Weekend Reading for Financial Planners (Mar 5-6)

How Russian Sanctions Work

(David Frum | The Atlantic)

Russia’s invasion of Ukraine has sent geopolitical shockwaves across the globe and has created a humanitarian crisis. In response to the invasion, several countries – including the United States – have imposed financial sanctions against Russia and its influential oligarchs, from asset freezes to limitations on financial transfers in/out of Russia via the SWIFT system.

Though some of the harshest sanctions could be the ones applied against the Russian central bank. The U.S. government and the European Union Commission have announced that they will impose sanctions against the Russian central bank that have the potential to squeeze Russia’s ability to transact in dollars and euros. And while Russia has significant foreign currency reserves, many of these are held at foreign central banks, and could themselves be made inaccessible by sanction restrictions. This could compel Russia to sell some of its physical gold holdings (as long as it could find a willing buyer for them) to generate foreign currency, which in turn may still leave the Russian ruble in dire straits because it would not be able to be converted into dollars or Euros. In addition, it is likely to lead to the Russian central bank potentially putting a freeze on withdrawals as it tries to maintain its own holdings, and fear of such withdrawal freezes can trigger a run on Russian banks by local citizens… further accelerating the decline of its banking system. Ultimately, the sanctions have the potential to cripple Russia’s economy.

Given the ramifications of the sanctions, many investors might be concerned about the potential follow-on effects of the sanctions on Russia on other economies and the broader markets as well. But while the Russian stock market saw significant declines following the invasion, U.S. markets have so far not experienced similarly dramatic losses. In fact, looking back on U.S. market performance following major geopolitical events shows that most have some short-term volatility but do not result in significant, long-term drawdowns. This could be because, while the events cause an immediate shock, the underlying profitability of U.S.-listed companies is ultimately far less impacted. So while clients might be nervous about short-term volatility (which can create challenges for advisory firms as well!), advisors can help put these events in the context of the broader picture of historical investment performance while recognizing the importance of compassion and self-care for both clients and themselves in times of acute market and geopolitical stress (because even if US markets do recover relatively soon, it’s still understandably scary for clients who feel their own financial success at risk in the geopolitical turmoil!).

Retirement Savings Legislation Continues To Percolate On Capitol Hill

(Mark Schoeff | InvestmentNews)

In May 2021, the House Ways and Means Committee unanimously passed a new round of retirement legislation, dubbed the “Securing A Strong Retirement Act” (HR 2954), and colloquially known as ‘SECURE ACT 2.0’, which was viewed as a follow-up to the SECURE Act of 2019. This legislation included measures such as gradually pushing back the RMD age from 72 to 75, and boosting the allowed catch-up contributions for retirement accounts, but it lost momentum and has not been taken up in the full House.

But this week, a House Education and Labor subcommittee met to discuss draft legislation that combines several other retirement-related measures, including: improving fee disclosures in defined-contribution retirement plans; expanding workers’ ability to be part of their employer’s retirement plan; increasing spousal protections in 401(k) plans; and allowing annuities as qualified investment default alternatives in plans. And while the bill has not been formally introduced, there has been some speculation that legislators might look favorably upon such a bill that could make retirement savings easier, and could provide them with a ‘win’ to show constituents in advance of this year’s midterm elections.

Notably, this draft legislation also comes on the heels of IRS proposed regulations that clarify many of the original measures of the SECURE Act in areas from who qualifies as an Eligible Designated Beneficiary (still able to stretch their inherited IRA) to the interplay between trusts and retirement accounts. So while this retirement-related legislation and other regulations continue to work their way through Congress and regulatory agencies, given the wide range of potential impacts (from who needs to take RMDs to how much can be contributed to retirement accounts), taxpayers (and their advisors) will want to keep an eye on which measures are eventually enacted!

Next Iteration Of DOL Fiduciary Rule Catalyzes Lobbying Blitz On Capitol Hill

(Mark Schoeff | InvestmentNews)

In February, the Department of Labor (DoL) officially confirmed that it will not halt the pending overhaul of its fiduciary rule that will, for the first time, allow brokers providing advice on retirement plan rollovers to receive commission compensation for their advice (and for their firms to engage in principal transactions), as long as the advice was otherwise determined to be in the best interests of the client under the DoL's new “Impartial Conduct Standards”.

But now, in a move that is likely to please advocates of the fiduciary standard, the DoL plans to revisit the issue in the coming months, and a pending proposal likely would increase the number of financial professionals who must provide a fiduciary standard of care when providing investment recommendations for 401(k), individual retirement accounts, and other plans.

This potential move has brought back an array of lobbyists on the issue, who are making many of the same arguments from proponents and opponents of the original DoL fiduciary rule that was struck down in 2018. While fiduciary advocates argue that reducing conflicts of interest among financial professionals is in the interests of consumers, opponents (including several organizations in the investment product distribution industry) argue that doing so would increase the cost of advice for low- and middle-income savers (because those currently receiving commissions would have to charge directly for their services or find other sources of revenue). Though notably, the product distribution industry had the prior Department of Labor fiduciary rule struck down in 2018 by maintaining that their product salespeople were not in the business of providing advice in the first place (and thus that it was an ‘overreach’ by the Department of Labor to subject their non-advice sales activity to a fiduciary standard!).

Either way, though, while it remains to be seen whether the DoL will advance the proposal to broaden the range of financial professionals who must act in a fiduciary capacity, CFP Professionals (including those at broker-dealers) will continue to have a “Fiduciary-At-All-Times” obligation, which can be used as a contrast to non-fiduciary product salespeople (even as being a fiduciary becomes less of a differentiator in a world where more advisors are acting in a fiduciary capacity).

Advisors Using TAMPs Are Happy They Outsourced Investment Management: AssetMark Survey

(Cheryl Winokur Munk | Barron’s)

Working as a financial advisor requires a range of responsibilities and related time commitments. And because an advisor is likely to find certain parts of the financial planning process more productive and enjoyable than others, they have the option to outsource some of these other responsibilities to free up their time. For those advisors who prefer to outsource investment management responsibilities, Turnkey Asset Management Platforms (TAMPs) represent a way for advisors to stay involved in the investment process without having to be that hands-on with the portfolio (and have more time for client-facing meetings, financial planning analysis, or finding more prospects to grow the business).

And a recent study from AssetMark (a TAMP itself) shows that advisors who have outsourced investment management responsibilities have been happy with their decision. In fact, 92% of advisors polled in 2021 said they are “very happy” or “somewhat happy” with their decision to outsource investment management, up from 83% in 2019, and only 2% of those surveyed said they were unhappy that they outsourced. Further, 98% of those who outsource investment management said they are delivering better investment solutions by being able to offer greater oversight of portfolios, offering access to a broader range of products, and by improving investment performance, among other factors. Also, the study also found that outsourcing saves advisors 7.2 hours per week on investment management, which they often use for client relationship-building activities.

Of course, the AssetMark study reflects a natural self-selection bias – advisors who wouldn’t be happy outsourcing generally don’t do so in the first place (and among those surveyed who do not currently outsource, the most common reasons cited for not doing so include concern about higher fees, enjoying the investment management process, and a loss of control). Nonetheless, the AssetMark study shows that for those who are inclined towards outsourcing, the anticipated benefits of doing so are typically experienced in the end, which is important not only in considering investment outsourcing but outsourcing for other areas of an advisory business as well, including lead generation and back-office functions. As in the end, while outsourcing can come with an upfront cost, the ability to focus on what a given advisor does best (and what generates more clients) can not only improve their wellbeing, but also their profitability as well!

Model Portfolios Aren't Winning Over New Advisors: Survey

(Emily Holbrook | ThinkAdvisor)

The Turnkey Asset Management Platform (TAMP) has long been a popular solution for financial advisors who want to provide comprehensive wealth management to clients but prefer to focus their time more on financial planning and client-facing duties than the actual investment management process and its implementation. But as back-office investment functions (e.g., trading and rebalancing) have become easier over time thanks to improved ‘robo’ automation tools, some advisors have turned to model marketplaces, which offer a centralized platform with a series of third-party-created investment models, while allowing the advisor to retain control and discretion to implement the trades themselves using their technology (and incur lower costs than they would using a full-scale TAMP).

But a recent survey by Escalent found that while there is a contingent of advisors who are heavy users of model portfolios, the space has struggled to attract wider adoption. Between 2019 and 2021 the proportion of advisors using model portfolios from asset managers (54% in 2021) and/or other third-party providers (35% in 2021) as part of their investment management remains relatively unchanged, while 52% of advisors remain most reliant on model portfolios they create or modify themselves. On the other hand, while the number of users who use model portfolios remained stagnant, those who already used them tended to expand their use of them, with 27% saying they increased their use in the past year, and only 4% reporting that they used them less often, according to the survey.

Among the reasons given by advisors for not using model portfolios was the perception that the models do not perform as well as a more active approach in a volatile market environment, suggesting that being able to take an active approach to portfolio construction (or at least, communicate the ability to be more active with clients if desired) remains important for these advisors. More generally, though, the implication is simply that for advisors who see their own value proposition as constructing portfolios for clients, it’s difficult to rely on third-party models, and growth of model portfolios will likely be contingent on advisors shifting more broadly towards more planning-centric value propositions (where their primary value proposition is the financial planning itself, such that it’s not a concern to outsource the portfolio construction aspect to a model provider).

RIAs Defend Their Turf Through Service Expansion: Cerulli

(Michael Fischer | ThinkAdvisor)

The financial advisory business has undergone an evolution over the past several decades, shifting from an industry primarily focused on investment product sales to one where clients pay for the advice itself. And while RIAs have long been focused on providing advice in return for compensation, broker-dealers are increasingly developing independent affiliation options that allow advisors to conduct fee-based or fee-only business, creating a ‘crisis of differentiation’ for advice-focused firms as the RIA and broker-dealer channels converge.

Amid that backdrop, a new report from Cerulli Associates shows that 93% of advisors across all channels expect to generate at least half of their revenue from advisory fees by 2023. And the shift to advice-based revenue is occurring as the number of firms grew at a 5.3% compound annual growth rate during the past five years.

However, as the business models converge across advisory channels – inherently reducing their differentiation – some advisors are expanding their service offerings to try to stand out from other AUM advisors, with trust services, digital advice platforms, and concierge/lifestyle services likely to lead the way during the next two years, according to the report. But while expanding into these areas could bring in more upmarket clients, they do come at a cost of additional staffing or outsourcing. Which means in essence, the rise of robo-advisors hasn’t caused fee compression as many feared, but it is triggering ‘margin compression’ as advisors reinvest into their value-add to defend their traditional 1% AUM fee.

Notably, among the other options for advice-centered firms to differentiate themselves – beyond just adding more and more services – pursuing a niche clientele can also be effective. Operating in a niche environment allows an advisor to focus on the specific needs of a given group of potential clients without necessarily entailing the costs of adding service offerings. Another option is to explore alternate fee models, including retainer or subscription fees, differentiating by serving a different kind of (non-AUM) clientele in the first place. The key point is that as financial advicers face increasing competition, the pressure is on to differentiate – either by adding services, or otherwise standing out – but advisors do have several ways to demonstrate their value to potential clients and differentiate themselves from other advisors, beyond ‘just’ trying to do more, more, and more!

New Database Ranks 4,500 U.S. Colleges And Universities By Return On Investment

(Ihsaan Fanusie | Yahoo! Finance)

Attending college is often considered to be one of the best ways to improve one’s chances of finding financial success. But with thousands of choices of colleges and programs, it can be hard to find which one is ‘best’ for a given student. And while students and their families are likely to consider a range of aspects when searching for colleges (e.g., one that offers a preferred major, or is located close to home), a new database from the Georgetown University Center on Education and the Workforce calculates the expected Return On Investment (ROI) for students at more than 4,500 colleges 10, 15, 20, 30, and 40 years after enrollment based on the subsequent careers they typically pursue after graduation.

The data shows that going to college does typically pay off: an average of 60% of college students earn more than a high school graduate 10 years after enrolling in college. However, this effect is not seen at all schools; in fact, at 30% of colleges, more than half of students earned less than a high school graduate 10 years after enrolling.

Among the key factors determining a school’s ROI are its tuition and costs, average student debt, graduation rates, and net earnings after enrollment. As reflected in previous research, graduation rates are particularly important, as those who attend college but do not graduate have to navigate the job market without a college degree but can still be saddled with student debt (and potentially the foregone income and experience from working during the time they were in school). Choice of major plays a role as well, as many of the top-ROI colleges specialize in higher-paying fields such as pharmacy and engineering.

And so, for advisors working with families on education planning, the new database can serve as a tool to demonstrate the relationship between the costs they will encounter for their student to attend college as well as the potential financial return for doing so. It also serves as a reminder that a student’s ability to graduate from a given school could possibly be more important than the particular college they choose to attend!

Myth: No One Ever Got Rich By [X]

(Lazy Man And Money)

Because individuals have a wide range of values for how they spend their money, there are a number of opinions on how best to control spending, increase savings, and build wealth. Some experts emphasize the importance of controlling day-to-day costs (e.g., the ‘latte factor’ of how reducing daily coffee purchases can lead to substantial savings over time), while others emphasize the importance of controlling spending on big-ticket items like houses and cars and worrying less about smaller purchases.

But individuals who try to get the ‘major’ expenses right also could still benefit from finding smaller ways to save as well (and conversely can undermine the success of ‘big’ savings if they are still too flagrant with small-but-regular expensive purchases). For example, some of the savings generated from brewing coffee at home rather than purchasing it at a coffee shop could be used to boost a family’s travel budget (which could pay for experiences that are particularly effective at increasing happiness). Though if buying coffee each day does bring significant joy to an individual, they could look for other areas of savings. For example, they might cut back on television or other media subscriptions (are they really going to read all of those magazines?), whose costs could instead be used in spending categories the individual values more (or to increase their savings!).

Another potential area of savings can come from credit card rewards. While an individual is unlikely to get ‘rich’ from credit card rewards and signup bonuses, they can potentially earn thousands of dollars each year in cash back and travel rewards. Because finding the most effective cards for a given individual’s spending and rewards preferences does not have to take a significant amount of time (and can be facilitated by their financial advisor!), it can be a high-ROI activity even if it is not the main driver of a person’s savings.

The key point is that while housing and transportation make up the largest parts of the average household’s budget (and therefore have the highest potential return from getting these purchases ‘right’), an individual’s daily spending habits in other areas (from food to entertainment) can also add up over time. Not that anyone gets rich by just getting [X] from their regular spending habits alone. But given the importance of prudent spending rates on financial success, aligning spending with one’s values – on both big-ticket items and smaller purchases – can lead to more enjoyment out of the money that is spent and ultimately, greater financial security.

The Best Ways For Couples To Manage Finances

(Cristina Lourosa-Ricardo | The Wall Street Journal)

Dealing with finances can be a major source of conflict for couples. From balancing different incomes to setting priorities for spending, there are many potential pitfalls (which an effective financial advisor can help attenuate!). And just as each couple is different, there are a wide range of methods that couples use to manage their finances.

Some couples pool their income in a joint checking account and then pay all of their bills from this account. In this way, they do not have to decide on who will pay for a given expense. Often, these couples will set a ‘worry-free’ spending limit where they can feel free to spend on expenses that are below the dollar limit, but will consult with their partner if the expense will be greater.

Other couples contribute equal amounts into a joint bank account for regular expenses (e.g., a mortgage payment or utility bills), and then maintain separate accounts for personal expenses. In this way, each individual can feel free to spend money in their ‘own’ account as they wish, as all of the main expenses are already covered.

Still other couples prefer to keep their finances entirely separate, choosing to maintain the independence of having full control over their ‘own’ money. They either split expenses down the middle and pay for them with their own accounts, or each cover certain bills each month.

Ultimately, there is no single ‘best’ way for a couple to manage their finances. Though no matter the method a client chooses, communicating effectively and practicing gratitude can promote a more harmonious relationship with their finances (and with each other, too!)!

When To Say "Yes" And "No"

(Mark Manson)

Sometimes, it can be tempting to say ‘yes’ to every opportunity that comes around. Whether it’s taking a new job, or going to a party when you do not know most of the attendees, saying ‘yes’ can open new doors, both professionally and personally. At other times, it can be tempting to say ‘no’, whether it means saying no to taking on an additional project at work, or turning down an opportunity to go out to dinner with an acquaintance who unloads all their problems onto you. Saying ‘no’ can help ensure that you have enough time for what is most important to you in life.

But at the extreme, saying ‘yes’ or ‘no’ all the time can lead to problems. Those who say ‘yes’ to every opportunity that arises can find themselves strapped for time and unable to focus on any single task, while those who always say ‘no’ might find it difficult to spot new opportunities or expand their social circle.

And so, the key is to know when to say ‘yes’ and when to say ‘no’. Manson suggests that individuals should try to say ‘yes’ to as many opportunities as possible when they enter a new phase of life, whether it is starting out in a new career or moving to a new city. This will allow them to meet as many potential connections as possible, and start building their skills and reputation. But at some point, an individual might find that they have more opportunities than they need. It is at this point that they can start saying ‘no’ more often in order to focus on the opportunities that provide the biggest upside.

In practice, for newer (or even experienced!) advisors saying ‘yes’ could mean joining a professional association, attending advisor conferences, or joining an advisor study group. But as an advisor’s business grows, they might have to say ‘no’ more often, particularly when it comes to taking on new clients. The key point is that there are certain times when ‘yes’ is the right answer and others when ‘no’ is appropriate, and that in general the natural arc of success is to start out saying “yes” more often but later shifting to say “no” with greater frequency… and knowing how to identify those situations can lead to professional success and a better work-life balance!

When Saying "No" Means Everything

(Scott Hanson | InvestmentNews)

When running a financial advisory firm, it can be tempting to offer everything to everyone. After all, if a firm limits its services and the types of clients it works with, it is reducing the pool of prospects that it could serve. And when income might be tight (particularly early in a firm’s life), turning down prospective clients can seem like a counterproductive business decision.

But it turns out that being more selective with the services a firm offers and the clients they work with can actually improve the bottom line. In Hanson’s case, his firm initially offered a wide range of services, including financial planning, investment management, insurance sales, and business transition planning, and he would take just about any client that came his way. But over time, he narrowed the scope of both the types of clients he would work with and the services he offered. After doing so, he found that he developed deeper expertise in the specific areas he worked on, and could charge above-market fees for his services while delivering them more efficiently at a lower cost!

And so, one way for advisors to both be more selective with the services they offer and the clients they work with is to serve a niche market. In this way, an advisor can build deep expertise in a certain area (e.g., working with doctors or those with equity in startups) so that they can become the go-to person for individuals with that specific need. In the end, serving a niche not only allows advisors to charge a premium price for better service, but also to run a more efficient practice (and benefit from the time savings that comes with it) as they become expert in handling the issues of their target client!

A Better Way To Say "No"

(Brett And Kate McKay | The Art Of Manliness)

It can often be hard to say ‘no’. Whether it’s turning down a professional opportunity or a social invite, saying 'no' inevitably involves letting someone else down. But one way to make saying ‘no’ more pleasant for both the individuals giving and receiving the ‘no’ is to shift the tone of the ‘no’ into a positive.

A ‘positive no’ starts out with warmth, where the person declining the offer can show appreciation for the ask. The person saying 'no' can then say what other priorities they have at the moment (e.g., spending time with family or another project at work). Then, the individual can explain that because of these priorities, they unfortunately cannot accept the offer. It is also important to end with warmth, so the recipient of the ‘no’ leaves with a positive feeling.

One situation when financial advisors can apply the ‘positive no’ is declining to take on a prospective client who has approached the firm. The advisor can express appreciation for the outreach, explain the firm’s other priorities (e.g., working with a specific type of client or better serving their current clients) and why that prevents them from taking on the prospect as a client, and concluding by offering a referral to other advisors who might be able to handle the prospect’s situation. In this way, instead of feeling rejected, the prospect will hopefully feel like their needs were understood, and that they will have an opportunity to work with a different (even-better-fitting?) advisor.

The key point is that while having to say 'no' is not easy, using the ‘positive no’ structure can make the situation more comfortable for both the person giving the 'no' and their counterpart. This can help maintain a positive relationship, and potentially lead to opportunities to say ‘yes’ when new opportunities arrive in the future!

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We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in a future column!

In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "Wealth Management Today" blog, as well as Gavin Spitzner's "Wealth Management Weekly" blog.