Weekend Reading for Financial Planners (Nov 21-22)

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.

Younger Investors Want To Increase Advisor Use While Also Automating Investing (Michael Fischer, ThinkAdvisor) - According to a recent new study from Cerulli Associates, 22% of retail consumers reported an interest in "increasing their reliance" on a financial advisor in the midst of the pandemic during the second quarter. However, a significant age split emerged within the results, with 40% of those in their 40s reporting an increased interest in working with an advisor, compared to just 9% of those in their 70s. At the same time, though, investors in their 40s also showed a heightened interest in using online automated investment solutions (e.g., "robo-advisors") and various budgeting apps, while older investors again showed less interest in those tools. The key point being that younger investors appear to increasingly want to automate aspects of their financial life that can be automated, but also see an increasing role for human financial advisors to play by going beyond what the technology can already provide and automate... while also highlighting a gap in the current marketplace as such investors are eager for advice but often struggle to work with traditional financial advisors (because they're too young to meet common asset management minimums), and implying a need for new/alternative business models to meet the unserved consumer need. Also notable amongst the results were an indication that younger consumers were interested in more flexible credit cards, and particularly those with cash rewards, suggesting that offering better cash management and credit solutions for younger clients may be a further way for advisors to add value to a younger clientele.

Foundation For Financial Planning Calls On CFP Board To Recommend Pro Bono Service For Advisors (Joyce Blay, Financial Advisor) - The Foundation for Financial Planning, which works with financial planners to help them engage in pro bono financial planning, issued a call this week to the CFP Board that it should "recommend" that all CFP certificants perform at least 25 hours of pro bono service annually. As while the need for pro bono financial planning has long been a challenge - in a world where Federal Reserve surveys show that nearly 40% of households couldn't afford a $400 emergency expense - the COVID-19 pandemic has further exacerbated financial stresses for many households and amplified the need for financial advice and the desire to work with a financial advisor... that many still cannot afford. Notably, an ongoing pro bono service expectation for financial planners would be similar to other recognized professions like law and medicine that have 'strong expectations' (albeit not outright requirements) to do so, and a prior CFP Board survey had already found that the majority of CFP certificants engage in pro bono work, and those who do average 31 hours per year. Still, though, the CFP Board has yet to put forth a formal expectation of pro bono service... which the Foundation for Financial Planning hopes to see changed in the future.

40% of Advisors Say Switching Firms Is Easier Than Before The Pandemic (Michael Fischer, ThinkAdvisor) - The pandemic has forced a substantive shift for financial advisors to not only work virtually but also adopt more technology to facilitate virtual interactions with clients, from implementing e-signature workflows for account opening and transfer paperwork, to being able to meet with clients and go over essential information via video call and screenshare. On the one hand, this 'forced' adoption of new technology appears to be leading to new efficiencies. On the other hand, it's also making it easier for advisors to consider switching firms in a world where the 'dreaded' re-papering process may be expedited by increasingly digital solutions. Accordingly, a recent Fidelity study with more than 500 advisors who were considering a move in March and are still considering a move in September showed that 40% of those advisors viewed the move as more feasible and easier due to the technology shifts that they had to make over the past 6 months in response to the pandemic. Notably, though, the Fidelity study also shows that advisors are not likely to make a final decision on a move based primarily on better technology alone, but 2-in-3 advisors have said that firms that were more digitally innovative during the pandemic have become a more attractive destination (and that when there is less reliance in an in-person office over digital tools, the pool of firms to consider working with gets wider as well).

How COVID-19 Will Change Aging And Retirement (Anne Tergesen, Wall Street Journal) - While much discussion has been had about how the coronavirus pandemic is changing the nature of work and the use of office space, it is also anticipated to change a number of dynamics around aging and retirement in the years to come, which may have major ramifications on financial planning for retiring clients. For instance, with 40% of COVID-related deaths occurring in long-term care facilities, there is a growing likelihood that more retirees will choose to age at home instead (while rising government regulatory standards on nursing homes in the wake of high death rates could also put many nursing homes out of business, reducing the supply), though there is concern about the supply of home health aides as well (who average just $17,000/year of annual income and work without health care, hazard pay, or child care). Other notable shifts anticipated to come from the pandemic include: the rise of telemedicine and wearing devices for health monitoring may make it safer to age at home for longer; we will be more focused on what we do with our time, especially in our later years, as the pandemic has highlighted the stress of loneliness and social isolation, and may increase how often we seek to move and live nearer to family members to stay connected; cuts in interest rates in response to the economic impact of the pandemic are anticipated to reduce returns in the decade to come, increasing sequence-of-return risk and the required nest egg that retirees will need to retire (which in turn may also force us to work later); and our views on aging itself may begin to change, particularly if/when/as inter-generational relationships expand in the face of more connectedness between the generations after the isolation of social distancing ends.

Why Annuity Demand Fell During The COVID Crash (David Blanchett, Michael Finke, & Timi Jorgensen, Advisor Perspectives) - When market volatility rises, investors typically "fly" to safety, leading to a spike in government bonds, and often a concomitant rise in demand for other "safe" and guaranteed investments like annuities. Yet unlike the volatility of the financial crisis, when it came to the March market crash in response to the pandemic, there was a drop in annuity purchases... raising the question of why investors were not seeking the perceived safety of annuity guarantees now as they have in the past. In part, the challenge simply seems to be a pervasive lack of understanding about how annuities with guarantees work, with only 1.5% of investors correctly answering three basic questions about 'annuity literacy' (that annuities with certain guarantees may keep making payments even if the balance falls to zero, that single premium immediate annuities get more expensive for older buyers, and what a 'typical' payout rate is for a lifetime annuity)... even though 68% of those investors then stated that having a guaranteed monthly income was a 6 or 7 on a 1-7 scale of importance (with particular interest amongst women, those without a college education, minorities, and those with less wealth). Still, though, when then prompted to own a financial product that guarantees such monthly income, only 16% of investors were extremely interested... in essence showing that annuity products themselves are less valued than the solution they are intended to provide for... and the more educated the investor, the less likely they were in an annuity product. Suggesting that now, even consumers who might otherwise be interested in the value annuities can provide are instead driven away by the stigma of how the industry has previously sold them.

COVID-19's Impact On The Advisor-Client Relationship (Chris Sonzogni, ThinkAdvisor) - For most financial advisors, the majority of their clients live within driving distance of their offices, and their entire process of both serving clients and getting new ones reflects this reality, with locally-based networking events, referral networks, seminar marketing, and Centers Of Influence dominating the charts of advisor marketing strategies. And this isn't entirely surprising, given both the effectiveness of such strategies, and that, as recently as 2015, only 30% of investors stated they were open to working with an advisor virtually. However, with the pandemic quickly normalizing virtual work - both with our offices, and with professionals we may hire - a rapid shift appears to be underway, with internet-based searches for financial advisors up 17% from March through August compared to the average in 2019, as the internet shifts from just a place for doing due diligence (e.g., checking out advisor online who was already referred offline) to a discovery vehicle (searching for an advisor online in the first place). At the same time, a demographic shift is underway as well, as wealth increasingly shifts from Baby Boomers and their parents' generation to Gen X and Gen Y, who themselves are more likely to leverage the internet for discovery (of everything from entertainment to shopping to professional services), which suggests that even when in-person marketing returns, it may not be as popular or effective as it once was. For instance, when it comes to medicine, "telehealth" services may surpass one billion remote visits this year, and 75% of all Americans state they're now interested in remote telehealth services (suggesting that it will remain long after the pandemic that stoked its initial demand is gone), and similarly a recent analysis from SmartAsset found a 27% increase in consumers' willingness to work with advisors remotely now than prior to the pandemic. Which is significant not only for the future of prospecting for business - as the geography of the firm disconnects from locally available clients - but also raises questions of where advisors themselves will build their practices in the future, when it's possible to be a "location-independent" advisor and no longer be constrained to local geography in finding new clients to work with?

Do Clients Need To See You More Often? (Julie Littlechild, Absolute Engagement) - It's long been observed that the #1 predictor of client retention, especially through volatile markets, is how often the advisor communicates with their clients. Yet with the pandemic forcing a shift to virtual meetings, the question has arisen whether virtual meetings are less effective for client retention due to the limitations of the virtual meeting, more effective because it's easier to connect more frequently, or unnecessary because there are so many other means of communicating in a digital/virtual world (e.g., emails, recorded videos, webinars, etc.). Littlechild's research suggests that the end result of the pandemic is likely to be an increased frequency of client review meetings - albeit potentially in shorter 'virtual' bites - and that the younger the client, the more likely they are to want to meet with their advisor. In fact, Littlechild found that amongst those who are 20+ years from retirement, almost 80% of them expect to meet at least 3-4 times per year (and almost 1/3rd of those expect 5+ meetings per year!), whereas 50% of retirees are comfortable with only meeting 1-2 times per year (and a mere 5% want 5+ meetings). Which means advisors who work predominantly with retirees now may not necessarily need to change much, but those who are pursuing a younger pre-retiree clientele need to be prepared for a more frequent meeting cadence... and the potential that when those younger clients eventually become retirees, they may continue to demand a higher-frequency touch from their advisors as well.

Communicating With Clients At Scale (Matt Reiner, Advisor Perspectives) - In the past, financial advisors were not just the 'experts', but the keepers of the money knowledge, where clients had to come to us to learn about various financial solutions (and then receive our help to implement them). But today, the rise of the internet and social media has put a nearly continuous flow of information at clients' fingertips... a boon for our ability to learn and gather information, and a real challenge for us as financial advisors when clients come with an ever-growing number of questions from "something they read online", for which the advisor is now expected to act not as a disseminator of information, but as a filter for what really matters (or not!?). Yet the good news is that a growing volume of technology tools to help monitor clients' financial plans and portfolios makes it easier to anticipate at least some of these conversations. For instance, advisors can track concentrated positions for clients and reach out whenever there is big news or a big move in that stock. Similarly, advisors can track any client's portfolio that drops more than 5% in two weeks, and send them a message of how the firm is viewing market volatility (and what response, if any, the firm plans to make). In turn, grouping clients together in common situations also makes it feasible to create group responses, whether it's a common email that a certain segment of clients need, or a group Zoom webinar for a particular group of clients (e.g., near retirees whose portfolios fell in the pandemic and may be wondering what that means for their long-term retirement outlook). The key point, though, is simply to recognize that responding to client concerns doesn't just have to be reactive to when clients reach out with questions or limited to the regularly scheduled review meeting; instead, the opportunity is to leverage technology to tag and identify clients with common needs and concerns, and then communicate with that group of clients at scale - whether by targeted 'mass' email or group webinar - to address their concerns efficiently.

How Can Advisors Retain More Clients? (Kristine McManus, Commonwealth) - Ideally, every client always receives superior service and has wonderful financial results in their portfolio, making it rather 'easy' to retain them. In practice, though, it's hard to be perfect all the time, setbacks can and do happen, and even good portfolio strategies don't always work. But in practice, it turns out that while poor investment performance - or more generally, making claims the advisor couldn't deliver on - does have an impact on client retention, the top reasons that clients leave are primarily about communication, from the advisor failing to return phone calls promptly, to simply failing to communicate often and effectively in the first place. Of course, the reality is that in a world where "happiness = reality - expectations", successful communication is not just about the communication itself, but also about setting realistic expectations for communication with clients (and then meeting or exceeding those expectations). Accordingly, McManus suggests that the first key for communication is simply to set "communication standards" in the first place - for instance, meeting with your team and setting what should be the expectation for responses (e.g., Same-day response? Next-day response? 24-hour response? Faster? Slower?). Once standards are set, consider how to communicate them to clients, whether informing them in meetings, or outlining expectations on the firm's website, or in an "Engagement Standards" document that all clients receive? And remember that communication doesn't have to just be reactive. If markets are volatile and clients are calling, consider posting information to the firm's website or sending out market commentary as an email or video to allay their concerns proactively (and then respond to those who still have questions). Though it's still important to remember that the #1 cited reason that clients stay with their advisors is still promptness in returning phone calls whenever it is that they do call or reach out!

Time Confetti And The Broken Promise Of Leisure (Ashley Whillans, Behavioral Scientist) - Studies of how human beings spend their time show that empirically, we really do have more time for leisure than we did 50 years ago... even if it doesn't feel that way at all. The culprit of this paradox appears to be technology, which both saves us time with improved efficiencies (thus more leisure time!), but also takes it away with the always-on nature of work that is never more than a smartphone away. The end result is that while we have more leisure time, it is more fragmented by the social media notifications, email notifications, Slack notifications, text messages, reminder alarms, etc., resulting in a phenomenon that Whillans calls "time confetti", the various bits of seconds and minutes that are lost to such distracting tasks (and the time-switching associated with them) that can collectively take a substantive toll on our ability to relax and actually enjoy our leisure time. The end result is that even an hour of leisure time isn't actually an hour of leisure time; instead, it's perhaps half a dozen blocks of 6-10 minutes each before some distracting notification or another may occur, leading to an unrelenting level of interruption that makes leisure time anything but. And the situation is only amplified by trying to ignore such distractions, as once notified, trying to ignore the work email just adds its own layers of guilt or fear (even as responding to them and losing our leisure time with friends and family also invokes guilt and unhappiness). So what's the alternative? Be careful what notifications are introduced into your life and leisure time in the first place, as the key is not to respond to the time confetti or to ignore it, but to avoid having it ever be present to begin with.

The False Promise Of Morning Routines (Marina Koren, The Atlantic) - While some people are "morning people", with a well-structured morning routine that brings stability and a sense of zen, from meditating to going for a run, making tea to doing yoga, for others the peacefulness of a morning routine still seems a long way off. In part that's because the idea of waking up 'extra' early to engage in such morning rituals itself can just add to the stress of doing them - simply piling on 'yet another' obligation to fit into the day. And also because of our modern tendency for "perfectionist presentation" - where some people present 'flawless' versions of their lives, especially on social media - which may imply the morning routine is more perfect than it actually is, even for its most visible adherents. Not to mention that some people simply aren't morning people, and their chronobiology actually predisposes them to be more productive in the afternoons or evenings (so-called "night owls", rather than morning larks). Accordingly, perhaps the better approach is not in trying to force one's self into an 'ideal' morning routine in the first place... but instead simply to look for the things that are unimportant and make those routine if only to simplify our lives so we don't even have to think about them (e.g., the routine yogurt and granola for breakfast?), freeing up our minds for the busy thoughts that do otherwise occupy our still-non-routine mornings?

How To Design The Perfect Day (Khe Hy, Rad Reads) - There is a famous saying that "Happiness = Reality - Expectations", which means not only can we increase our happiness by improving our reality but also by lowering our expectations... or at least, making more realistic expectations in the first place. For instance, in the virtual world, it's hard to step away from work and the feeling of being "always-on", even though the reality is that knowledge workers typically only have the capacity to do about 2-4 hours of high-quality work per day. Which means it's less about trying to maximize the productivity of an 8-(or 10-)hour workday, but instead thinking more carefully about how to spend those 2-4 peak hours of creative productivity in the first place. As in the end, one can argue that being overly "busy" is really just having an absence of priorities - true priorities, that get priority above all else, to the point that whatever is left that can't be done simply isn't done. Such that real productivity is about focusing on whatever is most impactful to do with those few hours of real focus time. In fact, Tim Ferriss of The 4-Hour Work Week is famous for asking "If you really, truly, were limited to only being able to work 2 hours per week in your business, what would you do?" Which usually leads to the recognition that only a small subset of clients drive most of the business profits, and only a small subset of our time has any real long-term impact on the business. Which in turn suggests that the real key to better focus and productivity is about structuring how the time of your week will be focused in the first place - not just with the tasks to be done, but also the time blocks (or 'timeboxing') for focus on the important-but-not-urgent tasks that also need to be done. Or alternatively, consider building your schedule not just around your time, but around your energy; whenever you have the most energy during the day (whether it's the morning for a morning person or the afternoon for others) and schedule your most important work to occur when you have the most energy to get it done, thereby ensuring that you do your highest and best work whenever you're most mentally and energetically prepared to do it well. Which is bound to feel like a pretty good day when you spend your best time doing your best work on what truly mattered most!?

I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!

In the meantime, if you're interested in more news and information regarding advisor technology, I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors, and Craig Iskowitz's "Wealth Management Today" blog as well.