Weekend Reading for Financial Planners (Oct 24-25)

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 24th/25th:

eMoney Advisor Rolls Out eMx Select Integration To MoneyGuidePro (Michael Kitces, Nerd’s Eye View) – This week, financial planning software maker eMoney Advisor announced that it will be integrating to financial planning software ‘competitor’ MoneyGuidePro. While the announcement may seem strange, though, the reality is that eMoney Advisor’s primary value proposition has increasingly been its Personal Financial Management (PFM) client portal, and it’s actually that solution being integrated to MoneyGuidePro – unbundled into a new service called eMx Select, first announced earlier this year at the T3 Advisor conference, and including integrations to a wide range of outside technology vendors. For MoneyGuidePro users, the new solution means an opportunity to use the popular eMoney Advisor client portal, while sticking with MGP for financial planning. For eMoney Advisor, it’s an opportunity to further grow the adoption of the non-financial-planning portion of their software, possibly convert MGP users into eMoney users, and ultimately Fidelity may even be positioning eMx Select to become a central technology integration point that allows it to better compete for RIAs with TD Ameritrade’s Veo open architecture system. MGP users who want to adopt eMx Select will be able to purchase it unbundled for $150/month (as opposed to $300/month for the full eMoney Advisor financial planning solution).

PIETech’s myMoneyGuide: Financial Planning For The Masses? (Joel Bruckenstein, Financial Advisor) – Also in the news this week from MoneyGuidePro was the release of its new MyMoneyGuide platform, which is designed to help financial advisors engage prospective clients online. The solution allows financial advisors to invite a prospective client to enroll in a MyMoneyGuide “Lab”, which is a guided online experience for the prospect to create their own initial financial plan. At the end of the Lab, the prospect can request that the financial advisor who referred them – whose picture, contact info, and other branding appear throughout the process –follow up with them further. The Lab itself is a 90-minute guided online interactive session, delivered by a ‘neutral’ CFP professional who works for MyMoneyGuide, whose sole purpose is to help the prospective client begin the process of creating their own plan, and encourage the prospect to engage their advisor at the end, with particular focus areas for further discussion. Labs will be offered at a wide range of times day and night, and be focused into particular types of client groups (e.g., one Lab for small business owners, another for those within 10 years of retirement, another for those who are still more than 10 years from retirement, etc.). Prospective clients who request the advisor to follow up will have their information loaded directly into the advisor’s version of MoneyGuidePro, to facilitate immediate planning without any further data gathering process (a very significant potential time savings for the advisor!). Advisors pay $75 per prospective client who actually engages in a Lab, and can even set a target budget (e.g., $1,500 per month, and after 20 people go through the Labs no further ones would be made available to prospects for the rest of the month); measuring new client flow after the lab creates the potential for the advisor to directly measure the ROI of the marketing effort (though it’s still up to the advisor to engage in the marketing process, digitally or in person, that directs prospects to enroll into a Lab in the first place).

Citing Edward Jones As A Cautionary Tale, Cerulli Alerts ‘eRIAs’ (Brooke Southall, RIABiz) – While many industry analysts continue to suggest that robo-advisors are on track for industry disruption, with an A.T. Kearney report earlier this year suggesting robos will grow AUM to $2.2 trillion by 2020, Cerulli Associates is suggested that there may be problems ahead for these “eRIA” firms. The company finds that to reach their $35B AUM breakeven levels, companies like Betterment and Wealthfront will need to grow at 50%-60% per year for the next 6 years, which may be difficult as established financial services firms begin to compete with their own offerings. Even the rapid growth of digital offerings from Vanguard (growing at almost $1B per month) and Charles Schwab (adding $500M per month) have been built primarily on converting existing clients to their new programs, not gathering new outside assets as today’s robo-advisor startups must do. In fact, there’s virtually no precedent anywhere in the financial services world for the kind of asset management growth rates that robo-advisors will need to survive, except perhaps the Edward Jones managed account program launched back in 2008, which Cerulli notes was still substantively different because it leveraged other Edward Jones assets. Notwithstanding these concerns, though, robo-advisor advocates suggest that the companies are still innovating, and that existing players replicating what those robo-advisors were doing 3 years ago still leaves room for them to further evolve and continue to gather market share today. Still, Cerulli suggests that in the end, most robo-advisors may be forced to adopt or pivot to a business-to-business (B2B) model to survive.

Obamacare Optimization In Early Retirement (Go Curry Cracker) – For retirees seeking to bridge the health insurance gap between ‘early’ retirement and Medicare at age 65, the solution is increasingly to utilize an ACA-compliant health insurance policy from the state-based health insurance exchanges, which ensures access to standardized coverage despite any pre-existing health conditions. Yet despite the common standards required of all exchange-based policies under the Affordable Care Act, there are still significant variations on cost, cost-sharing rules, and coverage levels, from one state to the next, and individual income circumstances can dramatically impact eligibility for premium assistance tax credits (which applies up to an AGI of $63,720 for married couples and $97,000 for a family of four). Planning for the tax credits is particularly important, because exceeding the income threshold by even one dollar results in a “premium subsidy cliff”, beyond which the insured can go from a significant tax credit down to $0 (and the more expensive the coverage, the greater the impact of losing the tax credits). Accordingly, income tax planning strategies are important, although since the tax credits are based on AGI, only ‘above-the-line’ tax deductions work, like contributing to an HSA, or a traditional IRA, as well as harvesting capital losses; conversely, retirees eligible for coverage should be cognizant not to have extra taxable income events, as the income ends out causing a higher tax rate as premium assistance tax credits are phased out.

The ETF Retirement Opportunity (Michael Finke, Research Magazine) –  The growth of ETFs over mutual funds has been dramatic in recent years… except in defined contribution savings plans, where mutual funds remain the dominant investment vehicle. The issue seems driven at least in part by the fact that the traditional benefits of ETFs, including greater tax efficiency (reduced likelihood of capital gains distributions) and their ability to allow intra-day trading are not very relevant within the context of an employer retirement plan. Nonetheless, ETFs have also been popular simply because they’re a “cheap” way to buy beta, given the low cost of ETF index funds. Although when compared to other index-based mutual funds, the cost differential of ETFs often isn’t very significant, either. On the other hand, across an entire household, the tax-efficiency of ETFs means that they’re actually best to hold in a taxable account anyway for asset location purposes, and to the extent the individual is going to hold mutual funds, sheltering them within a 401(k) plan is a good asset location strategy. Which implies that investors continuing to hold mutual funds in retirement plans, to the extent they were going to hold mutual funds at all, is actually a good strategy. Nonetheless, the 401(k) environment is beginning to shift, as baby boomers head into retirement en masse… such that in 2015, for the first time ever, defined contribution participants in the aggregate withdrew more money than they contributed to their plans. And as retirement accounts become more distribution-centric, Finke notes the rise of new forms of ETFs, particularly so-called “multi-asset ETFs” that contain a mix of underlying investments (possibly other ETFs) designed to replicate shifting asset allocation and liquidation strategies over time, similar to target date mutual funds.

Making Sense Out Of Variable Spending Strategies For Retirees (Wade Pfau, Journal of Financial Planning) – Pfau suggests that retirement spending strategies fall on a continuum, with a constant inflation-adjusted dollar amount of withdrawals (regardless of market performance) on one end, and an annual fixed percentage of the portfolio (that bounces up and down by the full amount of market volatility) at the other end. In between are an array of “variable spending strategies” that may be more variable than always maintaining a flat level spending amount, but are still designed to be somewhat flexible at least in extreme situations. Accordingly, Pfau analyzes a range of variable spending strategies that have been studied in the past 20 years, from floor-and-ceiling withdrawal methods, to Guyton and Klinger’s decision rules, Zolt’s target percentage adjustment, and actuarially-driven approaches that are based on variable life expectancy as well, all of which are designed to provide some framework about when spending might be adjusted based on significant market events (i.e., extreme bull or bear markets). Of course, figuring out how to measure and compare such strategies is difficult itself, as the traditional “failure rate” approach is irrelevant, since variable spending strategies typically avoid total wealth depletion, but may do so by extreme spending cuts that would still be untenable. Instead, Pfau suggests an “XYZ method”, where outcomes are evaluated based on the probability (X) that the spending falls below a threshold ($Y) by a certain year (Z). With this framework, Pfau discusses outcomes of the various strategies, generally noting that actuarially-based strategies often spend down wealth more efficiently, often by more effectively capturing spending upside in favorable market environments (albeit while risking more significant spending cuts along the way than constant spending or floor-based spending rules).

Engage With Clients Before You Meet Them (Bob Veres, Financial Planning) – The websites of financial advisors have been undergoing a significant evolution in recent years, given the growing recognition that the advisor website is actually the prospective client’s first impression of the advisor and an opportunity to actually engage them directly. Of particular importance is providing a way for prospects to engage in the website before getting to the infamous “Schedule An Appointment” button, in recognition that not all prospects are ready to go that far on the first visit. Instead, best practices is to given prospects other lower-stakes opportunities to engage, such as integrating Jemstep Advisor Pro’s tools that allow a visitor to aggregate their financial information and provide some quick analytics (and a comparison to the advisor’s portfolios); another option would be using Advizr Express to let prospects run a quick informal retirement analysis, to determine if they have a problem that merits a discussion with an advisor in the first place. Larger firms like United Capital are spending their own dollars to create unique and customized engagement tools specific to their own firm’s process (United Capital has its My Money Mind self-discovery assessment for prospects, along with its Honest Conversations tool). Ultimately, the key point is a combination of having a clear way to differentiate the advisor – right from the first visit to his/her website – and finding a way to engage a prospect with the company to get them interested enough to actually follow through to contact the advisor for a first appointment.

Video Conferencing For Advisors: The New Normal (Raef Lee, SEI Practically Speaking) – Earlier this year, as a part of its white paper on “Finding Your Inner Techno-Advisor”, SEI surveyed financial advisors about their habits in using video conferencing tools to engage clients, and found somewhat surprisingly that a whopping 70% of financial advisors are already using them in some form or another with clients. For the majority of advisors, video conferencing is used with specific clients who prefer to meet online (i.e., allowing the client to choose their preferred means of communication), although some use it regularly with all clients for specific interactions (e.g., a recorded investment update), and a small subset (1%-2%) are using solely video to meet with clients (i.e., they’re operating an entirely location-independent virtual financial advisory firm). In terms of the popular tools, SEI finds that GoToMeeting is the most popular business-oriented platform, followed by Join.me (popular for its simplicity and client ease-of-use) and then WebEx, although many advisors are using more “retail-oriented” solutions like Apple’s FaceTime, Microsoft’s Skype, and Google’s Hangouts. For those who haven’t tried the tools out, SEI suggests testing it out for internal meetings first, then with some existing clients who you know are technologically able and are open to new things, and then consider which other clients (or even new prospects) might be engaged with the video conferencing tools (and for clients who do prefer video chat meetings, be certain to note it in your CRM!).

Planning App Finds Middle Ground In Advisor Space (Joel Bruckenstein, Financial Planning) – In this article, Bruckenstein reviews a new financial planning software solution called RightCapital, which is less comprehensive than solutions like MoneyGuidePro, eMoney, or Advicent’s NaviPlan, but more robust than “lite” planning apps like Advizr (and Goalgami Pro). The planning software includes account aggregation (through Yodlee) for clients to integrate their live data directly into the planning software (via a client portal), and includes most of the ‘typical’ planning software functionality, including retirement projections, Monte Carlo analysis, comparisons of Social Security claiming strategies, and basic education and insurance projections. Overall, Bruckenstein notes that his initial impressions of RightCapital are favorable, particularly its easy data entry wizard and Yodlee data aggregations to simplify client onboarding, along with the software’s easy navigation and visually appealing charts and graphs. However, some of its output and action items are still relatively basic, and several of the charts could use some refinement to better communicate the relevant information (e.g., in one section a surplus is illustrated with a red bar that some might interpret as a deficit); in addition, its spending of dollars on various goals is not always well optimized, leading to scenarios where a low-importance early goal can make a high-importance later goal fall short (when realistically most clients would simply shift their spending and de-prioritize an early low-priority goal they can’t afford). RightCapital also doesn’t have modules for estate planning, charitable giving, and income tax strategies. Nonetheless, given that not everyone is looking for such depth, and that the software will likely improve over time, Bruckenstein suggests that RightCapital may be appealing to advisors serving the mass affluent who will be drawn to the relative easy and efficiency of the solution.

Are You Digitally Distracted? (Deena Katz, Financial Advisor) – As a digitally connected advisor, Katz notes that her regular digital routine includes everything from checking e-mail, LinkedIn, and Facebook, to following blogs and (digital) newspapers and magazines, and reading (electronic) books, not to mention following current news and events. Until a recent 3-week cruise with spotty internet forced her to disconnect for an extended period of time… and without access to the internet, eventually she was ‘compelled’ to start spending some time thinking about her business – a critical thinking process that there never seemed to be time for, until the disconnect left her with no choice. Yet the reality is that such critical thinking about our businesses is often one of the greatest ways to improve the efficiency and value of the business. In fact, Katz typically sets aside Fridays as a “reflection day”, yet notes that in practice such efforts often fail to succeed because we remain plugged into our digital world, and allow ourselves to be digitally distracted. So the next time you’re thinking about setting aside some time for critical thinking about your business, be prepared to take charge and really do so – which means setting aside time free of email and other digital communication, let people know you won’t be responding for a little while, and get focused on how to really improve yourself and your business!

The Ballad Of The Breakaway Broker (Josh Brown, Reformed Broker) – What started a few years ago as a trickle of brokers “breaking away” from wirehouses and insurance broker-dealers to join independent broker-dealers and RIAs is becoming a tsunami, with $1B, $2B, and even recently a $3B team leaving Northwestern Mutual to become an independent RIA and another $3.3B team that left Merrill Lynch. While in the past breakaway brokers were perhaps just a small subset of the most adventurous big-firm brokers who wanted to go out on their own, now it’s increasingly the biggest, best, and brightest of the shrinking broker-dealer world. The trend is perhaps further exacerbated by major bank and investment firm brands spinning off and winding down their own advisor divisions, from Barclays selling its wealth management business to Stifel, to rumors that Credit Suisse may soon engage in a massive overhaul of its “private bank” wealth management unit, and Deutsche Bank allegedly in talks to offload its wealth management business to Raymond James. Brown suggests that this unwinding of major bank, insurance company, and wirehouse brands is being driven by both a rising preference of consumers for lower-cost advice, increased transparency, and declining interest in “sophisticated” products that don’t actually add value, to the emergence of high-quality platforms that help advisors make the transition (e.g., Dynasty Financial Partners and Hightower Financial), and the fact that the more brokers there are who break away successfully, the more success stories there are that embolden other brokers to do the same. And the pace of breakaways may only accelerate further, as the retention and recruiting deals that wirehouses cut in 2008-2010 (the aftermath of the financial crisis) are now approaching their 7-9 year expiration dates. Of course, the caveat is that not every broker will want to break away, as many prefer the brand and structure of the major wirehouse environment; still, as external platforms to support breakaway advisors becoming increasingly robust, and more and more RIAs open their arms to support brokers breaking away to adopt an independent mentality, the trend seems poised to continue and even accelerate.

Can Financial Planning Evolve? (Richard Wagner, Financial Advisor) – When Loren Dunton and 12 others gathered in Chicago in 1969 to establish a new credential-based profession called financial planning, the initial curriculum for the program was built around the dominant categories of financial services products at the time, including insurance, investments, taxes (and tax shelters), retirement planning, employee benefits, and estate planning. And Wagner suggests that while those topical categories were fine and relevant for financial planning’s past, that perhaps it’s time to revisit them and evaluate whether financial planning is due for another stage of evolution into the future, particularly as the determination of what is financial planning is itself becoming muddied as more and more people do it (or at least, claim they do). In fact, Wagner raises the question of whether financial planning is even the right label, given that it essentially implies an ability to control (to “plan for”) a future that is inherently uncertain. After all, the original label established for the emerging profession was financial counseling, a term that regulators rejected and for which financial planning was just a substitute; perhaps, as we increasingly recognize the significance of psychological issues of money and behavioral finance, that label and grounding is more appropriate than was previously appreciated? Obviously, some may disagree with this framing, but nonetheless Wagner’s fundamental point remains that it is perhaps at least time to revisit and consider what the essence of financial planning is, what we think it should be, whether we need to more directly recognize our role as professionals in helping clients navigate their relationships with money and the awesome (and sometimes fearsome?) forces it generates, and whether it needs to be renamed altogether as it continues to evolve.

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.