Weekend Reading for Financial Planners (Oct 27-28)

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.

Ex-Wells-Fargo Brokers Sue For Damages, Claiming They Lost Business In Wake Of Scandals (Bruce Kelly, Investment News) - The ongoing series of crises and scandals at Wells Fargo (from more than 3 million fake and authorized accounts, to knowingly issuing billions in bad mortgage loans, and then forcing customers into auto insurance they didn't need) has caused its advisor headcount to decline by more than 1,000 in the past 2 years, as for many advisors the asset of the company's national brand and reputation has turned into a liability. But now, two former Wells Fargo advisors are actually suing the company, claiming that their own advisory practices under Wells Fargo were harmed (with business in one case down more than 50%) as a result of the parent company's public scandals, and that therefore the promissory note and the production requirements that were attached to their original recruiting package (in one case, just days before the first scandals became public) shouldn't have to be repaid now that they've left the company. The ramifications of the proposed lawsuit go far beyond "just" a dispute between Wells and two brokers over promissory note recruiting, though; it also signals a potential wave of former (and soon-to-be-former) Wells Fargo brokers suing the company over the collateral damage that Wells' reputational hit has caused to their practices (in fact, the well-known lead attorney for the Wells Fargo brokers, Andrew Stoltmann, has already set up a standalone website "WF Ruined My Business" to connect with other Wells brokers with a similar complaint). More generally, though, the lawsuit also raises broad questions about when and whether a broker or advisor should have legal standing to sue their own broker-dealer or RIA platform for reputational and brand damage if the parent company gets caught up in a scandal. Which means, if the Wells Fargo brokers prevail in this case, it may very well become a well-cited case for other unhappy brokers and advisors caught up in scandal-plagued firms in the future as well?

CFP Board Issues Call To Action To Promote Diversity In The Profession (Bernice Napach, ThinkAdvisor) - While the general population across the U.S. is 12.3% black and 17.8% Latino, the combined total of black and Latino CFP certificants is less than 3.5% of the nearly 82,000 CFP certificants in total, providing a stark contrast of just how severe the profession's lack of diversity really is. And the concern is not merely that the racial and ethnic diversity of CFP certificants does not match that of the general population, but that with people of color projected to become a majority of the U.S. population by 2045, eventually a lack of diversity amongst CFP certificants relative to the general population risks making the profession itself less relevant in the future. To begin addressing the issue, the CFP Board's Center for Financial Planning this week held a Diversity Summit in New York City, accompanied by the release of a major research report entitled "Racial Diversity in Financial Planning: Where We Are And Where We Must Go" that outlines both many of the root causes of underrepresentation of blacks and Latinos in the financial planning profession (lack of interest due to economic inequality and cultural norms, firms' hiring and boarding practices, and clients' own biases), and a series of Calls to Action for firms to consider in order to increase diversity of the profession, including: embed diversity into the firm's growth strategy itself; recruit diverse candidates and partner with minority business associations on internship programs; build and sponsor networks for financial planning professionals of color, and develop in-firm mentoring programs; better subsidize test and preparation costs for minorities interested in pursuing CFP certification; and actively support pro bono efforts by employees to support communities of color.

Clients Less Fee-Sensitive Than Many Advisors Think (Marlene Satter, ThinkAdvisor) - In its latest report "U.S. Retail Investor Advice Relationships 2018: Optimizing Engagement," Cerulli Associates finds that, notwithstanding advisor and industry concerns about fee compression, advisory fees are rarely actually the primary determinant for consumers choosing an advisor (with only 10% of all households citing "competitive fees" as the reason for beginning their relationship with their primary provider). Instead, the challenge is that consumers don't necessarily understand the value they're getting for their fees, especially those who offer a "comprehensive advice relationship"... as most consumers, right or wrong, often believe they are already receiving the maximum value from their current providers. In other words, the challenge is not that consumers aren't willing to pay (and even pay more) for a financial advisor, but simply that most consumers aren't able to distinguish between the "levels of comprehensiveness" that most financial services firms state they provide and are struggling to figure out how to comparison-shop advisors in the first place. Or stated more simply, financial advisors aren't yet facing fee compression, but instead are more likely to be struggling with growth because we are too value-ambiguous, instead (and pricing in turn only becomes an issue after a lack of clear value differentiation).

5 IRA Planning Strategies To Use Now (Ed Slott, Financial Planning) - As the end of the year approaches, it comes time to engage in end-of-year tax planning, given that most tax planning strategies must actually be completed by December 31st in order to count for the current 2018 tax year. And with 2018 being the first year since the passage of the Tax Cuts and Jobs Act (TCJA), even a number of “traditional” end-of-year tax planning strategies have new twists for the first time. For instance, TCJA eliminated the ability to do Roth recharacterizations in the future, which means that while it's still popular to do annual partial Roth conversions for clients, going forward, it will be necessary to wait until near the end of the tax year to be certain you know exactly how much to convert without accidentally causing the client's tax bracket to rise too high (which means now is the time to start doing pro forma tax projections for 2018 to figure out how much clients will want to convert this year). Other notable end-of-year tax planning strategies to consider include: preparing to do a Qualified Charitable Contribution (QCD), which will be even more appealing for those who don't do enough charitable giving (or have enough other deductions) to surpass the new higher standard deduction thresholds of $12,000 for individuals and $24,000 for married couples; remember that advisory fees are no longer deductible, and that going forward its better to deduct any IRA-related fees directly from the IRA (which by definition will be pre-tax, since the IRA itself is a pre-tax account); be certain not to do any end-of-year rollovers from 401(k) plans into IRAs that due to the IRA aggregation rule might adversely impact any earlier-in-the-year Roth conversions (including any backdoor Roth contributions); and don't forget to prepare for end-of-year RMDs themselves that must be completed by December 31st (or satisfied via a QCD if preferred).

Understanding The Tax Torpedo And Its Implications For Various Retirees (William Reichenstein & William Meyer, Journal of Financial Planning) - As income rises for Social Security recipients, their Social Security benefits slowly shift from being 0% taxable up to being 85% taxable, and the phase-in of the taxability of Social Security benefits, on top of the tax brackets themselves, can cause surprisingly high marginal tax rates, as much as 40.7% for those who might have otherwise thought they were in "just" the 24% tax bracket in 2018 (down slightly from a peak of 46.25% marginal tax rates under the prior tax brackets in 2017). Eventually, though, the maximum 85% of Social Security benefits are being fully taxed, and at that point, the retiree's marginal tax rate drops back to 24% again. Reichenstein and Meyer call this temporary but abrupt increase in marginal tax rate due to Social Security taxation the "tax torpedo," noting that its exact threshold kicks in anywhere between $10,000 and $20,000 of income (not including Social Security benefits themselves) for singles and $17,000 to $25,000 for married couples, and ends somewhere between $33,000 and $48,000 for individuals (and $47,000 to $67,000 for married couples), with the tax torpedo starting earlier, and extending longer, for those with higher Social Security benefit amounts (as there are literally more benefit dollars to be phased in with taxation). Not surprisingly, the incredibly high marginal tax rates of the tax torpedo makes it desirable to avoid where feasible, but Reichenstein and Meyer note that the optimal strategy to navigate around the torpedo isn't always intuitive; while in some cases, it may be appealing to reduce income (to stay below the threshold) or delay Social Security benefits (to avoid the onset of the torpedo), in other cases the best strategy is simply to stack more income on top of the torpedo, as once households exceed the top of the range, their marginal tax rate simply reverts back to the normal (much lower) tax bracket, and adding extra income on top of the torpedo in one year can actually help to avoid being hit (partially or altogether) by the torpedo in subsequent years!

5 Quirky IRA Rules You've Never Heard Of (Ed Slott, Financial Planning) - One of the biggest challenges in working with IRAs is that, beyond the general complexity of the rules for retirement accounts, is that there are a number of rare IRA rules that only apply in very limited circumstances, but can be incredibly important for clients who happen to meet those exact circumstances. Examples of these rare-but-important "quirky" IRA rules include: military death benefits (including SGLI [Servicemembers Group Life Insurance] death benefits) can be rolled into a Roth IRA or Coverdell Education Savings Account tax free, potentially up to several hundred thousand dollars that grow tax-free from that date forward, but the contribution must be done by the end of the year after the death benefit is received (though it is available to beneficiaries of all military personnel, not just active military); inherited IRAs cannot be converted to a Roth IRA, but ironically an inherited qualified plan (e.g., an inherited 401(k) actually can be converted for a non-spouse beneficiary (though it's still better to convert the beneficiary's own individual IRAs first, as the inherited Roth IRA will be subjected to post-death RMDs); don't forget that since 2015 there is a once-per-rolling-year limitation on doing an IRA rollover, which applies not only to an individual rolling over his/her own IRA but per PLR 201707001 also applies to a spousal rollover of a deceased spouse's IRA (though there is still no limit on otherwise-permissible trustee-to-trustee transfers); and don't forget that for those under age 59 1/2, even if an IRA withdrawal is fully non-taxable by being offset with other deductions, the 10% early withdrawal penalty will still apply on top!

The Worst Way To Botch A Referral (Dan Solin, Advisor Perspectives) - While most financial advisors rely on referrals for at least a significant portion of their new client growth, Solin points out that not all financial advisors are equally gracious and effective at receiving referrals in the first place, and that if advisors don't make referrals feel like positive experiences for the referrer that he/she may not refer again in the future. The starting point is simply to recognize that how the advisor responds to the referrer themselves can have a significant impact. For instance, Solin notes one instance where he made a referral himself for the CFO of an educational institution who was looking for a referral to an advisory firm, and when Solin made the introduction to the advisor via email (on a Sunday evening, when he happened to receive the inquiry), the advisor responded within an hour thanking him profusely and copying the head of his firm's institutional division with a commitment that the firm would follow-up on Monday (and in point of fact, the advisor also ended out following up later that evening as well, with a warm and appreciative response). By contrast, Solin also made another recent introduction to an investment banker for another client, and the investment banker then responded with a brief email "I can try...out today, here's my cell to catch up later this week." Which may seem like a straightforward response for an otherwise-busy individual, but Solin notes that from the referrer's perspective, what it really communicates is: “I'm busy; your inquiry is low priority, and will be handled in a manner that suits my convenience; you need me more than I need you; and there's no need to thank you or even acknowledge your efforts to refer business to me.” Which raises the question: when someone sends you a referral, how often do you respond in haste, and how often do you take a moment of your time to recognize and express gratitude to the person who has already taken a moment of their own time to refer you in the first place?

3 Unconscious Referral Killers (Bill Cates) - In most cases, referrals are the warmest leads that can come to an advisor, but Cates notes that even a warm referral lead can be unwittingly "killed" with a bad process in how you meet with and interact with the referred prospect. The starting point is simply to be certain you actually take the time, even with a referred prospect, to have a full discussion of what the prospect needs, and the value you provide, rather than assuming that the prospect already "gets it" simply because he/she was referred to you; otherwise, there's a risk that the referral introduction meeting will unwittingly be cut short, before the referral ever actually really understands what you do and how you can help. In addition, be cautious about communicating that you're too busy to take on new clients, or you can accidentally kill the prospect's interest in working with you from the very beginning. For instance, if a referral contacts you and during the initial chit-chat phase asks how your day is going, and you respond, "This is a crazy-busy day. I'm going from one client call to another. But I'll survive. How are you?" Recognize that what the referral (or person making the referral) may hear is "I'm too busy to deal with any new introductions right now. Probably better that you go to someone else who has more time to help!" Similarly, Cates notes that there is also a danger that advisors may actually convey they're too successful as well, as while it's nice to dress like success (e.g., custom suits and custom shirts), and drive like success (e.g., top-end automobile), or "time like success" with a high-end watch, the signal it may send to some prospects is that "you're done" and don't need any more new clients after all.

Be Clear About How You'll Handle Referrals Outside Your Target Market (Stephen Wershing, Client Driven Practice) - One of the most common reasons clients don't refer is simply because they don't know if their friend/family/colleague will qualify to work with the advisor in the first place (e.g., due to asset minimums that many advisory firms have), and it's easier to just not refer at all than risk the social embarrassment of referring to someone who in turn gets rejected. On the one hand, Wershing suggests that this is why it's especially important to be clear about your minimums or other requirements to work with you in the first place - so at least those who might refer understand the criteria in the first place, reducing their uncertainty. In fact, research from Wershing and Julie Littlechild earlier this year found a direct correlation between how often the advisor describes his/her target clientele, and how often he/she gets referrals; in other words, to get more referrals, make sure everyone knows (and hears on a regular basis) what types of clients you're trying to attract (ideally by not just sharing asset minimums, but the needs that you solve for the target clientele you're aiming to serve). But what this issue really implies is that advisors need to not only be clear about who they serve but also be clear about what they will do for people who are referred but are not a good fit. For instance, do you maintain a list of other advisors you refer out to and do your referrers know this... so they can at least rest assured that if they refer someone to you, and that person doesn't qualify, at least the referred person will ultimately get to someone who can help them?

Three Powerful Ways To Get More Done (Dan Richards, Advisor Perspectives) - In his recent book, "When: The Scientific Secrets of Perfect Timing," author Daniel Pink provides important insights about how to maximize your daily productivity. The first key point is to understand that our own individual productivity actually varies throughout the day, and most people have a "peak stage" where they're most effective, and a "trough" point where they're less productive (and more negative and irritable) before they recover again later in the day. For most people, the peak phase is in the morning (roughly 8AM to noon), and is when the most important work or meetings should be scheduled, while the trough occurs mid-afternoon (e.g., 1:30PM to 3:00PM) and is thus a good time for purely administrative tasks, while the Recovery phase (late afternoon, beyond 3PM) is particularly good for doing creative work like thinking, writing, or putting together presentations (though, notably, "night owls" tend to progress through the cycles in the opposite order!). In addition, Pink's work also finds that even during peak productivity phases, it's especially helpful to take brief breaks periodically, as the brain does better working for "just" 60-90 minutes at a time, followed by brief 5-10 minute breaks (ideally moving, outside, social, and fully detached from what you were otherwise doing), or even 10-20 minute power naps. And don't underestimate the importance of "temporal landmarks," from significant birthdays (we're often very motivated by the "nine-enders" like turning 29, 39, and 49) to turning the new year in January, and that we generally like to finish on a good note (so if there's bad news to share, always share it at the beginning of the meeting, and then follow up with the good news and leave on a high note at the end!).

28 Pieces Of Productivity Advice I Stole From Others That Made Me Successful (Ryan Holiday, Thrive Global) - Different people have different tools and techniques for staying productive, and Holiday simply lists out a number of great productivity tips from some well-known experts (and/or simply highly-productive people). Notable tips include: Every day, make a To-Do list of the 5-6 big items that must get done that day, with a goal of being able to cross them all off and tear up the card at the end of the day (and be amazed at how much you really get done when you cross off more than 1,000 items cumulatively over the span of a year!); create a voicemail message that simply says "I don't use voicemail, email me" and then stop checking your voicemail messages (it at least simplifies your life to have fewer places to keep up with communication and messages!); if you're going to hire an assistant, make sure they are older and more responsible than you, because it's impossible for them to help you control your time and organization if you have to teach them why it matters in the first place; swimming is a particularly effective exercise to support creativity, because it requires total isolation (no music, no phone, no other interruptions), allowing for powerful brainstorming; you'll never answer every email you get, so figure out how to respond to the ones that matter, and just delete the rest (because the truth was that you were never really going to respond to them anyway!); one of the best ways to avoid office BS is just to avoid the office, and finding the space where you can be most productive (at least, if your company allows it!?); and it's brutally difficult to learn to say "no" to things, but in the end you may be amazed by how much "No, thank you" ends out empowering you to focus on the things that matter most.

How To Have More Energy: 3 Powerful Secrets From Research (Eric Barker, Barking Up The Wrong Tree) - In his recent book "Are You Fully Charged?," researcher Tom Rath (from Gallup) found that amongst 10,000 people surveyed, a mere 11% said they felt like they had a lot of energy in the past day. And after delving into the academic research, Rath found that there are ultimately three factors that drive where and how we find energy and feel energized. The first is that in order to find energy, we need to find meaning in what we do, which effectively comes down to "doing stuff that benefits other people" (which actually gives us more of a happiness lift in the long run that just trying to do things for ourselves), such that when we feel like we're making progress in meaningful work we're 250% more likely to be engaged at the office. The second factor to finding energy was the interactions that we have throughout the day, as the research revealed that in the end, our most positive times are not actually about what we achieve, but about our moments of interacting and belonging and connecting with others; for instance, most people quickly recognize that the most positive experiences of their lives were all social events (e.g., when relationships begin and end, when you achieved something as a group/team, etc.), such that having positive personal interactions with co-workers at work is actually a key factor in finding the work itself to be energizing. And the third factor was health, as yes eating better, sleeping longer (and deeper), and moving around more, really does help us feel more energized... and not just with respect to foods and exercise that produce weight loss, but simply that more processed foods with lots of sugar tend to increase laziness, while trans-fats tend to increase aggression, and even 20 minutes of moderate exercise makes us feel better for up to 12 hours!

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 Bill Winterberg's "FPPad" blog on technology for advisors as well.