Executive Summary
Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big regulatory news from the Department of Labor, that its re-proposal of a fiduciary rule is being delayed once again, and is now expected next January of 2015. At this point, it's still unclear whether the delay is just to build support and finalize a cost-benefit study to get the rule implemented, or if the delay will result in fiduciary opponents building more momentum to try to undermine or change the rule.
From there, we have several practice management articles this week, including: a look at the success that "robo-advisor" platforms are having with young tech millionaires who have money but little desire to deal with 'antiquated' non-tech-savvy advisors; a second article about the growth of online investment platforms amongst older clientele as well (an estimated 40% of investors over age 60 are now 'self-directed' using robo-advisors or online brokerage platforms); a discussion from practice management consultant Angie Herbers about whether advisors should even try to manage people, or whether it's better for the advisor to just stay small and happy; how to categorize clients through your CRM to begin to refine and differentiate your services at varying tiers; and an intriguing article from Julie Littlechild suggesting that the real differentiator of the most successful advisors is not merely their vision of serving clients well and acting in their interests but their ability to operationalize those big ideals into actual tactics to be implemented in the business.
We also have a few technical articles this week, from a look at how the long-term care insurance industry is trying to restructure its regulatory rules to allow for more regular but much smaller premium adjustments, to a review of a new white paper by Cliff Asness and his team at AQR looking at the "myths and facts" of momentum investing, and also a good discussion of the pitfalls of portability of the estate tax exemption that advisors should consider before going with this 'simple' new estate planning technique.
We wrap up with three interesting articles: the first is a review of a fascinating book called "The Great Depression: A Diary" that details the diary entries of an investor who lived through the Great Depression, and consistently observed that at the time many/most investors realized it was the investment opportunity of a lifetime but simply had no cash available to invest at that point (and making the fundamental point that large cash positions are not a "negative real return" drag but funding for future opportunities that may be more than significant enough to overcome the drag of cash returns); the second is a look at the recent white paper issued by the Australian Financial Planning Association as it begins to lobby for new laws and regulations that would make financial planner/advisor a protected term that can only be used by advisors who meet specific education, experience, and other requirements; and the last is a nice discussion of how advisors can use RSS readers as a better means to keep up with industry news and developments in a simple and easy manner.
And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end! Enjoy the reading!
Weekend reading for May 31st/June 1st:
DOL Proposal Of Fiduciary-Duty Rule Delayed Again - In an update to its regulatory calendar this week, the Department of Labor moved its planned re-proposal of a fiduciary rule from this August to next January of 2015. Supporters believe the delay may simply be intended to allow time for Labor Secretary Thomas Perez to fulfill a promise made during his confirmation hearing to meet with all the interest groups trying to shape the rule, and also to allow time for continued refinements and to conduct a cost-benefit analysis. On the other hand, SIFMA has suggested that the DOL should continue to wait and not re-propose its rule until after the SEC advances its own investment-advice rule, though Barbara Roper of the Consumer Federation of America has expressed concern that the delay will aid Wall Street in their opposition to a fiduciary rule. On the other hand, Roper also suggested that it's even possible the White House might jump into the fiduciary-duty debate between now and the end of the year, which would send a strong message to DOL and the SEC that a fiduciary rule has support at the highest level. We'll see.
As Tech Millionaires Multiply, Wealth Advisers Struggle To Connect - This article from Reuters highlights a number of younger recent tech millionaires, who have been opting for online investment platforms like Betterment over 'traditional' human wealth advisors. The problems are numerous; this younger clientele don't like the "old school" model of letting the financial planner drive most of the decisions, and in some cases the investors simply report that it's so time consuming and effortful just to search out and find a financial advisor in the first place, that it's easier to just go with a straightforward online platform. A recent Spectrem Group survey finds that the youngest members of Gen X and millenials are the most likely to say they're dissatisfied with their wealth advisor. Advisors who are succeeding with these young tech millionaires often have to share a far wider range of advice than is 'traditional' in financial planning, including guidance on everything from how to tell potential spouses about their tech fortune, how to donate money effectively to smaller charities, or how to deal with old friends jealous of the sudden tech windfall. Social impact investing is also very popular amongst this type of clientele. The bottom line is that, especially amongst these tech millionaires, it's crucial for the advisor to be tech-savvy, as they often put as much or more trust in technology than in people - as Adam Nash, CEO of Wealthfront points out, a human can't really be watching their money 24/7, but a computer can.
Older Investors Turn To The Web To Manage Assets - Continuing the theme of the prior article, the prevailing view these days is that young people are self-directed investors using online technology for advice but "older" investors over age 50 are tech-illiterate and require face-to-face meetings with human advisors; however, the emerging reality is that there are plenty of people in older demographics who are adopting technology in their financial lives as well. In fact, recent research from Cerulli finds that nearly half of investors in their 50s describe themselves as self-directed (so their primary advice provider is either an online discount broker or a robo-advisor), and about 40% of investors over 60 describe themselves as self-directed as well. The reality seems to be that the self-directed movement is being driven by a combination of (lower) expenses, post-2008 trust issues with the industry, and sheer convenience, which is relevant regardless of age; in fact, Scott Smith of Cerulli suggests the problem could even be more severe amongst Gen X workers in the midst of building their careers, for whom regular in-person meetings are more of an onus than a bonus. Overall, clients over 50 now account for about 20% of Betterment's $550M of assets, and JemStep (which imports client account data and provides asset allocation advice they can implement themselves) finds 33% of its clients are age 50 to 67 (and actually have a higher propensity to subscribe and pay for their services).
Should You Be Managing Other People? How to Tell - While there's lots of advice out there about how to better manage employees, practice management consultant Angie Herbers notes that for a few advisory firm owners, the really issue is not about how to manage or what to do, but simply about whether they really want to manage people in the first place. After all, the benefits of having a larger firm - in terms of being able to work more on whatever tasks you enjoy the most, have more clients, increase revenues and income, etc. - are all predicated on a willingness and desire to manage people in the first place. For those with management experience, they may already have some perspective about how they feel on the issue, but Herbers notes that for most advisors, this is uncharted territory (and even for some with management experience, the realities of management in a large corporate environment are very different than in a small business). Herbers suggests that one of the easiest ways to distinguish your comfort level in managing employees is your comfort with transparency; how comfortable are you in being completely open with employees about who you are, your strengths/weaknesses, limits of your knowledge, your goals, your plans for the future, your performance and the success of the business, etc. After all, small businesses are small enough that it's hard to hide or limit this information, and Herbers notes that many of the advisors she's seen who struggle the most as managers are more private people who just aren't comfortable sharing in this manner. So if you're just not hard-wired to be transparent in this manner, and if you're not excited to develop the people who will someday represent you to the outside world, then the reality may simply be that you're a lot better off as a solo practitioner, with perhaps 1-2 administrative people, and just outsource the rest and stay small and happy.
Categorizing Clients - From Financial Advisor magazine, this article by practice management consultant David Lawrence examines how advisors can go about categorizing their clients as their advisory firm grows. The key, however, is that it's not merely about categorizing the clients for the sake of labeling them, but to then delineate differentiated service levels for the various client categories. The starting point is to get an understanding of where the breadth of clients fall in the first place; create a spreadsheet that lists all clients and their levels of AUM/planning fees/retainer fees, so you can visualize the number of clients and amounts at different tiers. Are there some natural client categories and breakpoints that emerge? Is there a category or tier of clients that seem to have a disproportionate amount of clients or service demands for the amount of fees/revenue generated, which may be causing the firm to become unbalanced? Lawrence notes that in some cases, firms are wary to back away from service levels for - and risk losing - existing clients, so the alternative is a "line in the sand" approach that commits the firm will focus on the new service levels for new clients, but not necessarily change existing clients (at least for the time being) to ease the transition. Once there is a commitment to segment clients, the next issue is how to do so - for which Lawrence recommends a good CRM platform is crucial to implement consistently (specific recommendations include Redtail and Junxure). The goal of the software is not only to track client categories, but to actually manage the workflows to ensure that tasks are being done for clients consistently. The CRM can also make it easy to record client preferences and then deliver them (including little things that clients appreciate, like their drink preferences during meetings).
Successful Advisors Operationalize Excellence - On her blog, practice management consultant Julie Littlechild looks at what defines success for advisors, building on a survey she conducted to look at whether success is driven primarily by who the advisors are, what they do, or how they structure their businesses (or some combination of the three). Littlechild found that one of the key factors is clearly the mindset of the advisor - that combination of perseverance, hard work, resilience, and gritty determination, that helps them to drive forward and be successful. Beyond that, however, Littlechild was struck by how general many of the comments were, as advisors talked about success factors like "putting clients first" - yet when was the last time you ever heard an advisor talk about not putting their clients first!? Ultimately, though, Littlechild concluded that the key differentiation is not merely the factor that the advisors have many of these high-minded ideals, but that they figure out how to operationalize them and actually put them into practice in the business and with clients. In other words, it's not merely the mindset, but the ability to execute on it - for instance, not just saying you'll be a trusted resource for clients, but actually reaching out consistently and persistently to connect with clients, address problems and fix them, ask for feedback and implement it, etc. So the ultimate goal is not just to have "big concepts" to drive the success of your business, but to actually break it down and figure out how to systematically implement it and demonstrate it to clients in action rather than just words alone.
Genworth Eyes New Approach To Long-Term-Care Insurance Rate Hikes - To battle their ongoing pricing challenges, long-term care insurance companies - led by the top player in the space, Genworth - are beginning to lobby regulators to allow them a more flexible pricing structure for LTC insurance, one that would permit them to reassess their LTC insurance assumptions on an annual basis and adjust their premiums accordingly. The goal would be to have a potential string of small single-digit increases in client premium costs, but avoid the current environment where nothing happens for years and then massive double-digit rate hikes have to be implemented. And notably, this isn't merely about spreading out large premium hikes into a series of smaller ones; by allowing more frequent premium adjustments without multi-year delays, Genworth chief executive Tom McInerney notes that the total premium hikes would be reduced as well, as it avoids scenarios where insurance companies lose years of investment income while waiting to get a premium adjustment implemented, which currently can take as long as 10 years for insurers to build the claims experience necessary to justify a rate increase (which digs a very big hole at today's low rates). However, some still express concern about the approach, worrying about how smooth the transition to such a regime might be, and questioning whether carriers would be as willing to adjust premiums downwards when assumptions call for it as they appear to be for adjusting premiums upwards. The biggest challenge, though, may simply be figuring out how to create a reasonable regulatory oversight and approval process that balances efficiency in allowing rate hikes while still providing some rigor to the process so companies don't just raise prices indiscriminately.
The Case for Momentum Investing - In this Morningstar column, investment commentator John Rekenthaler comments on the recently published "Fact, Fiction, and Momentum Investing" white paper by Cliff Asness and his colleagues at AQR Capital Management. The article aims to set aside from of the "myths" of momentum investing from the facts. The 10 myths include: momentum returns are too small and sporadic (actually momentum is present over very long periods and has robust out-of-sample performance); momentum cannot be captured by long-only investors and can only be exploited on the short side (shorting the losers is one means of exploiting momentum, but not exclusive, and not necessarily even better); momentum is stronger amongst small-cap than large-cap (it's not); momentum cannot survive trading costs (potentially true for individual investors, but not for institutions); momentum doesn't work for taxable investors (actually, its tax burden may not be much higher than value investing, since it actually tends to turn over losers but hold on to winners); momentum is best used with screens rather than as a direct factor (not necessarily); one should worry about momentum returns disappearing (as with value investing in the late 1990s, some factors may go in and out of favor, but there's no evidence the momentum effect has weakened overall); momentum is too volatile to rely on (again, the strategy may not work in all markets all the time, but that doesn't invalidate its long-term usefulness); different measures of momentum can give different results over a given period (actually true, but so what, isn't that true of every investment strategy that can be implemented in various ways?); and there is no theory behind momentum (actually there are several, though they tend to be behaviorally based rather than fit the 'traditional' factors like size and value). For those who want to read the full Asness white paper, it can be viewed here.
The Practical and Potentially Perilous Pitfalls of Portability - From the Journal of Financial Planning, this article reviews some of the challenges that remain since portability of the estate tax exemption was made permanent last year as a part of the American Taxpayer Relief Act of 2012. The primary guidance for portability is from a series of temporary Treasury Regulations issued almost two years ago (Treas. Regs. 20.2010), which affirm everything from the requirement to timely file an estate tax return in order to claim the transfer of the decease spouse's unused exemption (DSUE) amount in the first place, to how assets must be valued and reported (including simplified rules for those estates that won't owe any taxes and are filing only to claim portability). In principle, the benefit of portability is that it simplifies estate planning by reducing the need for bypass trusts, and can eliminate the need to 'equalize' assets amongst the estates of a couple in order to fund them; however, the authors point out that there are several pitfalls to portability, including: family dynamics (will the family be on the same page about incurring the cost/expense/time to file a return when there's no estate tax and the purpose is solely for claiming portability, especially if the cost to file comes from the inheritance of a non-spouse beneficiary?); asset composition (does the estate have rapidly appreciating assets that may be better suited for a bypass trust that shelters the exemption and future growth rather than relying on just portability that preserves the exemption but exposes future growth to estate taxes?); complications of state estate tax planning in decoupled states where portability works at the Federal but not state level (though many states are now under pressure to recouple); generation-skipping tax issues (portability applies for the estate and gift tax exemptions, but not the GST exemption); and impact of remarriage (or really re-widowing, where a second deceased spouse's exemption can overwrite the first). The bottom line - portability may be a 'simple' election, but still requires consideration of more complex issues before opting for the simple solution.
Lessons From America’s Greatest Investment Tragedy - This article shares some highlights from a book by Benjamin Roth, an Ohio lawyer who kept a fascinating diary during the Great Depression that his son published just a few years ago. While Roth was not specifically a professional investor or writer, the book provides some fascinating highlights about what life, business, and investing was like during the Great Depression, captured in short entries of just a few sentences at a time. The highlights paint an especially poignant picture about the value of having good 'ole cash in the bank, available to deal with the uncertainties of life or the opportunities that may come along; quotes include "Magazines and newspapers are full of articles telling people to buy stocks, real estate etc. at present bargain prices. They say that times are sure to get better and that many big fortunes have been built this way. The trouble is that nobody has any money." and also "I am afraid the opportunity to buy a fortune in stocks at about 10¢ on the dollar is past and so far I have been unable to take advantage of it." and by 1937 "The greatest chance in a lifetime to build a fortune has gone and will probably not come again soon. Very few people had any surplus to invest—it was a matter of earning enough to buy the necessaries of life." The comments paint an interesting picture with striking parallels to today, where once again people just care about return and "complain about how worthless cash in the bank is, earning a puny yield" yet when the inevitable crash comes, suddenly "nothing is more precious than cash in the bank, even if you had to sit on it for years earning that puny yield." In other words, holding cash isn't about getting a puny yield that loses money to inflation every day, but a pathway to having options in the future should opportunity (or a desperate situation) present itself.
Australian Ten-Point Plan To Legislate “Adviser” Unveiled - The Australian Financial Planning Association announced this week a 10-point plan to push for legislation that would protect the terms "financial adviser" and "financial planner" and limit them to only those who actually met the approach standards for advice. The initiative is part of the ongoing changes underway in the Australian advice market as a part of their "Future Of Financial Advice" (FOFA) reforms. The Australian FPA's 10-point plan on behalf of the emerging financial planning profession includes: 1) Restrict the terms financial planner/adviser under Australian law, and only permit an individual to use the term if they are members of an appropriate regulatory body, meet minimum educational and experience requirements, and maintain 30 hours/year of continuing education credit; 2) amend the Australian laws to allow the regulators to approve a professional body to oversee financial planners; 3) establish a working group to develop a holistic financial planner education framework with the aim of lifting the minimum education & experience standards to a relevant university degree; 4) extend the ban on commissions to even General Advice (Australia recently banned commissions for most financial advisors, but is considering a lift of the ban on certain types of general advice); 5) limit the scope of non-professional general [financial] advice to only be regarding factual information and/or explanations of financial products; 6) develop a co-regulatory design that includes approved professional bodies assisting regulators in overseeing advisors and protecting consumers; 7) create a publicly registry of [real] financial planners/advisors maintained by the regulator; 8) establish "suspension" powers for the regulatory to suspend financial planners/advisers suspected of material and systemic breaches of their best interest duty to clients; 9) establish a tax deduction for the preparation of an initial financial plan; and 10) consider lifting the criteria of a 'sophisticated investor' (similar to accredited investor requirements in the US). You can read the Australian FPA's "Future of the Financial Planning Profession" white paper in greater depth here.
How A Little Orange RSS Icon Changed My Life And Why It's Unacceptable That 98% Of Advisors Have No Idea It Exists - This article on RIABiz by social media and marketing consultant Pat Allen discusses that little orange icon on most media and blog websites that goes largely ignored: the RSS icon. So what is RSS? It stands for "Really Simple Syndication" and what it does is allow website publishers and bloggers to push content updates directly to any readers who use an "RSS reader" to subscribe to their content. The upside of the RSS approach for the reader is that a single RSS reader can be used to gather together all the content to a single central location, rather than try to keep up with a flurry of email updates or remember what websites to visit to "check" for new content. Allen in particular recommends Feedly as a good RSS reader - go to the site, create an account, use the "Add Content" button to add the websites that you want to follow (on an anonymous basis), and the latest content will be continuously updated and synchronized across all your desktop and mobile devices. Notwithstanding the ease of RSS, Allen notes that a recent advisor social media study found that only 2% of advisors are using RSS feeds (by contrast, 28% are using social media to read expert commentary and 16% are using it to monitor industry and market news!), suggesting a lot of room for further adoption!
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!
I’ve tried just about every RSS reader out there. To me, Newsblur is by far and away the best.