Weekend Reading for Financial Planners (June 2-3)

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 June 2nd – 3rd:

Advisor Groups Want Delay Of SEC's 'Best Interest' Standard For Brokers (Tracey Longo, Financial Advisor) - A coalition of 24 groups representing financial advisors, including the CFP Board, the Consumer Federation of America, AARP, and the NASAA state securities regulators, have sent a letter to SEC Commissioner Clayton (along with a separate letter from the Investment Advisers Association) asking for an extension to the deadline for comments on the new "Best Interest" regulations for brokers, and in particular comments regarding the newly proposed "Form CRS" (Customer Relationship Summary) that is supposed to provide consumers a clear four-page outline of the relationship between the customer and the broker. The efficacy of the Form CRS disclosures are especially important given that the SEC chose not to subject brokers to a full fiduciary standard akin to registered investment advisers, and that it's not entirely clear consumers will even understand the difference between the "Best Interests" regulation for brokers and the fiduciary standard for RIAs that also requires them to act in the best interests of their clients (particularly the least sophisticated investors most in need of the relevant information). To address the issue, consumer advocacy groups suggested that the new sample Form CRS disclosures should actually be tested with consumers directly, to affirm that it is accomplishing its stated intent in distinguishing between sales recommendations from brokers versus advice from RIAs, the difference between the proposed Best Interest standard for brokers and the higher fiduciary standard for RIAs, and that a broker's Best Interests duty does not apply on an ongoing basis in their work with customers. However, there is concern that Form CRS cannot be effectively tested with consumers by the August 7th comment deadline; thus the request for an extension.

Takeover Controversy Mars New York FPA's Annual Event (Ann Marsh, Financial Planning) - Today, the Annual Forum for the FPA of New York chapter kicked off, under what is still a cloud of controversy after the national FPA ended its affiliation agreement with the chapter (in the midst of accusations that its prior board used consumer information from pro bono events to solicit prospects, in violation of its own bylaws), launched a new "FPA of Metro New York" in its stead, transferred members from the old chapter to the new nationally-controlled chapter, and then proceeded with the originally scheduled symposium (and apparently shifting the revenue from the event organized by the "old" chapter to the new organization) without working with the leadership of the now-defunct chapter to facilitate the transition. The national FPA maintains that the national organization is entitled to the local chapter's funds, "because they were raised due to the chapter's prior affiliation with the national body", and per the affiliation agreement itself that stipulates funds from the chapter will be distributed to the national FPA within 60 days of a chapter's voluntary or involuntary dissolution. However, given that the funds haven't actually been transferred by the appropriate chapter leaders - who are still contesting the way the situation was handled – it appears that the national FPA should have obtained permission from a New York state court to take the funds. And arguably, if the chapter believes that the national FPA did not follow the affiliation agreement itself – either in the manner by which its affiliation was terminated, or the means by which the chapter's assets were taken – then the chapter itself could go to the courts and claim that FPA national inappropriately absconded with the funds. More broadly, though, the dispute between the FPA and its New York chapter has raised broader concerns across the FPA chapter community, about whether and to what extent the national organization should have the power to terminate a chapter's affiliation agreement and take its remaining assets as a natural result of being a "chapter" of the national body, or if the chapters (as separate and discreet legal entities from national) should retain more power over at least the assets of their organization that have accumulated over the years (even if they're no longer FPA chapters once the national organization terminates their affiliation agreement).

What Triggers The Affluent To Replace Their Advisor (Matt Oeschli, Oeschli Institute) - While clients may be dissatisfied with their advisors from time to time, recent research by the Oeschli Institute finds that clients rarely actually begin the process to search for a new advisor based solely on poor service from their current advisor... in large part due to the simple fact that most clients are not really aware of what they "should" be receiving in the first place (and thus tend to only be dissatisfied if they specifically get less than they were promised, or there is some other major faux pas that stirs the issue). Instead, what leads clients to actually proactively search for a new advisor is far more likely to be either a financial life event (e.g., receiving an inheritance, selling a business, etc.) or achieving a new higher level of assets that both make their financial complexity "top of mind" and make them realize that they could be able to now access a larger and more experienced/capable advisor (or at least one they perceive to be more experienced and more capable). Or stated more simply – clients are most likely to change advisors because their lives get more complex, and they don't have confidence that their current advisor is able to service their new level of complexity. Which is notable, because for many advisors, there is a desire to take on "smaller" clients specifically in the hopes that they will become more affluent with the advisor over time... even as Oeschli's research suggests that gaining affluence is more likely to make the client leave, as they become anchored to the original (simpler) services the advisor provided that are no longer enough for their needs. Which in turn suggests, at a minimum, that it's crucial for advisors who want to work with affluent clients to not only have the breadth of knowledge and expertise to be able to serve them, but that it's important to proactively communicate those capabilities from time to time, so that existing clients who have life events or a significant increase in affluence actually know that the current advisor is capable of delivering more when the time comes!

Younger Clients Turn What We Know About Referrals Upside Down (Julie Littlechild, Absolute Engagement) - Littlechild's company does survey research with consumers every year, and has found over the years, not surprisingly, that the higher the net worth of the client, the more satisfied they are likely to be (as their advisors do more to serve them), the more loyal they are, and the more likely they are to refer. However, it turns out that this behavior may be more specific to older affluent clients, as younger clientele apparently do not engage in the same types of referral behaviors. The good news is that it turns out younger clients (defined in Littlechild's research as those affluent clients under age 50) are even more likely to refer, with a whopping 80% of younger affluent clients reporting that they had told someone else about their advisor in the past 12 months (as compared to only about 1/3rd of those over age 50), and younger clients were also more likely to refer the advisor to multiple clients. The irony, though, is that the research also found that younger clients were less likely to be satisfied, less likely to continue working with their current advisor, and actually self-reported they were less comfortable referring their advisor in the first place! Notably, broader research across multiple industries suggests that younger clients are more dissatisfied with a lot of industries, ostensibly because they are simply more accustomed to living in a digital world with a lot of choices (and thus have higher demands and expectations). Yet the tendency of younger people to engage with digital tools has also turned them to be more community oriented, such that they're still more likely to refer, despite their higher standards and lower satisfaction with what they're receiving today. Although even for advisors who want to encourage this kind of behavior, it's notable that how younger consumers refer advisors is substantively different as well; they are far less likely to provide the name of the advisor or make an introduction directly, and are far more likely to either share a piece of content the advisor had written, or invite a prospect to an event the advisor was running. In other words, younger clients refer through content and experiences, not by just providing names and introductions.

I Outsourced My Marketing Plan: Here's What Worked (Dave Grant, Financial Planning) - For solo and small advisory firms, one of the biggest challenges is figuring out what to outsource (which costs money, of which there is a limited amount), and what to do yourself (which takes time, of which there is also only a limited amount!). In Grant's case, he started out by doing most of his marketing activity personally, but as his business grew (and he has less time than he did when he first launched), he's now had to begin outsourcing various parts of his marketing activities. Tasks that he's outsourced include: writing articles (you can set the content and style and key points, but find a supporting writer to turn it into quality written content; Grant started out by looking for writers via Upwork.com and Freelancer.com, then shifted to a retired CFP who had more depth on actual financial planning topics, and ultimately ended out working with personal finance freelance writer Zoe Meggert of Perfectly Planned Content); designing and distributing content (which Grant also outsources to Meggert, to handle finding appropriate images, uploading the content to the website, and then distributing it out via various social media channels); and generating leads (for which Grant evaluated CoPilot for LinkedIn connections, SmartAsset's SmartAdvisor for direct lead generation, Brewer Consulting for social media marketing into a niche, and Castor Abbot for automated video seminar marketing paired with social media advertising, and ultimately chose CoPilot and SmartAsset for their lower upfront cost commitment, and ended out switching to CoPilot competitor JetBuzz.io). Notably, Grant did find some tasks just weren't conducive to outsourcing, including producing video content and podcasts, which still requires him to get in front of the camera or microphone (from a home studio that he set up for himself).

The Deadly Risk Of Losing Your Financial Nest Egg (Susan Pinker, Wall Street Journal) - Nearly half of U.S. families have nothing saved for retirement, which is concerning not only financially, but also from a health perspective given an ever-widening gap in life expectancy between the financial haves and have-nots. Yet a recent study from the Journal of the American Medical Association by Lindsay Pool finds that the consequences of having money and then losing it may be even more dramatic. The researchers analyzed the data from the federally-funded Health and Retirement Study from 1994 to 2014 (where investigators check in with participants every 2 years), to see what happened to the subset of participants who had a catastrophic financial shock (ie., losing 75% or more of their assets in the previous two years). The striking results: those who had experienced a severe financial loss event were a whopping 50% more likely to have died during the period of the study (even after controlling for health, job loss, insurance loss, and marital breakdown), and women were more likely to have experienced a wealth shock than men (but were not more likely to die as a result, suggesting that women may be more financially vulnerable, but more resilient to the consequences). Overall, though, the mortality rate of those who accumulated wealth and lost it was still lower than those who never accumulated much at all; thus, as Pinker notes, "it seems that it's [still] better to have saved and lost, than never to have saved at all." In the meantime, researchers are now looking to understand why, exactly, a financial loss takes such a substantial physiological toll on the body.

Keeping Up With the Joneses: Neighbors of Lottery Winners Are More Likely to Go Bankrupt (Peter Coy, Bloomberg) - According to a new Working Paper from the Federal Reserve by Sumit Agarwal and colleagues, not only do lottery winners struggle to hold onto their winnings, but even their neighbors are more likely to declare bankruptcy after the lottery win occurs. The rise in neighbor bankruptcy appears to be a combination of both a tendency to spend more on "conspicuous goods" to keep up with the lottery-winning neighbor (as spending on indoor items like furniture did not rise, but did rise on visible goods like new cars), and that neighbors of lottery winners are themselves more likely to invest speculatively into high-risk assets (ostensibly hoping to "make a killing" and end up like the lottery winner) and also to borrow more. Notably, the effect was visible even with relatively "small" lottery winnings (ranging from $800 to $120,000, as larger lottery winnings tend to make people move out of their neighborhood anyway), and the results held even though "smaller" lottery winners don't even share that they won (which the researchers theorize may have actually egged on the problem as neighbors spent more to keep up without realizing that lottery winnings were involved in the first place). On the plus side, at least, the data didn't find any evidence that the neighbors more likely to file for bankruptcy were more likely to list gambling as the cause, suggesting that the neighbors weren't literally buying more lottery tickets themselves in an effort to get a similar winner. Nonetheless, the results still reaffirm that the effect of trying to "keep up with the Joneses" remains incredibly powerful.

Why More Young Married Couples Are Keeping Separate Bank Accounts (Caroline Kitchener, The Atlantic) - Historically, couples merging their finances into a joint bank account when getting married was viewed as a sign of commitment to the marriage... a financial version of "what's mine is yours, what's yours is mine". However, a study from Bank of America earlier this year found that younger generations are increasingly likely to maintain separate accounts than prior generations, especially amongst lower-income couples. In part, the shift appears to be a byproduct of the fact that Millennials are more likely to get married later in life (which means their independent financial status is more established before they ever have to decide whether to merge), and are also more likely to cohabitate before getting married (as co-habitating couples are also more likely to maintain separate finances, and once the couple is in the "habit" of living together with separate finances, the habit tends to persist). More generally, though, the trend towards maintaining separate accounts appears to be a more direct means for the members of the couple to affirm their own financial identities and relative contribution to the marital unit – in other words, separate accounts and separate finances makes it easier for each to understand what they bring in financially, how they contribute financially to the couple's common good, and helps to ensure that each member of the couple is more financially responsible (unlike with a single joint account, where one member of the couple tends to take full responsibility for the financial decisions of the couple). In addition, there is some evidence that maintaining separate finances is seen as more empowering for women in particular, who in the past were less likely to be breadwinners and have "their own" money, while dual-income couples with dual/separate accounts can more clearly establish and maintain control over their own financial destiny (even if it is ostensibly linked to a spouse's). Or stated more simply, in the modern world, the sign of commitment to marriage isn't the decision to create a joint bank account, but simply the decision to split all the expenses evenly between the two of them.

Are You Paying Yourself Properly? (FA Bean Counters) - The whole point of starting an advisory firm is to generate income to pay yourself as an advisor, but the reality is that from a legal and tax perspective, "how" you pay yourself actually matters, depending on the type of entity being used (i.e., whether it is a sole proprietorship, partnership, LLC, S corporation, or C corporation). The most straightforward option is to be a sole proprietorship, which have little in the way of government regulations or additional tax obligations; the business is not taxed separately, and instead the net income after all expenses is simply reported on Schedule C as part of the individual Form 1040 (with self-employment taxes paid on that income as part of the personal tax return as well, and the annual tax obligation paid with the annual tax return, or as estimated tax payments along the way). With a partnership, the entity itself will file a tax return (Form 1065), but the entity does not pay income taxes, as the income tax consequences instead flow through to the individual partners (reported to them via Schedule K-1). In the case of an LLC, it depends how many members there are; a single-member LLC is disregarded for tax purposes, and reports as though it were a sole proprietorship anyway, while multi-member LLCs generally report as partnerships (but can choose to be taxed as corporates in some states). S corporations function similar to partnerships, with a separate entity that files its own return, but passing through the income tax consequences, while a C corporation is a discreet entity unto itself, that files and actually pays its own taxes. The reason these different entity types matter, though, is that it means owners are not compensated in the same way from each. For instance, sole proprietors and partners (of partnerships, or multi-member LLCs) will report all the income (or their share) on their personal tax return no matter what, so there's no such thing as a "salary" for the partner or sole proprietor, who instead simply take a draw of the actual profits from the business for cash purposes (as it's all "income" for tax purposes anyway). By contrast, with an S corporation, it is possible to be both an owner (receiving pass-through distributions) and an employee, and in fact the IRS expects that S corporation owners who are also involved in the business as employees will take a "reasonable" salary as compensation (where the entity must actually pay the payroll taxes on that owner's salary). And in a C corporation, dollars generally will only come out taxable, as either salary, or dividends. The key point, though, is to understand that technically, there is no such thing as "salary" for sole proprietor owners, nor partners or LLC members, who only receive their cash share of profits but not a salary (though partners and LLC members can have "guaranteed payments" that shift around the profits to ensure they're allocated appropriately).

The Three Pillars Of A Successful Advisory Business (David Grau, FP Transitions) - One of the fundamental challenges of growing an advisory firm is that the skillset that lets someone "hang a shingle" to launch a practice and start gathering clients is not necessarily the skillset that aids the development of a large and sustainable multi-advisor business. The key distinction here is not just the size of the business, but its sustainability in particular, which Grau suggests is predicated on three core pillars: organizational structure, entity structure, and compensation structure. The key for the organizational structure is to have an equity-centric model that brings multiple advisors under a single umbrella, where they not only share support staff and expenses, but also clients and revenue and the success of the business... because the whole point is to collectively build something that is worth more than just the individual contributions of each, and that means having an entity that truly collects all the incoming revenue, pays out compensation for production and work performed, and covers the operational overhead necessary to make it happen (and produce a bottom-line profit, which is then shared back out to those owners). Of course, shifting equity ownership over time also requires an effective entity structure, most commonly either a corporation (i.e., an S corp), or an LLC, which also help to insulate the liability of the growing business as well. And the third pillar is compensation structure, which involves not just paying advisors for their relative contributions of revenue, but compensating them with a salary and bonus for their role in their business, and allowing the profits for successfully serving the revenue of the business to flow to the bottom line where it's shared as profits instead... which helps to reduce the risk of the advisors thinking just towards their own books of business, and focused instead on the collective profitability of the shared core.

When It Comes To Growth Plans Advisors Must Make A Decision (Angie Herbers, ThinkAdvisor) - The disruptive change of technology may not cause advisory fees to compress to zero or replace all financial advisors with robo-advisors, but Herbers suggests that it is driving advisory firms towards a fundamental fork in the road: to either grow much larger (e.g., pushing for $1B+ of AUM) and deploy new technology to gain economies of scale; or to grow much smaller, and focus in as a solo advisor on a select core group of clients that make it easy to leverage technology with limited overhead. Otherwise, firms can get stuck in the "middle" – which Herbers estimates is $2M to $5M of revenue – where the business is too big to act small, but too small to act big. However, for firms that want to make the push to grow big, it's important to recognize that a number of fundamental changes must occur in the business to make the growth achievable. In particular, Herbers emphasizes three key changes and challenges: 1) the firm must designate a CEO whose sole job will be leading the firm towards its designated goal, which could be a key employee hire (if you're ready to "let go" of that control!), or simply a shift in the role of founder/owner of the business (though that means letting go of working with clients to actually focus on the business itself); 2) the brand itself will be challenged, and it's crucial to spend time advocating for and defending it (e.g., one firm got sued by a competitor over its marketing message, which the founder took as a sign of success that competitors cared enough to try, but was a challenge to navigate nonetheless!); and 3) learn to better manage the corporate finances (which means really understanding operating income and return on investment, as now it's not just about the advisor's take-home pay, but the profitability and financial strength of the entity for all shareholders!).

How Tech Can Turn Doctors Into Clerical Workers (Abraham Verghese, New York Times) - In the medical world, the rise of data-driven medicine, including technology that supports it, is raising challenging questions about where the line begins and ends between the role of doctors and the tools they use. Which is a concern because the technology itself may actually be distancing the physician from the patient; for instance, in the past, doctors "made rounds" to see patients one bedside at a time, but now increasingly "rounds" are done by looking through a series of computer readouts about the patient that may be nowhere near the physical patient themselves! And the situation is made worse by the fact that the rise of "Electronic Health Records" (EHR), is increasing the amount of time that doctors have to spend entering all that information into the software... such that now, studies show that for every 1 hour a doctor spends with a patient, there are nearly 2 hours spent on EHRs. The good news is that the rise of EHR has reduced medication errors, and is providing rich data sets for new medical research; the bad news, though, is that the doctors increasingly turn into clerical workers doing data entry, and it's hard to even quickly gather the relevant data from the systems as keyboard shortcuts make it easy to "type" long notes that now take longer to read as well (and risks being less accurate as the doctors feel pressure to fill in all the boxes and data points, even if they didn't have time to actually evaluate every data point with the patient). And patients themselves may be getting less interaction with doctors and nurses, whose attention is increasingly focused on the "COWs" (Computers On Wheels), and entering data there, instead of the patients themselves. Ultimately, though, Verghese notes that technology may still be a savior – creating a world where artificial intelligence and machine-learning algorithms do more of the heavy lifting behind the scenes, making it easier for the doctor to actually focus on the patient, and ensuring that medicine remains focused first and foremost on actually caring for and about the patient. A reminder that is arguably equally relevant for the rise of technology amongst financial planners as well.

Why Is It So Hard to Talk about Money? (Ingrid Paulin & Wendy De La Rosa, Scientific American) - A recent survey found that personal finances are now the most challenging topic to discuss with others, more so than even the subjects of death, politics, and religion, which can ultimately lead to stress in relationships (with money now cited as the primary reason couples divorce, even as 40% of couples aren't comfortable discussing how they will manage their money together before they get married). Notably, though, the inability to talk about money doesn't just lead to potential relationship damage; it also leads many people to simply make less effective financial decisions, as they fail to get input and advice from others that could have helped them create better habits or avoid easy financial mistakes. Fortunately, though, the research is finding that better money conversations do help, with one study showing that students were less likely to struggle with impulse spending and had less credit card debt when they were from families that spoke openly about their finances, and another finding that people who had the option to publicly announce their savings goal to their friends (and then feel accountable to them for it!) had a 3.7X increase in the number of savings deposits they made. What are some good starter questions to open up the conversation? The authors offer up 10, including: What is the best piece of financial advice you've ever received?; How do you measure your financial success?; What is a question you have about money that you've always wanted to ask someone?; Have you ever successfully negotiated a pay raise?; and What's one thing you wish your parents would have done differently financially?

Wealth & Work: A Ten Thousand Year Old Pattern (Thomas Elpel, Green University) - Historically, our ancestors in the stone age had to spend every living moment just trying to find enough food to keep themselves alive and fed... yet the irony is that it actually didn't take very much time to hunt prey that could feed everyone for a period of time, and while it was certainly a more dangerous time, our ancestors actually spent far less time working than we do today! In fact, anthropologists have increasingly found that cultural and technological advancements appear to lead us to work more, not less. Not because hunting and gathering is terribly efficient, per se, but because they also didn't need to produce as much to sustain themselves in the first place, when their only material "wealth" was what they carried on their back, and they only needed to produce enough food to simply feed themselves (which meant most of their time was simply spent wandering and "hanging around"!). It wasn't until the arrival of "tools" that we began to make shelters, clothing, jewelry, and other things that we then had to produce and maintain. In this context, the evolution now becomes clearer – greater tools and technology allowed us to build better shelter and more furnishings, and more food to feed more people, and more "luxuries"... all of which required more collective work from everyone to sustain (even as the technology improved our efficiency to produce them). After all, the advancements of technology do make our work more efficient... but it also leads to decreasing costs for those goods, and draws in competitors, such that in the end, everyone gets cheaper clothing, but you simply end up producing 3X as much for 1/3rd the cost and don't save much of any time from your working day. Fortunately, there does tend to be at least a little bit of net increase in wealth – the "profit" from the business – but this too gets consumed, creating more jobs on which the money can be spent, but in turn requiring the community to do even more work to produce the goods necessary to absorb the additional wealth being created. The end result is that the advancement of technology and culture is making us incrementally wealthier over time, but it is also drive us to collectively work more to harvest the opportunities to produce goods and services to absorb that additional wealth... which raises interesting questions about whether or how much we will collectively accept the rising volume of work that appears to accompany the rising levels of wealth... even as the trend also helps to explain and validate why financial planning is rising up as the new profession of the 21st century (because so much additional wealth creates additional demand for guidance about how to use that money resource most efficiently!).

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.