Weekend Reading for Financial Planners (Jun 18-19)

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.

Vanguard CEO Hints Strongly That Robo-For-RIAs May Be In The Offing (Graham Thomas, RIABiz) - At the recent Morningstar Investment Conference, Vanguard CEO Bill McNabb shared some of his vision of where Vanguard is going, including an increasing focus on technology. In fact, McNabb noted that he recently took the entire executive team to Silicon Valley, to understand some of the FinTech trends there. Notably, though, Vanguard emphasizes that it has no plans to offer a pure robo, and has continued to stay focused on the value of human financial advisor advice; after all, their Vanguard Personal Advisor Services solution is actually delivered by human advisors (despite the common 'robo' label applied to them, they're actually not). Yet Vanguard doesn't just aim to compete with financial advisors; it also sees an expanded role in partnering with external RIAs. In fact, McNabb noted that he expects RIAs will increasingly look to their product and other support partners to help them with technology, thanks to the scale that larger provides have, which some have inferred to mean that Vanguard may eventually begin to offer some kind of technology platform for RIAs as well. McNabb also noted that thanks to Vanguard's size and resources, they have active teams exploring all sorts of new technology as well... with the expectation, similar to Silicon Valley venture capitalists, that many may fail, but if one or two are successful and gain traction, they could become a big deal and be incorporated into the core of the Vanguard offering. In fact, McNabb ultimately stated that Vanguard sees itself not just as an asset management firm, but as a technology company, which already employs an 'army' of 3,000 engineers.

The ETF Liquidity Mirage (Bob Rice, Investment News) - As investors increasingly recognize the costs and trouble of trading individual and often illiquid bonds, investors are turning more and more to bond ETFs, which have recently seen record dollar inflows. However, even as investors are looking at ETFs as a liquid substitute for illiquid segments of the bond market, the SEC and Federal Reserve are raising concerns about the impact of this liquidity mismatch. The issue specifically pertains to what happens when markets become more stressed. In 'normal' times, Authorized Participants that can create and redeem ETF baskets keep ETF prices reasonably in line with the value of the underlying securities, taking advantage of the arbitrage opportunity that emerges if the NAV of an ETF deviates materially from what the underlying can be bought or sold for. However, Authorized Participants are not required to 'fix' an ETF's traded price, and if the underlying securities can't be easily bought and sold, then the Authorized Participants may step away in volatile markets and the whole pricing mechanism begins to break down. In fact, at that point the 'liquidity' of an ETF and its relative ease of trading may just amplify the price swings, as was seen briefly last August 24th when the illiquidity caused by trading halts in just a few S&P 500 stocks helped cause 20% price swings in several equity ETFs. Of course, these problems 'should' only be temporary in the moments that bouts of illiquidity occur, but nonetheless it's still an important reminder to be cautious of stop-loss market orders and trading strategies that rely on ETF liquidity if they may not always be so liquid.

Redo Strategies: When Can You Redo A Prior Social Security Claiming Decision? (William Reichenstein & William Meyer, Journal of Financial Planning) - While the overwhelming majority of those who claim Social Security are happy (or at least content) with their decision, sometimes a Social Security recipient wishes to "undo" their prior decision. Fortunately, those who have just recently filed for benefits within the past 12 months have the option to "withdraw" their prior Social Security application, repaying any benefits already received and undoing the claiming decision altogether by filing Form SSA-521. (In the past, the withdraw rules allowed recipients to withdraw at any time; however, the Social Security Administration changed the rules in 2010 to require withdrawals to occur within 12 months of the original start of benefits.) Once someone withdraws benefits, they may later reapply, and going forward benefits will be calculated as though they were claimed at the new date in the first place. Alternatively, those who have already been receiving benefits for at least 12 months (so withdrawal is no longer an option), there is still an option at full retirement age to voluntarily suspend benefits instead. Suspending benefits does not require a payback of prior benefits, and does not undo any existing reductions for receiving benefits early; however, for every year that benefits are not received between full retirement age and age 70, it is possible to earn an 8%/year delayed retirement credit, which increases benefits and can help offset the previously applied reduction for having started early. However, it's important to remember that since the Bipartisan Budget Act of 2015, the decision to voluntarily suspend benefits would stop not only that person's benefits, but also any spousal or children's benefits payable based on his/her earnings as well.

State Street Execs Expect Retirement Savings Law By 2018 (Greg Iacurci, Investment News) - There is a growing consensus emerging amongst policymakers, at both the state and Federal levels, that some changes need to be made to the current structure of retirement savings in the U.S. The overarching theme is to expand access to retirement plans through the workplace, and recent studies like the Bipartisan Policy Center's Commission on Retirement Security and Personal Savings has suggested a combination of easier automatic enrollment into retirement accounts and automatic escalation to increase savings over time. Other ideas include incentives to encourage such behaviors through a combination of tax credits for small employers to offer plans, and possibly more flexibility for employers to join "open multiple-employer plans" (MEPs). Notably, some of these options - particularly around requiring enrollment, and requiring employers to offer such plans - has met with limited support from Congressional Republicans, but there is a growing movement at the state level to adopt such initiatives as well, and a whopping 30 states have either passed or are considering legislation for at least automatic IRA programs (if not creating virtual marketplaces for businesses to shop more easily for retirement plans). And even the private retirement industry sees the opportunity, and thus is helping to organize a coalition to push the issue in 2017 with a new administration and Congress, with the hopes of getting enough traction to see a law come about in 2018.

Under New Fiduciary Rule, DoL Has Reason To Pay Attention To Reverse Churning (Blaine Aikin, Investment News) - In the entire 1,000-plus page Department of Labor fiduciary rule, "reverse churning" is only mentioned once, but the SEC and FINRA have had reverse churning on their radar screen for years. The issue of reverse churning is the situation where an advisor places a client's assets into an advisory account, charges an ongoing advisory fee, but doesn't actually do anything for the client after the initial engagement. The issue first surfaced about a decade ago, when some brokers were shifting client investments from traditional brokerage accounts (where a commission had already been paid) into a fee-based advisory account where the client paid an ongoing fee just to keep the original already-commission-paid investments. In the fiduciary context, the concern is that any investment adviser that is paid an ongoing AUM fee but doesn't provide ongoing value may be breaching the fiduciary duty of loyalty by receiving "unreasonable" ongoing compensation. Ironically, in the past, many brokers avoided ERISA specifically by doing transactional business - since the prior fiduciary definition required advice to be ongoing/regular to be fiduciary - but now that all such advice will be fiduciary, brokers may increasingly shift towards fee-based accounts, which means the issue of reverse churning will become more widespread (and in fact may be the reason that the DoL explicitly stated that the shift from a commission-based account to an advisory account is itself a recommendation subject to fiduciary scrutiny). From the advisor's perspective, though, the point is simply to recognize that the DoL expects advisors to substantiate that they are actually doing ongoing portfolio monitoring and/or providing some kind of ongoing service, to receive that ongoing AUM fee and not constitute reverse churning.

How An Eclectic Trio Of RIA Custodians Are Willfully Gaining Ground With Snail-Like Precision (Lisa Shidler, RIABiz) - It's hard enough for advisors to parse and differentiate amongst the "big 4" RIA custodians (Schwab, Fidelity, TD Ameritrade, and Pershing Advisor Solutions), but there are actually a number of even-smaller RIA custody platforms, that each have their own unique qualities. In this article, RIABiz profiles RBC Advisor Services, Trust Company of America, and Shareholder Services Group (SSG). In the case of RBC Advisor Services, a division of the larger RBC Capital Markets (which also includes a broker-dealer platform), the RIA custody unit was launched in 2010 with about $11.5B of AUM and 84 advisors (ostensibly spun off from the existing RBC business) and now reports that it custodies about $13B of RIA assets for 91 advisors. While that's a significant amount of assets, the lackluster growth of the past 6 years emphasizes RBC's struggle in figuring out how to balance its RIA custody services along with its 'legacy' broker-dealer platform and support business as well, though it is now aiming to resolve those concerns by trying to appeal to RIAs serving cleints that need the support of big-broker services as well, consolidating the location of its RIA support team (in Minneapolis), growing its awareness, and offering its services with no RIA asset minimum (which includes a partnership with Blackrock's FutureAdvisor robo offeirng for advisors). Trust Company of America, on the other hand, has grown a bit more rapidly in recent years, from $9.5B and 120 advisors in 2010 to $14B across 202 firms now, appealing in part to the growing number of advisors who prefer a 'truly' independent custodian that doesn't also have a retail offering its advisors must compete with (as is the case for Schwab, Fidelity, and TD Ameritrade). Historically, Trust Company of America built its own proprietary technology for advisors, but the growing pressure of third-party integrations is leading them to build external partnerships as well and open up choices beyond their proprietary platform, including working with Riskalyze's AutoPilot "robo" offering, and Jefferson National's ultra-low-cost Monument Advisor variable annuity. In the case of Shareholder Services Group, the custodian has been around since 2002, and is one of the oldest of the 'smaller' independent custodians, founded by Peter Mangan (who had prior experience with Jack White, another firm famous for welcoming the 'little guy'). And while SSG doesn't publicly disclose its assets, it has about 1,400 total advisors, and is growing rapidly, adding 1-2 RIAs every week last year. Unlike the others that heavily rely on their own homegrown technology, SSG is also unique it that it's effectively a reseller of Pershing Advisor Solutions' NetX360, and builds proactively with other third-party technology providers as well (e.g., Black Diamond for portfolio performance reporting and AdvisorPartners for a "robo-advisor" product for small accounts). And as Pershing adds new partnerships, SSG simultaneously gains access to the same technology as well.

MoneyGuidePro: A New Version Rockets Out Of The Gate (Joel Bruckenstein, Financial Planning) - The most commonly used financial planning software platform is MoneyGuidePro, and earlier this year the company rolled out its new MGP: G4 release. For this new version, the big focus was on supporting the collaborative value of having a human advisor and technology, with easier data gathering capabilities and a design built around "conversations" that advisors and clients may have. In fact, G4 literally comes pre-built with several "Conversations" modules, including a "Quick Intro" version when prospecting, "Retirement Zoomer" (a basic retirement plan), "Retirement" for more in-depth retirement planning, "Retirement + Estate", and "College Zoomer" for college planning. Each Conversations module is comprised of a series of MGP screens, formulated into a workflow that guides the advisor-client conversation through the relevant data-gathering and analytical tools. More conversations will likely be rolled out in the future, and enterprises can build their own conversations modules to further customize their own style and approach to financial planning advice. The new version of MoneyGuidePro also includes a section called MyMoneyGuide, a form of prospecting tool where potential clients can sign themselves up to a guided introductory financial planning lab, delivered by MoneyGuidePro professionals, which then serves up the prospect (with completed MGP data) to the advisor to move forward (at a cost of $75 per attendee). Additional features include: greater ease in setting client goals (which MGP divides into wants, needs, and wishes) including an automated 'goal generation' tool that sets up common default goals as a starting point; more pre-populated data on return assumptions (which can be changed) and expense assumptions (e.g., for Medicare Part B and Part D costs in retirement); more Social Security strategy modeling; a "brute force" Monte Carlo engine that runs a thousand simulations of the retirement plan; and refinements to the SuperSolv functionality that lets the advisor "solve" for what it takes to make the plan successful (holding certain key assumptions constant). Overall, Bruckenstein notes that G4 isn't perfect, but there's not much to critcize, as it's well built to co-create financial plans and present on the fly, as interactive financial planning continues to rise in popularity.

Can TD Ameritrade Turn iRebal Into The RoboAdvisor Engine Of Choice? (Craig Iskowitz, Wealth Management Today) - While a growing number of advisor platforms have been quick to launch their own 'robo' solution for advisors, or are preparing to do so, TD Ameritrade is positioning its iRebal software as the ultimate robo technology for advisors to manage model portfolios for clients. In fact, iRebal is the central platform being used for six external "digital advice" platforms, such as the Adhesion Wealth Advisors' ETF Select solution. Primarily, though, iRebal is software used by independent RIAs - now nearly 2,000 of them. Its cloud-based rebalancing platform is free for advisors at TD Ameritrade (but the cloud-based version only supports TD Ameritrade assets); advisors must pay separately for a server version of iRebal to use it in a multi-custodial context, similar to multi-custodian rebalancers TRX and Tamarac. In addition, iRebal has APIs that make it easeir for third parties to integrate, though notably iRebal still lacks the API ability to bring in automated data aggregation (instead, it's a manual file upload process). And iRebal doesn't have the ability to handle the sleeve-level performance reporting that is popular with Unified Managed Account (UMA) multi-manager models (though notably, the RIA community has been slow to adopt UMAs anyway). Where iRebal shines, though, is its ability to offer customizable trading rules, such as having an alternative designated security if the minimum purchase for the 'normal' security cannot be met (e.g., due to the level of transaction costs for small accounts), and advisors can set varying levels of minimum buy and sell amounts across different security types and models. In addition, iRebal is quite capable at its 'core' rebalancing duties, which includes not only basic periodic rebalancing, but rebalancing available cash balances if/when/as they appear, and doing tax-aware asset location while executing rebalancing trades.

Junxure Cloud Comes Of Age (Joel Bruckenstein, Financial Advisor) - Junxure CRM was originally built nearly 20 years ago by an advisory firm for their own use, and then turned into a software solution sold to other advisors. The "homegrown" nature of Junxure made it highly targeted to financial planning firms with a deep understanding of their needs, but slower to adapt to technology changes; as a result, Junxure only adopted its web-based version, "Junxure Cloud" a few years ago, and its initial cloud release lacked many capabilities of the original server software that were popular (and for some, essential). However, Bruckenstein notes that Junxure Cloud has made significant progress over the past two years to improve its competitive position. The software scales well, from solo practitioners with one assistant, up to large RIAs with multiple employees, each of whom gets their own user profile with control over what they can and cannot see and have access to, and allows for customization of alerts and security features. Junxure has a strong reputation for the depth of its 'records' capabilities, and the ability to effectively capture the large volume and varied types of communication and interaction that happens with financial planning clients over a multi-year relationship (in addition to captures all the core client data details), from key documents to related tasks, business opportunities, and even emails associated with the client record. Bruckenstein also notes that Junxure has 'extensive and flexible' capabilities when it comes to workflows (which are actions, recurring actions, and action sequences in Junxure). A recent new addition to Junxure Cloud is its "Client Service Monitor", which allows advisors to create tiers of service and segmented service models, define deliverables that those clients should receive, and then track if they're actually being delivered. In fact, ironically because Junxure is so capable, Bruckenstein notes that its biggest negative is probably the significant learning curve it entails, and while online help is available, Bruckenstein's experience with it was mixed. The other big challenge for Junxure Cloud - for those coming from another CRM, it's difficult to effectively migrate all the data into Junxure due to the lack of automated data flows (although to be fair, that's at least somewhat of a challenge for most CRMs that advisors might switch to). And Junxure is still looking to build out more integrations, which are limited and often entail little more than single-sign-on but no real-time two-way data flows. Pricing for Junxure Cloud is competitive, at $65/user/month, and lots of discount opportunities (e.g., through membership associations) to get access for $55/user/month instead.

How To Raise The Retirement Age For People Who Want To Work (Peter Coy, Bloomberg) - There is a fundamental disconnect when programs like Social Security suggest people are 'too old' to work, even as so many retirees are still young enough to travel and play 18 holes of golf. While there's nothing wrong with letting those who can afford to retire early choose to do so while they still have years of good health in front of them, the fact that so many 'early' retirees can still work raises interesting questions given the increasing financial strain on Social Security and Medicare, and whether it's time to revisit the eligibility ages for those programs. In fact, one recent NBER working paper has found that the majority of men are healthy enough to work up through their mid 70s, but the majority of those aged 65 to 74 who can work are choosing not to; while health does decline with age, people's tendency to work declines must more rapidly, which suggests that what's pushing most people into retirement isn't poor health and the inability to work, but perhaps the availability of programs like Social Security and Medicare that 'encourage' it. On the other hand, the number of senior citizens who are working has increased as well in recent decades, due to everything from improving health, the gradual increase in the normal retirement age, and possibly the decline of pensions and shift to defined contribution plans than eliminated an 'automatic' retirement at the point of pension eligibility. On the other hand, the problem is that increasing normal retirement age would disproportionately impact those who are less educated (and generally have lower incomes), who are more likely to have jobs that would be limited by their later-years' health. Thus, the question is how to take advantage of the work capacity of older Americans who can work (and reduce the strain on social programs), in a manner that doesn't adversely harm the less-educated people who tend to have more physically difficult jobs and really can't work later? One proposal has been to raise the normal retirement age, perhaps to age 70, but make it easier for older people to go on disability (as currently qualifying for Social Security disability insurance is an arduous process), and perhaps to have more flexibility for "partial disability" (as right now Social Security disability is all-or-none). Another option would be to change the normal retirement age based on the worker's occupation, and raising it for less-physically-demanding deskbound jobs (though a similar program in Greece led to an embarrassing array of lobbying efforts for various jobs to get favorable treatment, from radio presenters 'at risk' from the bacteria on their microphones to wind instrument musicians contending with gastric reflux as they puff and blow). Ultimately, though, given that the percentage of those over age 65 still working today is well below what it was 60 years ago - when even more of the work was physically demanding, and our life expectancies were much lower - there's arguably a lot of room remaining to encourage some sort of later-years' work.

Evolution Or Extinction: The Future Of Mutual Fund Wholesalers (Jeff Briskin, Advisor Perspectives) - The ability of the internet to speed communication and the delivery of information has simultaneously made it easier for fund companies to connect with advisors, and caused advisors to get so bombarded with an overload of information from fund companies that it's actually harder than ever for wholesalers to connect. In fact, a recent advisor survey suggests that only 39% of advisors rely on wholesalers at all anymore, while 63% use third-party research sites (e.g., Morningstar) as their primary resource for fund-related research (and another 32% just go directly to the fund company's website). Some firms have even had to design 'gatekeeper' processes to limit and control the flow of information being pitched to/at the firm from wholesalers. In turn, this means that wholesalers are being forced to adapt their messaging and communication even further, recognizing that advisors at RIAs have different needs than those at broker-dealers, smaller advisors may be different than large firms, and in general advisors are less likely to respond to wide-net marketing initiatives. Instead, the demand from advisors themselves is for wholesalers to add 'real' value - not sales pitches about the products, but access to the asset managers themselves and their intellectual capital (e.g., the manager's views on the markets, rationale for portfolio decisions, and detailed attribution data to substantiate their performance results and decisions). Of course, asset managers themselves cannot possibly communicate with every advisor, which means wholesalers are shifting to become the proxies for the portfolio managers, and must be able to articulate the thinking and themes of the manager and answer the associated questions. Ironically, in this context, it seems that the challenge of wholesalers is remarkably similar to the challenge that advisors themselves are facing with clients - the transformation from just being a salesperson with a product, to a value-added relationship manager trying to survive and thrive in the information age.

What The Story Of ATMs And Bank Tellers Reveals About The 'Rise Of The Robots' (James Pethokoukis, American Enterprise Institute) - As the looming threat of automation comes for many industries, raising the question of whether robots will cause the elimination of human jobs (including the current case of robo-advisors vs advisors), it's interesting to look back at how the rise of technology played out when Automatic Teller Machines (ATMs) were introduced. At the time, it was expected that the ATM would cause massive technological unemployment for bank tellers, yet the reality is that the total employment of bank tellers went from about 500,000 tellers to almost 600,000 in the past 30 years, even as over 400,000 ATMs were rolled out. In fact, since 2000, teller jobs have not only increased, but at a faster rate than the growth in the labor force as a whole! So what happened? In the past, the average bank branch in an urban area required 21 tellers, and with the advent of the ATM the required staffers dropped to only 13. But that meant it was so much cheaper to operate a bank branch, that the banks opened far more branches, and the end result was an increase in the demand for bank tellers - more than enough to offset the job losses imposed by the technology on a branch-by-branch basis. Similarly, the addition of scanning technology in cash registers has led to an increase in the number of cashiers, and the growth of electronic discovery software used by law firms filing lawsuits has led to an increase in the number of paralegals in the past 20 years. The end result was that the technology did eliminate some jobs, and also made some tasks of those old jobs irrelevant, but ultimately made the job focus on higher-value tasks and the business so much more efficient that the total employment demand for those jobs went up after the technology was introduced. (Though now the technology is finally getting so efficient than demand for bank branches itself is beginning to decline, but that's still only projected to result in a modest 8% decline in teller jobs over the next decade.) What all this suggests is that the real challenge when technology comes in to "disrupt" a new industry is not whether all the jobs will vanish, but how to train the work force to upgrade their skills to add value on top of the new technology as it makes them more efficient than ever.

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, you may want to check out the recent video from late-night HBO comedian John Oliver, who smartly criticized the American retirement savings system as he expressed support for the Department of Labor's fiduciary rule and called out non-fiduciary brokers.