Weekend Reading for Financial Planners (Nov 13-14)

Authors:

Ben Henry-Moreland

Team Kitces

Ben Henry-Moreland is a Senior Financial Planning Nerd at Kitces.com, where he specializes in writing and speaking on financial planning topics including tax, practice management, and technology. He also co-authors the monthly Kitces #AdvisorTech column. Drawing from his experience as a financial planner and a solo advisory firm owner, Ben is passionate about fulfilling the site’s mission of making financial advicers better and more successful.

Read more of Ben’s articles here.

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Adam Van Deusen, CFP

Team Kitces

Adam is a Financial Planning Nerd at Kitces.com. He previously worked at a financial planning firm in Bethesda, Maryland, and as a journalist covering the banking and insurance industries. Outside of work, he serves as a volunteer financial planner and class instructor for local and national non-profits.

Read more of Adam’s articles here.

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NASAA Report Zooms In On Broker-Dealers' Lack Of Reg BI Compliance (Melanie Waddell, ThinkAdvisor) - On Thursday, NASAA released its 2021 Reg BI Phase Two Report, a review of the data it collected on broker-dealers’ compliance with the SEC’s Regulation Best Interest rule from examinations of firms since the rule’s implementation date of June 30, 2020. And though the Reg BI rule requires broker-dealers to act in the best interest of consumers while making investment recommendations, the report concludes that “too many Reg BI firms are still placing their financial interests ahead of their retail consumers”. The report puts a spotlight on the use of “complex, costly, and risky” products (which it characterizes as including private funds, variable annuities, non-traded REITS, and leveraged or inverse ETFs). Notably, though firms decreased their recommendations of these products overall, the number of firms offering them actually increased from 2018 (prior to Reg BI’s taking effect) to 2021, and those that recommended them often did so without first discussing lower-cost or lower-risk options with their clients as required by the rule. The report also found that most firms have lagged in updating their policies and procedures (such as gathering more details about the client’s situation to make recommendations in their best interest) to comply with Reg BI, and that practices like sales contests and extra compensation from product manufacturers (which create a conflict of interested for the broker-dealer when recommending a strategy to the client) are still relatively common... particularly compared to investment advisory firms that are held to a fiduciary standard at all times, where such practices are virtually nonexistent. The issues with compliance, however, may have less to do with the intentions of broker-dealer firms than the nature of the Reg BI rule itself, which requires the brokers at broker-dealers to act in the best interest of the client only at the time of the recommendation, while at all other times holding broker-dealers themselves to a lower standard of care similar to the pre-Reg BI “suitability” standard. In addition, the fuzziness of the line determining what constitutes a “recommendation”, as well as the similarity of the Reg BI standard of care to the standard that came before it, means that many firms may simply not yet understand how their existing policies and procedures do (or do not) comply with Reg BI. While it seems likely that the SEC will address NASAA’s findings by issuing additional guidance on the rule, it remains notable that, two years after the finalization of Reg BI (which was designed to raise the standards of care for broker-dealers selling investment products), the rule has so far failed to curb the conflicts of interest that it was designed to eliminate – particularly those involving brokerage salespeople holding out as “financial advisors” who are nevertheless subject to Reg BI and not held to the fiduciary standard of care required of registered investment advisers.

SEC Finds Widespread Advisory Fee Calculation Errors (Melanie Waddell, ThinkAdvisor) - On Wednesday, the SEC issued a Risk Alert detailing the results of a recent examination initiative on investment advisory fees charged to retail clients, focusing on three specific areas: the methods with which investment advisers charged for their services, the adequacy of their fee disclosures, and the accuracy of their fee calculations. Without specifying how widespread they were, the report highlighted a number of deficiencies found in the examination initiative, the most notable of which were inaccurate fee calculations that resulted in clients being charged incorrect fees. For example, some firms implemented new fee schedules, but failed to convert all existing clients to the new system, while others calculated fees that were supposed to be based on the total household accounts but in practice were based on the individual account values rather than aggregating all of them together (which would have resulted in a lower fee overall as a percentage of the assets with a tiered fee schedule). Additionally, the report detailed the RIAs’ fee disclosure issues, including inaccurate or outdated fee schedules in firms’ Form ADVs, inaccurate disclosures about the timing of fee billing (like stating that fees would be calculated based on clients’ average daily account balances while in practice calculating them based on the value at quarter-end) and inaccurately disclosing whether fees could or could not be negotiable. Finally, the SEC’s examinations found that many firms lacked written policies and procedures on fee billing and monitoring fee calculations, or that the policies and procedures that did exist were generic and did not reflect the firms’ specific practices, and also found issues with firms’ financial statements (such as not recording pre-paid advisory fees as liabilities). As the year-end window for registration renewal approaches, the SEC’s report is a good reminder for advisory firms to review their billing practices to ensure they are charging fees correctly and consistently with their written disclosures, and that their policies and procedures correctly reflect their actual billing practices to ensure that clients are charged correctly for the financial advice they receive.

SEC Slams Almost All Robo-Advisors With Deficiency Letters (Tracey Longo, Financial Advisor) - In (yet) another risk alert issued this week, the SEC detailed the issues it found when it examined advisers who provided “digital investment advisory services”, better known as “robo-advisors”, and notably reported that nearly every firm examined received a deficiency letter with issues needing to be corrected. The examinations focused primarily on three areas: the firms’ portfolio management processes, their advertising and marketing practices, and their compliance programs. Among other issues, the SEC found that firms did not collect enough information about their clients to ensure that their investment recommendations would be in the clients’ best interests – often relying on brief questionnaires with only a handful of questions to recommend an asset allocation model – nor did they re-evaluate their recommendations on an ongoing basis, or monitor for changes in the client’s financial situation (which also raised the issue of whether many robo-advisors were really acting as unregistered “Investment Companies” rather than Registered Investment Advisers, given that most robo-advisors offer little in the way of “individualized” investment portfolios, nor do they typically offer a way for a client to contact a human advisor if needed). Most robo-advisors also had issues related to their marketing practices, like using “misleading” performance numbers without disclosures to explain why certain numbers were used, or misrepresenting SIPC protection as protecting investors from market losses (when in reality, it would only protect investors if the advisor’s custody provider were to fail). In the realm of compliance, the SEC found that most robo-advisors had inadequate policies and procedures; namely, they did not tailor their compliance programs to the unique nature of giving digital advice, in ways like monitoring and reviewing their trading or rebalancing algorithms to ensure they were performing as intended. Ultimately, though the issues above can be addressed and corrected by robo-advisors, it is clear by their pivot from potential replacements of human financial advisors to technology tools for human advisors that the value of a robo-advisor often comes not from their “advice”, but from the automated investment management platform that underlies it… and that perhaps “investment adviser” is not the correct title (or regulatory designation) for a firm that is really, in practice, a technology platform and model portfolio provider?

How Advisors Can Systematize When They Don’t Have Time (Stewart Bell, Audere) - As a financial advisory firm grows, so do the number of processes and tasks it must implement to serve its clients. At the same time, many advisors would rather focus on developing financial plans and working directly with clients, rather than spending time on administration and other duties. And while systematizing less-desirable tasks to reduce the time needed to complete them is an alluring prospect for advisors, creating these systems still takes time in itself and can become a blocking point. Bell suggests that advisory firm owners interested in systematization first consider which processes, if systematized, would free up the most time, and focus on those first. Once systems are in place, the firm can then refine the systems to ensure they are working at peak efficiency. In addition, firm owners can also take a step back and consider what they want their firm to look like in the future, and what processes and systems will be needed to get there in order to anticipate future systemization needs. And while the systemization process might seem daunting and time-consuming, firm owners can leverage the experience of other advisors who have succeeded in creating systems for marketing, training new advisors, analyzing tax returns, client tracking, and other tasks. Ultimately, taking the time to systematize a firm’s processes can not only allow a firm owner to spend more time on the responsibilities they enjoy (or even cut back on the hours spent working), but also add value to the client experience! Though the key to getting started is simply to get started – with the simplest highest-impact tasks first, and then use the time savings from those first few to reinvest into systematizing more thereafter.

Five Ways To Get Your Firm Unstuck (Jamie Hopkins, InvestmentNews) - The path of financial advisory firm success is not always linear, and owners can sometimes find their firms stuck in a rut. Signs of this could include restless employees, inefficient processes, or unenthusiastic clients. For firm owners who find their firms in this situation, several action items could help pull them out. First off is an evaluation of the current workforce, as well as hiring processes to make sure the right people are in the right seats. Considering whether current employees might be better suited for another position at the firm and ensuring that the hiring process is designed to find candidates that fit within the firm’s culture can both enhance firm productivity and prevent employee turnover. Next up, firm owners who have lost focus can rediscover their focus, mission, and passions through introspection. Potential exercises to do so include writing one’s own eulogy (to consider whether one is living up to their own goals), considering their own purpose in running the firm, and reevaluating their long-term goals. Firm owners in a rut can also consider whether their technology stack meets their needs, and potentially outsource technology management responsibilities to free up time for responsibilities they find more valuable. Firms that are dealing with client turnover can create a client advisory council or use client surveys to get real-time feedback on how the firm could improve, and to create positive feedback loops that could improve client retention and convert new prospects. Finally, firm owners in a rut can consider whether their custodian, business partners, and centers of influence are meeting their needs, and if not, looking for alternatives. These action items offer opportunities for firm owners stuck in a rut to look both inward and outward to get their firms (and themselves!) moving in a more positive direction, though obviously firms that are feeling stuck can’t (and shouldn’t) try to tackle it all at once, but instead pick the one area to start that they anticipate could create the biggest positive lift.

Investing Time In Your People Gives Great Returns (Tony Vidler) - With the wide range of responsibilities financial advisory firm owners face, paying attention to employee development can sometimes slip down the priority list. At the same time, firms with unhappy employees have to deal more often with employee turnover, one of the more costly and time-intensive tasks for a firm owner. Dedicating time to the firm’s employees can boost productivity and prevent turnover, but approaching employees in an unstructured way can limit the returns of the time investment. With this in mind, Vidler suggests a three-part structure for firm owners to use when meeting with employees. The first step is to ask the employee about their recent wins in order to demonstrate an interest in their accomplishments, and acknowledge strong performance, without the conversation becoming a performance appraisal (for instance, as a quarterly “check-in"). The conversation can then transition into the employee's worries, or areas where the employee wants help. This allows the firm owner to provide personal coaching to improve the employee’s ability to complete their work. Finally, the firm owner can ask employees what they are working on, and, if necessary, direct the employee’s attention to other areas that may be a higher priority for the firm. This step also introduces a sense of accountability, as the tasks the employee is currently working on can and should become “wins” in a future conversation. And so, while firm owners can provide many tangible benefits for employees (e.g., competitive compensation and perks), taking the time for high-quality communication that ensures team members are focused on and feeling successful when achieving the most important work to be done in the firm, can also pay dividends both for employee morale and the firm’s bottom line!

My Parents Retired At 42: The Upsides Of Financial Independence (Budgets Are Sexy) - While most Americans picture themselves retiring sometime in their 60s, the FIRE (Financial Independence/Retire Early) movement has gained significant attention during the past decade thanks to a range of bloggers (e.g., Mr. Money Mustache and the Mad Fientist) and others who have chronicled their high savings rates, accumulation of assets, and eventual retirements decades before most other individuals. However, the concept of retiring (very) early goes back many decades, with many individuals pursuing this path in the pre-internet days. In fact, the author’s parents retired at age 42 in the early 1990s to spend more time with their kids, well before FIRE went mainstream. And having grown up in a FIRE household that traveled frequently and allowed his parents to attend all of his extracurricular activities, the author suggests that retiring early can benefit kids as well as the parents. At the same time, the early retirement path is not without its pitfalls, and while retiring extremely early can require spending flexibility, it is perhaps more important for individuals thinking about early retirement to consider why they want to retire in the first place (a question that is not limited to early retirees!) and how they will spend their time in retirement. Of course, completely stopping work at an early age is the extreme end of being financially independent. Other options to take advantage of financial independence include transitioning to part-time work or taking work-free sabbaticals throughout one’s career. Similarly, financial advisory firm owners have successfully molded their business to fit their lifestyle, whether it be taking more than ten weeks of vacation a year or working 10 to 15 hours per week to spend more time on family and other interests. So while some individuals make the choice to leave the working world early in life, becoming financially independent is really about having more options for both one’s personal and professional lives!

How A Family Crisis Changed One Advisor’s Approach To Retirement Planning (Tony Hixon, Rethinking65) - Retirement is often viewed as a reward for a life of hard work. Whether one’s vision is laying on the beach, heading to the golf course, or just sitting down with a book, the popular conception of retirement is that it is a period of well-deserved relaxation. However, many retirees find that they lose a sense of purpose when they are no longer employed, and miss the routine that work life can provide. And while financial advisors are often focused on the quantitative aspect of whether clients can afford to retire, helping clients consider the qualitative aspects of the decision can be a valuable service as well. Hixon, a financial advisor, came to this realization and changed his approach to retirement planning after his mother fell into a deep depression, and ultimately committed suicide, within a year of her retirement. Now, in addition to crunching the numbers, he has clients consider big questions like how they will live a life of purpose in retirement, and seemingly smaller ones like how they will spend the average Tuesday. Financial advisors also have a range of structured tools available to help clients think more deeply about their purpose and aims, including George Kinder’s Life Planning and Carol Anderson’s Money Quotient systems. Through self-exploration, aspiring (or current) retirees might discover that they do not want to completely stop working, and instead reduce their hours or take extended, but temporary, periods off work. And so, because the most successful retirees retire ‘to’ something rather than ‘from’ something, advisors can add significant value to their clients by helping them figure out what that ‘something’ is!

Learning To Embrace The End Of History Illusion (Ben Carlson, A Wealth Of Common Sense) - The financial advice business inherently involves long-range planning and predictions about a client’s future goals. But while people recognize that it is hard to predict what will happen in world affairs or the stock market in the future, they do not necessarily recognize how their own goals and preferences will change in the years to come. This phenomenon, dubbed the “End of History Illusion”, describes how people recognize that they have changed significantly during the previous ten years but persistently predict they would change very little over the coming decade. For example, individuals were willing to pay significantly less to see a concert today by their favorite band from 10 years ago, than they state they think they will be willing to pay to see their current favorite band perform ten years from now. Notably, the phenomenon is most pronounced early in life, which can make developing long-range financial goals challenging. For example, the picture of retirement for an individual in their 30s (projecting out to when they’re in their 60s) could be very different from their optimal retirement when the same person reaches their 50s (and the goal is a lot closer). And so, financial advisors can use financial planning to help clients understand what goals would be possible rather than pursuing any one in particular. This can help clients maintain the motivation to save during their working years, while recognizing that their goals might shift over time. The key point is that while no two individuals will have the same vision for retirement, the same person could have very different goals at different points in their life!

How Generosity Changes Your Brain (Stephen Johnson, BigThink) - Research has shown that giving to others (especially to people and causes whom the giver really cares about) has psychological benefits. The counter-intuitiveness of this fact – that having money makes us happy (to an extent), but giving money away makes us happy too (often even more so) – makes it perplexing, but scientific research has increasingly discovered that the mental benefits of giving correspond with physical changes to our bodies and brains, that could reveal more about why it feels good for us to help others. For instance, studies have shown that the brain’s reward system releases neurochemicals when donating to charity that cause our body temperature to rise and create a positive “warm glow” feeling. The physiological benefits of giving can also lead to longer lives, and provide long-lasting protection against depression, showing that the effects are not merely temporary. One theory scientists have put forward is that humans’ interdependence and community-minded nature – particularly regarding those who are most vulnerable, like children – has contributed to our survival as a species, meaning that our ancestors were naturally selected in part for their caring and sympathetic traits. What this means for us today is that, for people who are unhappy about their current spending habits, the issue may be less about how much they are spending but whom they are spending it on. And while the scarcity of both time and money in our lives can make it difficult to make a habit out of giving, using behavioral tricks – like conducting a “self-audit” of your spending habits, categorized by money spent on yourself versus money spent on others – can help to bring spending in line with one’s values. Notably, however, one other behavioral trick borrowed from the financial planning realm – setting up automatic recurring contributions – may not deliver the same “high” as a conscious act of giving, so people who want to maximize their own happiness by giving may actually be better off setting aside the time to give intentionally.

Yes, Age Does Make Us More Generous (Alison Gopnik, The Wall Street Journal) - As people age, their personalities, preferences, and even their values change – often more so than they would have predicted themselves. Among those traits that change with age is an increasing inclination to think about others, which often leads older people to donate more money to charity than those who are younger. Though this may be in part because older people generally have more money to give in the first place, new research has suggested that the underlying altruism that drives people to give is also higher in older individuals. One analysis examined 16 different studies on giving and concluded that, even when adjusting for other factors like wealth and education, older people still tended to give more. And in another study where participants were told to squeeze a device that, based on the strength of the squeeze, would earn rewards for either the participant or others, older people were much more likely than younger people to put in more effort when the rewards would go to someone else instead of themselves. While there is no scientific explanation yet for why generosity increases with age, one reason may simply be that people get happier and more satisfied when they grow older, as the ambition that drives them as younger people is replaced with more feelings of contentment and a sense of purpose outside of themselves. For financial advisors, this means that, as clients enter into and age through their retirement years, it’s important to check in regularly and understand how their intentions might change and their spending habits shift focus from themselves to gifting to others, and ensure that their financial plans – and their assets – are still working to achieve what truly makes them happy.

Gratitude in Abundance (Jeremy Walter, Calibrating Capital) - Financial advisors (and their clients) are accustomed to the concept of abundance. Not only is being a financial advisor generally a well-paying, rewarding career, but the majority of the clients whom advisors work with also have income and assets that provide them with everything they need to survive, along with a good amount of the things they want. But as we accumulate resources and acquire more of the things we want, our sense of appreciation for the things we already have often declines. In a Twitter thread and subsequent essay that spanned the early days of the pandemic, financial advisor Jeremy Walter challenged himself to walk through his day and point out all of the pieces of abundance in his life – from his warm bed to the roof over his head to his own health and that of his family – to restore some of the gratitude that is lost in abundance. And now, after nearly two years of pandemic life, many people have a greater appreciation for things like health and loved ones that they took for granted before. Because, while it’s easy to talk about counting our blessings, the most powerful way to feel grateful for the things we have is to experience not having them. Accordingly, it may actually make us happier to limit the indulgences that we have gotten used to, whether that be eating whenever we feel like it, or instinctively turning on Netflix or even showering with hot water, in order to make them that much more special, and feel a greater sense of gratitude, when we do partake in them. By building more gratitude into our lives, we remind ourselves that we do have enough of what we need – and that feeling of “enough” helps us feel more content and ultimately happier with our lives.

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 Craig Iskowitz's "Wealth Management Today" blog, as well as Gavin Spitzner's "Wealth Management Weekly" blog.