Executive Summary
Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with an interesting new consumer survey from J.D. Power (and a similar one from Spectrem) finding that the majority of consumers currently using commission-based investment accounts don't want to switch to a fee-based solution instead, even as studies also find that those who use fee-based accounts are more satisfied with what they pay... and reinforcing that while there may be some harm caused by inappropriate commission-based sales, there is a segment of consumers that don't want to pay ongoing fees and would prefer to just engage via commissions when they wish.
From there, we have a few practice management articles, from a look at how the biggest key to getting new clients may be "approachability" (which is far easier said than done!), to a discussion of what the real difference is between a TAMP and a "robo-for-advisors" solution (as the two increasingly converge towards each other), what to do (and not to do) when talking to the media as a financial advisor to get PR exposure, and what your website homepage must include in order to be appealing to prospects (even including the ones that were already referred to you, but are still checking you out online first!).
We also have several more technical articles this week, including: strategies for using bonds to meet retirement expenses; whether the rules limiting upside return projections on indexed universal life policies under Actuarial Guideline 49 went far enough; what to do when a retired couple applies for long-term care insurance but only one of them gets it (and the other gets declined); and an in-depth look at how the number of publicly listed stocks has dropped by almost 50% in just the past 20 years, as fewer and fewer companies choose to IPO in the public markets, even as M&A activity continues, resulting in a more-and-more concentrated number of publicly traded mega companies (and potentially less diversification even for the investor who buys a total market index fund).
We wrap up with three interesting articles about spending and saving behaviors: the first is a fascinating look at how a couple earning $500,000/year in a major metropolitan area can still spend "reasonably" (at least, relative to their income) yet find themselves living paycheck to paycheck; the second dives into how one Millennial blogger managed to accumulate $1M in investments in barely 5 years by converting his long-term savings goals into a daily savings effort (which so motivated him that as his income rose, he saved virtually all of it, accelerating his financial success); and the last looks at how anyone can get their financial life more streamlined and organized (which, notably, is something few financial advisors actually focus on directly, even though it could arguably be a complementary or even a separately paid service!).
Enjoy the "light" reading!
Weekend reading for March 25th/26th:
Commission-Based Clients Don’t Want Fee-Only Accounts (Tobias Salinger, Financial Planning) - In a recent J.D. Power survey, almost 60% of investors at full-service commission-based firms said they would "probably" or "definitely" take their business elsewhere if they were forced to switch into a fee-only model. The results highlight concerns that as many brokerage firms look at switching to fee-based accounts or other more levelized compensation approaches under the DoL fiduciary rule, that many consumers will be unwilling to stick with the change. In other words, at least some segment of those who have chosen commission-based accounts appear to have proactively chosen the path – which helps to explain why many firms looking at fee-based accounts are still aiming to preserve at least a self-directed brokerage option. Though, in point of fact, this perhaps simply helps to illustrate that if advisors are going to charge ongoing fees, they need to provide ongoing value, and that consumer perception is that commission-based advisors aren't providing ongoing value (and therefore the consumers don't want to switch to pay an ongoing fee). In fact, the J.D. Power study also shows that consumers who do use fee-based accounts are actually more satisfied with what they pay than those who pay commissions. Which means those who choose to pay ongoing fees for ongoing services really are more satisfied with what they get. But clearly, the results show that not everyone wants to pay ongoing fees for that level of ongoing service and advice. Similarly, a recent Spectrem Investor Pulse study also found that only 2/3rds of investors say they're familiar with the term fiduciary, and even fewer know what it means, and, as a result, few are willing to pay more for fiduciary services... although 65% did agree that a fiduciary rule for advisors was necessary.
'Approachability': The One-Word Descriptor That Separates Good RIAs From The Rest (Abby Salameh, RIABiz) - Money is still one of the last great taboo subjects; Emily Post, who literally wrote the book on manners almost a century ago, notes that people should not discuss money (outside of business hours) if possible, and while many aspects of culture have changed since then, our discomfort in talking about money has not. As a result, whether it's a fear of offending someone else, or being judged on their own finances, most people are still very uncomfortable talking about money issues. In fact, Salameh notes that the challenge is so substantial, that one of the single greatest drivers of which financial advisors are successful in getting clients (or not) is their "approachability" – the extent to which they make clients, and especially new prospects, comfortable talking about their money issues (especially since at that point the advisor is still largely a 'stranger'). And notably, approachability has virtually nothing to do with technical expertise; instead, it's all about communication, empathy, and the ability to quickly build rapport with a prospective client. In other words, while ultimately technical knowledge and all those investment and financial planning strategies do matter – at some point, you still have to deliver results to keep the client – it's the ability to smile, project an open posture, make good eye contact, and listen (not just talk) and make prospects feel heard, that really wins new client business.
What's The Difference Between A TAMP And A Robo? (Bob Veres, Advisor Perspectives) - In recent years, "robo advisors" have been pivoting to serve financial advisors instead of looking to compete with them. Except, the reality is that many of the tools in the hands of advisors are ultimately just doing onboarding paperwork (account openings and transfers), or investing portfolios to models and then rebalancing them... which financial advisors already often do, either using technology (e.g., custodian platforms and rebalancing tools) or outsource to a TAMP for support. Which means ultimately, a "robo" is becoming little more than internal technology to do what most TAMPs already do, as the two converge on each other – with the one major distinction that with a TAMP, the advisor actually outsources responsibility for asset management duties (by delegating them), while robo-rebalancing tools still leave the responsibility on the advisor's shoulders to implement (albeit with a lot of automation to make it as easy as possible). On the other hand, it's also notable that when the advisor retains responsibility, the advisor is arguably the one "delivering the value", while with an outsourced TAMP, functionally the TAMP delivers the value and the advisor is effectively "selling" a packaged investment product (and perhaps or hopefully adding additional advisory services on the side). In other words, automating trading tasks still means being responsible for getting them done and not fully delegating them, which arguably puts the advisor in a different position in the client value proposition. Though, as Veres notes, the dividing line is getting fuzzier and fuzzier. Especially as TAMPs become more flexible – and therefore less pure delegation – at the same time that the technology makes it easier to automate it all anyway.
What Not To Do When Speaking To The Media (Carolyn McClanahan, Financial Planning) - Media exposure can help financial advisors improve their credibility with existing clients, as well as provide outright exposure to new prospects, but most financial advisors don't have the budget to hire a public relations firm. Accordingly, McClanahan provides some tips on how financial advisors can start building their own media presence: 1) have some focused area of expertise or passion, because that's what makes you a regular resource for journalists and allows you to "earn" the media; 2) share your expertise/passion actively, including and especially with your peers, as while other financial advisors aren't reporters themselves, doing so is what can eventually get you speaking engagements, which can lead to media quotes in industry publications, which gives the visibility that lets more reporters find their way to you and your expertise; 3) give back to your professional associations (like FPA and NAPFA), as the media often looks to those organizations for sources, and being an engaged volunteer helps makes you top of mind to association staff who may refer you; 4) attend some national conferences (even if not speaking), as many reporters attend major industry events, and you can potentially network with them there; 5) be active in social media, as the reality is journalists are often seeking out experts online (especially via Twitter), and will also appreciate it (reinforcing the relationship) if you share their articles publicly; 6) respect journalist deadlines (which means they need to be made a priority when they call, or your opportunities will slip by); and 7) do not "fake it until you make it", as being wrong will quickly blow your credibility (instead, if you don't know the answer, refer the reporter to a source who can expertly answer their question, as that can still enhance your credibility by being a valuable resource to the reporter!).
The Ideal Text For Your Homepage (Steve Wershing, Client Driven Practice) - Many (or even most?) financial advisors have never gotten a client from their website, but Wershing points out that the cause may simply be because most financial advisor websites aren't very good at actually engaging prospects to turn them into clients in the first place (and you'll never know how many prospects you never talked to because they never reached out after seeing your less-than-ideal website). In fact, research from McKinsey finds that 70% of consumers now go online to do research before contacting a company about an important purchase, which means there's a high likelihood that even prospects referred to you are checking out your website first. Accordingly, to draw their interest, it's crucial to provide the right information, which Wershing suggests should include: 1) information about you; 2) information about your unique offer; 3) a description of your ideal client; and your ideal clients' top desire or challenge. The point here is to simply and quickly make a connection between who YOU are, and the people you want to serve – so that if your ideal client really DOES hit your website, they'll read it and immediately say "wow, this advisor is a PERFECT FIT for someone like me!" But doing so requires being specific to that key client, as broad-based commitments like "our service is second to none" and our "commitment to clients is unparalleled" doesn't really resonate – it may sound good, but marketing people refer to it as "puffery" and consumers will doubt whether it could be literally true anyway.
Using Bonds To Meet Retirement Expenses (Wade Pfau, Journal of Financial Planning) - Bonds are a common part of a retirement portfolio, but Pfau notes that bonds can be used for retirement income in substantively different ways. The first is using bonds in an "assets-only" framework, where bonds are included simply as a diversifier to the rest of the total return portfolio under the standard mechanics of modern portfolio theory (given their lower volatility and low correlation to stocks). The reason that Pfau notes this as an "assets-only" approach is that the portfolio isn't necessarily adapted specifically to the client's "liabilities" – in the form of future spending – but instead, is simply done to manage for total return and allow distributions to happen as necessary. An alternative approach, though, is to more explicitly tie the bonds to future retirement liabilities – in the extreme, by directly matching individual bonds to specific future retirement cash flows, or at a minimum, adjusting the duration of the bond portfolio to immunize it against the interest rate risk of the future spending liabilities. Although notably, the latter is difficult, as the calculation of the duration of retirement spending liabilities is complex, especially since it would have to be recalculated over time as life expectancy decreases; nonetheless, there are some solutions to help, including DFA's target-date retirement funds (which define retirement liability specifically as supporting inflation-adjusted spending for 25 years after the target date, primarily using TIPS), and Blackrock's CoRI retirement indices. Given the complexity of duration-matching, arguably simply buying individual bonds is simpler and more straightforward for most advisors and clients, though notably the uncertainty of the retirement time horizon makes still makes this challenging (even if it can insulate the interest rate risk dynamics).
Rules Governing Indexed Universal Life Insurance May Not Go Far Enough (Greg Iacurci, Investment News) - Back in 2015, the National Association of Insurance Commissioners (NAIC) adopted Actuarial Guideline 49, which tamped down on the maximum return assumptions being used in indexed universal life projections. In the past, the average assumed illustrated policy return was 7.46%, and now faster AG 49, it's down to 6.33%. However, the problem is that some are still concerned that the maximum return cap is still unrealistic and not likely to occur, but that "allowing" it as a maximum rate has turned it into the default rate that gets used for many/most illustrations (without any acknowledgement of how improbable it might be). And recent year-end data shows that despite the new limitations on illustrated rates, indexed UL policies still had their best sales year on record, notching about $1.9B in annual premiums, and largely driven by which illustrated returns look best on paper and without adjustment for the risk that the insurer might change their own internal participation rates, spreads, and caps, in future years. Similarly, the fact that borrowing rates are variable (and could rise) also typically isn't illustrated, despite the fact that many IUL policies are specifically used as a form of "bank on yourself" future borrowing strategy (e.g., for retirement income). Which means there's a substantial risk that consumers end up buying IUL policies based on projections that may be (far?) rosier than the results they're actually going to get.
What To Do When A Couple Applies For LTC Coverage And One Is Declined (LTCI Partners) - A majority of LTC insurance is purchased by couples, in no small part because one of the greatest fears of those facing a long-term care event is not the impact on their own care, but fear that the costs will impoverish (or at least impair) the surviving spouse. Yet the challenge is that sometimes, only one spouse is actually able to get coverage, and LTCI Partners notes that even after completing a preliminary health screen, about 15% of LTC insurance applicants are declined over health history. So what's to be done for the uninsurable spouse? Three options to consider are: 1) Some LTC insurers (such as Mutual of Omaha) offer an optional rider that provides an additional benefit (without a reduction in the policy limit) if the insured is receiving benefits while his/her partner is alive, where the additional funds can be used to help pay for care of the uninsured partner (which at least ensures that if the healthier care-giver spouse gets sick, there will be dollars to help both of them at the point they both need assistance simultaneously); 2) purchase a "cash benefits" rider, and/or a hybrid Life/LTC policy, that will pay the full amount of the daily benefit regardless of costs incurred, which means the couple isn't constrained to just reimbursements for the one insured spouse and instead can buy a larger daily benefit to get larger checks that cover both of them; or 3) wait until the unhealthy spouse is really in need of income and care, and consider a medically underwriting single premium immediate annuity (as while it may feel 'odd' to buy a SPIA for someone who is unhealthy, a medically adjusted one can pay a substantial benefit relative to the premiums paid, allowing the ill spouse to leverage a smaller amount of dollars for a larger amount of care expenses).
The Incredible Shrinking Universe Of Stocks (Michael Mauboussin, Credit Suisse) - Since 1996, there has been a sharp decline in the number of publicly traded stocks listed on the U.S. stock exchanges, down a whopping 50% in the past 20 years, even as the number rose by 50% in other developed countries. In fact, there are now fewer listed companies than there were in 1976, despite the fact that our economy (as measured by GDP) is three times larger than now than it was then; even the Wilshire 5000 Total Market Index (established in the mid 1970s to capture the then-5,000-or-so publicly available stocks) only has 3,816 stocks in it. And the shift has substantial ramifications; there is some research to suggest that growth in publicly listed companies is tied to economic growth and entrepreneurship, and from a practical perspective, the shift of companies away from public markets means that just owning an index fund (and perhaps a venture capital fund) isn't enough for diversification, because now it's also necessary to own private equity (and even venture capital funds that are focused on both early-stage and late-stage). Notably, a decrease in public stocks can occur either because fewer become listed (e.g., through spin-offs or IPOs), or because more become delisted (through M&A, bankruptcies, or simply voluntarily delisting). Mauboussin suggests that the primary culprit is the former, and by at least one measure, companies only have half the propensity to publicly list now compared to 20 years ago, due to costs for everything from listing fees themselves, to the expenses of disclosures, regulatory requirements, competitive disadvantages from disclosures, and the challenges of communicating with shareholders and managing their expectations. And notably, while many of these requirements are driven by regulation, the declining trend was already underway prior to Sanbanes-Oxley in 2002 (and Dodd-Frank more recently). In the meantime, while IPOs have slowed, the pace of M&A remains high, along with private equity deals, which has caused the delisting pace to grow faster than the IPO pace (thus leading to net declines in listed stocks). In the meantime, the growth of ETFs has helped to partially offset the volume of individual stock delisting, and active trading of ETFs has filled the volume void even more. Nonetheless, the challenge remains that as fewer companies IPO, and the ones that do IPO later, the opportunity set of the stock market may be fundamentally changing from what it once was.
Scraping By On $500,000 A Year (Financial Samurai) - Virtually anyone would likely agree that making $500,000/year is "rich", with the presumption that anyone making so much money should have little difficulty making ends meet, even given their prospective tax bill for hitting the top tax bracket. And in a world of dual-income couples, especially working in major metropolitan areas that tend to have a "healthy" income, there are a lot of households making $500,000+/year, even those "just" in their 30s or 40s, from a married couple who are both experienced lawyers, to an early riser to the VP level in the corporate ladder, or someone who created their own online business. Yet the problem is that a rising income often leads to a rising lifestyle, especially for those whose friends are earning similar incomes (and are similarly creeping up their own lifestyle expenses), such that even a $500,000+ income household may be living "paycheck to paycheck". For instance, the article shows an example of one $500,000 income couple who maxes their 401(k) contributions, pays their tax liabilities, and then spends $5,000/month on their mortgage (plus another $20,000/year in property taxes on their $1.5M home), $18,000/year on vacations, almost $10,000/year on car payments for a BMW 5 Series and a Toyota Land Cruiser), and donates another $18,000/year to charity. Yet on a relative basis, the couple spends "just" 16% of their income on housing, 2% on car payments, 3.5% on charity, and 3.5% on vacations – all of which may seem quite reasonable relative to their income – yet still end up with less than 2% of their income remaining at the end of the year and basically live paycheck-to-paycheck throughout (beyond their 401(k) savings). Of course, on an absolute dollar basis, the spending may seem higher – "just" 3.5% on vacations is still $18,000/year, and about 16% of income on housing is still $80,000/year for mortgage and property taxes on a sizable $1.5M home. Yet ultimately that's actually the point – expenses that may be "reasonable" relative to income can still be draining when the lifestyle rises to the income. If one spouse lost their job, the couple would face a household financial crisis. All of which at a minimum emphasizes the point that even "reasonable" expenses (relative to income) can stress a household financially – regardless of how high that income is – though more generally, it also helps to reinforce the point that the path to higher income doesn't necessarily lead to greater happiness... and ironically, lifting up lifestyle commensurate to higher income can just make the stress even worse!
31-Year-Old-Millionaire Shares His 'Hack' To Build Wealth (Kathleen Elkins, CNBC) - Financial blogger "Grant" of Millennial Money went from having $2.26 in his bank account, to over $1 million, in just five years. The key, according to Grant, is to break down long-term goals into the smallest possible pieces: daily goals. It started when Grant tried to figure out what it takes to save $1.25M for his distant future retirement over 30 years at a 5% return, and found he needed to save $50/day. And so he set a goal to do just that. And although he didn't hit the goal every day, he hit it most days. And the effort to do so helped him focus on ways to earn more money to hit his goal... which turned into a "side hustle" job, and once he started to hit the goal consistently, he began to increase the goal as his income rose (to $70/day, then $80/day, then $100/day). Now, his current minimum threshold is to save $200/day to keep going, although notably he's already hit his $1,000,000 goal in just 5 years. Admittedly, the speed of Grant's success is as much a story about his rising income (which let him save so much more) as just his goal to save, but the key point is that by creating a savings goal first, that he could engage with on a daily basis, as his income rose, he felt motivated and focused to save all of it, which is what ultimately drove the final outcome.
5 Best Practices For An Organized Financial Life (Christine Benz, Morningstar) - For many people, tax season just serves as an indirect reminder of how disorganized our financial lives can become, in the midst of the mad scramble to gather all the relevant financial documents and information in time for April 15th. Accordingly, Benz provides some suggestions on how people can help get themselves more financially organized in the first place, including: 1) streamline your financial life to the extent possible in the first place (e.g., consolidate bank and investment accounts down to fewer financial services firms, eliminate the extra credit cards, roll over the old 401(k) plans, etc.); 2) transition from paper statements to paperless (which not only cuts down on the efforts to organize all that paper, but can also reduce risk of identity theft, as physical financial documents being mailed are still far more easily stolen [from mailboxes] than hacking online financial accounts); 3) use a password manager, both to maintain financial security, and because remembering all those financial account passwords can itself make you feel more disorganized in trying to remember them all!); 4) for the few papers you still need to keep, create a three-tier filing system with a safe-deposit box at the bank (for the highest value stuff), a home safe or fireproof box (for the valuable but able-to-be-stored locally), and a file cabinet (to organize the rest); and then 5) create a master directory, a document that lays out all your key financial information, so that you've got an easy reference point (and loved ones can use it to help out in the event die or become disabled). Notably, from the financial advisor perspective, these are not only good tips for being more financially organized, but arguably helping clients do this could even be a value proposition and separate (or bonus) service for clients unto itself!
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.
Very good read this week. Especially the last piece on organizing one’s financial life. I’d add keeping and organizing important documents in a cloud-based vault (and I know many, including me, do this for clients already so this likely goes without saying for some).
Financial Samurai? I’ve commented on his blog a few times over the years. Usually to point out the gross errors he makes in many of his articles. Most of my comments end encouraging him to research his topics better. His articles on Roth IRA, backdoor/megabackdoor Roth IRA investments are just awful. Now Michael is linking to his site? Maybe this is to help us better understand the misinformed client better? Heaven help us!
Just because you have issues with some articles he produces doesn’t prove that nothing he produces is/can be useful. And the article in question is not a technical discussion of Roth rules. 🙂
– Michael
As a reader, I can only judge by the fruits of his online work. The Roth articles were my first introduction to his blog back in 2014 (both comical reads). I find most of his articles (as do many who comment below his posts) to be full of half-truths or more often just his personal opinion (the Roth articles are just one of many examples).
Disadvantages Of The ROTH IRA: Not All Is What It Seems (2014)
The Only Reasons To Ever Contribute To A Roth IRA (2015)
Thanks for the weekend reading!
Wesley
Some great ideas in the article What To Do When A Couple Applies For LTC Coverage And One Is Declined. Thanks for sharing.
There is another option and that’s Short Term Care Insurance. There are quite a few policies out there that pay benefits for all levels of care. Overall, STC policies don’t include the 90-day certification language, so your client can truly get benefits from day one. They are less stringent when it comes to underwriting and more affordable. A client could even “stack” policies so as to end up with 2 or three years of coverage, which is enough for most people. The downside is that not every state allows them to be sold. Check with your FMO to see if they are available in your state. Remember, just because your client was declined, doesn’t mean he/she is dead. In fact, since they are health compromised, it’s even more important to get them some kind of coverage.
I appreciate your observation about the need to save even more money if you allow your lifestyle to increase in line with your income. It amazes so many, when applying a basic 4% withdrawal rule as an example, of how much money needs to be saved to generate sufficient income stream in retirement. Instead of examples of couples who can’t save much on $500k/year income (that 401k contribution isn’t going to fund a $500k/year lifestyle in retirement!), it would be more interesting to see more examples of high-income couples balancing spending and saving today so they can maintain their lifestyle in retirement.