Executive Summary
Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a recap of the recent FPA Experience national conference, along with a discussion of the latest research from Cerulli suggesting that the declining market share of wirehouses may actually be accelerating even as we become more distanced from the financial crisis, and a nice overview of the current state of fiduciary rulemaking (or lack thereof) from the SEC. From there, we look at Financial Planning magazine's recent Influencer Awards recognition, a discussion of the FA Insight "Growth by Design" study of how firms are strategically viewing and managing growth, and a wide-reaching interview on safe withdrawal rates from retirement researchers Bill Bengen, Jon Guyton, and Wade Pfau. There are also a few investment articles, including the latest change from Vanguard to further drive down the expenses of ETFs, a recap on the current state and future of actively managed ETFs, and a striking article on asset allocation glidepaths suggesting that rising equity exposure in the years before retirement may actually be more effective than declining equity exposure! We wrap up with a brief article (and associated video) showing how to hide the new "endorsements" feature of LinkedIn (which some have suggested may be a violation of the regulations barring client testimonials), and a profile of a financial advisory firm making an interesting splash in social media with a controversial political video that has generated a whopping 1,000,000 views and 100,000 Facebook fans. Enjoy the reading!
Weekend reading for October 6th/7th:
The FPA Throws Its Annual Gathering In A Spirit Of Renewal After Years Of Membership Decline - This article by Tim Welsh of Nexus Strategy is a review of the recent FPA Experience annual conference, which drew nearly 2,000 attendees in San Antonio this past week. Highlights included the ascension of FPA's new CEO Lauren Schadle, as longtime CEO Marv Tuttle retired, naming the new Board of Directors president Janet Stanzak, and bold statements by the FPA calling for a focus on the CFP certification as part of a new tagline "One Profession, One Designation, One Association" that was rolled out at the conference. At the same time, the FPA expressed a new commitment to bolster its practice management deliverables to members. The article also provides an in-depth look at some of the activity around the FPA's "Major Firms" initiative, as the organization tries to bolster its relationship with major financial services firms that may hire large numbers of CFP certificants but potentially face different membership needs than the majority of FPA's current independent members.
The Prognosis For Morgan, Merrill, UBS and Wells Is Even Grimmer Than The Negative Hype, Cerulli Report Shows - This article on RIABiz discusses a recent report released by Cerulli, suggesting that the four major wirehouses - Morgan Stanley, Merrill Lynch, UBS, and Wells Fargo - may lose 7% market share in the next 3 years, even more than the 6.7% they've lost in the past four years since the financial crisis. The problem is not just that the wirehouses are letting go "smaller" advisors with lower production and focusing on the higher net worth, but that they're simultaneously losing some of their largest advisors that do work with high net worth clients to various independent channels, and the wirehouses are behind on training programs to replace these advisors. While wirehouses currently have 41.1% of market share, Cerulli projects that by the end of 2014, the wirehouses will be down to 34.2%, while RIAs to 14.4%, dually registered advisors to 10.3%, and IBDs fall slightly to 12.6%. Notably, though, this means that Cerulli anticipates in the aggregate, independent channels will have a larger market share than wirehouses by 2014.
SEC Fiduciary Rule Stalled—But for How Long? - This article from Investment Advisor magazine provides a nice summary of the currently stalled fiduciary rule from the SEC, which may now be 3-4 years away from real progress according to Knut Rostad of the Institute for the Fiduciary Standard. Nonetheless, SEC Chairwoman Mary Schapiro insists that work is still ongoing internally at the SEC on the issue, and that a request for information to conduct a cost-benefit analysis - the required next step towards rulemaking, but also one that has paralyzed the SEC on much of its recent rulemaking - may still be forthcoming soon. Notably, the SEC also appears stalled because Dodd-Frank gave it many mandates, but the fiduciary rule was merely something the agency was "authorized" to act upon, which may have resulted in it getting a lower priority internally at the regulator, although recent fiduciary rulemaking activity the Department of Labor could potentially force the issue forward. Perhaps the greatest wild card, though, is that it's unclear whether Schapiro herself will remain past the end of the year, and there are often changes at the SEC after an election; as a result, the real direction for fiduciary rulemaking in the coming years may depend on who ends out being in charge in 2013.
Realms Of Influence: Financial Planning's Influencer Awards to Six Outstanding Advisors - This article is a write-up of interviews with Financial Planning magazine's six "Influencers" of 2012, including: the Industry Contributor Award to Tom Orecchio (who drove the establishment of the Financial Planning Coalition in 2008); the Practice Management award to Julie Littlechild (who pioneered the process of regularly and systematically surveying clients and adapting the financial planning firm based on the results); the Tech Innovator award to Bob Curtis of MoneyGuide Pro (as the first major financial planning software package to transition to the cloud); the Portfolio Innovator Award to Wade Pfau (for his research, especially around retirement income and extending the safe withdrawal rate research); New Generation award to Caleb Brown of New Planner Recruiting (for his work in helping young planners find financial planning jobs, in addition to his leadership with FPA NexGen and more generally on financial planning career development issues); and the Lifetime Achievement Award to Marv Tuttle (for his 29-year career with the FPA and its predecessor organization, along with 9 years as the FPA's CEO).
Striving for Sustainability: 2012 Growth by Design Study - This article by Dan Inveen and Eliza Depardo of FA Insight looks at their latest research on what supports growth for advisory firms. The stats for growth overall remain positive; the average advisory firm retained 97% of its clients, and added nearly four new clients for every one lost, with a 6.1% growth rate in 2011 that is expected to be slightly better (6.9%) in 2012. Revenue growth combined with limited staff growth has supported the firms financially as well, leading them to show more income per owner than they have at any time prior to the financial crisis (although as expenses rise, firms are also showing a steadily rising level of overhead per client, which in turn is squeezing profitability a bit). While growth has many positive attributes for firms, the study also notes that some firms appear to be producing growth more sustainably than others; the research cautions that growth on the back of rapidly declining profit margins can put the business at risk.
Safe Withdrawal Rates: What Do We Really Know? - This article from the Journal of Financial Planning is an interview with retirement researchers Bill Bengen, Jon Guyton, and Wade Pfau, moderated by yours truly, regarding the current state of the safe withdrawal rate research. The article looks at what these researchers are currently advocating as a safe withdrawal rate (4.5%+ for Bengen and Guyton, but only 3.5% for Pfau), whether the safe withdrawal rate research is still relevant in today's world (it's actually holding up remarkably well for year 2000 retirees), the impact of asset allocation on the process (including the importance of actually holding government bonds as the research suggests), the impact of fees and taxes, the difficulties of today's financial planning software tools, and more.
Vanguard Takes Next Leap In Fee War With Big Index Shift - The big news from Vanguard this week was a decision to change from MSCI to the FTSE Group and The Center For Research In Securities Prices (CRSP) for benchmarking returns. The primary issue at hand was simply that Vanguard is required to pay an index licensing fee for use of the indices to help construct its ETFs and the underlying index-based basket of securities, and was finding that the index licensing fee was consuming more and more of the expense ratio. The shift allowed it to negotiate a less expensive fee, and as a result they will be able to further drive down the expense ratios on their ETFs to maintain their competitive edge (as Vanguard ETFs have been attracting nearly 1/3rd of all ETF dollars this year!). Notably, as a result of the index changes, in the coming months the Vanguard ETFs will be making changes to the underlying ETF portfolios to align them with the weightings of the new index providers. In most cases, the changes may be fairly minimal, although in some situations they may be more significant - for instance, while MSCI considered Korea an emerging market, FTSE considers it a developed one, and as a result the Vanguard Emerging Markets ETF will be transitioning out of its Korea holdings in the coming months and reallocating accordingly.
The Future of Actively Managed ETFs - This article takes a fresh look at the current state of the actively managed ETF marketplace, a few years out from their initial launch that simultaneously drew predictions that such ETFs would be a "game changer" and that they would be ineffective, fail to draw assets, and "die on the vine." Thus far, it appears that both predictions were too extreme, and that the developments have been more nuanced - in part, because there is such a range of ETF strategies that it's not even clear how to divide "active" versus "passive" ETFs in all scenarios. In the segment most clearly identified as actively managed ETFs, the results have been varied - some ETFs have launched and already folded, while others are attracting assets and doing quite well, suggesting that perhaps investors are simply becoming more discriminating about when and whether they do/don't pay for an active manager. In addition, some funds and fund managers still fear revealing their trades on a daily basis, as is implicitly required with ETF status, expressing concern that investors will simply mimic their strategies independently. Overall, the bottom line is that the jury is still out on the success of actively managed ETFs, but that the space clearly continues to evolve.
The Glidepath Illusion - This article by Rob Arnott on Advisor Perspectives takes an interesting look at the use of so-called "glidepaths" - where equity exposure gradually shifts or "glides" over time, such as the traditional glidepath where individuals slowly reduce their equity exposure over time. Notably, though, Arnott finds that having a declining equity glidepath in the years leading up to retirement actually results in less average wealth at retirement and consequently less retirement income that can be generate than just holding a 50/50 portfolio. In fact, even the worst case scenario for the 50/50 portfolio is still better than the declining equity glidepath! This is due in large part to the fact, as noted previously on this blog, that traditional retirement projections rely on the portfolio to nearly double in the last decade, and as a result decreasing equities in the last 10 years makes it almost impossible to reach the same level of wealth. Perhaps what's most notably, though, is that the best approach is actually a rising equity glidepath, where equity exposure increases as retirement approaches! While such a glidepath does introduce additional volatility and uncertainty, it's virtually all upside volatility! Notably, the results also still hold when Arnott provides a series of alternative projections using lower forward return assumptions.
How To Hide Endorsements From Your LinkedIn Profile - The LinkedIn social networking platform recently launched an "endorsements" section, that allows people to endorse specific skills of individuals in their network. Given industry restrictions against client "testimonials" some consultants have suggested that endorsements may not be permissible under current regulatory guidance. Accordingly, this article provides a helpful video walk-through on how to remove endorsements from your own LinkedIn page, if you wish to remove them preemptively just to eliminate any risk of regulatory concern.
A $3.4-billion DFA RIA Sends His Social Media Presence Sky High With A 'Yep, I Built That' Strategy - This article discusses the recently "controversial" social media activity by Mark Matson of Matson Money, who created a YouTube video entitled "Yep, I Built That" in response to the recent comments from President Obama. The video, which can be seen here, has already garnered nearly 1,000,000 views in just over a month, along with a Facebook Fan page with over 100,000 Likes. The video clearly has a political bent to it, which as a marketing strategy has generated a great deal of controversy within the industry as well. Is politically-oriented marketing good strategy because it builds shared values with some (even while alienating others)? The article notes that in reality, Matson is still trying to determine how to capitalize on the success of the video, as it appears to have already gone far wider than he anticipated. Nonetheless, while many critics remain, I suspect that many financial planners wouldn't mind having 100,000+ prospects who have signed up to receive further updates and information from the firm!
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!
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