Weekend Reading for Financial Planners (Oct 23-24)

Authors:

Adam Van Deusen, CFP

Team Kitces

Adam is a Financial Planning Nerd at Kitces.com. He previously worked at a financial planning firm in Bethesda, Maryland, and as a journalist covering the banking and insurance industries. Outside of work, he serves as a volunteer financial planner and class instructor for local and national non-profits.

Read more of Adam’s articles here.

+ Read More +

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.

+ Read More +

Schwab CEO Suggests Direct Indexing 'Freight Train' Approaching (Jeff Berman, ThinkAdvisor) - While direct indexing has been a niche option for high-net-worth investors looking for the tax savings of being able to tax-loss harvest the underlying stocks of an index, a spate of recent acquisitions and new investments of direct indexing platforms by some of the biggest players in the asset management industry (from Blackrock to Vanguard to Morgan Stanley to Franklin Templeton) has signaled a potential inflection point that could upend the way financial advisors invest client assets. Charles Schwab CEO Walt Bettinger added his voice to the chorus this week, remarking at Schwab’s virtual IMPACT Conference that, “We all want to be part of that freight train as it plows its way through the market”. In fact, Schwab recently indicated that it is currently piloting Schwab Personalized Indexing, a direct indexing program that it plans to launch in 2022, and Bettinger took direct aim at mutual funds and Exchange-Traded Funds (ETFs), commenting that RIAs, as well as investors of all sizes, will be able to take advantage of the personalization that direct indexing provides (and is not available through the legacy products). Yet while direct indexing has potential benefits for a wide range of clients (e.g., those with concentrated stock positions or a desire to exclude certain types of companies from an index for reasons from factor investing tilts to ESG preferences), it remains to be seen how swiftly advisors will actually move client assets over from mutual funds and ETFs. Just as the rise of ETFs, with their tax advantages and tradability, did not serve as the death knell for mutual funds, it is unclear whether the direct indexing freight train will be able to strike a severe blow to these investment vehicles. Nonetheless, the signal that even Schwab sees direct indexing as the “freight train” that can smash through the current hegemony of mutual funds and ETFs – and is talking up direct indexing’s use at the biggest annual conference for RIAs – is a signal that advisor platforms themselves are increasingly seeing direct indexing as the key to their own future (which isn’t surprising, as brokerage firms have more profit opportunity of their own by receiving payments for order flow on hundreds of underlying stocks in an index than when advisors just trade one index ETF), which may make the adoption of direct indexing a fait accompli?

“Future Proof” Looks To Upend Conceptions Of An RIA Conference (Brooke Southall, RIABiz) - The pandemic put a temporary halt to in-person RIA industry conferences, but many have come back or are being planned for the coming months. And while conferences for financial advisors are not necessarily known for being hip, a breakaway team of conference organizers dubbed Advisor Circle (who previously ran the Inside ETFs conference and recently announced their own inaugural ETF-focused conference called Exchange) is teaming up with ‘Reformed Broker’ Josh Brown and the Ritholtz Wealth Management team to launch a new event, Future Proof. Aimed at the growing world of RIAs, Future Proof is set to take place September 11-14 of 2022 in Huntington Beach, California, but not at the standard hotel or convention center; instead, the focus of the event will be a series of stages and exhibits along a half-mile of beachfront. The organizers hope to create an experience similar to the South by Southwest (SXSW) festival, and programming will feature not just industry speakers but also artists and musicians. The event is also trying to distinguish itself by its size – targeting 3,000 attendees, with room to expand beyond that – and by not giving sponsors speaking slots in exchange for their support (i.e., no “pay to play” speaking slots). And so while questions remain about what conference attendance will look like in a post-pandemic world, as well as the appetite of advisors to try new events, Future Proof is predicting that advisors can and will return to the conference world in the future… especially if events start offering a new kind of (less-sponsor-centric) conference experience?

Tax Hikes Could Fall Away As Democrats Shrink Spending Bill (Mark Schoeff, InvestmentNews) - President Biden and Congressional Democrats have been working for months on a multi-trillion dollar infrastructure spending bill and accompanying tax legislation. The release of the tax portion of the proposals by House Democrats on September 13 sent shockwaves throughout the financial industry, with proposed measures that included increasing the top ordinary tax bracket back to 39.6% (with an additional 3% surtax on income above $5M), raising the top long-term capital gains tax rate to 25%, cracking down on popular retirement account strategies like the backdoor Roth, and bringing the estate and gift tax exemptions back to pre-2017 levels ($5M per person, indexed for inflation), but it remains unclear how many of these would make it into the final legislation. This week, reports suggested that the size of the infrastructure legislation could be shrinking from $3.5 trillion to $2 trillion as Democrats attempt to rally their caucus around compromise legislation that satisfies both their centrist and more progressive members, who will be needed to pass the bills into law. The significance of this shift, though, is that a smaller infrastructure bill would mean there would be less need for matching revenue… and so some of the proposed tax increases could fall off when the final legislation is introduced. Nonetheless, it remains unclear which provisions will remain (or not), which means not only that financial advisors and their clients will have to wait and see which tax measures will be enacted, but also that areas still at risk for enactment that would be effective immediately – for instance, changes in the treatment of grantor trusts, whose effectiveness could be severely curtailed – still require immediate action, as, if those tax increase provisions do remain, by the time it’s clear in the final legislation, it will be too late to act!

What The First Bitcoin Futures ETF Means For Advisors (Bernice Napach, ThinkAdvisor) - With its dramatic price increases over the past decade (coupled with sharp declines along the way!), Bitcoin has caught the imagination of a wide range of investors. One of the challenges for advisors with clients interested in investing in Bitcoin, though, is how to actually invest in it, as the cryptocurrency generally cannot be held directly at the custodians financial advisors use to manage other client assets. And so it’s notable that this week, ProShares debuted its Bitcoin Strategy ETF (BITO), which invests in Bitcoin futures contracts to give investors exposure to the cryptocurrency in an exchange-traded product with a 0.95% expense ratio. The ProShares ETF could be the first of many ETFs to follow, with several other managers planning launches in the fourth quarter of 2021, potentially leading to fee wars that could drive the costs of these investments lower (and in fact, VanEck is expecting to imminently be launching their own Bitcoin Strategy ETF [XBTF] with ‘just’ a 0.65% expense ratio). Notably, though, because the SEC has only approved ETFs that invest in Bitcoin futures – and not directly it Bitcoin itself – the new ETFs do have the potential to track the price of Bitcoin more closely than previously available Bitcoin Trusts, but could encounter roll costs – which occur when investors roll from one expiring futures contract into a later month and the later contract costs more than the current contract – that could reduce the ETFs’ return below the returns of Bitcoin itself. Further, those investing in the new ETFs will have to contend with Bitcoin’s continued price volatility, making it important for advisors to communicate to clients how a Bitcoin ETF might (or might not!) fit into their broader investment portfolio.

Bitcoin ETF Creates Opportunity For Advisors, But Some Are Skeptical (Avi Salzman, Barron’s) - Financial advisors interested in adding cryptocurrencies, such as Bitcoin, to client portfolios have faced challenges on how to implement a crypto-investing strategy. The most common custodians do not have crypto platforms, and Bitcoin Trusts, which trade over the counter, have had trouble accurately tracking changes in the price of Bitcoin, while direct investments in Bitcoin (and the dynamics of managing ‘cold wallets’) is not feasible for most financial advisors. The emergence of Bitcoin Futures ETFs – starting with this week’s launch of the ProShares Bitcoin Strategy ETF (BITO), and more to come in the coming weeks – which can be traded using traditional advisor custodians like any other ETF, presents an opportunity for advisors to add, manage, and bill on Bitcoin exposure to client portfolios. But while crypto advocates among advisors are eager to take advantage of this opportunity, other financial advisors are more skeptical. One reason for this skepticism is that rather than investing in Bitcoin itself, the new ETFs invest in Bitcoin Futures, which can come with trading-related (roll) costs, and can (potentially materially) deviate from the spot price of Bitcoin. Others remain skeptical of Bitcoin as a whole, given the relative lack of regulation and competing cryptocurrencies that could eat into Bitcoin’s market share. Not to mention that the sheer level of crypto price volatility could also put advisors at a higher risk for defending themselves in a lawsuit. And so, just as investors have widely divergent opinions on the value of Bitcoin and other cryptocurrencies, advisors are likely to differ in their view of and use for the new Bitcoin Futures ETFs as they now become available.

Why The SEC’s Bitcoin Solution Is A Problem (Ben Fulton, ETF.com) - The introduction of the first Bitcoin Futures ETF has been cheered by many as a solution to many of the problems investors (and advisors) have had investing in cryptocurrencies such as Bitcoin. These problems include the security of direct crypto holdings, deciding how crypto fits within a broader portfolio, and the inability to hold crypto exposure at traditional RIA custodians and broker-dealers. And while Fulton agrees that Bitcoin Futures ETFs will make it easier for advisors to invest in and manage Bitcoin exposure for clients, he thinks systemic risk could develop due to an unnatural supply-and-demand imbalance for the Bitcoin Futures themselves. This could occur not only because of the potential popularity of the ETFs from consumers, but also because the ETFs could see huge flows from other funds managed by the issuer of a Bitcoin Futures ETF that could create destabilizing demand shocks. Fulton suggests that ETFs that invest directly in Bitcoin itself, rather than via futures, would avoid many of these problems, citing the success of funds in Europe and Canada that hold Bitcoin directly. But so far, the Securities and Exchange Commission (SEC) appears to view the risk to investors of funds investing directly in Bitcoin or other cryptocurrencies (which are largely unregulated) as greater than the risk of funds investing in Bitcoin futures (which are SEC-regulated). For now, advisors and clients seeking crypto exposure through ETFs will have to rely on products based on derivatives, and accept the risks that come with doing so!

How Advisors Are Guiding Clients Through The ‘Great Resignation’ (Cheryl Winokur Munk, Barron’s) - The current tight labor market and rise in disposable personal income have led many workers to consider leaving their jobs, either to get away from a job they dislike or for more lucrative opportunities elsewhere. In fact, a record 4.3 million workers quit their jobs in August, according to preliminary data, and the phenomenon has been dubbed the “Great Resignation”. And while financial advisors generally do not consider themselves to be career advisors as well, they can help clients considering leaving their jobs to consider the financial ramifications of the decision. One consideration is whether the client already has another job lined up, and if not, whether the client has sufficient resources to carry them through the period of unemployment (as well as the impact the non-earning period will have on their future retirement plan projections!). A gap in employment can create planning opportunities as well, though, including making Roth contributions and even tactical partial Roth conversions in years with lower between-jobs income. In addition, advisors can help clients navigate changes in employment benefits, including workplace retirement plans, stock compensation, health insurance via COBRA or state insurance exchanges, maintaining life and disability insurance, as well as other forms of compensation. Also, clients who are in the midst of buying a home or refinancing their mortgage will also have to consider how the job change will affect the mortgage process. The key point for advisors is that while they might not typically focus on counseling a client on whether to leave their job, not to retire, but to find a new and better one, there is significant room to add value to the client’s decision-making process through financial planning!

The Compounding Impact Of Getting A Raise (Jesse Cramer, The Best Interest) - With average hourly earnings on the rise, many employees might be considering whether their current salary reflects their value to their employer. But as Cramer points out, employees should not assume that employers will automatically recognize their performance with a pay boost. In fact, human resource departments with a mandate to keep compensation at the lowest level an employee will accept are likely to be resistant to requests for a raise, at least unless the employee has negotiating leverage of their own. In Cramer’s case, he applied for a job at another company and received an offer for 30% more than his current salary, which his original company matched instantly to keep him there. The significance of this is not only that getting a raise improves an individual’s earnings in the current year, but it also serves as a higher base for future pay increases, or negotiating compensation for future jobs… which means a ‘one-time’ raise can actually lead to a lifetime of substantially higher compensation! And because other aspects of a compensation package, such as bonuses and retirement plan matches, are based on salary, getting a raise can lead to even larger increases in total compensation. All of which means the current “Great Resignation” could offer employees (including those in the financial advice industry!?) a chance to gain the leverage they need to increase their salary, and so advisory firm owners might want to consider how they can better design compensation models to motivate employees and support their firm’s culture (in addition to helping clients navigate their own compensation raises with their employers).

Why Budgets Make People Angry (Ben Carlson, A Wealth Of Common Sense) - Every now and then an article or tweet appears showing how a person or couple who makes a seemingly high salary can end up with remarkably little extra income at the end of the month after taking into account their expenses. Often these anecdotes are about people who live in high cost-of-living cities, where everything from housing to childcare can cost far more than national averages (making spending seem outlandishly high for others living elsewhere in the country). Yet while these sample budgets seem outlandish to some commenters, others (in similar income or cost-of-living circumstances) see the expenses as reasonable given the individual’s circumstances. The lesson here is that no two individuals’ budgets are the same, and an expense that might seem extravagant for one person might be viewed as normal by another. In fact, Carlson notes that budgets are actually very personal, and reflect an individual’s priorities and values. And while financial advisors might hesitate to help clients make granular spending decisions, some of the most successful financial personalities help individuals do exactly that! From the advisor perspective, though, it’s still important to recognize that different clients are likely to have very different priorities when it comes to spending (which means clients may have different priorities than what the advisor themselves would do in a similar situation), not to mention that each member of a couple could value budget items differently as well. In the latter case, advisors can focus on improving how they communicate with couples and learn to handle conflicts that arise during client meetings if and when they open the household-spending conversation with clients. As in the end, while no two budgets are alike, understanding how client priorities differ – and how the ways they spend reflect (or may be misaligned to) their values – can lead to a better advisor-client relationship and a more successful practice!

How Companies Are Managing Employee Burnout (Tiffany Hsu and Lauren Hirsch, The New York Times) - The pandemic has increased levels of work-related stress for many employees. As while the transition to virtual work has been smooth for some, others have found it hard to balance high expectations from employers while working from home with personal responsibilities while they’re at home (in addition to the mental strain of the ongoing pandemic itself). With workers stressed (and many leaving for other firms), companies have come up with a variety of solutions to address increased work-from-home burnout. One trend is for entire companies to shut down for an entire week, frequently around this year’s Labor Day holiday (or perhaps the coming Christmas-to-New-Year’s week?). Others have allowed their employees to take off Fridays in the summer, or set periods where workers are not expected to check email. Yet, many workers find it hard to relax during ‘mandated’ time off, and the amount of work that needs to be done does not necessarily decline during a company holiday (meaning some workers might be even busier when they return from the break!). Notably, financial advisors themselves are not immune to burnout, either, particularly in times of market stress when clients might be seeking reassurance or an opportunity to vent. In fact, advisors can be particularly susceptible to ‘indirect’ trauma from having to deal with repeated client fears and concerns being vented at them in client meetings throughout the year. And while all individuals have different preferences, self-care and self-compassion, no matter what form it takes, can help advisors manage their own stress and better serve their clients.

Redefining ‘Productivity’ For The Hybrid Era (Jaime Teevan, Harvard Business Review) - Many companies that went fully virtual early in the pandemic have considered whether to go completely back to in-person work or shift to a hybrid workplace, where employees split their time between the office and home. And while many employees miss the collaboration and social aspects of working at the office, they also worry about the loss of flexibility that a full-time return to the office would entail. Employers considering how to address this ‘hybrid paradox’ can first consider how they define productivity to begin with. Teevan suggests that employers should consider not just how much work employees get done, but also focus on well-being, social connections, and the collaboration and innovation that can drive business success. With this in mind, one version of the hybrid office would encourage collaborative work when employees are in the office, while allowing workers to design their days around their other priorities (such as family, fitness, hobbies, or even naps!) when working from home. Teams can create agreements on how they want to work in the hybrid environment, to ensure that each member can contribute whether they are working from home or in the office. For financial advisory firms transitioning to a hybrid workplace, potential methods to ensure a smooth transition include cultivating a team-based accountability system, creating an employee career-progression strategy, and measuring productivity by progress toward company goals rather than time spent in the office. While each firm and employee will have their own preferences, supporting a team that can prosper in both the in-person and virtual worlds can lead to a more resilient and successful firm overall!

Be Challenged, Not Overwhelmed (Lawrence Yeo, More To That) - Working toward a goal and achieving it can create a great sense of fulfillment. However, the path to fulfillment can entail stress and fatigue… which means putting in ‘one more hour’ can lead to progress toward a goal at the cost of potential burnout. The work-from-home environment has exacerbated this tendency for many, because the lines between work life and home life have been blurred and it’s increasingly difficult to find the line of when to stop putting in the next hour and turn work off. For employers looking to motivate workers through this dynamic, Yeo suggests that money is a significantly weaker factor than things like challenging work, recognition, responsibility, and personal growth. Further, encouraging employees to take time away from the sometimes-overwhelming wave of email and assignments can also prevent burnout, and help workers achieve personal and company goals. Similarly, developing mindfulness and meditation skills can help individuals recognize when they are on the edge of moving from being challenged to being overwhelmed. In fact, according to Kitces Research, stress management strategies are directly associated with higher self-reported life satisfaction, physical health, and mental health for financial advisors. Non-business-related socializing, engaging in art and music, and other hobbies were most strongly correlated with these positive attributes, particularly when they were engaged in an overwhelming business. So while it might be tempting to put in that extra hour on a challenging work assignment, advisors might find that using that hour for constructive relaxation will lead to even greater gains in wellbeing (which can ultimately lift their long-term productivity by even more, anyway!)!

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 Craig Iskowitz's "Wealth Management Today" blog, as well as Gavin Spitzner's "Wealth Management Weekly" blog.