portal at the same time, but at the cost that it may operate separately from a client portal the advisory firm also offers). Because so much communication happens directly via email, though, one of the most popular (albeit premium) advisor solutions is Citrix ShareFile, which supports both a client portal, file-sharing via the cloud, and the ability to encrypt entire emails directly from Outlook (or to replace attached files with secure links automatically).

You, Dear Investor, Are Patient, Prudent, And Calm (Jason Zweig, Wall Street Journal) - The financial services industry has long derided individual retail investors as "ill-informed, fickle, and hapless," labeling them as "dumb money" that blindly chases performance by buying high and selling low (such that the only solution is to hire an advisor to "get smart"... for a reasonable fee, of course). However, a recent new study of the clients of Vanguard finds that, in reality, most investors (at least those using Vanguard) appear to be patient and prudent, with an average of 68% in stocks (despite a modest assumption that they will return only 5.2% in the coming year and 6.3% over the next 10 years) that doesn't change much even when their return expectations change. Similarly, the student found that over the past two years, investors weren't making significant changes to their portfolio, including the sharp 6% decline in early 2018 (the more recent Q4 2018 decline occurred after the study had already closed). Other notable findings included: older investors over age 70 do hold more conservative portfolios, but only slightly so (averaging just 20% less in equities than those under age 40); wealthier investors do not take a lot more risk than those with less money (despite having greater capacity to do so); and the biggest predictor of what investors do increase their equity exposure (or decrease it) is based not on their overall outlook for stocks, but how confident they are their predictions will be proven accurate (along with how often they log into their accounts and how often they trade). Which suggests that rather than asking clients what they would do if stocks fell 10%/20%/30% in a bear market as a measure of risk tolerance, perhaps the better approach would be to ask them how much they expect stocks will grow in the coming decade... and how confident they are in their forecast.

Are Smarter People Better Investors? (Nick Maggiulli, Of Dollars And Data) - As financial advisors, we often work with incredibly smart clients in high-earning professions like medicine, law, or engineering... who still end out being remarkably poor investors despite their intelligence. In part, that's simply because "smarts" in one industry or profession don't translate to others, but also because it's not clear that "intelligence" can actually lead to materially better investment returns beyond a certain minimum threshold to avoid the worst returns. One recent study of male investors from Finland found that high-IQ investors did tend to outperform, at least in part because of superior market timing, stock-picking skill, and trade execution, but also because they were less subject to the behavioral biases like the disposition effect (to sell winners and hold losers) and more likely to take advantage of tax alpha opportunities like tax-loss harvesting. Or more generally, the research suggests that smarter people may achieve better investment results at least in material part because they make fewer behavioral mistakes (as opposed to just better investment picks) and also because they may simply be paying lower investment fees by doing more of it themselves. On the other hand, a separate study found that high-IQ investors do tend to predict booms further in advance (i.e., they buy further in advance of big market rises, rather than at the peaks), but don't necessarily do a better job of predicting when the crashes will happen. Ultimately, though, Maggiulli suggests the key takeaway is simply that a lot of "smart" investor success has to do with accumulating investment knowledge (to avoid high costs, to be wary of entering markets at high valuation extremes, and of managing their behavioral biases), rather than raw processing power to make savvy trades... recognizing that almost anyone can take the time and effort to gain core investment knowledge to improve their investment results, even if they're not going to (and probably shouldn't!) actively trade on it.

How "Resulting" Impacts Your Personal Finances (Ryan Frailich, Forbes) - One of the biggest challenges with decision-making is that the good choice isn't always rewarded in the end; as Frailich notes by example, if two people have too much to drink and the first drives home (safely) and the second takes an Uber (and gets sideswiped in an accident, resulting in months of physical therapy), it's hard for anyone in such a situation to not look after the fact and regret what seemed like the good decision up front (to not drink and drive). Or stated more simply, we should evaluate the quality of our decisions based on the process we engaged in up front to make the decision, but in practice, we tend to engage in "resulting" - or drawing a conclusion on the soundness of a decision based on the outcome after the fact. In the context of personal finance and investing, such "resulting" can be especially pernicious, as it can lead investors to quickly become overconfident in their (otherwise-bad) investing decisions if they had a few early (and lucky) successes, while taking away from good investment decisions that happen to not yield fruit early on. Common examples include not just taking a concentrated investment bet (e.g., putting all your money into Amazon in 1998 and having it work out!), but buying a home with only a 3% downpayment and then having it appreciate tremendously to double (or more) your investment, or never buying disability insurance and fortunately ending out with no health events. And again, the challenge can swing the other direction as well, from saving diligently all your life only to unfortunately pass away shortly after retiring (without the opportunity to use the money), to buying insurance and then never actually having a claim (or worse, having one that ends out being excluded anyway), or buying and holding a solid investment that just stubbornly refuses to generate much appreciation. Ultimately, drawing on Annie Duke's "Thinking In Bets" book, Frailich suggests that the best way to evaluate financial decisions is to ask a series of questions in advance: How will this help me get closer to my ideal life? What is the range of outcomes and the best and worst-case scenarios? At what point will I change course? What are my other options? And, who could this impact, and what do they think about the decision?

The Story Of The Coca-Cola Millionaires (Nathalie Pierre, Void) - The small town of Quincy, Florida (about 30 minutes outside of Tallahassee) has long had the most millionaires per capita of any city in America, despite a small population of just 7,965. And how did one random small town in America create such a high concentration of millionaires? Long-term investing in Coca-Cola stock. As the story goes, back during the bust of the Great Depression, a local banker named Mark Munroe noticed that even during the low point of the Depression, otherwise impoverished people would still spend their last nickel to buy a bottle of Coca-Cola. As a result, when Coca-Cola crashed to a low of $19/share after a dispute with the sugar industry (from an original IPO price of $40/share in 1919), Munroe not only bought shares for himself, but encouraged everyone in the town of Quincy to invest, too, even lending money to depositors to buy more of the stock. And as Coca-Cola recovered - and eventually became a national and global brand - dozens of "Coca-Cola millionaires" emerged, many of whom amassed significant fortunes that were then bequeathed to (local) children and grandchildren as well (as a single share of Coca-Cola purchased at $40/share in 1919 with dividends reinvested would be worth $10M by 2013!). And to honor its history, the bank where it all started has Coca-Cola on display... and as of 6 years ago, a whopping 65% of all of its trust assets under management for the local community are still invested in Coca-Cola stock! A powerful reminder of the incredible return potential of buying and holding stocks (though in modern times, most advisors would likely recommend a slightly more diversified approach to buy-and-hold stock investing!).

Women Did Everything Right. Then Work Got 'Greedy'. (Claire Miller, New York Times) - One of the unique effects that has emerged in some jobs, particularly professional services, is that earning potential may be exponentially higher for someone who is able to put in even just slightly more hours into their job. For instance, one married couple who are both lawyers has ended out maximizing their income by having one work part-time (21 hours/week) while taking care of family, while the other works 60-80 hours/week... and in the process, earns 4X to 6X the other. In other words, one spouse working less to give the other spouse the time and flexibility to earn more actually generates the couple more money than just having each work a "normal" full-time job. Yet the challenge is that because of this phenomenon, American women of working age are the most educated ever, yet educated women face the biggest gender gaps in seniority and pay (representing just 5% of big-company chief executives and only a quarter of the top 10% of earners)... which may not be a function of overt gender discrimination, per se, but simply because the non-linear returns to working long inflexible hours have greater increased (particularly in managerial jobs, and professions like law, consulting, and finance), such that two incomes are actually not always better than one (even for an otherwise-dual-income-potential household)... and when someone has to be the primary caretaker who has flexibility for the needs of the children, the mother is still more likely to be the one. Or viewed another way, the implication is not that women may be stepping back from work because they have higher-earning husbands, but that their husbands are able to earn more because they take a step back from work. Notably, though, the premium for working longer hours in a salaried role is itself a relatively recent phenomenon; it's only in the past 20 years that salaried employees have earned more by working long hours, while in the past people who worked at least 50 hours per week in a salaried role were paid 15% less on an hourly basis. And ultimately, there doesn't appear to be a gender gap for those who do work extra-long hours, as women working extreme hours appear to get paid as much as men who do the same... instead, the issue is simply that men and women aren't equally likely to be the "primary" long-hours worker in the first place, ostensibly due to family care dynamics. Which is important, as it implies that the key to improving gender inequality in income, especially in high-earning professions, may be less about programs like universal public preschool and free afterschool care for children, but more around employers giving employees more predictable work hours, and better flexibility on where and when work gets done in the first place.

Why You're Buying Products From Companies You've Never Heard Of (Christopher Mims, Wall Street Journal) - In recent years, there has been an explosion of "microbrands" in everything from gadgets to apparent, cosmetics to furniture, and even mattresses. Historically, launching a narrowly targeted niche product wasn't feasible, because it was virtually impossible to cost-effectively advertise and get consumer attention for your unique niche solution. However, in the internet age, and especially with the hyper-targeting of social media, it's more feasible than ever to get a new product in front of the exact audience it's best for... and then leverage the internet to facilitate and outsource everything from rapid manufacturing to payments and shipping. A key aspect of microbranding, though, is that companies can also reduce the risk of a failed product launch by testing it in the marketplace beforehand... spending what may be just a few hundred (or maybe a couple thousand) dollars on some advertising directed to a landing page, which can be used to gauge interest up front about whether people would buy the product once launched (and even collect pre-orders that can then be quickly outsourced for manufacturing and delivery). And notably, the phenomenon isn't unique to "traditional" manufactured products; arguably, it's equally relevant amongst financial advisors, who can now experiment with and test targeted niche services, initially marketed as a pre-launch offer directly via social media, to figure out whether the new service will attract clients before the firm even puts resources towards doing so. (And if it's successful, the advisory firm can then finish developing the business model, service model, hire the necessary staff, and roll out the offering!)

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.