Weekend Reading for Financial Planners (Nov 5-6)

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 5th/6th:

Evidence-Based Financial Planning: To Learn... Like a CFP: This article by financial planners Elissa Buie and Dave Yeske of Yeske Buie in this month's issue of the Journal of Financial Planning is a wake-up call to the emerging financial planning profession: if we want to become a true profession, we must move from bland aphorisms and anecdotally-supported beliefs to an evidence-based science. To do so, we must systematically test our beliefs and methods as financial planners using the scientific method, and follow the evidence to determine not just what is a majority or consensus practice, but a genuinely determined "best" practice. This places a new commitment on practitioners to stay abreast of new developments in the profession - and learn how to read and consume new research - and the further growth of an academic community to partner with practitioners in developing this scientifically-based body of knowledge. 

Let Go To Grow: This article by consultant Angie Herbers is the cover story for the November issue of Investment Advisor magazine, and it's quite impressive. Herbers discussions the results of a multi-year research project on what makes financial planning firms great, and comes up with some very surprising conclusions - most significantly, that most owner/advisors are not good people managers, and they don't have to be, in order to build great businesses. At the same time, Herbers emphasizes that the best firms succeed by making their employees great, noting that firms who hire great can still make their employees mediocre - not by having great managers, but by creating the right environment and incentives for employees to prosper. Herbers indicates the key is focusing on the "four Ps" of Preparation, Pay, Perks, Productivity. For more detail, read the article, or better yet, download Herbers' entire white paper for free.

They've Taken Emotional Intelligence Too Far - This article from the TIME website by Dr. Daniel Goleman - publisher of the original book "Emotional Intelligence" that put the concept on the map - discusses how industry has actually gone too far with his research. Yes, emotional intelligence (or "EQ") matters, but actually, IQ still matters more. As Goleman highlights, IQ is still the better determinant of career success; the caveat is once you cross a sufficient IQ threshold and end out in an above-average-IQ job (e.g., accountant, physician, executive... or financial planner?), EQ does a better job distinguishing who will succeed. Although not written for financial planners, the article seems to have clear relevance in our world too; our interpersonal abilities to connect and relate matter, but only for those who have the IQ to learn the technical knowledge necessary to be capable in the first place.

To Connect With Prospects and Attract Referrals, Communicate Solutions, Not Methods - This blog post by practice management consultant Stephen Wershing discusses the fact that most advisors spend too much time describing the process they utilize and not the solutions they deliver. But Wershing contends that in the end, "people care less about what you do and more about what they get" - your clients provide you a referral because you provide a solution to a problem their friend has, not necessarily because of how you provide that solution. And the solutions have to be concrete; saying "I help people reach their financial goals" or "I give people peace of mind" is too abstract and general, and often just unrealistic. As Wershing points out, "I have just started a new business with one child in college, and am newly married, working on consolidating two households, and have a three-year-old in the house for the first time in 14 years. You are NOT going to give me peace of mind." Wershing summarizes it best in the end: "If you stand for process you are a technician. If you represent a solution, you will attract clients and referrals who need a problem solved."

Regulatory Armageddon - This article by Bob Veres of Inside Information, reprinted in Advisor Perspectives, provides a short debrief of some highlights from the recent Business and Wealth Management conference in Chicago, followed by an extended discussion of the conversations from an invitation-only "Leadership Forum" also conducted at the event, where the focal point of the discussion was what on Veres calls the potential for "Regulatory Armageddeon" - FINRA oversight of investment advisors. Veres' discussion suggests that given FINRA's oriented towards major wirehouse broker-dealers, that a grab for regulation of investment advisors could ultimately be a path to squeeze out "the little guy" - which previously has been small-to-mid-sized broker-dealers, but could easily include RIAs as well if FINRA becomes their regulator. The alternative from the Leadership Forum? An independent SRO, funded with user fees, that can more effectively oversee and regulate the delivery of financial advice, which is different than the principal activities of a securities dealer, which FINRA was originally created to regulate (back when they were called the National Association of Securities Dealers {NASD}). Veres paints a chilling picture of what may unfold in the coming years if independent (read: non-wirehouse) financial advisors don't take control of their own destiny.

Banks Not Wanting To Lend Is A Myth - This blog post from mortgage banking veteran Mark Hanson is an excerpt from a research note he sent to clients recently, about the current state of the banking, mortgage, and housing industries. Hanson's note debunks several "myths" about the market, pointing out that in reality mortgage liquidity is abundant for credible borrowers ("the primary difference between the bubbles years and now is not the loan parameters; rather now you have to prove what you put on the loan application!"), banks not wanted to lend is a myth because 95% of all loans are sold to Fannie and Freddie or are insured by the FHA anyway, preventing foreclosures doesn't help the housing recovery, and time is still necessary for the market to heal (not quick fixes to plug short-term gaps). The research note provides a striking insider's view to what's "really" going on in the mortgage and housing industry.

European Summit: A Plan With No Details - This article was last weekend's John Mauldin article (published on Advisor Perspectives) about the then-just-announced Greek debt deal. Although Mauldin's analysis of the Greek deal and the European situation is striking, he also provides an interesting explanation of why the market "melted up" in response to the Greece announcement - and it's not the reason you think. Mauldin suggests that the real issue was not relief over the Greek debt deal, but paranoia over the fact that the deal Merkel and Sarkozy struck potentially invalidated the some or all of the Credit-Default Swap (CDS) market, and as a result triggered an unbelievable amount of equities short-covering as major banks and traders unwound their CDS hedges. The problem is that while this may have produced an incredible rally in the short term, it actually implies the system may be less hedged and more unstable going forward from here; it was a melt-up this time, but it could be a melt-down next time.

Whipsaw Traps - This article is the weekly commentary from John Hussman of Hussman Funds, and as usual Hussman provides incredibly insightful commentary on recent market volatility and the current situation in Europe, starting with an analysis showing that the recent rally is more characteristic of a "whipsaw trap" that turns back around into a bear market decline, than a rally that may see a follow through to much higher levels. Hussman then follows with a withering evaluation of the current proposals for the EFSF, noting in essence that the current structure is "irrelevant until you need it, and then suddenly is not nearly enough [when you do]." Hussman also notes that while there is much focus on Greece, the situation may soon come to a head in Portugal too, as current bond rates suggest as much as a 68% chance of default within 2 years, 88% within 3 years, and 100% within 5 years. And if Hussman wasn't bearish enough, he also notes that notwithstanding the recent retrospective announcement that Q3 GDP was 2.5%, the current constellation of an ECRI Weekly Leading Index below -7, an ISM Purchasing Managers Index below 52, and an S&P 500 price below its level 6 months earlier (all of which are currently true), has revealed a recession within 13 weeks... in 100% of the historical instances it has ever occurred. Ouch.

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!