Weekend Reading for Financial Planners (Nov 16-17)

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 November 16th/17th:

CFP Board, Under Pressure, Drops CE Plan - The big news this week was the CFP Board's announcement that it will be dropping its contemplated plan of offering CFP CE credit directly, a move that would have put the CFP Board in direct competition with the continuing education sponsors it regulates. Instead, the CFP Board announced a series of initiatives that would be aimed at improving the quality of continuing education for CFP certificants over the next 3-5 years. Prospective changes, to be implemented in coordination between CFP Board staff, their volunteer Council on Education, and CE sponsors themselves, would include: a complaint procedure for CFP professionals to report issues with CE programs; updates to the registration process for CE programs and sponsors to increase expectations of quality standards, provide clearer learning objectives, and define instructor criteria; enhanced auditing of CE programs by CFP Board staff (especially programs that receive complaints); collaboration with CE sponsors to "redirect the culture of the CE business to focus on quality"; a recognition program for CE programs that meet high quality standards and receive positive feedback from CFP professionals; and regular updates to CFP professionals on the results of the CFP Board's CE auditing. Notably, though, the CFP Board's announcement did stipulate that it would not be entering the CE business "at this time" - a caveat that prompted Professor Vickie Hampton, chairwoman of the personal financial planning department at Texas Tech, to submit a public letter to the CFP Board signed by more than 40 faculty members at various CFP Board Registered Programs that expressed concern with the CFP Board's phrasing and stating that they do not believe the Board should ever become conflicted by offering continuing education as long as it is the regulatory body for the CFP marks. In separate but related news, the recent CFP Board's Board of Directors meeting also decided to extend the CFP Board's "Let's Make A Plan" public awareness campaign another two years, citing a 7 percentage point increase in CFP brand awareness amongst mass affluent investors, beating the 4-point goal originally targeted.

SIFMA Vows To Put Customers First - This week, the leading Wall Street trade organization SIFMA put forth a new document designed to educate investors and outline the rights they have when working with financial advisors. Entitled "Our Partnership With You", the paper states that consumers should "receive personalized investment advice about securities that is in your best interests" and also advocates that clients have a right to be informed about material conflicts of interest that a broker faces and a right to be clearly informed about fees associated with their investment accounts. Notably, though, SIFMA's document never mentions the term "fiduciary duty", as SIFMA chief executive Judd Gregg makes the point that existing fiduciary law and its judicial history could inappropriately impact the industry; nonetheless, SIFMA maintains its position that the SEC should move forward on a rule to establish a uniform fiduciary duty on anyone providing retail investment advice... as long as the changes implement a "new" fiduciary standard accommodative of the broker business model. In response to the SIFMA announcement, Barbara Roper of the Consumer Federation of America raises the concern that investors could be confused by SIFMA's initiative if it doesn't really match a consistent uniform [fiduciary] standard, and Knut Rostad of the Institute for the Fiduciary Standard points out that while the announcement "aspirationally... looks very interesting" that "without any verification or validation, it's not clear what these [suggested SIFMA investor] rights mean."

FINRA Expands BrokerCheck to Include IARD Reports - Also in the news this week, FINRA announced major enhancements to its BrokerCheck system, that will now allow investors to search both the BrokerCheck and Investment Adviser Registration Depository record for any securities professional or firm, directly from the FINRA homepage. In addition, BrokerCheck indicates that results will soon be displayed in a graphical timeline, illustrating a "more user-friendly" view of an industry professional's employment status and history and industry registrations, with reportable disclosure (e.g., disciplinary) events showing up as red dots along the way. FINRA also stated that it will make a new BrokerCheck widget available to embed on third-party websites, essentially making it possible for an advisor to embed BrokerCheck on their own website to allow clients to directly view their regulatory record without going to FINRA or the SEC websites first.

Fiduciary Update: Where the Rules Stand Now - Reporting on a session from this week's Schwab IMPACT conference, this article discusses a recent update by Fi360 CEO Blaine Aikin on the status of various fiduciary rulemaking that is underway. The basic gist is that notwithstanding considerable political opposition, fiduciary rulemaking remains a work in progress, though nothing will be finalized before next year at the earliest. And it's not just about rulemaking at the SEC and the Department of Labor; Aikin notes that FINRA appears to be in action here as well. The latest big FINRA steps include its enhanced due diligence requirements in an updated suitability rule, and more recently its "Report on Conflicts of Interest"; while these changes may still be "tiptoeing" around the fiduciary standard and are more like "fiduciary lite" they are still a definite raising of the bar at FINRA, perhaps to support its efforts to be the regulator for the advisory community as well as the broker-dealer community. In the meantime, SEC Chairwoman Mary Jo White has reiterated her commitment to moving ahead with fiduciary regulations under Dodd-Frank (albeit without a final time frame for implementation), and the Department of Labor is now expected to unveil its own revised proposal to expand the definition of fiduciary under ERISA sometime in the first half of next year.

Schwab IMPACT 2013 Is Another Great Bash - This week also marked the monstrous Schwab IMPACT conference, with more than 2,000 advisors and another 1,000 exhibitors, sponsors, and Schwab employees. The big bash did have a few distractions - including some disgruntled former Schwab advisors picketing outside the conference, and some highly visible Fidelity marketing plastered on every bus stop in the area (a move it did in 2010 as well) - but overall the event was a strong success, and author Tim Welsh suggests that Schwab and its conference are now essentially an overall barometer of all things RIA. The Schwab leadership themselves emphasizes several key RIA themes, including an acknowledgement that technology is not just a future generation issue but a 'now' generation issue, and that mobile and social media and the cloud are changing how advisors work with their clients ("your web address will be more important than your street address [in the future]"). Some key technology initiatives announced from Schwab in particular included a white-labeled mobile app for advisors to use with their clients, a new custodian-direct portfolio management system fueled by a new data structure called PM2, and some niceties like electronic 1099s for easier tax reporting. Popular speakers included industry prognosticators and consultants from compliance expert Tom Giachetti to Mark Hurley of Fiduciary Network and a popular session from Kelli Cruz of Cruz Consulting Group on how to craft a compensation plan to attract key talent; overall, succession planning was again a top issue at the conference as well. Keynote speakers also included big names like former Maine Senator Olympia Snowe, former Secretary of Defense Leon Panetta, financial journalist Michael Lewis, and author Daniel Pink; as Welsh points out, those 12(b)-1 fees Schwab collects can fuel a lot of offerings to keep advisors coming to the conference and returning to the exhibit hall!

Everything You Need To Know About The Plans To ‘Fix’ Obamacare - From Ezra Klein's "Wonkblog" this article provides a great summary of this week's announcement by President Obama to potentially allow some of those who are having their individual health insurance coverage cancelled to renew it for another year. There are actually several different potential solutions on the table right now. The first is Republican Fred Upton's "Keep Your Health Plan Act" which would simply allow insurers to keep offering their current plans, and would also allow them to offer new plans that are not ACA compliant; the legislation is controversial in that the first clause allows but doesn't require insurers to keep offering coverage (and many are not expected to do so if not required), and the second part would allow insurers to continue to discriminate against those who are sick or who have pre-existing conditions (which basically makes it dead-on-arrival in the Senate with no chance of passing). The next alternative is Democratic Senator Mary Landrieu's "Keeping the Affordable Care Act's Promise Act" would actually require insurers to keep offering the plans they intended to cancel, and insurers would then also be obligated to annually inform policyowners of how their policies fail to meet the ACA minimum essential health benefits standards; the purpose would be to encourage consumers in "old" plans to switch to plans on the exchanges over time, but the concern is that healthy people would choose to keep their existing lesser coverage, resulting in unhealthy people disproportionately going on the exchanges and potentially damaging the long-term viability of the exchange plans. A similar alternative is Democratic Senator Mark Udall's "Continuous Coverage Act" which mirrors Landrieu's plan, but would only run for 2 years, after which the transition to the exchanges would still be required (unless extended again). President Obama's solution, in turn, appears to be a combination of the available solutions - insurers can choose to (but are not required to) renew policies this year (and through June of 2014, allows some policies to continue into 2015), while also sending Landrieu-like letters trying to encourage consumers to switch. Notably, Klein points out that the insurance industry is very upset with this solution, as they have been taking heat for the Affordable-Care-Act-mandated cancellations, and now will take even more blame if they don't choose to offer renewals of the coverage, despite the financial risks they bear of segmenting such renewals into a separate risk pool. In the meantime, the pressure remains to fix the Healthcare.gov website, as in reality many people receiving cancellations might actually have better coverage options on the exchanges, but with the website problems they aren't even able to find out.

For Retirement, Are R-Bonds Right For You[r Clients]? - On Marketwatch, retirement commentator Bob Powell discusses a recent Treasury Department announcement that consumers may soon be able to purchase "R-Bonds", a new form of government savings bond that would be targeted primarily for those not enrolled in a company-sponsored retirement plan (whether because the company doesn't offer a plan, they work part-time and aren't eligible, or they're simply self-employed or unemployed). The basic idea is that R-Bonds would have similar tax characteristics to an IRA and be eligible to be rolled over into an IRA once savings reach a now-unspecified threshold, and contributions could be done via automatic payroll deduction. Notably, the plan is not finalized and official yet, but the Treasury emphasizes that it does have the authority to move forward if/when it's ready, and doesn't require separate Congressional approval. Commentators point out that this may not necessarily expand retirement savings - as it's not clear how R-Bonds are all that different from just opening an IRA and investing the proceed into government bonds - but may set the stage for a future automatic-IRA type of program (as R-Bonds could be a future default investment option for such accounts). There is some question of whether the financial services industry itself might push back on the R-Bond proposal, but if the reality is that R-Bonds are primarily for very low asset levels, and convert automatically to IRAs at some relatively low threshold - e.g., a $10,000 account balance - then R-Bonds might simply become a feeder system for IRAs for a segment of Americans that financial services companies struggle to service profitably anyway. In addition, others point out that a fixed-interest government bond isn't necessarily the best investment choice for a lot of young workers with long investment time horizons, and it's not clear if/whether other incentives will be included (or if they'll be necessary to induce participation); nonetheless, stay tuned, as there may be more news on R-Bonds in 2014.

4% Limits - In Financial Advisor magazine, financial planner Dan Moisand shares his thoughts about the so-called "4% Rule", which Moisand suggests first and foremost would include not calling it a "rule" as few if any financial planners actually apply it as such in an blind and arbitrary manner. Beyond the fact that planners tend to use 4% as a point of reference or a "guideline" more than a rule, though, Moisand notes that in his experience, most clients simply don't want to comply with it, because life - and the associated spending - is simply not all that steady in the first place. Instead, "life happens" and whether it's a new cost or a new opportunity, unexpected expenses pop up; in addition, as markets go up and down, so to do clients often change their spending patterns, and in some cases the impact of inflation (especially in recent years) feels so modest that they don't increase their spending withdrawals at all. In other situations, the primary issue is the fact that many clients would prefer to spend more in the early years, recognizing that they will likely be spending less in their 90s as they age (few 95-year-olds still travel and golf like they did at 65!), and in some cases they may not even wish to plan for a time horizon that long in the first place (not unreasonable, given that the odds that even one of a 65-year-old couple is still alive at age 95 is only 18%!). Moisand also points out that the 4% rule itself is also incredibly conservative; 96% of the time, the amount of assets at the end are more than they were at the beginning, and how often does a client really want to focus their lifetime spending decisions around the risk of that last 4% of scenarios (especially when there's only an 18% chance they'll live long enough for the 4% to even matter!?). Moisand wraps up with an example of a client couple, the "Smiths" who are spending 5.5% of their assets and are quite comfortable with their decision; they have lived through volatile markets and are comfortable with their ability to handle and adjust to market risk, they have the ability to reduce their expenditures without materially limiting their lifestyle (allowing for a more dynamic spending plan, not the rigid one assumed in the early 4% studies), and because they have greater spending flexibility, they don't need a super-high Monte Carlo success rate and can accept a more modest "probability of adjustment" if necessary. Perhaps most significant, though, is the fact that because the Smiths have done "real" planning, they understand the range of possibilities and the trade-offs they face, and they know what the trigger points will be for scaling back if necessary.

Bond Worries? What Advisors Should Do - On the Financial Planning magazine website, Allan Roth provides an interesting perspective on how to address today's advisor (and client?) fears about the potential for rising interest rates in the coming years, and their adverse impact on bond prices and investments. Although the end of QE "Infinity" is still unknown, a Wall Street Journal survey of 50 economists predicted the 10-year Treasury will rise nearly 100 basis points to 3.47% by the end of 2014 (with one economist projecting a rate as high as 5.20%). And that would potentially be the second year in-a-row for losses, as given how much rates have risen this year, the Barclays Aggregate Bond index is already down 1.1% year-to-date (up to November 1st). Of course, the reality is that economists are notoriously wrong about their predictions of both the directionality and magnitude of interest rate movements; nonetheless, for those who continue to fear an interest rate increase, what's to be done? Roth includes an interesting chart showing the impact over the next 10 years of an interest rate increase of anywhere from 1% to 10% in the coming year, from a base rate of a 2.3% yield for the Barclays Agg and the current 5.6-year duration; the forecasted 1% interest would result in a total return loss of about 2.8% next year, but a breakeven by year 2 (given the incoming yield return), and a 3% single-year increase would result in a 13% one-year loss and a breakeven by year 4. Even a 5 percentage point increase - which would be worse than anything in history - would result in a loss of "only" 23.2% in a year, which is painful but still far less than the 37% loss on the total return S&P 500 in 2008 alone, and would recover entirely within 5 years. Roth also looks at the relative benefits of owning short-term versus intermediate-term bonds, generally finding that with modest (e.g., 1% - 3%) rate increases, intermediate-term bonds quickly prevail (even with their initial losses), though with severe interest rate changes (e.g., 5%+) it can take 10+ years for intermediate-term bonds to cumulatively outperform the shorter-duration alternative. The bottom line - for those who fear severe interest rate movements, short-term bonds are better than intermediates, but even for relatively significant rate movements the intermediate bonds don't perform all that badly and recover relatively quickly; either way, both are still far superior to the prospective losses of an equity bear market, though.

It's Time To Rethink The Standard "Out Of Office" Email - From the Blueleaf blog, this article makes the good point that while a lot of advisors seem to focus extensively on providing great client service, their communication when they're not in the office - in the form of the "Out of Office" email - often leaves a lot wanting, from bland thoughtless messages to ones that have outright typos and grammatical errors. Not that we shouldn't step away from email from time to time, but that if we do, we should put more thought into the out-of-office message that's communicated. For instance, instead of just being a "robot" using the standard out-of-office subject line - "Out of Office AutoReply" or "Automatic reply" or something to that effect, write a subject line that represents you, a real human, and not something that patently communicates "thoughtless robotic autoresponder"! In addition, to the extent you have to share some necessary information, do it more creatively - for instance, instead of stating that you'll return on November 2nd, state that you'll respond on November 3rd, leaving yourself leeway to prioritize and triage responses when you get back, rather than being under pressure to respond to everyone immediately (i.e., manage expectations!). And in the meantime, try sharing something constructive with them; for instance, if you're unavailable, your out-of-office email can kindly remind them where to access their own financial information/details online. Or just outright have fun - for instance, your out-of-office email could ask them a question, like "Have you read an interesting book recently? My Kindle is getting dusty" and turn your message into a moment of engagement! The article wraps up with an example that combines all of these techniques... and I have to admit, reading that sample message, compared to the standard "AutoReply: Out of Office" makes a pretty compelling point!

Three Trends That Will Change the Game for Advisors - This article is an excerpt from the recently published "Get Wise To Your Advisor" book by Steve Lockshin, looking at how the advisory industry may soon change, especially given how rapidly technology has transformed other industries over the past decade, from the rise of Amazon to the emergence of gas/electric hybrid or fully electric cars, to how online brokerage has been impacting financial services already and how software-based investing may continue to do so in the coming years. Overall, Lockshin highlights three primary trends of note: 1) the separation of value services from commodity services, where financial advisors may not be eliminated, but many of the things they do today, such as basic passive strategic portfolio construction, will be commoditized to the point that it won't be profitable, forcing advisors to focus on higher-value services and solutions like personalized financial planning (and to separate the pricing of their commoditized and high-value services); 2) focus on unconflicted advice, as transparency makes it clearer who are capable unbiased fiduciaries and who are not; and 3) partner firms that empower consumers will emerge, which work with consumers to help them figure out which model/solutions/advisors/resources are needed, how much consumers should pay for it, and recommend (and audit) the referral partners accordingly. Ultimately, Lockshin predicts that the driver of these changes will simply be consumers themselves, as choices and flexibility provide consumers the information they need to put pressure on the advisory industry and allow advisors who change to succeed at the cost of those who do not.

Does Your Corporate Mission Statement Deliver, Or Is It Time For Change? - This article makes the important point that while many organizations claim to be "mission-driven" few have employees that can even really fully articulate the mission of the company, much less actually fulfill the organization's mission. And it's not for a lack of consumer interest; the article notes that a majority of consumers believe that companies/brands should play a role in improving our quality of life and well being, yet only about half of them believe companies actually work hard at doing so. And it's not just about doing more business with the public; another recent study found that employees who worked at firms with clear mission and follow-through were twice as likely to want to stay with their current employer and three times more likely to have high job satisfaction. So if consumers and employees want companies to be mission-driven, and most companies have a mission statement, and mission-driven companies have better financial results, where's the problem? While a failure of leadership to drive the mission in some cases may be an issue, the author suggests the problem is much more fundamental: most company mission statements are just plain awful! So how do you craft a strong mission statement? The article provides a lot of ideas, but the four key areas include: craft a mission that is genuinely unique and differentiated (no more bland statements filled with platitudes!); aspire to more than just financial results (shareholder profits/growth/value are a benefit but should not be a mission, as making money should be the result, not the goal); mission should force tough decisions (if your mission encourages employees to say "yes" to everything rather than make hard decisions, it's not really a mission); and the mission should be top-of-mind for all employees (to say the least, if your mission just sits empty on your website, and your employees cannot even state your mission, there's a lot of room for improvement!). Yet in the end, as former GE CEO Jack Welch states, "No company, small or large, can win over the long run without energized employees who believe in the mission and understand how to achieve it."

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, including his "FPPad Bits And Bytes" weekly advisor technology update!

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!