Executive Summary
Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with coverage of the newly shortened computer-based CFP exam that was administered for the first time this week, and also an announcement by the CFP Board in its recent business webinar that the public awareness campaign, and the additional $145/year fee that funds it, is expected to continue "indefinitely" (as long as the campaign results continue to be positive). In addition, the FPA also released this week a new study about advisors and growth, finding that advisory firms are struggling to achieved their growth goals, with only 9% of all firms reporting that their business development efforts are "very effective" in achieving their goals.
From there, we have a number of technical articles this week, including: a discussion of the current status on Social Security benefits for same-sex married couples; how early retirees can maximize premium assistance tax credits for getting health insurance during the "gap" years from retirement until Medicare eligibility; some key details to know about how non-transparent "active" ETFs will work; a discussion of what kinds of assumptions are (and are not) reasonable when clients are pitched on equity-indexed universal life strategies; a new court case in Pennsylvania on "filial support" that raises the question of whether long-term care facilities may become more aggressive in pursuing adult children for the unpaid expenses of their indigent elderly parents; and a summary of the current state of dependent care accounts, and the opportunities they provide, even though they are not often utilized.
We wrap up with three interesting articles: the first provides a good overview of some of the latest research on whether money really can buy happiness or not (hint: it's not just about having wealth, but about how it is spent); the second explores some new research on the behavioral biases that impact not only investors, but also advisors and even fund managers; and the last is a (not entirely positive) review of the recent Tony Robbins book that finds the book may not have as clear of a fiduciary message in practice as it purports in theory.
And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the launch of a new financial planning software solution called Advizr, a new "robo-planning" solution iQuantifi, and more! Enjoy the reading!
Weekend reading for November 22nd/23rd:
CFP Board Exam Moves Online (Mark Schoeff, Investment News) - This week marks the first administration of the computer-based version of the CFP exam, which has also been shortened from 10 hours over 2 days to only 6 hours on a single day as a part of the transition. Despite the shortening of the duration, though, the CFP Board insists that the exam is not intended to be easier or watered down, and will still draw from the same bank of test questions that were previously used, with a similar difficulty leading to a similar pass rate. The transition to a computer-based exam has allowed the CFP Board to expand the availability of exam sites - from 50 paper-based sites to 250 locations through a partnership with Prometric test centers - and with the computer-based exam, a preliminary pass/fail result will be available immediately, with official results released two weeks later (previously the paper exam took five weeks to announce official results). Notwithstanding the CFP Board's claims that the exam will not be easier, though, it does appear that test takers found it appealing to pursue the computer-based version; after only 1,386 people sat for the last paper exam in the summer, a whopping 2,200 were registered to sit for the new test this week, making it the largest CFP exam group in over 3 years.
CFP Board: Higher Fees to Continue (Charles Paikert, Financial Planning) - The CFP Board raised its annual recertification fee by $145 to $325 three years ago, with the additional fee dedicated exclusively to its public awareness campaign. The original campaign was targeted to run for 2 years, with an option to renew it if results were favorable. Thus far, the public awareness results have actually been so successful, that the CFP Board stated in its recent Business Update webinar that the additional $145 fee will be included "indefinitely" (or at least, until the measured public awareness results of the campaign stop improving). During the webinar, the CFP Board also noted that while the number of CFP certificants is up 30% since 2007, now at 70,540, that overall only 20% of practicing "financial advisors" are CFP certificants, and there are more CFP professionals over age 70 than under age 30, suggesting there's still plenty of room for further growth and improvement.
Financial Advisors Miss The Mark On Business Growth Goals (Emily Zulz, ThinkAdvisor) - The Financial Planning Association's "Research and Practice Institute" has released a new study on "2014 Drivers of Business Growth", and finds that growth is a major challenge in today's environment, with only 25% of firms reporting that they exceeded their business growth goals over the past year, and only 9% reporting that their new business development process is "very effective". Amongst those firms that are effectively growing, the study found that successful firms were more likely to have a clearly defined value proposition, were more likely to have a formal written business plan, and were engaging in marketing tactics including center-of-influence referrals, client events, and marketing through thought leadership (which appears to be on the rise as an emerging tactic).
A Crash Course Of Social Security Benefits For Gay Couples (Mary Beth Franklin, Investment News) - The number of states that allow for same-sex marriage is up to 33, and since the Supreme Court struck down a section of the Defense of Marriage Act last year, the Federal government is required to recognize same-sex marriages that are legal at the state level. These changes not only allowed same-sex married couples to be treated as a married couple for income tax purposes, but if they reside in a state that recognizes their marriage, the couples can be eligible for Social Security marital benefits as well, including spousal and survivor benefits. If the couple has minor children under the age of 18 when one spouse claims benefits, the children may be eligible for Social Security dependent benefits as well. The opportunity for same-sex married couples to claim spousal and survivor benefits also means they're eligible for Restricted Application and File-And-Suspend claiming strategies as well. Notably, while the current rules require the same-sex couple to live in a state that recognizes the marriage, legislation has been introduced in Congress that would aware benefits to couples regardless of where they currently live (as long as their marriage was legal where it was performed); to protect themselves, couples living in a state that does not recognize their marriage but who wanted to apply for couples' benefits should do so anyway, which will help them potentially claim those benefits back if the rules are changed later.
How Early Retirees Can Get Cheap Health Insurance Through Obamacare (Carolyn McClanahan, Forbes) - With open enrollment for health insurance under the Affordable Care Act now underway, Americans have an opportunity to apply for health insurance online and potentially receive a premium assistance tax credit to help with the cost of coverage. And because premiums are higher for older individuals, but the formula for premium assistance tax credits caps the cost of coverage regardless of age, early retirees in particular may be eligible for very significant (i.e., thousands of dollars) premium assistance tax credits (until they turn age 65 and become eligible for Medicare). To qualify, McClanahan first suggests that early retirees just need to get a handle on how much cash flow they need to cover expenses; once that is determined, the retiree can try to manage withdrawals from retirement accounts, liquidations from brokerage accounts, and spending from savings, to ensure that Adjusted Gross Income (plus untaxed Social Security and any tax-exempt interest) falls above 100% of the Federal Poverty Level (FPL), but below 400% of FPL, to be eligible for the tax credits (or above 138% of FPL in states that expanded Medicaid). If/once eligible, coverage should be purchased on the health insurance exchange (either the state exchange if applicable, or through the Federal government's Healthcare.gov portal); notably, those whose income will fall below 250% of FPL should aim to purchase a Silver policy (as Silver policies are eligible for additional subsidies that reduce out-of-pocket costs for lower-income individuals). Bear in mind that ultimately, though, the premium assistance tax credit is just an advance based on an estimate of current year income, but will have to be partially or fully repaid if income comes in higher than expected; as a result, it will still be important to monitor income throughout 2015 to ensure the retiree's income is on target, and especially that it stays below the 400% of FPL upper threshold.
4 Things To Know About Non-Transparent Active ETFs (Matt Hougan, Journal of Financial Planning) - For most of their history, the defining characteristics of ETFs have included that they're index funds, they're transparent, and they trade at ultra-narrow penny-wide bid/ask spreads. Yet in recent years, the actively managed fund industry has been pushing hard to come up with a version of non-transparent ETFs, utilizing the popular ETF structure but making them opaque enough that the active managers don't have to worry about the world seeing what they're trading (and potentially front-running them) on a real-time basis. The problem from the perspective of traditional ETFs is that part of why their bid/ask spreads remain narrow is that, given their transparency, arbitrageurs can continuously monitor the price of the ETF compared to the underlying securities and ensure their price is on target - a phenomenon that is impossible if non-transparent active ETFs are launched (at best, the active ETFs may have a "proxy" portfolio that tracks the real portfolio but doesn't fully reveal it). Notwithstanding these concerns, though, Hougan points out that the active ETF structures still appear to be basically sound (and preserve many of the classic ETF tax benefits), and that trading spreads may be wider but probably still won't be terrible (especially in the early active ETFs, which will likely be more plain-vanilla U.S. equity funds that market makers can handle). Hougan also notes that while active ETFs will almost certainly be more expensive than pure index ETFs (as there is a manager to be paid!), they will likely still be cheaper than the average actively managed mutual funds (probably on par with the institutional class shares of such funds). Of course, in the end, the real determinant of the long-term success (or not) of actively managed ETFs will simply be whether their performance delivers when the time comes.
Proper Assumptions About Indexed Universal Life Insurance Income (Brandon Roberts, The Insurance Pro Blog) - Permanent life insurance has long been marketed as a vehicle to generate income in retirement, and in recent years a particular variety of coverage - (equity-)indexed universal life (IUL) - has become especially popular as a vehicle. Part of what makes IUL especially popular as a vehicle to accumulate cash value for future tax-free policy loans is that IUL loans are "non-direct recognition", which essentially means the cash value can remain invested even while it serves as collateral for the loan, creating the possibility that the ongoing returns of the policy will exceed the loan interest rate, which in turn further grows the cash value for even more subsequent borrowing. On the other hand, if the policy's cash value underperofrms - for instance, "just" earning a 0% or small positive return that isn't enough to out-earn the loan interest rate, the policy can fall backwards. The situation can be exacerbated by situations where unusually large loans are taken in anticipation of growth that doesn't actually occur - which Roberts points out is a concern, as many IUL policies are being illustrated at 8% returns based on back-tested results that may have worked in a particular historical scenario but may not be realistic going forward. And in fact, even some of the back-tested scenarios for returns don't work once those same returns occur on top of loans are being taken out. (Michael's Note - this is basically the IUL equivalent of sequence-of-return risk!) The bottom line: be very cautious about IUL being illustrated at rates of return that are unrealistic, and/or by using back-tests that may have held up under certain historical conditions without loans but wouldn't be sustained with the actual loans that clients plan to take for retirement income.
Filial Support: Making A Comeback? (David Lenok, Wealth Management) - While many people feel a moral responsibility to help support their parents in their older years, 29 states can actually require it legally, through what are known as "filial support" laws. For the most part, these laws appear to be outdated remnants of centuries gone by, but they are nonetheless now being used by some nursing homes and other health care providers as an avenue to recover from adult children the cost of care that their indigent parents were unable to pay. Yet in a recent Pennsylvania court case, In re Skinner (2014 WL 5033258) decided on October 8th of 2014, two adult children were sued by their mother's assisted living facility for unpaid bills. Ultimately, the focus of the case actually became a dispute amongst the brothers, as one of them also lacked the assets to pay the mother's bill and threatened to file bankruptcy himself, shifting the mother's debt entirely to the other brother. Nonetheless, the point remains that filial support laws remain on the books in many states, that facilities in at least some states are becoming cognizant of this and seeking to use the laws to recover costs from children when their parents cannot pay, and that as a result adult children at risk might even consider buying long-term care insurance on their parents simply to protect their own assets.
Dependent Care Accounts, Hamstrung By Limits, Are Still Worth Exploring (Ron Lieber, New York Times) - Flexible spending accounts (FSAs) that employers offer to help with health care expenses got another inflation-indexed bump last year, and will have a maximum contribution limit of $2,550 in 2015, yet Lieber notes that dependent care accounts (often offered alongside health care FSAs, but used for child care and other expenses) remain at the same $5,000/year contribution limit they've had since they were first created in 1986. The problem is that dependent care accounts were never indexed for inflation (if they had, the limit would be up to $10,859 by now!), in part because they were never actually intended to be tax-preferenced contributory accounts in the first place (the original purpose of the legislation was to encourage employers to start on-site day care centers or directly subsidize workers' child care costs). Nor does there seem to be much momentum to make a change for dependent care accounts to catch them up - despite how much child care costs themselves have risen - in part because they're not widely adopted; Aon Hewitt estimates that only about 3% of employees are contributing to them. Nonetheless, amongst those who are using them, the average contribution is a healthy $3,492/year, which can add up to almost $1,000 of tax savings depending on tax bracket. And Lieber notes that the accounts are probably underutilized, as parents may not realize the accounts are really quite flexible, for child expenses as broad as after-school programs and day camp, and even for a disabled spouse or aging parent who lives in the household as a financial dependent.
Can Money Buy You Happiness (Andrew Blackman,Wall Street Journal) - A growing body of research is digging deeper into the fundamental question "Can Money Buy Happiness" with results that are increasingly complex and nuanced. Broadly speaking, the data does indicate that those with higher incomes are a bit happier than those struggling to get by, but ultimately the biggest driver of how wealth impacts happiness seems focused specifically on how people spend the wealth. For instance, studies are finding that people actually derive more happiness when they give money away or spend it on others, than when they spend it on themselves; if they are going to spend it on themselves, spending on experiences (e.g., travel) creates more happiness than spending on material things. The latter is notable in particular, because people by and large tend to spend more on material goods than experiences, expecting that the goods will last longer than the fleeting experience; yet the research now finds that this is a "misforecasting" problem, as ultimately after the fact people report that their experiences tend to provide the better value (possibly because we adapt so quickly to our material goods anyway, which is why taking time to 'count your blessings' and slow down your adaptation really can help). The fact that experiences are often done with other people, facilitating positive interpersonal connections, further accentuates their long-term psychological value. The research also finds that "buying time" has an especially positive impact, too - one study estimated that on average, it would take a 40% raise to offset the added misery of a one-hour commute (suggesting that it's better to spend money on buying a home closer to work, than buying a fancier car to make the long drive!). Notwithstanding all the research, though, there is evidence to suggest additional happiness has diminishing returns, in that even the wealthiest people still have some negative feelings from time to time (i.e., there's never a point where you're so wealthy you're always happy!); nonetheless, when people self-assess their own quality of life, the research does suggest that greater wealth continues to facilitate some additional happiness.
The Folklore Of Finance: Beliefs That Contribute To Investors' Failure (Paul Sullivan, New York Times) - The State Street Center for Applied Research has issued a new study entitled "The Folklore Of Finance" that looks at how investor beliefs and behaviors sabotage their investment results. The results, perhaps not surprising to advisors, are that consumers face a lot of behavioral challenges that inhibit their ability to invest for and achieve their long-term goals. The first challenge is investors' focus on short-term performance and the pursuit of alpha, notwithstanding the fact that the actual amount of alpha appears to be shrinking as more and more investors have access to an increasing breadth of information. Notably, though, the research points out that many investors are so driven by the pursuit of performance, that they will not necessarily be content with passive indexing solutions either; the recommendation instead is to try to help investors (and the firms they work with) create systems that reduce the likelihood of herdlike behavior that creates some of the biggest problems. In fact, the study was also very negative of some of the behaviors exhibited in investment management firms serving advisors, noting in particular that "career risk" has a significant (and not beneficial!) impact on how managers behave (with 54% of institutional investors and 45% at asset management firms saying they feared they would lose their job if they underperformed for as little as 18 months). Yet this paints a particularly troubling picture - that investors do poorly managing their own money, but that investment firms may be succumbing to many of the same pressures as well! The bottom line: the path to correcting behavioral biases of clients may be very difficult, and for many advisors and firms there may not be enough cognizance to how they are suffering from the same biases themselves.
Yes, I Actually Read (Most Of) Tony Robbins' New Book (James Osborne, Bason Asset Management Blog) - The industry has been abuzz this week with the announcement that self-help guru Tony Robbins is making a shift into the finance industry, with his new book "MONEY - Master the Game: 7 Simple Steps to Financial Freedom", especially since Robbins has been reportedly encouraging consumers to seek out low-cost indexing solutions and advisors subject to a fiduciary standard. Ordering the book and reading through (most of it), Osborne finds that it certainly has the "you can do it, just seven easy steps, I'll tell you all about it!" self-help tone, but more concerningly regularly pushes the theme that "the rich" have access to unique investments that everyone else does not (and the book will open the door to everyone) - accordingly, the book then pushes "experts" that Tony has "partnered" with to bring those solutions to the masses, most notably through Hightower Advisors (partnered with Tony's recommended personal advisory firm, Stronghold Wealth Management) in what appears to be a robo-advisor-like service (and although Stronghold states that Robbins has no financial interest in the business, it's not clear why Robbins only endorses Stronghold in the book, and not Vanguard, or even other 'robo' services like Weatlhfront or Betterment). In terms of investments themselves, Robbins essentially pitches a version of Ray Dalio's "All Weather" portfolio mix, and also endorses various structured investment products (e.g., bank-owned structured notes, and equity-indexed annuities) which Osborne states are pitched by Robbins "like a schooled product salesman, touting the wonderful benefits and quickly glossing over risks and opportunity costs of these products." Osborne also notes other "doublespeak" in the book, including that people should invest in simple index funds but that markets are treacherous (thus that indexed annuities are the solution), that Wall Street mega firms are bad but the CEO of JP Morgan is a saint and a genius, that the investment industry is out to get us with expense and complex products but then recommends buying them anyway. Notwithstanding these concerns, Osborne notes that Robbins does stress the importance of working with a fiduciary, the issues of behavioral finance, the power of compounding interest and saving early, and the value of putting savings strategies on autopilot while being mindful of their spending habits. Nonetheless, Osborne's conclusion is that the book comes off as very biased, using the language of a financial salesman, and not the impartial fiduciary advisor it purports to endorse.
I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!
In the meantime, if you're interested in more news and information regarding advisor technology I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read "FPPad Bits And Bytes" on his blog!
Congrats to my friend, cycling partner, neighbor, and colleague for being mentioned in Michael’s blog!
I sat for the computer-based CFP exam this week. I enjoyed the test-taking experience and thought it was done very well, though I never sat through the paper-based test to be able to compare the two. It is very convenient to be able to take the test at your own pace. I started at 8:30am and was finished with a “preliminary” result by 12:45pm. Certainly seems desirable over the previous 2-day testing period.