Weekend Reading for Financial Planners (October 17-18)

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.

More Investors Turned To Financial Advisors During Pandemic (Michael Fischer, ThinkAdvisor) - According to a new survey conducted by the College for Financial Planning, 71% of advisors are reporting that they have more clients now than before the coronavirus pandemic broke out, suggesting that the sharp V-shaped recovery in the markets has mapped similarly to a fast recovery for most advisory firms themselves (at least when it comes to clients and revenue). In fact, the fast market recovery appears to have translated through to clients themselves as well, with 70% of advisors also reporting that their clients were not changing their retirement date at this point due to the pandemic-driven market volatility earlier this year (and in fact, of the other 29%, only 17% planned to delay, and the other 12% had moved up their retirement date). Which simply adds to the growing volume of data that, unlike prior (and more protracted) recessionary bear markets, like the 2008-2009 financial crisis, the coronavirus pandemic may have a prolonged impact on how advisory firms are run, but doesn't appear to have materially impaired their ongoing revenue and economics the way the financial crisis did.

With Social Distancing And Remote Work, Study Shows Advisors Increasingly Embracing Social Media (Asia Martin, Wealth Management) - As financial advisors have seen most of their 'traditional' marketing activities curtailed by the pandemic and its remote work and social distancing protocols, digital marketing and social media have seen a rapid increase in adoption and utilization as advisory firms look to new channels for opportunities. In fact, the latest Putnam "Social Advisor Survey" found that during the early months of the pandemic, 74% of advisors who use social media were able to obtain a new lead or onboard a new client, and 55% of those who received a lead from social media attributed it to their pandemic-driven ramp-up in social media usage. Overall, the Putnam study finds that the average assets advisors gained through the use of social media was $2.4M in 2019, but is already up to $7M in 2020. Amongst platforms, advisors reported most commonly using LinkedIn (85%), followed by Facebook (65%), Twitter (57%), YouTube (53%), and Instagram (46%). Ultimately, though, most advisors using social media still caution it's a "long game" more than a short-term return; but with general consumer research showing that social media engagement is up 61% during the pandemic (including a 40% uptick in those over age 35), it appears that advisors are having more success with social media in part because consumers are paying more attention to it now than in the past (given fewer other options in a pandemic environment?).

Annual Growth Remains Strong For Large AND Small RIAs (Michael Fischer, ThinkAdvisor) - Earlier this year, Schwab released its annual 2020 Benchmarking survey of the RIAs on its platform, and this month offered up further detail on the (distinct) trends of both smaller and larger firms. Overall, the results show that coming out of 2019 (albeit recognizing that this is last year's data before the pandemic hit), growth was strong across the board, with "small" RIAs (those with <$100M of AUM) reporting a five-year compound growth rate of 7.7% in AUM and revenue and 4.6%/year in client growth, while $1B+ AUM "larger" RIAs reported 9.2% average annual growth rates in AUM (though only 7.4% in average annual revenue growth as more affluent clients disproportionately hit higher lower-fee-tier breakpoints) and 4.4%/year growth in the number of clients. Notwithstanding these healthy growth rates, though, Schwab found that the #1 strategic priority for both large and small firms coming into 2020 was acquiring new clients, though smaller RIAs were also focused on improving satisfaction for existing clients and scaling their compliance, while larger firms' next strategic priorities were around developing talent and formulating long-term growth strategies (to complement their current-year new-client-acquisition efforts). In fact, the data showed overall that it's actually larger RIAs that are struggling to maintain their growth pace, as Schwab's study found that organic growth contributed 2X more to asset growth for firms with <$100M than those with >$250M of AUM (though notably, it is arguably easier to grow a higher percentage rate when it's on a lower asset base). Similarly, while retention rates remained strong across the board, it was smaller RIAs with the stronger client retention rates (at 97.5% on average) versus larger firms (with those at >$250M of AUM retaining only 96.5% of clients annually).

TAMPs Consolidate To Compete (Nicole Casperson, Investment News) - While much has been written about the question of whether independent advisory firms will need to merge and consolidate in order to compete (or if this will continue to be a golden age for solo advisors), it is increasingly apparent that when it comes to third-party asset managers (from mutual funds to TAMPs), consolidation via mergers is becoming essential for most to survive (at least for those TAMPs that are not already 'huge'). As a result, the landscape is currently dominated by a subset of "platform" TAMPs - which offer an increasingly wide array of third-party investment managers in one centralized solution - including Envestnet and AssetMark. In turn, the TAMPs that want to remain competitive without being huge will have no choice but to find a niche of their own that allows them to differentiate with at least a segment of advisors they can uniquely serve, though notably, large TAMPs like SEI that are looking to expand into new markets are, in turn, seeking out niche TAMPs to acquire in order to move into those advisor markets as well. Ultimately, industry experts expect that there will be fewer than a dozen platform TAMPs that survive, along with 20-30 more product TAMPs with various niches and specializations for particular advisor segments, while the rest are sold or merged as the brutal fee compression that has driven down mutual fund fees in recent years increasingly puts pressure on TAMPs to scale bigger so they can get their fees down for advisors as well.

Firms Go Off-Grid To Drive Growth Long-Term (AdvisorHub) - For decades, "the grid" has been central to the compensation structure of advisors working at broker-dealers, with a standard incentive structure that said, "the more new revenue you generate, the higher the payout you earn". However, in recent years the model has begun to shift, a function of both advisors moving away from commission-based business models into recurring revenue fee models (that have different internal business incentives for maintaining existing clients versus just continuously seeking out new ones), and broker-dealers beginning to recognize that as the business focuses more on recurring revenue, a different set of advisor behaviors (e.g., around client quality and retention) are more important than 'just' new revenue sales. And in fact, sometimes just driving advisors to keep growing bigger and bigger results in them growing beyond their capacity, resulting in unhappy advisors, reduced client retention, and worse outcomes. Accordingly, some broker-dealers are also adding grid-related incentives for everything from teaming up (to have more advisors to service clients), to the adoption of new technology (that makes the firm more efficient and gives the advisor more time to service clients). Still, though, the aftermath of a volatile bear market is often that, once the dust settles, clients will take a fresh look at whether they're happy with their current advisor or going to seek a new one... which means 2021 may still see an uptick in the amount of grid bonuses that are tied to new growth and new revenue production in the coming year.

Asset Managers Are Eating [Permanent] Life Insurers' Share (Allison Bell, ThinkAdvisor) - In 1995, life insurers' share of U.S. household assets was almost 10%, driven by the substantial accumulation of cash value inside of permanent life insurance policies; by 2019, though, that share has fallen to just 4%, as consumers increasingly look to the stock and bond markets for investment growth instead. Notably, though, direct investing in stocks and bonds is also on the decline - from 23% in 1995 to just 18% today - as households increasingly look to third-party managers to invest their portfolios (even with and despite the collapse of trading commissions on stocks). As a result, mutual fund companies have grown their market share from 13% to 24% over the same time period, while retirement accounts have risen from 28% to 37%. On the other hand, the analysts also suggest that the decline in the use of permanent life insurance may be contributing to a growing gap of consumers being under-insured in general, as there still hasn't been nearly enough growth in term insurance to offset the actual insurance gap of consumers as the adoption of permanent life insurance has continued to fall.

PPP Forgiveness Simplified For Loans Of $50,000 Or Less (Ken Tysiac, Journal Of Accountancy) - Earlier this month, the Small Business Administration (SBA) began approving Paycheck Protection Program (PPP) loan forgiveness applications, for small businesses that had met the various requirements around how PPP loan proceeds were used and maintained the required levels of employment. However, the certification process is proving onerous for many ultra-small businesses - often with only 1-2 employees, and sometimes sole proprietorships of just the business owners themselves - where documentation is more limited and the rules are less practical to apply. Accordingly, last week, the Small Business Administration issued an interim final rule that provides a simpler loan forgiveness application for businesses that took out a PPP loan for less than $50,000, including not only a 1-page Form 3508S, but an outright waiver of the requirement of small businesses to meet the requirement to maintain the same number of Full-Time Equivalent (FTE) employees and their ongoing salary/wages (i.e., small businesses with loans under $50,000 will be eligible for forgiveness even if those original requirements were not actually met). The reason for the shift appears to be the sheer difficulty of evaluating and certifying the applications (as well as the burden that was placed on lenders to review such applications), given that loans of $50,000 or less were only 12% of loan volume ($62B out of $525B in PPP loans) but a whopping 69% of the number of loan applications to be reviewed for forgiveness (3.57 million loans out of 5.2 million in total, and nearly half of those had only 0 or 1 employee anyway). In fact, some had advocated that all PPP loans up to $150,000 receive such expedited treatment, though, in the end, the Treasury opted for the $50,000 PPP loan threshold.

New IRS Guidance Raises Timely Questions On SECURE Act (Ed Slott, Financial Planning) - One of the big changes under the SECURE Act for financial advisors was the new option for clients over age 70 1/2 to continue to make contributions to traditional IRAs. However, the recent IRS Notice 2020-68 has stipulated that while consumers may contribute to IRAs after age 70 1/2, it will be up to IRA custodians whether they wish to allow such contributions to occur... or not. As IRA custodians are being provided with both the option to delay as long as December 31st of 2022 to update their IRA adoption agreements and related systems to support post-age-70 1/2 contributions, but are also being guided under Notice 2020-68 that it will be optional whether custodians do so or not. In addition, the new guidance also clarifies that those who make post 70 1/2 contributions must still take their annual required minimum distributions out of the account (at least, once reaching the new age 72 RMD threshold), showing both the dollars in and the dollars out (such that if a retiree has a $30,000 RMD, they can't just claim they were going to make a $6,000 contribution and take out $24,000... instead, they must actually make a $6,000 IRA contribution if they wish, and separately still have to take out a full $30,000 required minimum distribution). Other notable changes and updates in the guidance include further details about how to calculate the amount of future QCDs that are offset for those who make post-70-1/2 contributions and clarification on the new "Qualified Birth Or Adoption" penalty-free distribution from retirement accounts that it is a permitted $5,000 per parent (both parents can receive a distribution for the same child), and each child or adoption qualifies for its own distribution (thus if a couple has twins, each spouse can take $10,000 from their respective IRAs, or $20,000 in total). However, at this point, the IRS has issued no further guidance on the new 10-year rule that has replaced the 'stretch IRA' for many beneficiaries, beyond the details stipulated in the original law itself.

DOL Issues Proposed Rule On Pooled Employer Plans (Melanie Waddell, ThinkAdvisor) - When the SECURE Act was passed last year, a key aspect of the new law was the establishment of new "Multiple Employer 401(k) Plan" (MEP) solutions for small businesses that want to band together to have one collected 401(k) plan for them all (in the hopes of saving on the administrative costs and hassles of the plan, not to mention sharing the due diligence efforts on plan investment options, and being able to file a single Form 5500 for them all). However, numerous questions remained about how, exactly, MEPs would be administered. Now, the IRS has issued a Notice of Proposed Rulemaking to begin putting the new MEP structure into place, starting with a new sub-category dubbed a Pooled Employer Plan (PEP), and what a "Pooled Plan Provider" will have to do to actually offer and administer such plans. Notably, the Department of Labor has indicated that Pooled Plan Providers will themselves be required to register with the DoL before beginning operations, but are anticipated to have a streamlined registration process so PEPs can get up and running quickly in 2021 when the new rules are anticipated to take effect, and a new ongoing "Form PR" to replace the existing Form 5500 for such pooled 401(k) plans. Ultimately, it remains to be seen whether/how PEPs will be implemented in practice, and whether they will really be lower cost than existing 401(k) plan solutions for small businesses (the original goal of the structure), but many financial advisors are eyeing the new PEP rules as an opportunity to create their own PEP for their small business clients, effectively running (and managing?) all clients' 401(k) plans from a single consolidated platform (once PEPs are actually available).

The 3 Breaks You Need To Take Every Day (Laura Vanderkam, Forge) - While we're all constrained to the same amount of time every day, not everyone brings the same amount of energy to their day, nor even maintains the same amount of energy throughout the day (with most people peaking in the morning, and finding their energy waning in the afternoon). But a recent study found that a single five-minute session of stair climbing could raise energy levels for over an hour, allowing the subsequent work being done to have more focus and energy (thus literally being able to get more done!). Which means, in essence, that taking breaks can actually make you more productive than trying to work more hours straight through without them (especially since the reality is that once our brains get fatigued, we'll start mentally checking out anyway... which is why productivity goes down when we've gone too long without a break!). So when and what kinds of breaks should be taken? Vanderkam suggests a framework of three different types of breaks - based on the kinds of activities that typically make us happy - including Physical (e.g., taking a walk), Social (coffee with a colleague), and Spiritual (praying or meditating, or perhaps simply listening to uplifting music?) breaks. In turn, Vanderkam suggests then spacing out these breaks throughout the day - for instance, a Social break in the morning (mid-morning coffee break with a college?), a mid-day Spiritual break (lunch with a good book?), and an afternoon Physical break (a walk for some fresh air?), though to each their own about the timing and sequence (if you want, take a push-up break in the morning, a short run over your lunch break, and a meditation break for 10 minutes in the afternoon).

Why It's So Lonely At The Top (Arthur Brooks, The Atlantic) - One of the most famous lines from Shakespeare's "Henry IV, Part 2" is the king's statement: "Uneasy lies the head that wears the crown", and modern research has, in fact, affirmed that leaders are more likely than others to say they are lonely people in general, and that isolation and loneliness at work are a particular source of unhappiness. By contrast, amongst employees and managers in general, Future Workplace has found that 70% of employees say their friendships at work are the most important element to a happy work-life (and that 58% said they would turn down a higher-paying job if it meant not getting along with co-workers). The problem appears to stem from the simple reality that a key role in being a leader is to hold team members accountable... which may be good for business results, but isn't necessarily positive for forming workplace friendships. As a result, bosses can effectively end out being "lonely in a crowd", with limited opportunities for workplace friendships even in a workplace dense with colleagues who might otherwise be friends. And of course, the problem isn't helped by the fact that leaders often have to work long hours in order to support their businesses (with one study from Harvard Business Review finding the average American CEO works 62.5 hours/week, vs 44 hours/week for the average worker). So what's the alternative? One option is simply for leaders to take it upon themselves to find new social outlets; if it can't be at work, it might be in a group of other CEOs with whom they can connect and commiserate (thus the rise of various CEO study groups and young-leaders organizations). And recognize that while leadership requires a lot of work, often leaders rise to the top in part because of workaholism - a level of over-the-top work that isn't actually really necessary for success (but just becomes a habit that's hard to break). The key point, though, is simply to recognize the risks and tendency for leadership to lead to loneliness... and the need to have a proactive plan to put in place in order to combat it.

Advisors: Are You Fulfilled By Your Firm? (Ryan Shanks, LinkedIn) - From mergers and acquisitions to the breakaway broker, the world of financial advisors has been in a frenzy in recent years with the opportunities to capture the business of 'advisors in motion'. Yet Shanks notes that while there is a growing focus on the opportunities for industry players who want to win those new advisor business opportunities, there's been remarkably little focus on what leads advisors to be so unfulfilled by their current firms that they're willing to make such leaps in the first place. When actually surveyed, Shanks found that ultimately, advisors dissatisfied with their current firms were most likely to be unhappy due to the technology (32%), followed by a poor work/life balance (24%), and then poor leadership ('just' 21%) (though notably, poor work/life balance was the biggest reason for the discontent of 60% of women advisors). At the same time, though, the study still found that only 26% of advisors were actually seeking new opportunities in the past 12 months, with the primary blocking points being unable to meet the $$$ requirements to switch platforms (47% of advisors), and a failure to find a good match on personal values with a new firm (29% of advisors). For firms that were able to retain advisors, the biggest drivers of long-term satisfaction were growth opportunities within the firm (#1 for advisors at broker-dealers), and like-minded leadership (#1 for advisors at RIAs), with workplace flexibility ranking highly for all. Are you fulfilled at your advisory firm, and if not, what's the key factor that would make you consider a switch?

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, and Craig Iskowitz's "Wealth Management Today" blog as well.