Weekend Reading for Financial Planners (Oct 1-2)

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 October 1st/2nd:

Fiduciary Rule Keys Nationwide's Acquisition Of Jefferson National (Charles Paikert, Financial Planning) - This week, Nationwide (via its Mutual Insurance company) announced that it is acquiring Jefferson National, maker of the popular no-load variable annuity Monument Advisor. Jefferson National's "investment-only variable annuity" (IOVA) is a flat-fee annuity that charges just $20/month as their M&E charge (though they also make 0.25% in 12b-1 fees on the back end of many of their underlying investment subaccounts), and their ultra-low cost has led them to become widely adopted in the RIA community (with a reported $4.7B of assets, including inflows of just $800M in 2015, up from $400M in 2012), primarily being used as an asset location tax-deferral vehicle. However, the Nationwide acquisition appears to go beyond "just" being an opportunity to acquire a growing fee-based annuity product, and instead is about positioning Nationwide to grow fee-based (no-commission) annuity distribution as the DoL fiduciary rule looms large next April. The acquisition not only gives Nationwide an already-popular no-load annuity to bring to its existing enterprise partners, but also a way to reach the thousands of RIAs already doing business with Jefferson National to be offered new fee-based insurance and annuity products that Nationwide might roll out in the future (from optional living benefit and death benefit riders on the Monument Advisor product, to new fee-based fixed index and life insurance products). Going forward, Jefferson National will remain a wholly owned subsidiary, though it remains to be seen whether Nationwide will keep the Jefferson National brand. From the broader industry perspective, take this acquisition as another sign that the depth of fee-based no-commission annuity and insurance products is about to ramp up dramatically in 2017 as the fiduciary rule rolls out.

Advisors Warming Up To The DoL Rule, See Business Opportunity (Grete Suarez, Investment News) - A recent new advisor survey from Fidelity finds that 29% of advisors now see an opportunity in the DoL fiduciary rule (up from 17% in January), and another 25% believe the rule will have a positive impact on their ability to acquire and retain clients. Nonetheless, advisors do also report that they anticipate spending more time on DoL-related compliance issues and paperwork, and that the rule will pressure their overall compensation. In fact, one-in-10 advisors now report that they plan to leave or retire earlier than they had planned, and another 18% say they are reconsidering their career as advisors (though notably, it's not clear whether or to what extent those "advisors" were actually really providing advice already, versus simply selling financial services products!). Advisors also consider to raise the concern of whether smaller clients will still be profitable, and whether they need to offer lower-cost automated services to cater to those clients (though barely 10% of advisors reported actually having a "robo" solution in place). More broadly, advisors are widely reporting that they anticipate shifting to doing more fee-based business, as would be expected given the DoL fiduciary rule's push towards levelized compensation, though broker-dealers are reportedly more likely to pursue the full-BICE rules rather than the level fee fiduciary simplified exemption. But even amongst wirehouses, 3-in-4 advisors anticipate their firms will focus more closely on holistic financial planning.

Don't Ask Directly For Referrals (Craig Faulkner, Financial Planning) - Satisfaction surveys continue to show the overwhelming majority of clients are satisfied with and loyal to their advisor, and likely to continue working with him or her. However, only 29% said they had actually referred their advisor in the past year. And more importantly, of those who did refer, 98% of them said they did it because a friend asked for a referral, or because they saw a friend in need (e.g., facing a financial challenge) and made the referral voluntarily; only 2% of the clients who referred did so because their advisor actually asked for the referral. Which implies that if advisors want to improve their referral outcomes, the best approach is not to try harder in asking for referrals (which doesn't actually appear to work), but instead to make it easier for the client to voluntarily refer - i.e., for the advisor to be more "referrable" instead. So how can you better create situations that make it easier for clients to pass your name along (and for those who receive the name to actually act on the referral and contact you?)? Faulkner suggests four steps: 1) invest into your website, because even those who are referred are likely to at least type your name into Google and check you out, which means your website will be the prospect's first impression (and you want to make a good first impression!); 2) make it clear that your firm is open to accepting referrals (not necessarily by asking them, but perhaps by writing an article that showcases an example of a referred situation, how you helped the referral, and plants the seed of how clients can do the same); 3) make resources free and sharable (creating a blog or other educational content helps to demonstrate expertise and build trust, and clients can then 'refer' the advisor by socially sharing the content, forwarding an email with the educational resource, etc.); and 4) do client surveys annually, both to simply gather information about what you can do better, but also because the buy-in it creates can help further foster client referrals.

Don't Waste Your Time On Networking Events (Derek Coburn, Harvard Business Review) - Big networking events are a recognized staple of most industries (including for financial advisors searching for clients). Unfortunately, though, many struggle to get the networking results they desire... and in turn, experts produce articles about what to do at a networking meeting in order to get better outcomes. Yet Coburn points out that few raise the question of whether they're even worthwhile to attend in the first place. Is going to a networking event with a wide mixture of professionals, each with a wide range of different goals, really a good use of an advisor's (or any professional's) time? Coburn suggests that for those who are serious about doing some kind of networking event, the best approach is to host your own event instead - where you set the activity (to something people will enjoy), can invite the strategic partners you want to spend more time with (and any guests they invite), and more generally where you can control the attendees, the setting, and therefore better impact the outcomes. Another alternative is the "double dating" strategy, where you get four tickets to an event, and in the process bring your own significant other, invite a current client (or strategic partner), and invite them to bring a guest or significant other as well (giving you the opportunity to both deepen the relationship, and meet someone new). And remember that if you're looking to expand your network, one of the best approaches is not to go to a networking event with strangers, but to re-connect (re-network?) with existing but dormant relationships, from former classmates and former co-workers, to former contacts from a previous career, who may be open to re-initiate the relationship, and be more willing and open to hearing about what you do because of your prior shared history together.

Client Attraction? Try Prospect Repelling! (Kristin Harad) - It's a marketing standard that in order to build your advisory firm, you must first clearly define exactly who your target clientele is in the first place; after all, if you don't know you're trying to reach, it's almost impossible to figure out what kinds of marketing messages to communicate, what kinds of content to share, and which strategic partners to work with. But Harad notes that it's equally relevant to consider who you do not want to work with in your business - not only because bad-fit clients are less likely to value your services and refer you, but because they can drain your energy and enjoyment in the business. And as an independent financial advisor, you have the right to decide whether you want to work with any particular client, or not! So what are the common themes and characteristics of the 'negative', bad clients that you do not want to work with? Or alternatively, consider the characteristics of your best/ideal clients, and then list the opposite traits, to compose the list of the kinds of people you don't want to take on as clients. Once you've formulated the list, Harad suggests actually writing it down as an active statement - for instance, "Under no circumstances will I work with clients who..." or "I will never take as a client a person who..." And keep the statement nearby... so that the next time you're talking to a prospect who probably isn't a good fit, the statement will be there to remind you that you need to say "no" (or perhaps to fire an existing client you've already got that you shouldn't have taken in the first place!)!

Engage Readers With ‘Emotionally Naked’ Writing (Dave Grant, Financial Planning) - The conventional view as a "professional" advisor is that it's best to stay somewhat aloof and reserved, staying unemotional in a world where clients themselves can often become very emotional. But Grant shares how he's had a personal breakthrough in connecting with others after his recent column sharing his challenges with depression as a struggling RIA owner, which generated exponentially more engagement and responses than his typical 'professional' articles. The underlying point is that it's OK to share your personal experiences, even and especially if they're emotional and talk about a struggle you had and how you worked through it - the point is not to say "here's what you should do because it worked for me" (since we're all different), but simply to recognize that personal stories are what makes a connection to others, who may have shared a similar pain at some point, and will thus find the story resonates with them. In essence, then, the basic template becomes: explain the topic; include a personal story of how the issue impacted you; explain what happens if a change is made; discuss how to do this in succinct steps; and then wrap up the message. And remember that at the end of any story or article or marketing material, it's crucial to have a Call To Action - something to tell the reader/prospect what to do next, even if it's relatively simple, because that moment of emotional vulnerability is the moment they're most likely to take an action, so the next step should be as clear and simple as possible!

The HECM For Purchase Program Simplifies Home Buying For Retirees (Tom Davison, Tools For Retirement Planning) - For most retirees, the classic decision on buying a retirement home is whether to pay cash (which may include a substantial withdrawal from a portfolio), or to finance it with a mortgage (which allows their cash to stay invested, but introduces the obligation of the ongoing monthly mortgage payment). However, those who are at least age 62 have a third option, which is to make a cash downpayment and finance the remainder with a reverse mortgage instead. Unfortunately, using a reverse mortgage will generally require a larger downpayment than a traditional mortgage (given reverse mortgage borrowing limits), and typically has a somewhat higher interest rate than traditional mortgages (largely due to the ongoing 1.25% mortgage insurance premium assessed on top of the interest rate itself), but the key benefit is that a reverse mortgage requires no ongoing payments. In other words, it may take a little more upfront, but buying a retirement home with a reverse mortgage reduces the ongoing retirement cash flow obligation, as the reverse mortgage simply accrues (negatively amortizes) the interest instead (though as a non-recourse loan, it can never accrue against the borrower for more than the future value of the home itself). Of course, reverse mortgages are already often used to free up equity in the home, or to refinance a traditional mortgage into a reverse mortgage to eliminate the mortgage payment obligation, but Davison points out that the HECM reverse mortgage can also be used as an upfront purchase (known as a "HECM for Purchase" or "H4P" loan). With a HECM for Purchase, the borrower can choose either a fixed-rate HECM, though doing so means the entire HECM disbursement will be made at once; the alternative if to choose a variable rate loan, which allows the borrower to further draw on the HECM as a line of credit (if not already maxxed out), which will grow by the (variable) rate of interest (though also risks accruing more interest and more quickly eroding the equity in the home, if interest rates rise). Notably, though, lender/broker credits for closing costs are not allowed on the HECM for Purchase loan (in contrast to a refinance or cash-out HECM), so expect to pay more in closing costs with a H4P loan (though potentially with a slightly lower ongoing interest rate).

Factor Investing: A Post-Modern Portfolio Theory (John Blood, Investment Advisor) - The standard framework for portfolio construction is the same for almost all advisors: using Modern Portfolio Theory (MPT), which typically means aiming to balance out risk and return, and seeking non-correlated assets to minimize overall portfolio volatility. Built on top of this framework are additional investment strategies that aim to add value - from seeking to increase returns and/or reduce downside risk with combinations of stock selection, tactical asset allocation, adding alternative investments, etc. However, a growing base of research suggests that many/most of these strategies are failing to persistently add value, and/or may be chasing a shrinking overall pool of available alpha in the first place. However, Blood notes that even for those who don't wish to pursue such active strategies, there's still a question of how best to allocate an otherwise passive portfolio, what are the underlying "factors" that provide a positive return premium, and how much should be invested towards each. Research has identified hundreds of potential factors, but academics have narrowed it down to relatively few, including size (small-caps tend to outperform large-caps), relative price (value tends to outperform growth over time), quality (companies with higher profitability ratios tend to outperform), and momentum (companies with positive momentum tend to maintain it), with some additional research suggesting that low volatility and dividend yield may also be unique factors. In this framework, then, portfolios are built not based on divvying up amongst various 'traditional' asset classes, but based on exposure to the various factors (with securities chosen based on how cleanly they align with and represent the factors), where the goal is to invest into the factor with the lowest-cost building blocks available (typically ETFs or sometimes mutual funds from a few asset managers focused in this space, including FlexShares, iShares, AQR, DFA, and State Street). Notably, the point is not to use these vehicles to time the factors (even though there are time periods when some are more or less in favor than others), but simply to invest across all of them, and let the markets provide their return premia over time.

This Is Radical: Three New ETF Ideas That Actually Make Sense (Jason Zweig, WSJ) - There are now almost 1,900 ETFs offering almost every investment strategy imaginable. The good news of such a wide range of competitors is that it helps to bring down costs for consumers as companies fight for business and market share; the bad news is that in an effort to differentiate, asset managers have offered even-more-focused (and often more risky) ETF solutions, from ETFs that track the prices of cocoa or livestock to palladium or the Singapore dollar, twice the opposite daily return on gold-mining stocks, and more. Yet despite the proliferation of ETFs, Zweig points out a few gaps that still exist in the ETF marketplace that would be helpful and make sense for investors. One type would be a "Rest Of The Market" portfolio, which would be a series of ETFs that own the entire stock market except one industry, allowing investors to avoid being over-exposed to the industry they work in; for instance, if you worked in the tech sector, you might be the "Rest of the Market Ex-Technology" ETF, to own a diversified portfolio where your human capital (your job in the industry) represents your exposure to that particular sector. And in point of fact, ProShares has actually already launched such an ex-sector ETF series, though so far it has garnered little interest. Another "good" ETF option would be a "Whole Planet Portfolio" that would package every publicly traded stock and bond on Earth into a single convenient bundle - an extension of the U.S. "total stock" and "total bond" market ETFs that exist now, but extended to the globe. And as a third 'ideal' ETF, Zweig suggests a form of bond ETFs that are specifically designed to be held until maturity, and then actually mature, giving investors a means to have the diversification of a bond ETF, but the hold-to-maturity benefit of an individual bond as a way to manage through interest rate volatility (such as the Guggenheim BulletShares).

How To Motivate Your Employees: Give Them Compliments And Pizza (Melissa Dahl, Science Of Us) - We all like to be recognized for our hard work and accomplishments, but what kinds of incentives work the best? In his recent new book entitled "Payoff: The Hidden Logic That Shapes Our Motivations", noted behavioral finance researcher Dan Ariely asked employees which reward they would want for a hard day's work: a cash bonus, a (rare) compliment from the boss, or a voucher for free pizza... and found that the most effective incentive was the pizza, followed (closely) by a compliment (as measured by the output of factory workers who received each of the potential incentives). Notably, the cash incentive did result in some productivity boost that day... simply less than the pizza or compliment incentive. However, the researchers found that the cash bonus also had a drawback; the next day, after the incentive was gone, the workers performed materially worse, such that the total productivity impact for the week was actually negative (while the pizza incentive performed better, and the compliment had the most sustained positive impact). The underlying key point - people do not work for money alone, as social factors like gratitude also play a substantial role in happiness and motivation, and incentivizing too heavily with money can actually reduce intrinsic motivation. Ironically, though, people tend to misjudge this, even about themselves; another study found that when asked what would motivate them, people were more likely to suggest extrinsic motivation (e.g., financial rewards), even though when the moment came, it was the intrinsic motivation that carried the day. In other words, money and prestige may motivate, but they fade quickly; a sense that other people appreciate what you do sticks.

Research: We Drop People Who Give Us Critical Feedback (Francesca Gino, Harvard Business Review) - Getting honest and direct feedback and constructive criticism is crucial for most people to improve themselves. Unfortunately, though, most people tend to surround themselves with people they get along with and who already have a good impression of us... in other words, the kind of people who will not give you critical feedback, even when it's necessary. In fact, one recent research study found that we actually have a tendency to move away from people who provide feedback that is more negative than our own view of ourselves; rather than listening to the advice and taking it constructively, we tend to just avoid interacting with them altogether so we don't have to hear it (and feel dragged down). Or viewed another way, we have a strong tendency to surround ourselves with "yes men" (and women) who provide confirming feedback that supports how we already see ourselves, leaving a giant gap in our ability to actually garner constructive criticism (even when it's necessary). In fact, the research found that this who received negative feedback, and chose to distance themselves from that reviewer, just performed even worse the following year, having failed to take the criticism constructively. The bottom line: if you're serious about improving your performance (at work or in your business), be certain to develop, and maintain, relationships that can give you the tough feedback when it may be necessary.

A Science-Backed Guide To Taking Truly Restful Breaks (Christian Jarrett, 99u) - When we're feeling overloaded with work (from an overflowing email inbox to an onslaught of client meetings), the idea of taking a break seems absurd, as it feels like the only path forward is to keep trudging along. Yet the research suggests that taking a break is critical - even intra-day, it's necessary to take brief restful breaks to recoup your energy. And in recent years, researchers have really begun to study what, exactly, are the best kinds of "micro breaks" that help us refresh. The first tip is to recognize that a healthy break means fully switching off - in other words, don't just take a break and browse the news, skim an industry magazine, or even do some shopping, because it may be a break from work but the willpower and concentration it requires still doesn't really give us a break, unlike a relaxation break (just daydreaming or even stretching for a while) or a social break (chatting with colleagues and taking a real mental break from work). In fact, these kinds of micro breaks are so effective, that it helps to take them more frequently; one study found that taking a mid-morning break was better than just taking a break at lunch itself, and another found that if breaks are frequent, even ones as short as a couple of minutes are sufficient and long enough to be beneficial. And notably, when you actually take the break, it's best to do it by physically getting up and out of the office; those who got outside, even if just for a five minute walk around the block, got a more rejuvenating benefit than just forced socialization that still happens in the office. The bottom line, though, is simply to recognize that when your mental energy and willpower are running on empty, the best approach is not to try to eke out a few more miles of driving, but to take a break and refill the tank (and then you can hit the gas again).

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!