Weekend Reading for Financial Planners (Mar 15-16)

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 March 15th/16th:

CFP Board Announces Suite of Academic Initiatives to Advance the Financial Planning Profession - This week, the CFP Board announced a number of significant new academically-related initiatives that it hopes will advance financial planning. The first is the potential establishment of a new "Center for Financial Planning" that would help to fund academic financial planning that in turn could be used to help financial planners better serve the public; the new Center would also be aimed at helping support more diversity within the financial planning profession, and continue building capacity for the next generation of financial planners. The second initiative is the announcement that the CFP Board intends to launch a new academic financial planning journal in partnership with John Wiley & Sons; the purpose of the new Journal is to "create an academic home for those faculty who are teaching and conducting research in financial planning" (as contrasted with the FPA's Journal of Financial Planning, which is intended primarily for practitioners, not academics). The third announcement is the launch of a new Ph.D. doctoral program for financial planning at Louisiana State University; although this is actually the 5th doctoral program, it is notable in being the first based within an AACSB-accredited business school.

Advisor Groups ‘Working Hard’ to Get Senate User Fees Bill - The Investment Adviser Association and other planning groups  (ostensibly including the Financial Planning Coalition) are "working hard" to get a bipartisan user fees bill introduces in the Senate to mirror H.R. 1627 legislation introduced by Representative Maxine Waters in the House. The renewed effort by the IAA comes as FINRA "remains committed" to its own efforts to gain oversight of investment advisors, though FINRA did fail in its attempts last year to get the House to pass legislation to appoint it as the SRO for all advisors. As the SEC continues to struggle with its own efforts to increase oversight of investment advisers though - including a lack of funding from Congress to hire more examiners, as an increased SEC budget has been proposed  but is "dead on arrival" on Capitol Hill, especially given the upcoming midterm elections - the issue remains at the forefront, and the IAA intends to make it a focus of its lobbying day in Washington on June 12. In the meantime, a potential fiduciary proposal is still scheduled to be released by the Department of Labor in August, though Assistant Labor Secretary Phyllis Borzi maintains that while the redraft it the DOL's "Number 1 Priority" they will take their time to "get it right" before releasing it, and the SEC is still considering fiduciary rulemaking of its own.

Is Merrill Lynch Taking Its More RIA-Like Training Program Another Step Forward - Merrill Lynch, which has been trying recently to revamp its training program for advisors away from the 'stockbroker' of old to the advisor of the future (with a more 'RIA-like' approach focusing on overall client life issues and not just the sale of products), recently made a notable new hire to head up its advisor development program: Racquel Oden, who is notably young, black, and a woman, marking a significant departure from the traditional view of wirehouses as being focused on older white males. Of course, there is already debate about whether Oden's hire amounts to little more than a younger multi-ethnic tokenism hire, or if it's really an attempt to bring a fresh perspective to advisor hiring and development at the firm. Oden's background itself is impressive; she's worked in the industry for more than 16 years, starting out as an equity trader at Morgan Stanley in 1997, followed by a range of responsibilities at UBS for 11 years, and has now spent four years at Merrill Lynch (most recently as managing director of wealth). She also has a strong history of advocacy for women and African-Americans, and if Merrill Lynch can be successful in broadening the industry's efforts reaching out to women and minorities, it would have a significant impact. On the other hand, Merrill Lynch does not have good history in this regard, as it has faced a number of lawsuits - including a proposed $39M class action lawsuit settlement as recently as December 2013 - from various women and minority employees who claimed they'd been discriminated against. Ultimately, Merrill Lynch states that the purpose of Oden's hire is about continuing development of the advisor training program itself, and not specifically about diversity, but the question remains about whether in the end it's a sign that either is really changing, or whether the Merrill Lynch culture is still too big to change.

YouTube Secrets For Financial Advisers - From the blog of advisor tech guru Bill Winterberg, this article provides some tips to advisors who are thinking about using video more for their marketing and how to do it. Why do video - and host it on YouTube - in the first place? Winterberg points out that YouTube is now the world's second largest search engine right behind Google itself (and because Google owns YouTube, the results of Google are often seeded with the results from YouTube!), so having at least some content there is important to being "found" online in the first place. Winterberg also points out that it doesn't cost a lot to get started, though he does suggest some quality equipment, rather than just recording on your iPhone (and he offers a list of recommended gear). Other tips include: don't just ad lib, make a transcript of what you're going to say (which helps not only to ensure it's reviewed for compliance purposes, but because you can also upload your transcript to YouTube to add closed captions and give YouTube more detail to index for search results); create a custom thumbnail image for your video; use YouTube annotations to make it easy for viewers to subscribe to your channel or watch related videos; in the description box, use hyperlinks (complete with "http://" prefix) to direct viewers back to your site; consider hiring a coach to help you; and make sure you end with a good "Call to Action" that tells people what they should do next. Winterberg notes that these tips were drawn from a video interview he did himself with Joe Simonds of Advisor Internet Marketing; if you're interested, check out the whole video interview here.

Advisor As Auteur - This article by financial planner Dave Grant on RIABiz discusses how he uses video in his own Finance For Teachers advisory firm for marketing purposes, and how he overcame the "learning curve" involved. The first tip, though, is simply to recognize that no video is likely to be 100% perfect, so don't try; not only because we're often hypercritical about ourselves on video in the first place, but because having video for people to make a connection with you is so powerful that "a three-star video is better than no video at all." So how do you get started? Grant suggests that the starting point can simply be the equipment you already have: your smartphone, as virtually all of today's smartphones can record video with audio (an iPhone4 will even shoot in relatively high quality 720p HD). If you're going to use your smartphone, though, you should pick up a simple smartphone tripod at least, so that your video will be steady and not a shaky "video selfie". Alternatively, you can also use a computer webcam (Michael's note: my webcam of choice these days is the Logitech HD Pro C920), but be certain to pay attention to how it's positioned and the angle (so that people aren't just looking at the top of your head or up your nose!). Practice recording a few times and look at the result, and you may catch some adjustments to make before you record the 'final' version. Grant also notes that paying attention to audio and lighting are important; ideally, record outside in natural light (but not in direct sunlight where you'll be squinting at the camera), and if you're recording somewhere that has any background noise, get an external microphone. How long should your video be? Grant aims to record around five minutes, where you intro yourself, hit just one topic area with 2-3 key points, and then close out; the longer the video, the less likely people are to stick with it to the end.

4 New Advisor Tech Trends - From Financial Planning, advisor tech consultant Joel Bruckenstein highlights the top trends from the recent Technology Tools for Today (T3) advisor tech conference last month. One big theme and conversation topic at the conference was the rise of "robo-advisors", though MoneyGuidePro CEO Bob Curtis pointed out that the platforms are primarily about creating model portfolios, not providing individual financial advice, and Neesha Hathi of Schwab Advisor Technology Solutions noted "Has WebMD replaced your doctor? [No.]" In fact, in a poll amongst the admittedly-tech-optimistic audience at the conference found 98% of respondents thought the technology being created by the robo-advisors is an opportunity, not a threat, such as the Advisor Connexion offering from Folio. There were also several new "innovative" software debuts, including Advyzon by YHLSoft, a cloud-based tool that offers portfolio management and monitoring, data aggregation, professional-looking reports, and more, and is created by one of the [former] primary architects of the Morningstar Office and workstation platforms; Bruckenstein also highlights RetireUp, a new software offering to do "simple, graphically pleasing retirement plans." Other tech trends at the conference included deeper integrations, with a large strategic partnership announcement from SEI to work with Redtail, MoneyGuidePro, and ActiFi to create a cross-application workflow automation system that will be released later this year, along with an integration announcement between MoneyGuidePro and account aggregator Yodlee to provide an aggregation dashboard tool at the significantly-undercutting-price of $495/year. The last notable trend at T3 - a deeper integration of younger advisors, as the event launched the [first] annual FAStech Cup Competition, where financial planning college students are given technology-related challenges to compete.

Should Retirees Be Stocking Up on Stocks? - In Research magazine, Texas Tech professor Michael Finke looks the decision about how much equity to own in a portfolio in retirement. Conventional wisdom - as embodied in today's "target date" funds - assumes that equities should decrease as we age, our time horizon shortens, and we get more conservative. Yet recent research (by Wade Pfau and yours truly) suggests that in reality, the better path may be to start with a more conservative equity exposure in retirement and allow it to increase with age. The point is not to increase 90-year-old grandmas to 90% in stocks, but simply that a portfolio that glides up from 30% in equities in early retirement to 60% at the end actually fares better than holding a 60/40 portfolio throughout (the neoclassical economic theory that portfolio allocations should be consistent from year to year). And the rising equity glidepath overall is actually a more conservative portfolio on average than a static 60/40! The reason this approach performs well is that research has shown that a sharp decline in the portfolio in the early years has a greater adverse consequence than a similar decline in later years; as a result, the goal of the rising equity glidepath is to be more conservative in the early years when the consequences of this risk are greater. On the other hand, separate research has found that with historical market returns, the tendency for stocks to be volatile in the short-run but more stable in the long run suggests that actually the younger retiree with a longer time horizon may really be able to afford having more stocks in early retirement (more consistent with the classical approach of decreasing equities over time).

Does International Diversification Improve Safe Withdrawal Rates? - On Advisor Perspectives, professor Wade Pfau looks at how more international diversification in a portfolio can impact safe withdrawal rates (SWR), especially given that the overwhelming majority of SWR research thus far has been based on relatively few asset classes (and usually just domestic ones). Notably, Pfau has already done research on safe withdrawal rates on a country-by-country basis, finding that the SWR itself varies from one country to the next (and that the US was actually amongst the best-performing countries), but the goal here was to find whether globally diversified portfolios themselves fare better or worse than investors maintaining their single-country allocations. With global diversification, the outcomes were actually mixed; while 15 out of 20 countries improved (sometimes significantly), there were 5 countries that fared worse (including, notably, the US). Overall, though, global diversification did help more than it hurt, and was especially helpful in the most of the worst-faring countries (where safe withdrawal rates were as low as 2% or less due to domestic stock/bond market disasters). When examined in the context of the US, global diversification helped about 50% of the time and hurt 50% of the time; a detailed analysis shows that the global diversification was a drag on withdrawal rates during the early 1900s and again during the great depression, but was generally helpful the rest of the time. The bottom line overall: global diversification can help, but it's certainly no panacea, and isn't a universal improvement.

Recent Changes in the Gains from Delaying Social Security - From the Journal of Financial Planning, this article by John Shoven and Sita Slavov looks at the benefits of delaying Social Security in the historical context. As it turns out, a number of changes over the past several decades have significantly increased the actuarial value of delaying; in particular, longevity has increased (above the assumptions around which Social Security was based), and real interest rates have declined (below the discount rates inherent in Social Security's actuarial calculations). In addition, the challenges in the 1990s and early 2000s that made it possible for one spouse to claim benefits even while the other delays - the so-called file-and-suspend rules - have made delaying even more appealing in certain situations (further aided by the opportunity to file a restricted application), and overall the delayed retirement credits themselves for waiting past normal retirement age have increased significantly since the early days of the Social Security system. Overall, the authors conclude that the net present value of Social Security benefits are increased by about 1%-2% for singles, 5%-6% for two-earner couples, and 2%-4% for one-earner couples, with younger cohorts benefitting from the rules changes even more than older ones. The end result - as a result of all these various changes, it really has gotten a lot more valuable to delay Social Security benefits for retirees today that it was just two decades ago.

America's Weird, Enduring Love Affair With Cars and Houses - In the US, the real estate and housing industries account for $1 of every $2 spent by the typical U.S. family; in other words, our spending is dominated by what we spend on our houses and our cars. And notably, the trend is remarkably persistent even at different education (and by proxy, income) levels; families with at least a bachelor's degree spend about 32% of income on housing and another 17.1% on transportation, while those without spend 33.7% and 18.9% respective. While this does show that there is some slight decrease in the spending on housing and cars at higher education levels, the difference is remarkably slight given that families with led by a college grad have an average income that is almost double that of high-sch0ol-grad households. Or viewed another way, we seem to be so in love with buying cars and houses that even with radically different levels of income, from lawyers and doctors to high-school dropouts, we all seem to spend half the household income in these categories, which means even as our income rises we lift up our spending in these categories to match. Yet it doesn't "have to" be this way; by contrast, in Japan the average spending on housing and transportation is barely over 30%, and the percentage of income spent on food consumed at home is more than double that in the US (about 17% versus 8%, respectively). So what do we make of this spending tendency? On the one hand, it suggests that we should perhaps spend less time sweating the small stuff and more time focusing on the big things that matter, like what we spend on cars and houses. On the other hand, imagine what the world would look like if we didn't spend $1 of every $2 on houses and cars; the real estate and auto industries would take a big hit, but we'd also have a lot of money for other things, from technology gadgets to eating out with friends. And what's notable about these latter implications is that Gen Y may be starting to live into this vision already, with a trend towards "urban light" areas, though it's not clear if this is just a recession-era fad or the start of a real change in our spending behaviors around cars and houses.

The Great Divide Over Market Efficiency - This article by Cliff Asness and John Liew in Institutional Investor looks at the Efficient Markets Hypothesis (EMH) and how it has evolved over the decades, especially in light of the recent selection of Robert Shiller and Eugene Fama for the Nobel Prize in economics; the fact that both won is an intriguing decision, given that Fama was a pioneer of EMH while Shiller has been an active EMH critic with much of his research. Notably, Asness and Liew themselves got their Ph.D.s from the University of Chicago and studied under Fama, though suggest they're not exactly biased towards EMH given that both have also spent the past 20 years pursuing investment strategies at least partially predicated on markets being inefficient; ultimately, Asness and Liew suggest markets may be more efficient than Shiller and many stockpickers suggest, but less than Fama implies. In practice, these theories are tested by establishing a pricing model to predict how security prices 'should' behave, and then examine whether they do behave that way, and whether investors can beat the model; notably, though, this approach suffers from the "joint hypothesis problem" - that in the end, you can't actually test market efficiency alone, but only market efficiency coupled with some security pricing model (which runs the risk that either could turn out to be inaccurate). This in fact has been the issue in the past; for instance, studies have shown that markets aren't perfectly efficient as predicted by the Capital Asset Pricing Model (CAPM), but it's not clear whether the problem is EMH, or CAPM. Overall, challenges to EMH fall into two categories: "microchallenges" (return anomalies like value and momentum), and "macrochallenges" (market prices overall don't seem to fully reflect just the present value of future cash flows). The authors note that some of these 'failings' of EMH appear to be driven by risk factors (that aren't necessarily in models like CAPM), though some appear more behaviorally driven by investors themselves, and the balance between the two themselves can vary over time. Notwithstanding these inefficiencies, it doesn't necessarily mean the markets can be consistently beaten, though, due to the "limits of arbitrage" - that in the words of Keynes, "markets can remain irrational longer than you can remain solvent" and moreover that sometimes there's just not enough money available to buy (or short) an investment to "make" its price efficient. Overall, the article is an excellent exploration of the current issues and dynamics around EMH, and relevant for those who are active or passive.

The Incredible Shrinking Management Fee - This article by Jason Zweig of the Wall Street Journal profiles WiseBanyan, the most recent entrant to the "robo-advisor" world that offers to provide investment management services not just at an ultra-low cost, but entirely free, with no minimum account size, no sign-up fee, and no cost to buy or hold the investment portfolios (which are comprised of low-cost Vanguard ETFs averaging 0.14% in expense ratios). Whether WiseBanyan itself will succeed as a company or not remains to be seen; its founder declares that the company "ultimately hopes to make money by charging fees for additional services" in the future, though it's not clear exactly what those will be and whether WiseBanyan will be successful at doing so (in the end, the business has to make money somehow!?). Notwithstanding the uncertainty about whether WiseBanyan will actually survive and succeed in its gambit, Zweig nonetheless points out that the downward march of investment management fees does continue to raise the fundamental question for investors: "am I getting my money's worth from my financial advisor?" After all, if it's not WiseBanyan offering the service for free, it may be Wealthfront or Betterment, which only charge "slightly" higher fees of 0.15% - 0.25%. Zweig notes that there are many advisors who really do provide value beyond the portfolio alone, and some are even dissociating their pricing from the portfolio and charging flat or retainer fees instead. On the other hand, data from Cerulli suggests that a large number of advisors may not be providing much value-add; about 9% of the roughly 300,000 advisors in the US do nothing but manage portfolios, and at the other end only about 26% provide full comprehensive financial planning advice. The fundamental point (as noted previously on this blog as well) is that the pressure is rising on advisors charging 1% on AUM to justify their value proposition, and while some may still be able to do so, others may not be charging a fair price for the services actually being provided.

I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!

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. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read "FPPad Bits And Bytes" on his blog!