Weekend Reading for Financial Planners (Mar 7-8)

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 7th/8th:

Brokers Do A Better Job At Cybersecurity Than Investment Advisers: SEC (Mark Schoeff, Investment News) - The SEC recently completed a massive examination sweep on cybersecurity (paralleled by a similar FINRA cybersecurity examination sweep of broker dealers), and the results suggest that cybersecurity is a major issue for advisors across all channels, but that broker-dealers may be doing a better job of implementing cybersecurity protections. For instance, while most firms have some kind of written cybersecurity policy, only 57% of investment advisers have a process to audit them and determine if they're working, compared to 89% of broker-dealers. Similarly, 71% of broker-dealers put cybersecurity requirements in their contracts with vendors and business partners, compared to only 24% of RIAs, and 2/3rds of broker-dealers have a chief information security officer while only 30% of RIAs do (who tend to assign the duties to a chief technology officer or other staff member instead). And over half of brokers have cybersecurity insurance, compared to only 21% of investment advisers, although notably few of either actually guarantee to protect clients against cyber-related losses (only 15% and 9% of brokers and advisers, respectively). On the other hand, the sweep that found a quarter of broker/dealers have suffered losses due to cybersecurity issues - most commonly after receiving fraudulent emails seeking to transfer client funds - while only 2% of the RIAs surveyed had reported a loss related to an email scheme.

Genworth Financial Struggling Under The Weight Of Long-Term Care Costs (Zachary Tracer, Bloomberg News) - On Monday, Genworth Financial disclosed that its upcoming earnings numbers would be weaker than expected, due to continued losses on its long-term care insurance coverage; in response, the company's stock fell 5.4% on Monday, and overall is now down 50% in the past 12 months after two consecutive quarters of (long-term care claims-driven) losses. The woes of Genworth's long-term care claims are being blamed on a combination of the rising cost of long-term care claims, and the continued record-lows in interest rates that are limiting the company's ability to invest premiums at originally-projected growth rates, which in turn has been forcing rate increases on both existing and new policies (although notably, older policies that have experienced premium increases are technically still a "good deal" in most cases). Between Genworth's losses and the recent decisions of both Metlife and Prudential to leave the long-term care insurance marketplace altogether, some are suggesting that there has been an outright "market failure" for long-term care insurance, as the cost accelerates beyond the point that most can afford it, although few viable alternatives have emerged either, and Genworth's CEO McInerney still insists that Genworth is committed to continuing to adapt LTC insurance until it finds a viable formula. In the meantime, though, both Standard & Poor's and Moody's have downgraded Genworth's debt ratings to junk in recent months, given the ongoing pressures of its long-term care insurance coverage.

Blogging Tools To Maximize An Adviser's Online Voice (Alessandra Malito, Investment News) - For advisors looking to get into the world of blogging, there are several blogging tools available that can make the process of setting up and getting started much easier. The first is to create a blog on WordPress.com, where you create your account and then log into a dashboard where you can write articles, add images, and manage the appearance of your blog; however, while creating a blog on WordPress.com is easy, the plug-ins and customization is more limited, and unless you upgrade to a premium account ($99/year) some WordPress ads will appear on your blog and the domain of your blog will end with .wordpress.com instead of just .com. The second option is to build a blog via WordPress.org; the difference here is that using WordPress.org (instead of .com) gives you downloadable software to create your own blog, with virutally unlimited options to customize, and once completed you can simply add the blog to an existing website (though WordPress.org has a bit of a higher cost). A third option is to use popular blogging website Blogger, an easy-to-use platform that connects with your Google account, and after choosing a simple template you can get started right away; the Blogger platform is free, but has less functionality than WordPress with fewer ways to customize and brand.

9 Steps to Building a Client-Attraction Virtual Event (Kristin Harad, Journal of Financial Planning) - In this article, Harad makes the case for advisors (whether new or experienced) who need to boost their list of prospective clients to try a "virtual" event like a webinar. The upside of a virtual event is that it's relatively inexpensive (especially compared to running an in-person event), can be launched quickly (up and running in 30 days or less), has easy setup thanks to today's technology solutions, is easily repeatable once done in the first place, and is especially effective in a business like financial advice because it naturally positions the presenter as an expert (with something to teach). So what should you do if you want to try it? Harad suggests the first step is to commit that you're going to do it, and no more than 30 days out from now (which should give you the deadline and motivation to follow through!). From there, you need to craft your objectives, which should be two-fold: to build a contact list of people interested in your seminar (who might be subsequently marketed to further), and to offer some kind of revenue-generating follow-up (e.g., "Schedule a call within 30 days after our webinar for a discount to our Social Security workshop!"). Once you begin marketing, remember that initially you don't even need the full presentation yet, just a title and a few bullet points of what people will learn (and you can evaluate the response rate you get to decide whether there's enough interest to follow through and deliver the webinar, or cancel and reschedule). If there's interest, then you'll need to decide what platform to use (GoToWebinar? AnyMeeting? ClickWebinar?), and fully invest into getting the word out (email invitations, call prospects, distribute through social media, identify partners who have prospective clients who might be interested, etc.). As you see the feedback and interest, you can then finish crafting the webinar presentation, and conduct the actual event (and don't forget to mention your offer!). Notably, Harad also points out that the real key to a successful event is the follow-up, so don't forget to reach out after the fact - to attendees and non-attendees - so see if they want to take advantage of your offer, or otherwise have questions or want to engage.

Stop Marketing and Start Building Social Capital (Jay Palter, Iris.xyz) - Most advisors are acutely aware of the importance of business networks, and the idea that who you know often trumps just what you know when it comes to business. And in this context, Palter suggests that tools like social media can be especially effective at building social capital; in fact, while some prominent social media commentators have been critical about whether social media marketing really pays off for big brands (at least compared to other more "traditional" marketing channels), arguably that may be because even on social media, we just don't relate to big corporate brands as effectively as we can relate to other people. When a person is active on social media, it creates an opportunity for demonstrated leadership and expertise, and helps to foster reciprocity (as social media provides many opportunities for small acts of giving and helping others that may one day lead them to try to return the favor). And Palter notes that the social media opportunities aren't just external; social media communication and sharing amongst team members within a firm can help foster community within an organization, too. The bottom line: don't just think of social networks in the context of marketing and business development, but a longer-term play on deepening relationships, developing thought leadership, and growing your social capital.

The Marketing Budget of An Elite Financial Advisor (Matt Oechsli, Wealth Management) - Oechsli's Advisor Institute did a study to examine the marketing spending of "elite" advisors, the majority of whom generated more than $1M of revenue last year. The results indicated that the majority of those elite advisors spend 4% or more of their gross revenues on marketing (so $40,000 on marketing for every $1M of revenue), which is notably far above the broad-based industry average found in most benchmarking studies (which is typically no more than 1%-2% of revenues on marketing). And Oechsli suggests that the percentage should be even higher for newer advisors - as much as 10% of revenues for those still getting started - with the percentage only declining as revenues rise because a smaller percentage of a larger number is still spending more on marketing (e.g., spending "just" 4% of $1M in revenues on marketing is still more dollars than spending 10% of just $250k of revenues for a smaller advisory firm, so the percentage only declines as the absolute dollars continue to increase). And what should marketing dollars be spent on? Oechsli suggests ideas like social events in your community (that might be attended by your affluent clients, potential prospects, and referral partners), charitable events or fundraisers (that again align to your target clientele), "fun" intimate events you can host, a social lunch or dinner, and also sending "surprise" gifts to prospects and clients (birthday/anniversary gifts, special occasions, etc., to reinforce the relationship). And bear in mind that once you're doing successful events, you may be able to find wholesalers from the various companies/vendors you work with who might be willing to co-market with you and provide further financial assistance as well.

A Worry-Free Retirement (Roy Diliberto, Financial Advisor) - It's a not uncommon situation where a client has more than enough financially to cover retirement expenses for life, with a "modest" withdrawal rate and ample empirical data to indicate that all should be fine... yet the client still has a high level of anxiety over each and every bump in market volatility and a fear that he/she will run out of money. Conversely, there are clients who may even be spending more of their assets over time, yet receive the cash flows in the form of a lifetime pension and worry little if at all; in fact, they paradoxically would probably fret more if they converted the pension to a lump sum and spent less from it but had to endure the market volatility along the way. Diliberto suggests that in these situations, the real underlying issue is emotional and "interior" and that it simply cannot be addressed by quantitative and analytical information alone. Instead, perhaps the better approach is to apply better assessment tools and methods to understand which clients can and cannot effectively tolerate the emotional stress of market volatility, and match the products (whether it be a portfolio, an immediate annuity, a reverse mortgage, or something else) to client needs based not just on which maximizes their financial wealth and retirement income but balances the financial and emotional realities. To illustrate the point, Diliberto discusses a scenario with a client who was nervous about market volatility, and used a guaranteed income overlay to his portfolio (although not named explicitly, it appears to be the Aria RetireOne product), which in all likelihood will simply reduce his wealth for a guarantee he'll never use (i.e., he'll "die with less money left over"), but gave the client the comfort he needed to not worry about markets anymore.

Should Clients Select Lump-Sum Pension Payments? (Neal Angel, Advisor Perspectives) - Making decisions about pension trade-offs can be challenging, as clients consider whether it's better to take a lifetime income option or elect the lump sum to invest themselves. The situation only becomes more challenging when considering the potential survivor income benefits in the case of a spouse, where the choices become an individual lifetime benefit, a reduced benefit with continuing payments to a surviving spouse, or the so-called "pension maximization" strategy of choosing a lifetime pension with little or no survivorship benefit but using a portion of the higher payments to purchase life insurance to protect the individual's spouse instead (for instance, instead of taking a joint-and-survivor payment for $1,000/month, take a $1,500/month lifetime benefit and use some of the extra $500/month payments to fund life insurance). Angel notes that in today's low interest rate environment, and with so many corporations struggling to keep pensions funded (an estimated 82% of the defined benefit plans offered by corporations in the S&P 500 were underfunded by 2006) and desirous to be released from their liabilities and shift the risk to employees, lump sum payouts have drifted higher than they were in the past. Though ultimately, the biggest driver of those deciding to take a lump sum may simply be the fact that with pensions so underfunded, and the Pension Benefit Guaranty Corporation (PBGC) raising its own premiums to prevent a shortfall, it's preferable to "take the money and run" than risk seeing a pension cut in the future, especially for those over PBGC limits.

Dominated [Retirement] Strategies (Dirk Cotton, The Retirement Cafe) - In this article, Cotton looks at retirement income strategies from the perspective of Game Theory. In game theory, strategies can be compared to determine whether one "dominates" the other; a "strong" dominating strategy is one that produces results that are always better off, and a "weak" dominating strategy is one that never produces worse payoffs but only sometimes produces better ones (in the rest of the outcomes they're tied). Of course, the whole point is that if a strategy is dominated (i.e., another one is equal or better in all situations), the player shouldn't pursue that strategy. In this context, Cotton then evaluates safe withdrawal rate (SWR) approaches following either a Fixed framework (the initial withdrawal rate sets a fixed real-spending dollar amount that never changes), or a Variable one (where the spending amount is recalculated at the beginning of each year as a percentage of the portfolio value). Of course, determining which strategy is "better" can be challenging, too; a variable approach might be "better" at managing sequence of return risk and provides more income when the portfolio prospers, but provides less predictable income and is more complex to implement. From the perspective of financial payouts, the variable strategy will clearly be superior in favorable market environments, as the recalculation process will allow for spending increases over time. With declining portfolios, the outcome is more "mixed"; the variable strategy will provide less in financial payouts, but in any scenario where the fixed payouts could deplete the portfolio entirely the variable approach will always leave something (as payouts decrease commensurate with the portfolio declines). Accordingly, then, if the goal is to balance upside with mitigating any risk of ruin, a variable approach dominates a fixed initial withdrawal rate, though in terms of maintaining stable payouts the variable-vs-fixed trade-off is just that - a trade-off (of upside potential for [some] downside risk).

Veres To SEC: Leave Those RIAs Alone (Bob Veres, Financial Planning) - In this "open letter" to SEC Chairwoman Mary Jo White, Bob Veres reviews the SEC's recent 192-page Fiscal Year 2015 Congressional Budget Justification, and raises some interesting questions about the SEC's current focus on RIAs. For instance, the SEC itself notes that it has historically focused its limited examination staff on areas that pose the greatest risk to investors, but then acknowledges that it hasn't been examining RIAs very much and requests more resources... raising the question of whether even the SEC is acknowledging that the low examination rate of RIAs (whose assets are typically held at a third-party custodian anyway) isn't actually a consumer risk in the first place? Even worse, Veres points out that the SEC's Office of Compliance Inspection and Examinations (OCIE) employs 914 members in its inspection team (which does 1,000 RIA exams, and also examines 100 investment companies, 450 broker-dealers, 45 transfer agents, and 100 other market oversight organizations); assuming about half the examiners are actually dedicated to RIAs, that means the average SEC examiner staff person is only overseeing 2.2 advisor examinations per person, and give the $210M budget allocated to its examination staff would imply the SEC's all-in cost per audit of each RIA firm is a whopping $150,336 (and with the proposed budget request and hires, the cost would actually rise to $200,000 per advisory firm audit next year!). Given these astonishingly high costs, for what the SEC itself has implied isn't actually a high-risk priority for investors, Veres suggests that the SEC should revisit its entire examination process, which dates back to the 1940s and 1950s when assets were harder to track, and doesn't recognize today's electronically-monitored custodian environment (especially for firms that use third-party custodians anyway), nor the fact that the true criminals are rarely caught with the current examination procedure either (given that the SEC examiners were even IN Bernie Madoff's offices and didn't catch the Ponzi scheme). Alternatively, to the extent that the SEC does insist on continued inspections, perhaps it's time for the SEC to examine its own productivity and why it's acceptable for examiners earning an average salary of $229,658 to examine only 2.2 firms per year on average and request a budget increase for another 325 examinations at a cost of more than $200,000 per audit.

'Mother Merrill' Nostalgia: What You're Really Missing (Danny Sarch, On Wall Street) - Brokers at major wirehouses are increasingly talking with nostalgia about the "old culture" of wirehouses that has been lost since the financial crisis... and Sarch suggests that the concerns may be more than just nostalgia alone, given that back in 2009 about 75% of advisors who departed one wirehouse simply joined another, but now the intra-wirehouse transfers have fallen by more than half despite the fact they're still offering the biggest payouts. Merrill Lynch perhaps had the strongest culture of all; known by its own advisors as "Mother Merrill", the firm had grown largely organically (unlike competitors that were more apt to acquire), leading to the fact that almost all advisors went through a common training program and shared a common culture. Yet while Merrill historically had strong technology for its advisors, good banking capabilities for its higher-net-worth clientele, a strong consumer brand, and managers who were given broad guidelines to run their franchises effectively, since the acquisition by Bank of America managers feel an increasing heavy-handedness from bank management in everything from adoption of new assessment tools with clients (which may be helpful but are hard to 'force' their use) to putting young trainee advisors onto existing teams (which if forced for a team not ready for the hire will be doomed to failure) to pushing BoA bank products. In the case of Smith Barney, the culture shift seems to be driven by the fact that in the "old" Smith Barney, advisors and managers had significant ownership stakes that led them to think and act like they were partners, but those there today indicate that it feels more focused than ever on "shareholder value" even at the expense of the client, and that managers have far less latitude than they used to in trying to make their advisors and branches successful. The bottom line: in today's corporate and regulatory environment, are wirehouses in danger of losing the entrepreneurial culture?

Stressed by Money? Get on the Couch (Paul Sullivan, New York Times) - At the Institute of Financial Planning at Kansas State University, there is a Financial Therapy Clinic, where researchers are actually studying the effects the body goes through while discussed money and financial planning issues. And the results are increasingly revealing just how stressful it really is for us to talk about our finances, even with a financial advisor; in fact, the probing questions of an advisor about goals actually increases stress, at least during the meeting itself. In turn, this reality of the stress of talking about finances is helping to fuel the growth of the "Financial Therapy" movement, which finds itself at the intersection of the people's relationships with money and requires both counseling skills and financial planning knowledge to be successful. Financial therapy focuses on the "money scripts" we have - the stories we tell ourselves (true or not) about money and our connection with it, often driven by formative or traumatic events in our past; some people are money avoiders (avoiding it at all costs), while others are money worshippers (believing it can solve all problems), focus on money as status (linking their self-worth to their net worth), or are hyper-vigilant about money (with prudence but sometimes depriving themselves for no rational reason). As awareness of the importance and significance of financial therapy rises, some advisors are incorporating it into their process, others are trying to charge for it separately, and a Financial Therapy Association (now with about 250 members) has been formed to support the nascent movement.

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!