Weekend Reading for Financial Planners (Jun 30 – Jul 1)

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.

Advisors To Receive Guidance For Meeting New CFP Standards (Karen Demasters, Financial Advisor) - This week, the CFP Board announced the formation of a new "Standards Resource Commission", a blue-ribbon panel of 13 experts who will be tasked with creating resources, such as fact sheets, FAQs, videos, webinars, and more, to provide further guidance to CFP professionals about what they must do to meet the new Code of Ethics and Standards of Conduct scheduled to go into effect next October 1st of 2019. As while the high-level duty of CFP professionals under the new standards is straightforward – to act in the best interests of the client at all times when providing financial advice – the nuances of determining when, exactly, the advisor has taken "reasonable" steps to meet that requirement is less clear (highlighted by the fact that the CFP Board's new Standards use 'reasonableness' in 28 different instances!). In fact, CFP Board CEO Kevin Keller noted that in talking to CFP certificants directly during the CFP Board's Town Halls, there was a clear desire for more concrete and specific guidance about what, exactly, CFP certificants are expected to do in order to comply with the new rules, in areas ranging from required disclosures to clients and upfront planning agreements, determining the depth of due diligence that's necessary to prove a "best interests" recommendation, to interpreting various compensation situations and whether the advisor can permissibly hold out as "fee-only" or not. Accordingly, the Standards Resource Commission was created, in a similar vein to the Commission on Standards that CFP Board created in 2015 to establish the latest version of the new standards themselves, and will include both independent practitioners like Linda Leitz and Bill Prewitt and Randy Gardner, large-firm representatives from Fidelity, Northwestern Mutual, Schwab, and Raymond James, fiduciary experts Blaine Aikin and Fred Reish, and consumer advocacy representatives including Pamela Bank of Consumer Reports and Lori Trawinski of the AARP Public Policy Institute.

Wells Fargo Memo Raises Questions About Commitment To Broker Protocol (Bruce Kelly, Investment News) - On Monday, Wells Fargo issued an internal memo to its Private Client Group (PCG) brokers noting updates to its privacy policy, which included a new clause stating that clients will now have the option to choose whether to allow their brokers to take contact information with them if they leave the firm, and will be able to call a toll-free Wells Fargo number to activate the "protections" on their existing accounts. The memo and privacy policy change has created an uproar, as the shift would potentially undermine what is otherwise Wells Fargo's continued participation in the Broker Protocol and impair the valuation of the practices of Wells Fargo brokers – as it's a moot point if Wells remains in the Protocol (which would allow brokers to take at least limited client contact information if they leave) if clients themselves have been granted the ability to prevent the broker from doing so. Of course, if clients don't want to follow the broker when he/she leaves, the client already has the option to simply decline to follow the broker and make the switch, but Wells Fargo brokers are raising the concern that clients may eventually be defaulted into the provision, or may not otherwise understand the future consequences of the seemingly innocuous (to the client) decision they're making now. Wells simply claims that the privacy policy change was done to improve its client privacy policies, after the SEC found Wells was out of compliance with the consumer information privacy rule, though it remains unclear how this change in particular would be necessary to comply with Rep S-P, when all other broker-dealers in the Protocol have not had any issue with compliance (and in fact, the Broker Protocol was created in part to provide firms with a way to allow brokers to take limited information when leaving without violating Reg S-P in the first place!). Though the change isn't entirely surprising, as once UBS and Morgan Stanley left the Protocol, and Wells Fargo made it easier for its brokers to switch to its semi-independent FiNet channel, there were already expectations that Wells Fargo would soon act to withdraw from the Broker Protocol, or at least limit their participation in it (as they now have).

The New Tax Form Is Postcard-Size, But More Complicated Than Ever (Jim Tankersley,  New York Times) - While the Tax Cuts and Jobs Act of 2017 was not quite the broad-sweeping simplification of the tax code that the GOP originally hoped, the elimination of a wide range of deductions and credits will cut the 2018 version of the Form 1040 tax return by more than half, reducing it from two full pages to one double-sided half page (postcard-sized). However, a significant portion of the consolidation is not actually the reduction of deductions, but a shift to including them on supporting worksheets, which then tally up various less-common deductions (e.g., deductions for student loan interest or teaching supplies) and then report them onto the new main form. The goal, apparently, is to consolidate the various tax reporting options including Form 1040, Form 1040A (the "short form" return), and Form 1040EZ (for filers without any dependents), into a single version. Supporters suggest that the new shorter form will make it easier for most to file their taxes simply, with fewer often-irrelevant lines to consider, and Republicans in particular are declaring the new form a victory of "simplifying tax returns down to a postcard", while detractors are raising the concern that shifting so many deductions to supporting worksheets will just create additional confusion (at least for those claiming the remaining less-common-but-still-available deductions and credits). Although, ironically, the biggest concern is that in a world where more than 90% of taxpayers now file their tax returns electronically anyway, and don't even necessarily look much at the Form 1040 itself anymore, a shift to a shorter and "simpler" tax return could lead more people to file paper tax returns instead, which may actually undermine the processing efficiency of the IRS (which requires more time and resources to process paper tax returns).

How Advisors Can Beat Their Fear Of Sales (Jan Wollman Rusoff, ThinkAdvisor) - According to consultant Alex Goldfayn, who recently authored "Selling Boldly", the single thing that hobbles our sales and business development efforts more than anything else is our own subconscious fears. For which Goldfayn suggests the best solution are applying the principles and learnings of Positive Psychology, the study of what makes us successful and happy, pioneered by famed psychology researcher Martin Seligman (as opposed to the rest of psychology that studies "what makes us screwed up, depressed, and anxious"). A core principle of Positive Psychology is that we can, quite literally, decide to be more optimistic, and that trying to approach challenges with an optimistic frame of mind can give us the perseverance and resilience we need to succeed (which Seligman suggests is twice as important for success as talent itself). In the context of financial advisors, "selling boldly" means approaching every conversation with a prospect, and every instance of asking for referrals, as something to be done proudly and confidently, anticipating upfront that asking for the business (or a referral) is going to be met positively because it's an offer to help (provide the advisor's valuable services). In fact, Goldfayn suggests that taking a more positive mindset in the first place is essential to improving sales outcomes, because "it's very difficult to make permanent behavioral change without first changing your thinking". And the principle can be applied to conversations with clients, as well; for instance, asking them "Did-you-know?" questions like "Did you know that I can also help you with your [portfolio/tax planning/insurance]" which activates the focused part of their brain to consider the offer being made. And recognize that hearing "no" from a client or prospect really just means "not at this moment"... which means it's your responsibility to try to help that person again (the optimistic mindset!).

Seven Proven Networking Strategies (Michael Goldberg, Advisor Perspectives) - Many advisors spend a lot of time doing "networking" with other professionals, but with very limited results to show for it (in terms of getting actual referrals of new prospective clients). Goldberg suggests the key is that networking is often not approached with the right attitude, which in the end is not about telling as many people as you can find about what you do in the hopes that they'll send you referrals; instead, it's about building a relationship with them, which starts with trying to learn about them, understand them, and help them, in an attempt to activate the reciprocity principle (that they'll help you back in return). In other words, the focus of the conversation from the start should be on asking them questions and trying to learn about them, to the point that they feel heard and understood and then ask to learn about you in return; at a minimum, it's an opportunity to find some common ground where you can relate. And bear in mind that helping them can sometimes be as simple as being a "connector" who introduces them to someone else you know who will help their cause (though make sure you know, like, and trust the person you're introducing, as ultimately you will be judged in your relationships by the introduction that you make!). If/when they ultimately ask about you and what you do, be certain to be specific about who you help and what you do; while there may be a temptation to talk in breadth about all the different types of prospects you may work with, most advisors will miss our on referral opportunities by not getting specific enough to actually make the other person understand and visualize who, really, would be a good fit to refer. And remember, the networking meeting is only the start of a relationship; if you want the relationship to deepen, it's crucial to stay in touch thereafter, which means not just connecting via social media, but having social visits from time to time. Which is also a good reminder that, because you can't possibly spend time with everyone, it's better to identify your top 50 potential networking connections, and spend as much time and effort as you can nurturing those relationships, rather than just having short-term one-off connections with an unmanageably large number of loose connections instead.

What Your Clients Told Me About Your Website (Steve Wershing, Client Driven Practice) - As someone who facilitates a large number of client advisory board meetings for financial advisors, Wershing hears a wide range of feedback to advisors about their websites (and the problems with advisor websites). The most common criticisms include: consumers prefer to scan information and not read lots of detail, yet most advisor websites are very light on graphics and images, and very heavy on text (not written in a manner that is conducive to being easily scanned); advisors often forget that "common" words for financial advisors are still esoteric confusing jargon for consumers, including "alternatives" and "fixed income" and "manager selection" and even "fiduciary"; prospects and clients strongly dislike stock photos, and strongly prefer real pictures of you and your staff (ideally with real clients); even better than pictures, use video so prospective clients can really understand how you communicate and what it would be like to sit across from you in a client meeting; clients are often open to using document vaults, but advisors don't do enough to train and show them how to use it (and if clients can't easily remember how to log in and figure out how to use it, they'll quickly revert back to email communication); and be certain to keep content current, as having only old content (e.g., the latest "new" blog post was 2 years ago!) actually makes the website look "neglected" and raises the concern in clients' minds about what else might be neglected in the business! The bottom line: be meticulous about your web presence, because prospective clients assume it is a window into how you approach everything in your business.

The Three Levels Of Financial Independence (Financial Samurai) - The basic concept of financial independence is rather straightforward: having enough money to be able to cover all of your expenses for the rest of your life, such that you are "financially independent" of the need to work (but unlike "retirement", may still choose to work simply because you  want to!). Yet Sam suggests that in the end, true financial independence is about having enough to satisfy not just your financial needs, but your psychological fears; for instance, some individuals or couples continue to work, even when they have "enough", because they don't feel like they have enough to have true financial peace of mind. Accordingly, financial independence really exists at three tiers: "budget" financial independence, which means having enough to no longer need to work... but only if you make some necessary trade-offs to live a modest "budget" living of ~$40,000/year, which may entail moving to a lower cost of living area (even if you don't necessarily want to), or delaying family/child decisions, or still feeling the need to engage in some side hustle to make ends meet; "baseline" financial independence, which means having enough to support a $60,000/year lifestyle that is consistent with the median household income in the US; and "blockbuster" financial independence, where your sustainable income may be $200,000+/year or more, which makes financial independence viable regardless of where you live (even if it's Manhattan or San Francisco!), or what kind of reasonably affluent lifestyle you live.

Are Your Clients Not Spending Enough In Retirement? (Meir Statman, Journal of Financial Planning) - A growing chorus has been calling for new solutions to the "retirement crisis" crisis facing Americans today... yet a recent research study by Vanguard found that only 4% of households actually describe their own retirement situation as a "crisis", and that amongst recent retirees, 90% stated that they are able to cover their needs and still spend freely enough on discretionary expenses, with only 10% feeling retired on a strict budget. And in fact, recent research on the so-called "Consumption Gap" – that consumers often spend less than they can afford to spend in retirement – suggests that the primary problem for many retirees may actually be a form of "self-induced poverty" where they actually do have more than enough to cover their spending needs, and instead limit their retirement spending not out of necessity but out of fear (or at least concern about the future impact of inflation). In fact, Statman points out that some common "spending problem" stories – like the widow who splurges after the death of a spouse – often are simply a shift from excessively frugal spending habits to "normal" affordable spending. The underspending problem, in turn, may be exacerbated by our "mental accounting" tendencies to separate dollars into capital/principal versus income... where even in late retirement when we could afford to dip into principal, we're afraid to do so because of what are at that point deeply ingrained habits to protect the principal. In other words, the very self-control habits that are often so effective at building wealth in the first place can become counterproductive when it's actually time to "enjoy" the wealth and spend it. Especially since a growing base of research shows that spending tends to decrease later in retirement (which just leads to even more excess unspent wealth in the later years). Although in such situations, advisors can at least explore discussions with clients about starting to give the money away to family, and at least try to help clients find the positive psychic value of "giving money to the next generation with a warm hand instead of a cold one".

How To Plan For Health Care In Retirement Without Going Broke (Bob Powell, Marketwatch) - According to Fidelity's latest estimate, a 65-year-old retiring couple will need an estimated $275,000 in today's dollars to cover health care expenses in retirement (calculated as the present value of monthly Medicare premiums, copayments and deductibles, and prescription drug out-of-pocket expenses, but not nursing home or long-term care expenses). Notably, though, it's not as though these retiree health expenses are actually due at a lump sum at the start of retirement; instead, the retirement is that they're simply a series of $5,000 – $10,000/year expenses for retirees throughout the retirement years (albeit slightly lower in the early years, and higher in the later years as intermittent health events lead to a progressive series of higher-cost "one-off" health events). And in fact, the relative stability of health care expenses in retirement (at least until the later years) means it's often easiest to simply earmark certain income retirements in retirement for those (recurring) health care expenses, such as one spouse's ongoing Social Security payments. Pre-retirees might look to fund their future retiree health expenses by contributing to a Health Savings Account, and leveraging the HSA's triple-tax-free benefits not for current medical expenses but retiree medical expenses. And for more affluent individuals, often the biggest challenge of health care expenses in retirement isn't the actual cost, but simply the "sticker shock" of transitioning from a world where the employer often pays some, part, or even all of the health insurance expenses, while the retiree must handle the entire cost of Medicare premiums and co-pays, and Medigap supplement insurance, all by themselves. Of course, it's also important to remember that one of the most straightforward ways to manage retiree health expenses is simply to try to live a healthier lifestyle in the first place, too!

The Best Advice You Can Ever Give (Gustavo Razzetti, Thrive Global) - Seeing people overcome their personal challenges by giving them good advice feels good, and can make us proud to recognize the impact that our advice had. Except the challenge is that ego-boosting feeling of seeing advice have a positive impact can potentially lead us to focus too much on the effort to give advice and share our expertise, and not enough on listening to the actual concerns the other person is expressing. The issue can be especially problematic when we offer unsolicited advice and try to "push" our recommendations onto someone who is not ready, willing, or interested in hearing them. Which means at a minimum it's important to wait until someone actually, truly asks for the advice before giving it... as the rest of the time, they're more likely just looking for someone to listen and hear them talk, perhaps in an effort to simply talk through their own problems or share to let go of some pain. And even when giving advice, it's crucial to remember that we can share our experiences and our knowledge, but you can't literally impact wisdom, as in the end, those insights must bubble up from within the recipient. As a result, often it's better to just be a good empathetic listener, and help people reframe problems and make the insightful connections for themselves by asking good questions, rather than simply trying to provide all the answers (even if they're right!) that the recipient may not be ready to take and implement anyway.

Maybe You're Asking The Wrong Questions (Scott Bell, I Heart Wall Street) - Giving good advice is a challenging thing, and even those who can find that magical alchemy of wisdom, personal insight, and experience that creates good advice in one area, may give terrible advice in others. For instance, Bell notes that his uncle has shared some particularly insightful advice and wisdom about matters of the heart... and also bought Beanie Babies, gold, and was certain that Lucent would make him a multi-millionaire. Of course, because bad advice is often strewn about – especially in the world of investing – we often try to focus on those who have some demonstrated track record of success, but even the most successful investors still make mistakes regularly. And it seems that our human brains may simply be hardwired to do a lot of crazy, non-productive, or outright self-destructive things from time to time (e.g., a pint of Hagen Daaz to feel better about a bad day!?). Often, the driver is simply because the motivator for our actions is not what you might expect. For instance, the client who has more than enough money to sustain their retirement spending for the next 100 years(!), yet still panics at each 5% pullback in the market, raising the question of whether they should be more aggressive (grow it more so you'll feel like you have enough, and you can afford to take the risk!) or more conservative (take the risk off the table, since you don't need the growth anyway!)... when the real issue is that the money was inherited from parents who died while the client was still young, and the fears of losing it were tied to the feelings of safety the money had come to represent after the parents were gone, which meant that paradoxically the key was to help them find joy in learning to give more of the money away, and freedom in learning to budget to give themselves permission to spend (none of which was an "investment" or risk tolerance problem!). At its core, the fundamental point is that the future of advice is likely to be much more about these kinds of "behavioral coaching" issues, and less about pure investment issues... and that focusing on the behavioral issues themselves requires asking substantively different questions in the first place.

Empathic People Get Burned Out Easily So Scientists Recommend Compassion Instead (Jordan Rosenfeld, Second Nexus) - Empathy is the ability to imagine how another person feels, and share an emotional experience with them, and is a trait that social scientists believe is one of the essential "prosocial" behaviors that helped humans stick together and survive evolutionarily. Yet recent research finds that "over-empathizing" might be leading to emotional burnout, and a whole host of negative secondary behaviors (including numbness, depression, anxiety, or becoming inexplicably angry). And the phenomenon isn't unique to those in helping professions – it's the same reason that even when we see a sad news story, we are initially (empathetically) drawn to it, and then often have to turn it off or look away because it hurts too much to keep empathizing (a form of emotional pain that can actually be observed in fMRI studies). By contrast, researchers have found that being compassionate – feeling for someone, but not empathetically with them – does not active the same pain pathways in the brain, such that it's feasible to extend such feelings of love and warmth and a desire to help without the pain and burnout that can be triggered by empathy. And in the extreme, Yale psychologist Paul Bloom, author of "Against Empathy: The Case for Rational Compassion" finds that overly empathizing can actually limit our ability to make rational or fair decisions. The fundamental point, though, is simply that by trying to shift from an attitude of feeling the pain of others, to an attitude of simple compassionate kindness towards... we can remain more focused on giving appropriate advice, while minimizing the risk of burnout.

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.