Weekend Reading for Financial Planners (Mar 30-31)

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.

Schwab Introduces Subscription-Based Financial Planning Option To Its Digital Advisory Service (Brooke Southall, RIABiz) - The big news this week was the announcement that Charles Schwab is launching a new financial-planning-for-a-monthly-subscription-fee solution as a new "Premium" version of its Schwab Intelligent Portfolios robo-advisor platform. Notably, though, the new monthly subscription fee financial planning offering will not be a purely digital offering; instead, it will provide 1:1 access directly to a CFP professional, who will both develop an initial upfront plan (for a separate one-time $300 fee), and then be available on a virtual basis, "24/7" for an ongoing $30/month flat fee. (Though notably, clients must also still participate in Schwab's Intelligent Portfolios platform, with a $25,000 minimum, on which Schwab makes additional fees through their proprietary ETFs and affiliated-bank cash sweep.) From Schwab's perspective, the angle is simply to price the solution the way "small" younger investors are used to paying for it - as a monthly subscription fee, the same way we pay for everything from streaming media services (e.g., Netflix) to the local gym. But with the monthly subscription fee model on the rise, both from organizations like XY Planning Network and its 875 advisors and a slew of hybrid broker-dealers adopting payment platforms like AdvicePay to roll out monthly subscriptions and other fee-for-service business models for their advisors, Schwab's move into the model will arguably begin to "mainstream" it for consumers (given Schwab's reach with over 10,000,000 accounts already). At the same time, though, having a highly scaled low-price-point financial planning offering from a consumer brand like Schwab will also put newfound pressure on independent advisors to truly justify what, exactly, they're going to provide to their own clients in terms of higher quality, greater expertise, or additional value, to justify their own fees above and beyond Schwab's $360/year offering.

FINRA May Nix Suitability Rule Due To Reg BI Overlap (Melanie Waddell, ThinkAdvisor) - In a recent regulatory panel, FINRA's Chief Legal Officer suggested that there is so much overlap between the existing FINRA suitability rule, and the direction that Reg BI is going, that FINRA will aim to at least adjust its suitability rule to better conform to Regulation Best Interest (and eliminate conflicting overlaps, particularly for hybrid broker-dealers), or may simply eliminate having a separate suitability rule altogether. On the one hand, the adjustment would arguably be a positive for the industry, as hybrid broker-dealers that must comply with two similar-but-not-same rules that overlap are subjected to additional compliance and regulatory cost burdens, increasing the cost of doing business and ultimately what advisors at those broker-dealers must charge their own clients to be successful. On the other hand, critics have already noted that if FINRA thinks the suitability rule is so similar to Regulation Best Interest that it is willing to completely eliminate suitability and just shift to Reg BI, that apparently FINRA doesn't actually think Reg BI is a materially higher or more difficult standard to comply with in the first place (or else it wouldn't be fighting a full fiduciary standard, and then consolidate the suitability rule into Reg BI anyway). In other words, FINRA's willingness to consolidate the suitability rule into Regulation Best Interest is the best case yet that Reg BI isn't a material improvement or change to broker-dealer standards in the first place.

Attracting Top Talent Means Rethinking Benefits (Samuel Steinberger, Wealth Management) - The standard employee benefits package to attract and retain young talent typically includes insurance (health and, perhaps, dental and vision), plus retirement benefits (e.g., a 401(k) or profit-sharing plan). But in today's environment, the standard employee benefits package has become so ubiquitous, it doesn't actually appear to be attracting top talent anymore, as it's not differentiating... and in practice, next-generation talent is often still so saddled with student loan debt that benefits like access to retirement accounts aren't actually appealing anyway. Accordingly, the hot new employee benefit is becoming "assistance in paying off student loan debt," which last year was only offered by 4% of employers but in the coming years is expected to quickly grow to 32% of employers, powered by new startups like Goodly that help to facilitate the new student-loan-repayment employee benefit. And while these trends are happening across the US in a wide range of industries, there's some expectation it will soon come to wealth management in particular (and in fact, a few national firms like Fidelity have already done so), given both the competitive squeeze in the face of an ongoing talent shortage, and the fact that new financial planners are increasingly coming from college programs (where they would potentially accumulate significant college debt). Especially since one recent study found that paying off debt is one of the most positive life events there is with respect to our overall well-being... which would be a significant boost to employee morale!

The Benefit Workers Want Most Is Less Work (Lila MacLellan, Quartz At Work) - While there's been a growing furor in recent years to find the next great employee benefit that will attract and retain top talent, from the traditional offerings like retirement plans or health insurance (or even on-site medical exams), to more specialized solutions like the option for paid sabbaticals, a concierge program, or rewards for healthy behavior, it turns out what employees want most is simply: unlimited paid time off. Of course, who wouldn't want to just continue to get paid on an unlimited basis for not actually showing up at work? But a deeper dive into the recent survey results indicate the point wasn't simply about being able to get paid for never doing any work, but simply the ability to have far more flexibility and available time to actually live life. The option was particularly popular amongst Millennials (with 80% saying they'd be drawn to the benefit), as compared to 70% of Gen X'ers, and "only" 63% of Baby Boomers. In other words, while most of the creative perks being made available by firms today are all designed to keep employees at work longer, by removing excuses to leave the premises (e.g., food on-site so they don't have to go to lunch, medical exams on-site so they don't have to go to the doctor across town), employees actually are showing a preference for being able to get off-site from work more easily, than just making it easier to stay on site instead. And notably, while some employers might fear employees abusing such a policy, in practice, research has shown than employees tend to take off fewer days with unlimited paid time off than with a more standard X-days-per-year vacation policy.

Best Interview Structures For Evaluating Prospective Advisor Candidates (Caleb Brown, New Planner Recruiting) -  One of the biggest challenges for independent advisory firms trying to hire prospective employees is that few have much experience in running an effective and efficient hiring, screening, and interviewing process in the first place. The in-person interview, in particular, is often the biggest stumbling block, as many advisory firms aren't certain the best way to run such a meeting, and may not even be certain what kinds of questions to ask (especially if the job description itself hasn't been fully fleshed out first). Brown highlights three different ways that prospective-hire candidate interviews can be structured, and where they may best fit: 1) the "Informal" unstructured interview, where there are no pre-determined question, usually done in a casual setting (e.g., over coffee or lunch), which works best when trying to build rapport and when the firm isn't really sure what its staffing needs are, and wants to spend time with a variety of candidates to determine who may be the best fit (though top-tier candidates may not really open up and will treat it like a "formal" interview anyway); 2) the "Semi-Structured" (hybrid) interview, with some pre-determined questions but also the flexibility for the interviewer to delve further in areas based on responses, which works best when there's one specific opportunity to interview for (as consistently-asked questions make it easier to compare candidates for a specific position or role); and 3) the "Structured" interview (most common with the largest firms), where the interviewer asks the same pre-determined questions consistently to every candidate, which makes it easiest to compare and "score" a large number of candidates to find the best (either with the firm's own scoring rubric, or a system like Topgrading), but introduces the risk that the firm misses out on unique capabilities and background of particular candidates (who never get the opportunity to go "off script" and explain what's unique about them).

It Starts With A Tweet: How Ritholtz Recruits Top Talent (Ian Wenik, CityWire) - When Ritholtz Wealth Management wants to hire, its high-profile leaders, Barry Ritholtz and Josh Brown, simply send out a tweet, which for their last position resulted in nearly 60 resume submissions overnight. Because while most firms must go to platforms like LinkedIn or Indeed to recruit, when an advisory firm already has a strong digital and social media presence - which by definition is comprised of people who have self-selected in to follow the firm because they already are interested in what it's doing and/or the conversations it's sharing - then the audience for the firm's content can also become prospective hires for the firm's new job openings. In fact, the firm's reach, and the volume of interest in can generate by propagating its openings via social media channels has allowed it to remain especially selective, focusing only on advisors who will be an especially good fit for the firm's culture. Accordingly, when the screening process begins, the first questions the firm tends to ask in the interview process are open-ended questions around their story and the reason they're looking to make a change, in order to first and foremost assess the candidate's culture and personality fit. From there, advisor interviewees then talk to the firm's CFO (to determine if the revenue they are bringing to the table will be aligned with their desired compensation), and then the firm's Director of Research to ensure that the investment philosophies are aligned as well. Which only then culminates in an in-person visit to the firm's offices for a final evaluation. The key point, though, is simply that, when firms generate their own organic reach in the industry, it becomes more and more feasible to cast a very wide net on potential hires, and aggressively screen prospective candidates for their cultural, philosophical, and personality fit to the firm. (In addition, of course, to assessing raw advisor skills as well.)

The Flattening Yield Curve (Jim Masturzo, ETF.com) - In 1986, a researcher named Cam Harvey first pioneered the research on how the slope of the yield curve relates to economic cycles (culminating in the publication of his dissertation on the topic a few years later). The key finding was that in normal growth environments, long-term Treasuries have a bit higher of a yield than short-term Treasuries, but in certain situations, this relationship would invert, with the short rate higher than the long rate... and that such inversions tended to foreshadow a coming recession. And notably, while the signal has not worked perfectly throughout history - sometimes, it signals an economic recession that never actually comes - in the case of Harvey's research, the relationship has actually become stronger since the study was first published, as every four of the US recessions that have occurred since his research was published were preceded by an inverted yield curve. Notably, though, the relationship between the yield curve and economic recessions isn't meant to just be an idle correlation; instead, Harvey posited that ultimately, interest rates are a combination of inflation and an underlying real return, and that when the yield curve inverts, it's simply a sign that the real return over the long-term horizon is worse than the short-term horizon, which would quite literally imply that the economy is about to shrink (i.e., a recession is coming, usually 12-18 months later). On the other hand, some have raised the question of whether the inverted yield curve effect will hold (as it has once again recently gone upside down), especially given the highly unusual monetary intervention from the Fed over the past 10 years; yet Harvey points out that at least parts of the Fed's quantitative easing have been done before, and the predictive value held, and that if anything the Fed and bond markets have gotten even more effective and efficient... which would imply the signal may be even more likely to function effectively going forward from here. Even if only because the impact of an inverted yield curve now is so well known, there's a risk that it becomes a self-fulfilling prophecy.

Is The Illiquidity Premium A Myth? (Julie Segal, Institutional Investor) - Over the past 20 years, there has been a significant shift of institutional investors away from traditional publicly traded stocks and bonds, and into the private markets where their funds would be locked up for many years, in exchange for the upside potential of an "illiquidity premium" attached to such investments. However, in a recent report, BlackRock is now making the case that it's not literally the illiquidity of the investment container that offers such premiums, but simply that the underlying assets themselves - from private equity to real estate to infrastructure investments - have greater complexity, which requires more specialized expertise and higher governance costs, and therefore demands a higher return. Which is important because it means both that the premium associated with some investments might eventually be unlocked in more liquid structures, and concomitantly also implies that investing into illiquid vehicles alone won't necessarily have any reason to command an illiquidity premium. Of course, for some investors, there's still an "appeal" to illiquid investments simply because they don't seem to be as volatile in the first place - since there's often no liquid market for them to be continuously marked to market - but in the end, the key point remains that the opportunity and value of private investments and other illiquid alternatives isn't really their illiquidity, but the underlying complexity premium that they may be able to command in the marketplace.

Structured Products On The Rise, Again (Samuel Steinberger, Wealth Management) - Nearly 12 years ago, leading up to the global financial crisis, "structured products" were a hot thing. Packaging together options strategies (typically on underlying equities or indices) into a bond, the structured note provided investors the opportunity for some upside participation, while partially or fully limiting any downside risk, and peaked at $114B of structured product issuance in 2007. The caveat, however, is that the structured note was still a note - a bond - and ultimately, some were underwritten by financial institutions like Lehman Brothers that performed incredibly well in tracking their desired stock indices... right up until the underlying bond itself experienced a near-total loss, causing most investors and advisory firms to pull away from structured products altogether. In recent years, though, structured products are experiencing a resurgence, driven in part by a newfound fear that markets may be approaching a peak, and that the downside protection of structured products may be appealing. While not at prior peaks - in 2017, structured products did "just" $55B of issuance - it nonetheless, led Goldman Sachs to spin off its "Simon" business to serve as an online distribution platform for structured products to financial advisors and compete against Luma Financial Technologies (its primary competitor, that itself was just bought by iCapital Network). And the hope is that technology will also make it easier to find and shop for such solutions, and even widen the marketplace (especially as discussions abound about whether to change the accredited investor rules). Still, though, critics raise concerns that structured products are still complex products whose risks aren't always fully appreciated (as evidenced by losses in the last market cycle), and that structured products are still being "sold" too much (rather than really being bought and demanded by investors). Nonetheless, the clear trend now is that structured products are on the rise... along with a more general trend of rising financial product complexity.

The Science Of Better Meetings (Steven Rogelberg, Wall Street Journal) - In a survey last year, "too many meetings" was the #1 top time-waster of the office workplace (cited by 47% of all workers), and it's rare to ever hear someone complain, "I wish I could go to more meetings!" Yet the reality is that meetings are essential to teams and organizations, for everything from inclusion and generating buy-in, to communication and coordination; in other words, the solution to too many meetings isn't to abolish meetings but to make them better. So how can meetings be made better? Some (research-driven) tips include: keep it small (Amazon's Jeff Bezos is known for instituting the "two-pizza rule," that if you need more than two pizzas to feed everyone in the meeting, there are too many people in the meeting), and a study from Bain & Company found that decision effectiveness declines once a meeting exceeds 7 people (otherwise, counterproductive behavior and interpersonal aggression can start to crop up); don't take an hour for a meeting that could be done shorter (for instance, try scheduling a 48-minute rule in place of a full hour, to apply a little more pressure to everyone to stay focused and get to the end of the meeting); do a meeting "pre-mortem," where the meeting leader sets forth exactly what goal the meeting is intended to achieve (or what key question must be answered), then conduct a "pre-mortem" thought experiment in how the meeting might run off track, and devise in advance a strategy to handle it and keep the meeting on track. Perhaps the biggest caveat, though, is simply to recognize that leaders of meetings themselves are often poor judges of the quality of a meeting, as one study found that 79% of meeting leaders thought their meetings were productive... even as only 56% of them thought meetings initiated by others were effective. In other words, if you really want to know if your meetings are going well, ask the attendees to share their feedback, don't rely on your own (likely biased) perspective.

What To Do When Your Meetings Have Gotten Too Big (Anne Sugar, Harvard Business Review) - The focus of running a good meeting is usually on how to run a good meeting, by setting a clear agenda and having systems in place to ensure everyone is heard. The caveat, though, is that it's equally important to consider the attendance list, or who is invited to the meeting in the first place, especially since it's very common to just "invite everyone" (either out of expediency or a fear of offending someone who feels left out). The end result, though, is meetings that have far more people in them than necessary, which itself then wastes their time, and undermines the value of the meeting in the first place. One rule of thumb to handle this is the 8-18-1800 rule - that meetings to solve a problem or make a decision should never include more than 8 people, though brainstorming meetings can include up to 18, and information-sharing updates can go one-to-many to up to 1,800. Which means if your decision-making meetings are too large, consider re-purposing them to brainstorming instead. Or just an informational update if they're already 18+ people. Or alternatively, consider creating "sub-groups" to break up an oversubscribed meeting into smaller ones that can more effectively communicate and make decisions. Of course, just breaking up meetings can add more of them and consume even more meeting time in the aggregate... but Sugar notes that one of the benefits of narrower and more clearly targeted meetings is also that then tend to be shorter when they're more on target, and in fact it may be easier to schedule the meetings shorter (or even cancel some meetings) once it's made clearer who really does and doesn't need to be in the meeting in the first place.

Running Effective Meetings: A Guide For Humans (Sarah Goff-Dupont, Atlassian) - The starting point for running an effective meeting is to start on time and have a clear agenda so everyone knows in advance what to expect. However, the reality is that truly having an effective meeting requires more than "just" those items (though they're a crucial starting point); instead, running a meeting effectively really requires running the meeting effectively. Which means not just "efficiently" to get through the agenda quickly, but effectively where everyone participates in and buys in to a decision or plan of action. As a result, the starting point is to have a clear purpose for the meeting, to know what exactly it's intended to accomplish, and in some cases simply to ensure and validate a meeting is really needed in the first place (e.g., unless it's truly for an all-hands or full-department meeting, when it comes to sharing information, most meetings aren't necessary - distribute information via email, chat, company intranet, etc.). At a minimum, consider whether a meeting is really more valuable than just an asynchronous conversation that could happen via email or chat systems instead. And when inviting people to a meeting, make sure everyone who comes really is someone who can make a unique and valuable contribution to that meeting purpose; again, information distribution after the fact can be accomplished by other means. Other key points for running effective meetings include: try to schedule the meeting when people can really be engaged (e.g., not during someone else's lunch hour when they're distracted, or pulling in remote employees in a different time zone when they wanted to be reading a bedtime story to their children); keep laptops closed and phones off, unless they're truly necessary (especially since open screens not only distract the person looking at them but often the person next to them who tries to peek, too!); keep your meetings remote-friendly if possible (sometimes people really do need to dial in from a distance, and making it possible to accommodate them is better than excluding them); be certain the meeting room is an environment where it's acceptable for people to disagree (as divergent thinking is crucial to arrive at good group decisions and avoid groupthink); and stay focused on getting to a real result or outcome so people can feel a sense of accomplishment at the end of the meeting that a decision was made or a key outcome was achieved. And of course, don't be afraid to self-reflect on how your own meetings are going, and be willing to make adjustments and take feedback from the team as well!

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.