Weekend Reading for Financial Planners (Nov 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 November 19th/20th:

Dallas Judge Indicates Possibility Of Vacating DoL Fiduciary Rule (Erin Sweeney, Investment News) - Just two weeks ago, the Department of Labor won its first lawsuit victory, repelling complaints from the National Association of Fixed Annuities (NAFA) that the fiduciary rule was implemented in an "arbitrary and capricious" manner. This week, a Dallas Federal court heard the complaints of the next DoL fiduciary lawsuit, filed jointly by the U.S. Chamber of Commerce, SIFMA, and FSI. But unlike the NAFA lawsuit, in this case the judge during the hearing appeared to be more sympathetic to the plaintiffs, and spent a lot of time focusing on how this version of the DoL lawsuit might be distinguished by the prior NAFA lawsuit that was already ruled in favor of the DoL. In particular, the judge focused on questions of how workable the DoL fiduciary rule really would be for independent insurance agents (who may lack sufficient information on competing insurance products to conduct their fiduciary duty), whether the DoL's cost-benefit analyses focused on mutual funds were sufficient to implement rules regarding annuity products as well, whether the DoL's BIC requirement is too heavy-handed in forcing firms to expose themselves to class action lawsuits (and whether the DoL has the right to unilaterally force such an outcome), and even raises questions about whether the DoL's rules are too restrictive regarding free speech (around how companies and products are advertised and represented). Notably, the judge herself did emphasize that the questions she was asking are just questions, and shouldn't be read in to, but nonetheless the judge did muse aloud as to whether adequate time remained before the April compliance date for the case to reach the Supreme Court, which would matter if her court ruled differently than the NAFA decision, creating a Supreme Court appeal possibility. Alternatively, it's notable that if the judge rules against the DoL, a Republican-led Department of Labor could simply choose not to appeal once President Trump takes office (which would be easier than Trump trying to defang the DoL rule). A decision from the judge is expected in December.

The Other DoL Retirement Regulation Trump And The GOP May Scuttle (Greg Iacuraci, Investment News) - While most recent focus has been on the Department of Labor's fiduciary rule, another recent DoL rule is also threatened: the one finalized in August that gave states a clear path to avoid ERISA liability in an effort to encourage them to develop automatic-enrollment payroll-deduction IRAs. There have already been 5 states in the past two years to pass such rules (Illinois, Oregon, Connecticut, Maryland, and California), and dozens more have proposals under consideration. And although technically states could just move forward anyway, and contend with ERISA exposure, several proposals from state legislators (including the one already passed in California) explicitly limit the state from moving forward if ERISA fiduciary duty still looms. On the other hand, while Republicans have generally opposed the rule, it's notable that President-Elect Trump has not articulated an official position on the matter, and might even prove supportive, as the proposal does encourage states to innovate and limits the reach of Federal (ERISA) regulation. On the other hand, industry lobbying groups, including both FSI (representing independent broker-dealers) and ICI (representing mutual fund firms) have objected to the rule, raising concerns that a state-by-state approach will just create a confusing patchwork of plans, and that open multiple-employer plans (also known as "open MEPs") would be a better alternative. And it's important to remember that, just like the DoL fiduciary rule, President Trump can't just rescind the regulation next year anyway, and instead would have to either start a new rulemaking process to change it, or get Congress to pass a new law that alters the rule.

Vanare Renamed To AdvisorEngine, Raises $20M In Series A Financing From WisdomTree ETFs (Joel Bruckenstein, T3 Technology Hub) - Vanare, one of the early robo-advisor-for-advisors platforms, announced today a whopping $20M Series A round from WisdomTree ETFs in exchange for a 36% equity stake, effectively valuing the company at $55 million. As a part of the deal, Vanare is changing its name to AdvisorEngine, will be introduced to WisdomTree's distribution network, and in return WisdomTree's asset allocation models will be made available through AdvisorEngine's open architecture platform. Notably, that suggests WisdomTree has partnered with AdvisorEngine for the same reason that Blackrock acquired FutureAdvisor – as a means to distribute their ETFs within the robo's managed account capabilities (though notably, AdvisorEngine is more open architecture than FutureAdvisor was). In turn, this also suggests that the valuation for AdvisorEngine may be less about its current revenues, and more about the ETF distribution potential that WisdomTree sees, especially given the significant push that many firms are making for more "robo-style" technology to help manage DoL fiduciary compliance obligations that kick in next year.

How Variable Withdrawals Improve Retirement Outcomes (Joe Tomlinson, Advisor Perspectives) - The early retirement research, as embodied by approaches like the safe withdrawal rate, and the "100 minus your age" asset allocation strategy, were developed as somewhat arbitrary and fixed approaches that were determined to work reasonably well across a wide range of scenarios. The caveat in practice, though, is that while those approaches may work on average (or in the case of safe withdrawal rates, in just the worst case scenario), there is such a wide range of possible outcomes, that in practice more dynamic or "variable" withdrawal rules may be more appropriate. This is important not only because more variable withdrawal strategies leave room for making mid-course adjustments, but also because knowing in advance that there will be mid-course adjustments can alter the optimal asset allocation as well. Tomlinson illustrates this approach with a form of ratcheting safe withdrawal rate strategy, where the safe withdrawal rate is recalculated every year based on the remaining time horizon and the latest account balance. The approach both increases consumption on average (given that markets generally move up more than down), reduces bequests (which for the retiree who wants to spend in retirement, is good news), and also reduces the probability of failure (by being more dynamic). With this more dynamic strategy, the reality is that now more aggressive portfolios don't necessarily fail more (as declining portfolios simply lead to declining spending once dynamic adjustments occur), but they do lead to more volatile spending; as a result, Tomlinson finds that more aggressive portfolios (than 50% in equities) actually produce little payoff, as they increase upside spending potential by almost as much as they cause dangerous shortfall risk (though the outcome is aided a bit by using a partial annuitization strategy).

As Medicare Part B Premiums Rise, Survival Strategies For 2017 (Bob Powell, USA Today) - For most ongoing Medicare Part B beneficiaries, their Part B premium will rise a modest 3.9%, from the $104.90 it's been for the past four years, up to just $109/month, thanks to the so-called "Hold Harmless" provision that prevents Medicare Part B premiums from increasing by more than the dollar amount of the Social Security cost-of-living adjustment. However, those who just signed up last year – and thus are only eligible for Hold Harmless for the first time this year – will see their premiums rise to $127/month. Which is still less than the roughly 30% of Medicare Part B beneficiaries not eligible for Hold Harmless at all, including those are just signing up for Medicare the first time this year, and those subject to the high-income Medicare premium surcharges, who will see their premiums jump to $134/month this year (and of course, any Medicare Part B surcharges will stack on top of that $134/month premium). So what should retiree clients actually do about this? If they're part of the 70% eligible for Hold Harmless, nothing needs to be done; the lower premium adjustment is automatic, though with open enrollment through December 7th, retirees should still evaluate if their current Part D plan makes sense, and whether it might be beneficial to switch from the standard Part B coverage over to a Medicare Advantage Plan (also known as Part C) instead. For the rest, though, look carefully at the timing of when to start Medicare; in most cases, it still pays to start as soon as eligible at age 65 (to avoid the late enrollment penalties that can otherwise apply), but those who are still eligible for coverage from an employer because they're still working will likely want to stay on the employer's plan (which counts as credible coverage that avoids the Medicare late enrollment penalty anyway). For those subject to the Medicare premium surcharges, unfortunately there's not much to be done now – as the 2017 premiums will be based on the 2015 tax return that's long since been locked in – but bear in mind that end-of-year tax planning this year can at least mitigate the IRMAA premium surcharges in 2018.

New Social Security Rules And Divorce (Mary Beth Franklin, Investment News) - Social Secuirty planning for couples was severely limited with last year's Bipartisan Budget Act of 2015, which cracked down on the so-called "file and suspend" and "restricted application" rules, banning the former entirely and the latter with a grandfathering provision for those born in 1953 or earlier. However, ex-spouses from a divorce still have a number of planning opportunities to coordinate spousal benefits, as long as the marriage lasted for at least 10 years, and the divorcee has not remarried. For instance, the ex-spouse can file for a spousal benefit at age 62 (though it's reduced unless he/she waits until full retirement age), as long as the other spouse has also turned at least age 62 (and regardless of whether he/she has filed). In addition, if the ex-spouse was born in 1953 or earlier (or on January 1st of 1954), it's possible to file a restricted application for the (ex-)spousal benefit only, claiming that benefit while still delaying his/her own benefits to age 70 (earning the maximal delayed retirement credit). And in a divorce situation, each spouse can actually file a restricted application for the other spouse's benefits, which only works for divorcees (as with a married couple, it's also possible to do a restricted application if the other spouse has actually filed, which means both can't restricted apply at the same time). And it's still possible for a divorcee to independently claim an ex-spouse's survivor benefit while delaying his/her own benefit, regardless of the 1953-or-earlier grandfathering rule.

How To Make Yourself Irresistible To Great Prospective Team Members (Julie Littlechild, Absolute Engagement) - Growing from a practice into a business that goes beyond just the founder/advisor requires (now or eventually) hiring great people. Except for most businesses, it's difficult to find those great people, as who knows what kind of response you'll get from a career/hiring site or LinkedIn job posting at the moment you need them and conduct the search. So what's the alternative? Create a Career Opportunities page on your website, now, for prospective team members – even if you aren't currently hiring. The purpose of the page is to tell the story of the business and the team, and convey its culture and values... so that people who might be a good fit will be attracted to the "Why" of the business and what it does. And the key aspect: provide a way for people who are interested to sign up and be notified of your future job openings, so that when you do have a position to hire for (which you can add to the bottom of the Career Opportunities page), you'll already have a list of people who are interested in your company and culture! Notably, if you do a good job with this Career Opportunities page, you're going to get a lot of applicants for your next job position, which means you need a way to screen them as well – so be ready to not only review resumes and references, but use personality assessments like StrengthsFinder and Kolbe A, and a work sample as well. For a great example of this approach done right, check out the "Careers" page on Michael Hyatt's website.

Six Things Your Team Wants You To Do (Beverly Flaxington, Advisor Perspectives) - Hiring new team members is a challenge for any business, but especially for smaller advisory firms who may not have a lot of familiarity and experience in how to go about it. Flaxington suggests several key points that are crucial to make the firm appealing from a hiring perspective, including: 1) be really clear on roles and expectations (as it may be a "do whatever is necessary" world when you're small, but the larger the firm gets, the more important it is to clearly define increasingly specific roles and responsibilities); 2) Communicate the roles and expectations (as with a growing team, it's necessary to develop an Org chart that really shows the expected lines of communication and collaboration); 3) Create communication protocols about how your team will communicate, both with you and each other (from doing a monthly team lunch, to having weekly team emails or regular one-on-one sit-downs with each team member); 4) Create team-building opportunities (formal or informal, it's crucial for your teammates to really get comfortable collaborating); 5) Provide a forum to discuss obstacles (whether it's as a group, or privately with you, if team members don't feel they have a place to voice their frustrations and concerns, they'll likely just leave); and 6) Help them learn about the different work and communication styles of other team members (crucial for the team to understand how to better delegate to and work with each other).

Should You Create A Dedicated Ops Department (Chad Onufrechuk, Financial Planning) - As an advisory firm grows, eventually the advisor themselves can no longer do all the operations duties, and it's time to begin hiring and creating a dedicated operations person (or as the firm continues to grow, an entire department). But for advisors who have never had dedicated operations support in the past, you may be wondering what, exactly, an operations team does all day and week in an advisory firm? First and foremost, dedicated ops team members can review all transactions in client accounts, and ensure they are all occurring as intended (and that clients aren't engaging in questionable trades, and/or that their accounts haven't been hacked). Dedicated ops team members can also more proactively track everything from planned purchase and sale transactions, wire transfers, or check deposits. On a weekly basis, the ops team can verify that clients taking withdrawals actually have sufficient cash available for their regular distributions (or queue up the trades as necessary), and on a monthly basis client accounts can be reviewed to ensure they're still on track with overall objectives and the client's investment policy statement, including whether the appropriate share classes are being used, whether tax loss harvesting should be done, etc. On a quarterly basis, it's time to review all client holdings and cash levels, invest any idle cash or rebalance if necessary, and prepare quarterly statements for clients. Of course, a dedicated ops team is also available throughout the day and week to respond to client requests, whether phoned or emailed in directly from the client, or at the direction of the advisor; in fact, ideally the well-oiled operations team makes it even easier for the advisor to spend more time with clients!

Why Each One Should Eat His Own Turtles (Nassim Taleb, Skin In The Game) - Nassim Taleb, of "Fooled By Randomness" and "Black Swan" fame, is writing a new book called "Skin In The Game", and is releasing parts of it as he goes. This is a section of the book, delving into the issues of uncertainty and conflicts of interest. It starts out with the telling of an ancient adage, "You who caught the turtles better eat them", a Roman story of fisherman who caught turtles they didn't want to eat, invited the god Mercury (who happened to be passing by) to eat them instead, only to be criticized by the god when he realized they were only offering him the food they didn't want anyway (and in turn he made them eat their own turtles after all). The idea of whether people's interests are aligned – whether they have "skin in the game" – is particularly relevant in the world of (financial) advice, particularly because in many scenarios what's sold as "good for the client" may really be good for the advisor, and that's especially problematic since if it turns out badly it's usually bad for the client but not the "advisor". More generally, this really just goes back to the phenomenon that often something that is sold as "good for you" isn't really that good, or is better for the person doing the selling (who doesn't have to eat their own turtles); or as Taleb states more simply, "giving advice as a sales pitch is fundamentally unethical", especially when the seller knows more than the buyer (and doesn't fully disclose it). So how do you resolve such asymmetries in information and business? Simply put, for the seller/advisor to have "skin in the game", creating consequences for bad outcomes that better align the seller and the buyer. Of course, actually investing together is one way of doing so, but Taleb notes that tort laws (and in our context, the potential to be sued under the DoL fiduciary rule) is actually another important way to create some skin in the game for advisors, because it at least creates the potential that inappropriately bad outcomes for the client are reflected with a bad outcome for the advisor as well. Or viewed another way, at least if the buyer has some uncertainty about the outcome, the seller has uncertainty as well, which at the most basic level is a form of shared skin in the game.

Financial Literacy Is Still Abysmal Everywhere (Adam Creighton, Wall Street Journal) - A growing volume of behavioral finance research observes that we engage in all sorts of problematic decision-making, but recent research also finds that beyond behavioral problems, most people are also just sheerly illiterate on financial issues. An OECD international survey on financial literacy found that barely 40% of over 50,000 adults across 30 countries knew whether a $100 savings account compounding at 2% interest would grow to more or less than $110 over 5 years. Similarly, only 44% shopped around when selecting a financial product, barely 50% bothered setting financial goals to achieve, and only 60% had any sort of budget. The average financial literacy score was just 13.2 out of a maximum score of 21. On the plus side, the study did find that most countries were at least realistic about their self-assessed financial knowledge gap; nonetheless, the gap itself persists. The OECD study suggests a need to put more emphasis on financial education in schools, and at an earlier age, and raises serious concerns about the ongoing shift (both in the US and global) towards more defined contribution and privatized retirement savings approaches, as well as whether alternative approaches to developing financial literacy are needed.

Sustainable Sources Of Competitive Advantage (Morgan Housel, Collaborative Fund) - Many people have invented new things over the years that create business value; the problem is that an idea, once successful, tends to spawn competitors who copy it, compete with it, and eventually commoditize it. Which means the real key to business isn't just finding an advantage, but creating a sustainable advantage that others can't (or aren't willing to) copy. And notably, intelligence and expertise alone aren't sustainable advantages; there are too many other smart people who can learn what you know and compete with you in the future. So what is a sustainable competitive advantage? Housel suggests five: 1) The ability to learn faster than your competition (always taking in new information, and being able to realize when you're wrong and need to go in a new direction, without being too timid to grow at all in the meantime); 2) Being able to empathize with your customers more than the competition, which often means being a patron of your own business or industry, from McDonalds execs eating at McDonalds, to the CEO of Delta flying Delta [as a passenger who can be bumped or have bags lost], or an investment manager who actually invests in their own strategies... or otherwise, you'll eventually lose the ability to understand how your customers/clients experience your product/service; 3) Communicating more effectively than your competition, as the reality is there people don't always buy the "best" product, they buy the one that is communicated most persuasively (though ironically, that's a challenge due to the "curse of knowledge", that the more we know the harder it is to communicate with those who know less); 4) The willingness to fail more than your competition (as people who are unwilling to take the risk of failure rarely innovate breakthroughs, either); and 5) being able to wait longer than anyone else (as not only is there a potential for the rewards of delayed gratification, but in today's business world so many others make short-term decisions that the ability to truly focus on the long term often goes a long way towards winning in the end). While the article was written about business in general, arguably it's highly relevant for financial advisors in today's world, where the pace of change and the convergence of all financial advisors on giving comprehensive financial advice is creating a crisis of differentiation, and really does mean advisors need to learn faster, empathize better, communicate more effectively, be more willing to try (and fail) on the path to the future, and maintain a long-term view in a short-term oriented business environment.

I hope you enjoy the reading! Please let me know what you think in the comments below, and if there are any articles you think I missed that 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. 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!