Weekend Reading for Financial Planners (June 29-30)

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.

White House Mulls Executive Order To Inflation-Index Cost Basis For Capital Gains (Saleha Mohsin, Bloomberg) - This White House is reportedly developing a plan to cut taxes on capital gains by indexing cost basis to inflation (effectively eliminating taxes on any appreciation attributable to inflation itself), which would be implement by having the Treasury Department itself re-define how cost basis is calculated (thereby avoiding the need and challenge of getting Congress to approve the measure). Notably, this is not the first time the measure has been proposed, as it was floated briefly last year, and was considered as far back as President George H.W. Bush's administration; however, the proposal has reportedly floated back to the top with the prospective goal of implementing before President Trump faces re-election in 2020. Arguably, the proposal itself is reasonable conceptually, as a way to shift capital gains to only tax "real" asset growth (and made Federal revenue itself less sensitive to inflation), though adaptations would have to be made to distort interest and depreciation deductions for inflation as well (otherwise "nominal" interest is deductible while only "real" gains are taxable, effectively distorting the tax benefit). Nonetheless, the proposal itself is controversial, with analysts suggesting that the proposal would reduce Federal tax revenue by $102B over the next decade, 86% of which would accrue to only the top 1% of households, and that it's unclear how much additional economic growth and investment it would actually stir. And it's not entirely clear whether the change can be made unilaterally by the White House, with the risk that, ultimately, there may be legal challenges to making the change solely via Executive Order.

House Passes Maxine Waters' Amendment To Stymie SEC Advice Reform Rules (Mark Schoeff, Investment News) - This week, the House of Representatives passed H.R. 3351 (a general funding bill called the Financial Services and General Government Appropriations Act of 2020) which included an amendment from Democrat Maxine Waters that would prohibit the SEC from using any of its spending authority from Congress to "implement, administer, enforce, or publicize" its recent Regulation Best Interest and Form CRS rules, on the basis that the rule itself is too weak to protect investors from broker-dealer conflicts of interest. Notably, the long-term goal appears not to be permanently cutting off funding for Regulation Best Interest, per se, but simply to try to stall the implementation under after the 2020 election, anticipating that if the Democrats take control, a Democratic administration will likely re-write the fiduciary rules anyway (and that pausing Regulation Best Interest until that point will spare firms "unnecessary" compliance costs). However, the reality is that to take effect, the Republican-controlled Senate must pass the legislation as well (with Waters' amendment), which doesn't appear likely at this point, though with rising House-Senate conflict over raising the debt ceiling, it's not clear where negotiations may lead. Though again, even if the measure fails, it is still viewed as a strong signal of where a Democratic administration may focus if there is a change in power in 2020.

Former DFA CEO Is Starting DFA 2.0, Dubbed Avantis, With ETFs Through American Century (Brooke Southall, RIABiz) - Two years after quitting as Co-CEO of Dimensional Fund Advisors (DFA), Eduardo Repetto is back as the founding CIO of Avantis Investors, along with former DFA COO Patrick Keating, which under the umbrella of asset manager American Century (to gain operational efficiencies and reduce cost) is developing a series of 5 factor-based ETFs (Avantis US Equity, International Equity, Emerging Markets Equity, Small Cap Value, and International Small Cap Value) aimed not just to replicate but beat the indexes. Notably, the new funds aren't necessarily expected to be higher turnover and more actively trading, though; instead, Repetto's goal to beat factor-based index funds is simply that, once the indexes aren't being followed directly, there's more flexibility to trade any time of the year as the data comes in (i.e., making factor-based adjustments based on real-time data flows, rather than being constrained to only making changes when the entire index itself is updated). Of course, the reality is that such "smart-beta" factor funds have already proliferated in recent years, and it's not entirely clear whether or how Repetto will be able to differentiate; on the other hand, the fact that DFA's strategies are already so popular but are now being repackaged into previously-unavailable ETF format (except directly through John Hancock), and with Repetto's latest thinking about making factor-based adjustments in real-time, may itself be enough to gain traction, and that similar to DFA the plan for Avantis is to distribute the ETFs primarily through RIAs (but without the stringent "qualification" that DFA requires for RIAs to gain access). The strategies will also available in mutual fund and SMA structure as well.

The Surprising Reality Of Financial Decision-Making As We Age (Ashby Daniels, Retirement Field Guide) - One of the biggest challenges for aging retirees is the risk of cognitive decline, both in general with respect to life, and in particular when making financial decisions later in life. In fact, research from Dr. Michael Finke and co-authors (then at Texas Tech) found that financial literacy decreases quite predictably and consistently by an average of about 1.5%/year after age 60. What's even more concerning, though, is that the research shows that confidence in about ability to make financial decisions does not decrease in our later years; in other words, our financial literacy diminishes and we don't realize it, leading to an ever-growing "overconfidence gap" between our self-perceived financial abilities and where they have actually declined to. In turn, this perhaps helps to explain the increased susceptibility of seniors to financial scams and fraud in particular, as the lack of self-awareness around declining financial literacy results in seniors failing to be as skeptical as perhaps they should about what's being offered to them (and/or their own ability to do proper due diligence). Similarly, the growing financial overconfidence gap in later years, and declining financial literacy itself, may help to explain the greater risk of seniors missing credit card or mortgage payments, making ill-advised donations and gifts, or even succumbing to elder financial abuse or more generally family members that take financial advantage of their elders. So what can retirees do? Daniels provides several key suggestions, including: write a letter to yourself that explains the telltale signs it might be time to delegate your day-to-day finances (it's easier to hear the news from yourself!?); designate a trusted person that others (e.g., the advisor) can call if something isn't right; and have a conversation with your children, so they too understand what the plan is, who to contact, and who has the letter that may unfortunately someday need to be presented back to the retiree.

New Financial Apps Aim To Protect The Elderly (Yuka Hayashi, Wall Street Journal) - With the challenge of ongoing cognitive decline for seniors (which only becomes more apparent as life expectancies increase), and an increasing awareness of the frequency of financial abuse and exploitation of seniors, a growing number of companies are designing tools to help adult children manage and monitor their parents' finances. Popular offerings include EverSafe for account monitoring, True Link Financial for prepaid debit cards (that are customized with both spending limits, and where the dollars can be spent), and Golden Corp that analyzes accounts to identify and eliminate unnecessary expenses (and in general help with bill paying). Of course, at this point, many of the technology tools themselves are still largely untested in terms of the actual effectiveness and safety they provide, and the kinds of access they create for "trusted" contacts could itself create a new vector for financial fraud and exploitation by family members. Still, though, with the Consumer Financial Protection Bureau estimating 3.5 million incidents of financial exploitation in 2017, and 70-somethings estimated to lose an average of $43,300 in each case of financial abuse, there is clearly a significant market need. In fact, because the burden itself tends to fall on adult children, many of the new tools are not actually targeting seniors themselves, per se, but the "caregiver generation" that is often more open to using technology to save themselves time in their financial caregiver roles (especially when the parents are hundreds or thousands of miles away).

3 Sites To Help Aging Parents Organize Details (Liz Weston, New York Times) - One of the practical challenges of estate planning is that, even when seniors put in place the necessary documents, including not just Wills but Health Care directors and Powers of Attorney, those key documents aren't necessarily handy and readily available when the time comes (and sometimes, no one knows where they are at all!). Fortunately, though, a number of websites are emerging that can help provide the necessary organization and accessibility around those key documents, including: Whealthcare, where users answer questions to create a "financial caretaking plan" that identifies the prospective issues they're likely to face and then provides a transition plan that allows trusted people to take over, and a customized to-do list to make sure crucial documents are in place; Everplans, an online vault to store important documents, contacts, and even login credentials, along with instructions to family members on how to handle your affairs (even down to what to do with your social media sites), where "trusted deputies" can be named to gain access to the site (and the key documents there), either all the time or only upon a triggering event (e.g., released for your executor after your death); and EverSafe, which monitors financial accounts for unusual activity, large transactions, and other potential problems (and then providing alerts via email, text, or automated phone call, which can go to you directly, or to a trusted contact as well).

The Marie Kondo Approach To Decluttering Your Budget (Sophia Bera, Gen Y Planning) - While some people are just naturally inclined towards budgeting and keeping detailed tracking of their spending, for others (or even most?), it's more difficult to do so. Although arguably, the first problem with budgeting is simply calling it "budgeting" (which for many people brings up negative connotations of limitations and self-denial); consider instead simply calling it a "spending plan," where the goal is to find out where every dollar is going, whether that matches the client's goals and values, and if not, reassigning each dollar to a new purpose (and where it's not necessary to plan for every dollar, but that you can create a side account for unexpected or seasonal purchases so at least there's a plan for the spending when the time comes). For those who have otherwise had trouble figuring out where the money is going in the first place, Bera suggests starting out by just tracking the high level "money in" (total income from various sources) and total "money out" (in just three broad categories of Fixed costs like rent/mortgage, cell phone, and utilities, the Future goals like retirement or home downpayment, and Everything Else that may be discretionary or flexible). Because in practice, just getting a handle on where the money is going is often enough to recognize that it's not being spent in ways that "spark joy," and could be re-allocated with just a little self-reflection. As the habit builds, tracking can be done on an ongoing basis by picking a system - some system - to track, whether by hand, creating your own spreadsheet, using online budgeting spreadsheets/tools, or signing up for a budgeting/tracking software app like Mint. The key point, though, is simply recognizing that creating a spending plan isn't about denying yourself dinners or HBO access, but simply to begin anticipating those costs, and deciding whether/how to make room in your cash flow for them.

How Kids' Allowance Works In The Smartphone Age (Julie Jargon, Wall Street Journal) - Notwithstanding the ongoing evolution of technology, "kids still want money, and parents still want to impart a basic work ethic," for which allowances are the most common solution. But as younger generations are increasingly smartphone-centric, so too are the next generation of allowance-tracking apps (rather than the traditional "chores posted on the refrigerator" approach). For instance, Greenlight can link directly to the parents' bank account to provide allowance funds, issue a debit card for kids to use (with spending limits and even restrictions on which retailers the child can choose), and even encourage savings by paying interest on the money that isn't spent (albeit paid from the parents' own pockets). As an added plus, the real-time view of their accounts also helps give kids more self-awareness of their finances, and can more quickly and directly reinforce the concepts of saving and spending. Other options in this category include GoHenry (which also issues a debit card, that includes spending limits and retailer whitelisting), RoosterMoney for even younger kids (which eschews the bank transfers and debit cards, and simply gives parents a way to mark off chore tasks and kids a way to keep track of how much they're earning and spending), BusyKid (which also permits allowance savings to be invested into stocks via Stockpile), and FamZoo (another solution for tracking chores and paying kids in cash or via prepaid debit cards).

Stop Wasting Money On Unnecessary Monthly Subscriptions (Joanna Stern, Wall Street Journal) - In the modern "subscription economy," where it's anything/everything "as a service" (from Software as a Service [SaaS], to Content as a Service [CaaS], and more), every business wants to put you onto an ongoing monthly or annual recurring billing for their services, to the point that one study from West Monroe Partners found that the average American pays $237/month for subscription services (far beyond just basic music and video streaming)... and that 84% of consumers completely underestimate how much they actually spend on those services every month. In part because we forget or can't keep track of all the subscriptions, and in part because many subscriptions raise their fees in the future after any initial low rate. But there are now a growing number of services designed to help you manage your other subscription services, including Trim and also TrueBill, which dig through your existing credit card and bank transactions to find potential services to cancel. Alternatively, you can just audit your own credit card and bank accounts and make a list (or a spreadsheet!) of all the recurring monthly and yearly subscriptions, and their charges... and then decide what to cancel, or at least consolidate into increasingly family (and lower-priced) family plans. Of course, the reality is that it's not always easy to cancel some services... which indirectly is what makes it appealing to sign up through third-party platforms (e.g., Apple's App Store), which makes it easier to cancel directly through Apple instead.

Psychology's Five Revelations For Finding Your True Calling (Christian Jarrett, Big Think) - The conventional wisdom is that the key to success is to "find and pursue your passion," but not all passions are equally positive to pursue, as the research finds that there's a difference between having a "harmonious" passion and an "obsessive" one; the former is a positive path (where the passion feels in control, reflects positive qualities, and complements other important activities in life), while the latter can actually be problematic and dangerous (e.g., passions where you don't feel in control, such that your mood or self-esteem depend on it). Though having some passion does help, as otherwise having grit (persistence to keep working hard) just becomes a grind (and the existence of "passionless grit" may help to explain why grit itself has not been as predictive of success as once expected). On the other hand, research also suggests that some people just haven't found a passion they want to pursue, and that's OK, too; the most unhappy people weren't those who didn't have a passion to pursue, but simply those who did have a passion and were declining to pursue it (i.e., it's less a problem to not have a passion, and more a problem to have one that becomes an itch you're not scratching). However, in practice doing work in your passion isn't always a matter of finding your passion and then pursuing work in the field; instead, many people find a passion by investing enough effort into something that it becomes a passion. Though that doesn't necessarily mean that doing what you love will lead you to finding a passion for it, either; instead, researchers have found that "people who believe that passion comes from pleasurable work were less likely to feel that they had found their passion... as compared with people who believe that passion comes from doing what you feel matters."

Money Won't Always Follow What You Love (Ross Levin, Financial Advisor) - "Do what you love and the money will follow" is a common saying in society today, but Levin notes that ultimately this is a poor model for success, both because many types of fulfilling work doesn't necessarily result in great remuneration (e.g., missionaries), but that money often follows even the work you do not love (e.g., unhappy but very successful business owners). Levin suggests that a better model is to pursue the Japanese concept of "ikigai," which is about finding the overlap between what you love, what you're good at, what you can be paid for, and what the world needs. In that context, arguably being a financial planner itself is actually a profession with a very high ikigai overlap, as the conversations that we have with clients, about both financial and emotional issues can become very fulfilling (in addition to the fact that the financial advice business happens to be very financially rewarding). But in practice, many advisors don't enjoy all the work that they do, instead getting stuck in the analytical tasks or operational busywork that may not be personally fulfilling. Accordingly, Levin suggests that pursuing ikigai itself can be an iterative process, and that as the business grows, one of the key opportunities is to continue to delegate and shift work duties, so that more of your personal time is spent at the intersection of what you're actually good at, that you can be paid for, that the world needs... and that you also happen to love doing. The key point, though, is simply that money doesn't automatically follow what we love, and that we won't necessarily love what provides money, but that we all have the power to iteratively adjust what we're doing to try to find a better overlap between the two.

How Setbacks Help Us Discover What We Truly Love (Srinivas Rao, Heleo) - The traditional view of finding success is to spot and identify heroes, and try to replicate (or at least be inspired by) what they did. But as Rao notes in this interview with Charles Duhigg, author of "Smarter Faster Better," the bulk of what makes heroes ultimately successful is usually not the one high-profile event or action they take, but the cumulative efforts that come thereafter (e.g., John Lewis not just for being a major figure in the Civil Rights movement, but for his lifetime of service in Congress going through the administrative steps and actions necessary to actually bring about change in a complex government system). In fact, Duhigg suggests that it can actually be dangerous to focus on heroes, as trying to observe what they did - and pursue their path or shortcuts - can potentially become a way that we stop thinking for ourselves. Perhaps even more important, though, is that many heroes are ultimately very flawed - having a lot of positives and a lot of negatives - such that, in the end, the best path may be to draw on small bits from many inspirations, as opposed to focusing on one hero in particular. As a corollary, though, Duhigg also notes that it's our flaws that lead us to make mistakes, but also to take risks and having an impact (such that their flaws ultimately become strengths). The key, though, is having some passion and higher purpose to pursue in the first place, which is what leads us to find ways to work around our flaws, and for our setbacks to become defining characteristics (rather than permanently just setting us back). Not that setbacks are always positive - sometimes a setback really is just a setback, and can even help us to realize that we're on the wrong path (because we realize that we're not inspired to try to overcome the setback), and need to find a better path instead. The key, though, is just to recognize that the path to success isn't always clear, and that the setbacks and bumps in the road are often what actually helps to either reinforce for ourselves that we're really inspired to keep working towards it (because we've really found a passion), or becomes the crucial feedback to realize that it actually is time to make a change.

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.