Weekend Reading for Financial Planners (May 19-20)

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 May 19th – 20th:

States Trying To Save DoL Fiduciary Rule Appeal Rejection Of Effort To Intervene (Mark Schoeff, Investment News) - Two weeks ago, the state attorney generals of California, New York, and Oregon filed a motion with the 5th Circuit Court of Appeals to take up the defense of the Department of Labor's fiduciary rule (after the DoL itself declined to appeal the loss), but were rejected with the same 2-1 vote that moved to vacate the rule itself; now, the states are appealing that rejection, asking the full 5th Circuit panel of judges to consider the request for them to be allowed to defense the rule, claiming that it's inappropriate that the two judges who vacated the rule should be the ones to decide whether to hear the appeal (as it effectively allows them to insulate their own decision from the Appeals process, even as ever other District and Appeals Court had ruled in favor of the DoL rule). Not surprisingly, lobbyists for the product manufacturing and distribution organizations, including SIFMA and FSI, are making the case that the original 5th Circuit decision to vacate the DoL fiduciary should stand, and industry commentators note that the Appeal is still a long-shot at best, as the states would have to first convince the Appeals court to even be allowed to defend the rule in the DoL's absence, and then still have to convince the broader court to actually overturn the original ruling. Nonetheless, the 5th Circuit was supposed to issue its official mandate to vacate the rule by May 7th, and two weeks later, it still has not yet done so as the issue remains in limbo, forcing the DoL to release an interim "temporary enforcement policy" reminding firms that as of now, the DoL fiduciary rule is still in place.

SEC's Temporary Reprieve Program May Signal New Enforcement Approach (Kenneth Corbin, Financial Planning) - Over the past three months, the SEC's "Share Class Selection Disclosure (SCSD) Initiative" has given advisory firms the option to self-report mistakes relating to mutual fund share classes, and avoid any fines or further disciplinary actions from the SEC, as long as the situation is corrected and any money inappropriately charged to clients is promptly returned. And the SCSD Initiative is significant not only as a means to actually rectify a problematic situation for many firms, but appears to be a shift in policy from the SEC itself, moving away from a "broken-windows" style approach (where every infraction is pursued, no matter how small, in the hopes that pursuing small matters will discourage firms from ever risking bigger mistakes, even as critics suggest it's just leading the SEC to focus excessively on the sheer number of enforcement actions regardless of their quality and substance) and towards one that strategically focuses on curbing more widespread industry abuses (and putting money back in the pockets of consumers that were harmed). In fact, the SCSD Initiative was launched in part because the SEC was concerned that continued individual enforcement cases against particular firms on the issue were still not dissuading the offending practice across the industry more broadly. Though notably, the SEC has still indicated that it's not going soft on enforcement itself, and instead is simply shifting resources to focus more on the 'quality' of enforcement actions (i.e., seeking out significant enforcement issues with material opportunities to "put money back in the pockets of harmed investors") than the mere quantity of investigations.

The Most Important Skill For Financial Advisors According To Clients (Michael Cohn, Financial Planning) - In a recent consumer survey of more than 300 individuals with >$150,000 in investable assets, a study by 1st Global entitled "Investors, CPAs, and Tax-Focused Financial Advice" found that "tax knowledge" was the most important factor for the affluent when choosing a financial advisor (at 66%, tied with "someone I can talk to and answer my questions", and just ahead of "someone to help select the right investments" at 64% and "fees/costs" at 62%). And notably, the results found that even though 53% of those surveyed already had a third-party CPA or accountant, "tax-aware advice" was still a key concern for them, from tax-optimized investing to estate tax planning and general tax planning strategies to reduce their tax burden. Consistent with the tax focus, the study also found that CPA licensees were the most likely to be associated with financial advice (47% of the time), compared with 40% for CFAs and 30% for CFP certificants (although notably and perhaps not surprisingly, the study found that CPAs were less likely to be associated with the investment portion of financial advice), while the ChFC and CIMA only had 7% recognition, and the PFS (Personal Financial Specialist) designation for CPAs scored at only 4%. Other notable results included: when evaluating whether an advisor was trustworthy, 90% of consumers defined a trusted advisors as "someone who had their best interest in mind", while only 10% cited skills or knowledge as an important trust factor; 57% of consumers still cited a preference for in-person interactions over digital (though the percentage was "only" 57%!?); and the study found that despite the 'digital savviness' of Gen X and Gen Y, younger generations were more likely to seek advice from professionals than Baby Boomers!

Go Ahead And Skip That Networking Event (David Burkus, Harvard Business Review) - The theory of networking meetings is going to a social gathering in order to expand your network of acquaintances (and future colleagues!?) by meeting new people with a common interest... but in a review of the research on networking groups in his new book "Friend Of A Friend: Understanding The Hidden Networks That Can Transform Your Life And Your Career", Burkus finds that in practice most people at a networking meeting simply spend time with the people they already knew! And the phenomenon isn't unique to introverts, who stereotypically would struggle to meet strangers in a crowded room; even extroverts often report feeling like their networking meetings were a waste of time. In fact, one study found that despite 95% of executives at a Columbia MBA networking event stated they wanted to meet new people, the average participant spend half their time with the mere 1/3rd of people they already knew, and even the "new" meetings that took place tended to be with others who were already similar (e.g., consultants talked to other consultants, bankers to other bankers, etc.)... and the most successful "networker" at the event turned out to be the bartender! The problem appears to be that, in the end, most of us simply prefer to stay in our current comfort zone, which is talking to the people we know, or at least familiar 'types' of people similar to us. So what's the alternative? Burkus suggests that the better alternative is not simply through networking meetings that create casual connections, but "higher-stakes" activities that connect you with a diverse group of others – in essence, don't just go to networking meetings, but engage in networking "activities" (e.g., serving on a nonprofit board, organizing a charity drive, playing in an amateur sports league, taking up a new hobby, etc.) where you actually do collective work together. Because it's the higher stakes of an end goal, and the common purpose of working towards it, that makes a "shared activity" more productive for creating new relationships than mere networking meetings (and casual conversations) alone.

The Behaviors That Really Annoy Prospects (Dan Solin, Advisor Perspectives) - Turning a prospect into an actual client is challenging for most advisors, and in a world where "sales training" is increasingly rare, there's often little guidance about what you should, or shouldn't, do in a prospect meeting. Solin suggests that one of the most common problems that advisors create in the process of getting new business is making the process itself unwittingly complex... such as given prospects upfront a lengthy questionnaire to better understand their personality type, or to give them financial questions to "think about", or outright requesting a lot of personal financial information and being too upfront before the prospect even really gets to know them. Solin suggests that if the goal is to screen prospects, a simple initial phone call should be sufficient to get a good feel, and that adding in more "screening tools" just create unnecessary barriers to prospects completing the process (raising the question of whether they really want to take the time to go through the process when they haven't decided yet if they want to work with the advisor!). Other similar challenges that Solin has observed amongst advisors include: setting the agenda themselves (which may fine in later meetings, but is not a good idea in a prospect meeting, because it should mostly be about getting to know the prospect, which means letting the conversation go wherever they take it, not where you want to take it); making the prospect meeting too much about yourself (if and when prospects really want to know more about you, they'll ask, and recognize they've probably already gone to your website to learn about you... what they really want to know and hear is whether you can solve their problems); and misunderstanding what it takes to get a favorable outcome (as much as we want it to be, it's usually not about your qualifications or expertise, but your likeability, because we usually don't trust people we don't like in the first place, even if they're otherwise technically "qualified"!).

Should I... Socialize With Clients? (Ingrid Case, Financial Planning) - Choosing whether or not to socialize with clients is a divisive issue for financial advisors; some advocate that it's better to keep the personal and professional separate, while others believe that it's the deeper connection of socializing with clients beyond a purely professional context that deepens the relationship (ultimately improving retention because it's harder to fire a professional who is also a friend, while potentially generating more referrals as well). Notably, though, while socializing with clients may help the advisor network their way to new business, it's important to keep a social event with a client truly social... which means not handing out business cards to potential prospects along the way, and may even entail setting ground rules like telling the clients themselves "we won't talk about business when we're spending social time together". Notably, social relationships with clients also make it feasible to expand the relationship beyond "just" the primary client, and to other family members as well – from allowing the advisor to form a relationship with an otherwise-less-involved spouse, to expanding the reach of multi-generational planning by forming a relationship with the client's children and other family members as well. At the same time, though, some advisors suggest that making a financial planning relationship more social can undermine the professionalism of the relationship, as clients who are friends may also be less likely to feel accountable to the advisor to get things done (and anticipate that "as a friend" the advisor will let them slide on not getting their financial planning tasks completed). Though all advisors seem to agree that, if the advisor-client relationship is going to get more social, it's a good idea to keep the alcohol under control (which means really knowing your limits, or just abstaining from drinking altogether with clients).

The "Future" Of Retirement Planning (Dirk Cotton, Retirement Cafe) - At its core, planning for retirement entails creating a model of our current resources and how they're expected to grow and change in the future, and match them to our current spending and how that's anticipated to grow and change in the future; to the extent that current and future assets can meet the current and future liabilities, retirement is "funded". The challenge, however, is that of the four key inputs – current wealth, future wealth, coming-year spending, and future spending – the only one we actually know is our current wealth and resources, as even one-year spending is uncertain, and multi-year spending changes (and investment returns) are even more uncertain (especially once you consider the impact of spending "shocks" like fixing a roof or an HVAC unique or a serious medical event). Yet at the same time, Cotton notes that the uncertainty of future asset growth and spending needs doesn't make planning itself irrelevant; just as we still plan outdoor activities around weather forecasts (even if there's still some uncertainty), and businesses still create business plans (even though future economic conditions are uncertain), planning still helps to understand the range of possible outcomes, and how trade-offs may be impacted by (or help shelter us from) certain adverse possibilities. Of course, the uncertainty of the future means, ideally, the model itself should reflect that uncertainty, which is why Cotton advocates that retirement planning should incorporate probabilities, and that Monte Carlo analysis is an effective means for modeling retirement... as while we don't know which exact path one individual's retirement will take, understanding the range of possibilities is still meaningful to evaluate the risks and consequences of trade-off decisions, akin to "a gigantic 'what-if' analysis", and one that implicitly incorporates sequence of return risk in a manner that spreadsheet projections (even conservative ones) fail to properly consider. The bottom line: retirement planning isn't meant to predict the future, but simply to explore the possibilities, for which the best approach is to use a model that reflects a wide range of possibilities (i.e., some form of Monte Carlo analysis!).

When Early Retirement Turns Into A Total Bore (Rob Walker, New York Times) - While the idea of early retirement is appealing for many, in some cases it turns out that retirees actually just end up being "bored out of their minds", lacking both the engagement and personal satisfaction that came from their working lives. As a result, sites like Upwork (which freelancers use to find consulting and other opportunities) are seeing a significant uptick in people who, after retirement, are trying to come back into the workforce through freelancing (a way to engage their expert skill set, but without returning to the fully daily grind of a 9-to-5 job); in fact, an estimated 16 million people aged 55-and-up did freelance work last year! Of course, some of those may be working because they have to, but many appear to be "working in retirement" simply because they want to, as a way to alleviate the boredom and have something to do (and wake up for) every day, whether by freelancing to hire out a specific skill set, or serving as more of a coach or consultant back to their prior field of work. For more experienced business professionals in particular, there are services like Patina Solutions, which offer "executive on demand" services to corporate clients, re-engaging retired business owners and executives that have possibly struggled with the slower pace of the non-business world and want/need to re-engage. Ironically, though, one of the biggest challenges for such retirees is not only that retirement may turn out to be unexpectedly and unpleasantly boring, but that those who face the challenge may feel uncomfortable talking to their peers (who, desiring retirement themselves, may not be able to relate)... which makes it a particularly important conversation for us as financial advisors to raise with retiring clients directly!

Retirees Reshape Where Americans Live (Janet Adamy & Paul Overberg, Wall Street Journal) - The population of Federally designated retirement destination counties rose by 2% last year, which may seem like a relatively small rate, but it's almost 3 times the rate of national population growth, suggesting that a substantial population shift is underway; in fact, nearly 750,000 Americans moved in the past year into one of the 442 counties that the Agriculture Department has classified as "retiree spots" based on their demographics. And while some of the retirement destination spots are not surprising – like much of Florida, and parts of Arizona and southern California – the shifts are broader than just retirees moving to warmer climates. For instance, Coeur d'Alene, Idaho, was actually the country's fifth fastest-growing metropolitan area last year, fueled by heavy investments in local infrastructure and residences appealing to retirees; other notable areas include Weld County, Colorado (a northeast Denver suburb pulling retirees from downtown), and Adams County, Pennsylvania (pulling retirees from Baltimore). More generally, the retiree trend reveals that suburbs are drawing more seniors out from expensive urban cores (rather than moving across the country to warmer climates), even as those areas also pull in Millennials and younger X'ers who prefer the more affordable cost of living to start a family. In fact, the demographic trends reveal that large cities have gone from drawing people from the rest of the country to losing people moving away from big cities (which are only growing now due to immigrants arriving there)... a trend that shifting retiree living preferences appears to be accelerating.

CFP Board Survey Points To Racial Discrimination In Advisory Industry (Ann Marsh, Financial Planning) - Of the roughly 80,000 CFP certificants, only 3.5% identify as Asian, 1.8% are Latino, and 1.5% are black, all of which are substantially lower than the general demographics of Americans. In a recent research study, the CFP Board attempted to understand why racial diversity is so low in financial services, and found that there's even a racial divide over the causes of poor racial diversity in the first place, with white CFP certificants more likely to attribute the lack of minority representation to a reluctance of minorities to pursue the profession, whereas minority CFP certificants themselves suggest that the problem is firms' own reluctance to hire minorities (and that there are implicit or explicit prejudices embedded in firms' hiring practices). Either way, both groups agreed that a lack of role models for people of color within the industry, along with the financial planning profession being "off the radar" amongst minorities are contributing factors. Overall, the CFP Board's research concluded that there are three broad areas hindering racial diversity amongst financial advisors: 1) economic inequality and cultural norms (e.g., minorities lack role models on how to enter the profession, and/or fear that they won't fit into a largely white profession); 2) firms hiring and onboarding policies (where a focus on sales and new business development leads firms to hire advisors they believe will be most likely to get new clients quickly, which drives them towards white advisors when most of their clients are white, and cite a "lack of fit" as the reason to pass on a minority candidate); and 3) clients' own inherent biases (where the majority-white clients may have their own bias towards working with white advisors, limiting the opportunities for minority candidates). Accordingly, the research suggests that relevant initiatives include: 1) formal mentoring programs to provide more effective role models for minority new entrants; 2) financial literacy initiatives to boost interest in financial issues and wealth creation amongst minorities; and 3) campaigns to boost awareness of financial planning career paths themselves. Notably, though, the research did find that amongst those who are financial advisors, minorities report similar career satisfaction to other advisors, suggesting that minorities are able to be similarly successful and satisfied as advisors, and that the primary blocking point is attracting minority advisors into the profession, not their ability to succeed once they're here.

Wealth Management Fares Worst In Broad Study Of Sexual Harassment (Andrew Welsch, Financial Planning) - In a survey on the prevalence of sexual harassment by industry sector of more than 3,000 individuals, the wealth management industry ranks an unfortunate #1, with 22% of those surveyed (and 33% of women themselves) citing a high prevalence of sexual harassment (as compared to "only" 15% in the insurance industry, 14% in higher education, 11% in health care, and 8% in accounting/tax). In some instances, the behavior is "just" belittling gender-biased comments or sexually-inappropriate jokes or innuendo, but in others, it escalates to inappropriate touching (back-rubs or a hand on the thigh) or outright sexual advances. The problem is exacerbated by the fact that managers are too often indifferent (which implicitly supports the now-unchecked behaviors), which creates an atmosphere where those impacted by the harassment may no longer feel comfortable speaking up to raise the issue in the first place (further perpetuating the problem). The situation is further complicated by the fact that traditionally, advisors themselves have been male, while women were more likely to be sales assistants, and managers would often side with the big (male) producers that generated revenue for their office (and fueled the manager's own compensation) rather than a lower-paid (and perceived as more-replaceable) assistant. And even at the advisor level, one recent study found that even though female advisors were less likely to engage in financial wrongdoing than male peers, they were 20% more likely to lose their jobs over it, and 30% less likely to find a new job thereafter. As a result of the systematic challenges, nearly 3/4ths of female advisors say that broad workplace cultural changes are necessary to remedy the issue, beyond just initiatives like "sensitivity training" that have limited impact when firms still don't apply effective consequences to those who cross the line.

Why Is The Pay Gap For Women Financial Advisors So Wide? (Annalyn Kurtz, Financial Planning) - According to data from the U.S. Department of Labor, women earned about 82% of what male workers earned in 2017... but when it comes to financial advisors, females earn just 59 cents for every dollar their male peers earned. In fact, a recent study by the Institute for Women's Policy Research found that when it comes to financial advisors, the pay gap is the worst of any occupation (even worse than other areas of finance like Financial Analysts and Accountants, where women at least earn 86% and 77%, respectively, of what men earn). And the data is based only on "full-time" financial advisors (who work 35+ hours/week), and thus is not distorted by what may be a higher percentage of women who work part-time. Nor is the gap explained by experience, revenue production, or ownership status, as an Aite study in 2013 found that female advisors still earned an average of $32,000/year less than their male counterparts even after controlling for those factors. There is some indication that the gap may be related to differences in overall business models, though, with men more likely to work in commission-based roles, and a higher percentage of women being paid salaries (at 32%, versus just 13% of men), which results in a disproportionate amount of the compensation upside accruing to men over women (even if they're similarly productivity in attracting and retaining clients). Similarly, only 39% owned all or part of their practices in 2013 (according to Aite), and at RIAs, only 20% of firm equity goes to women. All of which suggests that, despite the general view that the financial advisor industry is a meritocracy where the highest compensation goes to the most successful advisors, that intra-industry biases are causing women to earn proportionately less, even at similar levels of success... although notably, this also suggests that the gender pay gap may begin to narrow in the coming years, as the entire industry shifts from a sales-centric culture to a client-centric fiduciary world.

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.