Weekend Reading for Financial Planners (Sep 10-11)

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 September 10th/11th:

FPA Seeks More Influence Over CFP Board & Regulators By Creating Advocacy Council (Mark Schoeff, Investment News) – This week, the Financial Planning Association announced it was forming a new Member Advocacy Council (MAC), intended to take input from CFP certificants regarding the activities of the CFP Board and other regulators in order to get more vocal on their behalf regarding important issues. For instance, the FPA’s Advocacy Council might finally allow the organization to take public positions on issues like the CFP Board’s recent attempt to fund its new Center for Financial Planning through a controversial $25 automatic donation, or the CFP Board’s often criticized rules surrounding the definition of fee-only compensation. Of course, the reality is that the FPA and CFP Board leadership are often in private communication already; nonetheless, the FPA appears to be positioning the Advocacy Council as a way to focus its voice and form official positions on issues (though not on broader public policy issues, which will still be handled by the FPA’s Legislative and Regulatory Issues Committee). In fact, the FPA announced that it will begin with a survey to FPA members in the coming month to identify the initial concerns that (its member) CFP certificants have. The 6 members of the Advocacy Council will all be appointed by the current FPA president, and will include three current or past FPA leaders, two member-at-large positions, and a representative from the board of NAPFA, along with a chair (who will initially be well-respected former FPA president Nick Nicollete), and members can provide feedback to the council directly via a dedicated [email protected] email address.

Morningstar To Help Advisers Compare ETFs To Mutual Funds (Jeff Benjamin, Investment News) – This week, Morningstar announced that it will be expanding its forward-looking analyst ratings currently provided for mutual funds to cover ETFs as well, with the same Gold/Silver/Bronze/Neutral/Negative ratings levels that consider qualitative factors like the parent company, the ETF provider’s people and process, as well as performance and pricing. In a nod to the way that ETFs and mutual funds are increasingly being mixed together in investor portfolios, the goal is to provide clearer side-by-side comparisons of mutual funds and ETFs in the same peer groups, particularly given that they may be compared this way under the Department of Labor’s fiduciary rule next year. The initial rollout will cover about 300 ETFs by the end of the year, with more Morningstar Analyst ratings to be added over time. Notably, while other ratings providers, such as S&P Global Market Intelligence, also offer analyst views on ETFs, Morningstar’s change is the first to outright group ETF and mutual funds together in the same fund category (although mutual funds have long been compared to index mutual funds that arguably are substantively similar).

Attracting Referrals With Content Marketing (Steve Wershing, The Client Driven Practice) – The idea of “content marketing” is to create and distribute consistently valuable and relevant content to attract a clearly-defined target audience… which in the context of financial advisors, would be people who not only might become clients themselves, but could also be referral sources to people in their network who might be clients. Content marketing helps facilitate this because regularly providing timely and relevant original content gives readers something to talk about and share – for instance, if you wrote an article about a particular Social Security claiming strategy, then when a reader has a friend who mentions the challenge of figuring out the timing of when to claim Social Security, your article gets passed along, and an implicit referral is made. In addition, quality relevant content helps the advisor to become more familiar to the person who receives and reads the article, effectively making the prospect lead somewhat warmer... especially if you actually infuse your personality into the article (rather than just making it dry technical content). And giving away valuable content for free can help to evoke the reciprocity rule – that it’s easier to ask a prospect to commit to something, like an initial call or a meeting, when they’ve already received something of value. Notably, though, Wershing points out that for content to be effective, it must be well targeted to your niche and target clientele (otherwise, it’s just lost in the wash of other personal finance content produced by other media sites like CNBC or the Motley Fool), and ideally should express your own views and take a position (painfully neutral content isn’t very remarkable or referable!). Also, remember to make your content easy to share (i.e., provide easy buttons to email or socially share the articles), as well as being proactive in distributing it yourself (e.g., via social media, and via email, to clients and prospects and Centers of Influence).

How Financial Advisers Can Write And Promote A Book (Brad Johnson, Investment News) – Writing a book can be a powerful marketing tool, as books provide implicit credibility and can help establish the author as a thought leader. However, most people find the thought of trying to write a book as incredibly daunting. The key, however, is to form an outline first, which breaks the task of writing a book into much smaller bite-sized pieces. Once you form the outline, you’ve effectively already guided the flow of the book, and a detailed outline will even flesh out the key points for each chapter along the way; once that’s done, the actual process of writing the book is really little more than filling out each segment of the outline into a couple of paragraphs or a few pages each, which cumulatively adds up to an entire book. Ideally, this is done not just by explaining each point, but actually telling a short story that helps to communicate or illustrate each point – because the reality is that most readers would far prefer to read a story, rather than just listen to advice or be told what to do. And once the book is written, it can be leveraged in many ways – not just listed for sale online or in book stores, but you can offer an excerpt of the book as a giveaway (e.g., on your website in exchange for an email address), or distill a few key nuggets from the book into sound bites that you can use for media outreach.

The Key To Responding To A Prospect Inquiry (Dan Solin, Advisor Perspectives) – Despite the fact that virtually all advisors rely heavily on referrals and other ways that prospects find their way to the advisor and inquire about his/her services, surprisingly few have a standard process established in how they respond to inquiries. Solin notes that this is especially important in a world where inquiries usually do not come face-to-face, but instead by telephone or increasingly via email. Does the advisor have a style of writing and responding that ensures there’s a way to make an emotional connection in an email response to an inquiry – such as by expressing enthusiasm, or telling a brief story that makes a clear connection? And does the response really focus on what the inquiry asked about – which makes the prospect feel heard – or does it mostly talk about the advisor right out of the gate, raising the concern of whether the advisor will really be an effective listener at all? In fact, Solin emphasizes that with his coaching clients, that’s usually the biggest issue of all – that advisors tend to respond to inquiries by immediately launching into what the advisor does, how they work with clients, their credentials and qualifications, etc., instead of really trying to listen and understand what issue, exactly, the prospect is actually looking to get solved in the first place (and then explore whether or how the advisor can help).

What Happens When A Client Referral Is A Bad Fit? (Julie Littlechild, Absolute Engagement) – A common challenge for many advisors is that they receive a client referral, only to find out after the meeting begins with the prospect that he/she isn’t a great fit… leading to an awkward situation where it can be difficult to extricate from the conversation, and lacking an easy way to say “no thank-you” can end out with the advisor taking on the bad-fit client just to avoid the awkwardness of rejecting a referral. Littlechild suggests that this usually happens because advisors aren’t clear enough up front about who their “good fit” clients actually are, leading to these awkward scenarios where it’s only figured out on the spot (when it’s difficult to say no). The starting point to solve this problem is that, whenever you receive a referral, you should call the client who referred you, before meeting with the prospect, to understand more about the situation, and get a sense as to how likely it is (or not) that the person will actually be a fit (and of course, it’s a great opportunity to thank the client for the referral either way!). Second, decide how to set up the initial contact; for instance, if it’s more likely there may be a bad fit anyway, consider a phone meeting first, rather than moving straight to a full-length in-person approach meeting. Next, recognize that one of the easiest ways to defer a bad-fit prospect is simply to help them find the right/better solution instead (because in the end, they don’t really care about working with you, per se, but finding a solution to their problem); in other words, it’s OK to re-refer someone who was referred to you, and the bigger your network of peer professionals, the more likely it is that you can find a place to refer someone who may be a bad fit for your firm but a great fit for someone else’s. And once you have a plan for how you’ll handle the situation, be certain to communicate that to your existing clients up front as well – for instance, so they know that you will commit to meet with anyone they refer to help them find A solution, but that you’re not actually committing to take every referral on as a client yourself (so it’s less awkward if/when you really do decide to say ‘no’).

Ten Strategies For Using A Reverse Mortgage To Help Fund Retirement (Dirk Cotton, Retirement Café) – A growing volume of retirement research is exploring how a HECM reverse mortgage can be used to improve retirement outcomes. Unfortunately, the complexity of the product has caused it to be misused by many, but ironically the number of choices and “moving parts” also makes the reverse mortgage very versatile when used properly. One popular strategy is simply to use a reverse mortgage to refinance an existing mortgage, which can either eliminate an ongoing monthly mortgage payment obligation (by allowing the reverse mortgage to negatively amortize), or even a positive cash flow mechanism by taking a draw against the remaining line of credit balance on the reverse mortgage. For those who don’t already have a mortgage on the property, opening a reverse mortgage line of credit allows for cash flow draws to begin later – and notably, the earlier the line of credit is established, the more the retiree can likely draw in the future, as the available maximum borrowing amount on a reverse mortgage line of credit automatically grows over time. Some might use this proactively throughout retirement, while others might use the line of credit as the income source of last resort later (if necessary). And for those who don’t have their retirement home in the first place, the HECM can be used to purchase the retirement home in the first place, financing part of the purchase but without being obligated to have mortgage payments in retirement. Other strategies for reverse mortgages include: taking “lifetime” tenure payments (reverse mortgages can pay out monthly cash flows ‘for life’, though notably the payments technically only continue as long as the borrower lives in the home, so death or moving out could trigger the end of the payments); using the HECM as an emergency fund, or an alternative cash flow source to tap temporarily during a bear market, or as a last resource to cover long-term care needs; as a way to facilitate liquidity during a divorce settlement; or as a bridge for spending while delaying Social Security to age 70. Notably, another HECM option is to use the proceeds to invest (i.e., to buy equities), which may work “on average”, but entails substantial risk… such that it may be better to just buy stocks directly on margin, rather than risk the equity in the home on speculative investing.

The Worst Practice In Liquid Alternatives (Jason Kephart, Morningstar) – While most liquid alternative funds clearly report their portfolio holdings and fees to investors, Kephart notes that a few are using lax reporting rules on derivatives to camouflage their strategies and the associated costs. The issue pertains to liquid alternative funds that use total return swaps to access net-of-fee returns of commodity trading advisors running managed-futures funds. If the managed futures subadvisor were hired directly, their underlying expense ratio would have to be included, the liquid alternatives fund would have to include that cost in its own mutual fund expense ratio; however, when the swap is simply for the net return in the first place, the expenses that came out to produce that net return are hidden from view (and under SEC rules, the fund doesn’t have to report the cost of the swap itself, either). This allows the mutual fund to insert additional fees into the process, without having them directly disclosed to investors, and/or allows them to compete for business based on an expense ratio that appears lower than it is. For instance, Kephart notes that the Equinox MutualHedge Futures Strategy (MHFAX), LoCorr Managed Futures Strategy (LFMAX), and Altegris Managed Futures Strategy (MFTAX) all previously had net expense ratios over 3.75%, but switching to this swap tactic a few years ago, and reduced their reported expense ratios to around 2%; nonetheless, the costs were still here, just disclosed in a small print footnote in the prospectus, rather than being reported in the top level expense ratio. Fortunately, some of the funds are cleaning up in response to the criticism (e.g., the LoCorr Managed Futures fund restructured earlier this year to remove its total return swap and hire the subadvisors directly), but Kephart notes that other liquid alternative funds are ratcheting up the opaqueness, such as the GMG Defensive Beta (MPDAX) fund, which Morningstar is concerned may also be using swaps (though it’s impossible to tell from the limited disclosures). Fortunately, Morningstar does at least raise these as concerns in its stewardship ratings on the funds; nonetheless, for investors (and advisors) who simply screen on expense ratios directly, there’s a risk that the liquid alternatives funds that appear to be lowest cost are not in reality.

Small-Cap Withdrawal Magic (Bill Bengen, Financial Advisor) – Bengen’s original research on the so-called “4% rule” was based on a relatively simple two-asset-class portfolio of large-cap US stocks and intermediate (US) government bonds. Notably, though, Bengen later found that just introducing small-cap stocks into the mix, and the additional diversification that provides, allows the safe withdrawal rate to rise to about 4.5% instead (while allowing for slightly lower overall equity allocations). However, when Bengen did this research, he constrained small-cap stocks to a maximum exposure of just 17.5%, given their volatility. In a more recent follow-up, Bengen re-ran the study with the constraint removed… and found that in most years, the optimal safe withdrawal rate is actually driven by a 100% equity portfolio, and furthermore than in most years the optimal equity exposure is all small-cap (and no large-cap). And the boost from equity returns – despite the market volatility it entails – results in safe withdrawal rates that are 50%+ higher in most years, with 1/3^rd of historical retirees sustaining initial withdrawal rates above 13%(!), and another 1/3^rd sustaining 8% to 12% inflation-adjusting initial withdrawals. Notably, though, in the few worst scenarios, the safe withdrawal rate is still about 4.5%, though the optimal allocation in that worst year (1969) still entails a portfolio that is all small-cap and intermediate government bonds (and no large-cap stocks at all). Of course, the volatility these portfolios entail may still be untenable for many clients. Nonetheless, Bengen emphasizes that perhaps advisors and their clients are giving up far more than realized by constraining exposure to small-cap stocks and forcing exposure to bonds, and that perhaps other ways to mitigate those risks (e.g., considering the impact of market valuation, or using spending rules) from a more aggressive base portfolio might be worth further consideration.

Don’t Let Clients Make This Fatal IRA Rollover Error (Ed Slott, Financial Planning) – Historically, the once-per-year IRA rollover rule was interpreted by the IRS to mean that any one individual IRA account could only be rolled over once in a 12-month period, but the rule was applied separately for each account. However, in 2014, the Tax Court ruled in the case of Bobrow v. Commissioner that the once-per-year rule should apply once for a taxpayer in the aggregate across all of his/her IRAs, and accordingly the IRS officially adopted the position shortly thereafter in IRS Announcement 2014-32. Notably, this rule does not apply to direct trustee-to-trustee transfers from one IRA to another, nor does it apply to rollovers from employer retirement plans into IRAs (or vice versa), nor for Roth conversions, nor for (non-spouse) inherited IRAs. However, for old-fashioned “indirect rollovers” – where the IRA owner actually takes possession of the money, and then aims to roll it over within 60 days – the new once-per-year rule specifically applies once across all IRA accounts in the 12-month period (not just a calendar year, but any rolling 365-day period from the date the last distribution that was rolled over actually came out of the account). Notably, this new ruling kills the popular “serial short-term loan” strategy from IRAs (where money is “borrowed” from the IRA for 60 days, repaid from another distribution, which in turn is repaid from another distribution, etc.). But the bigger caution is all the accidental situations it can be triggered, such as the client who takes out several distributions from different IRAs and tries to roll them over (which fails even if they were all taken out on the same day, because different distribution accounts means they’re treated as separate distributions, and thus only one can be rolled over). Or the client who decides it’s just faster and easier to roll over IRAs by taking a distribution and not waiting for a trustee-to-trustee transfer, and liquidates multiple IRAs… and then can only roll over one. The easiest, safest route for advisors: just only do trustee-to-trustee direct transfers, period, if possible. Though beware situations where the money might have to be actually rolled over, such as a liquidating annuity that can’t be sent as a trustee-to-trustee transfer, or in some cases even rolling CDs. Especially since a mistake can’t be fixed, even with the new rules allowing taxpayers to self-certify a waiver of a late rollover contribution.

Igniting The Corporeal/Cognitive Spark (Mitch Anthony, Financial Advisor) – One of Anthony’s hobbies is shooting baskets, and at his gym he regularly sees a gentleman in his 70s who still shoots 100-200 practice shots each time he’s there. Asking how the man is able to stick with the game, he simply replies that most people find excuses to quit, and that the secret is to work through the occasional pains (especially since stopping and allowing your body to decline into disuse will only make the situation worse anyway). And once Anthony challenged his own 77-year-old father to step up accordingly, it turned out that not only was getting physically active again something feasible (albeit with practice to work up to it), the renewed “corporeal” physical spark ignited a cognitive spark as well. Notably, though, the idea that challenging the body physically can also ignite a mental spark is not new; in fact, Dr. John Ratey wrote about the phenomenon of how exercise can stir inspiration in his aptly titled book “Spark”. And the phenomenon is well routed in the body’s physiology; exercise increases the flow of serotonin and other neurotransmitters, which help not only with physical exercise, but are also relevant for carrying thoughts and emotions, and stimulating our brains. Which means ultimately, if you’re feeling like you’re low on inspiration and creativity lately, consider trying to get some more exercise… even if it inspires some aches and pains getting started. Because it’s the physical and mental rewards of the exercise itself, that biochemically will not only make you feel better, but spark your creativity, too.

A Work In Progress: Discovering Your True Goals (Angie Herbers, Investment Advisor) – Herbers notes that early on in her years as a business consultant to financial advisors, she thought her primary role was to ask advisors what they wanted their businesses to be, and then help them build it. In practice, though, Herbers has found that often advisors don’t really know what they want their business to be (even if they think they do), such that building towards the “desired” business doesn’t end out making them any happier (and often less happy). Thus, the real challenge is not merely figuring out how to build the desired business, but helping the advisor figure out for themselves what their desired business really is. For instance, some advisors start with a grand vision of what the business might be, but after a few years of real-world challenges, adapt to a more “realistic” vision… and then get stuck there, losing sight of what the business still might become. In other cases, the focus of the business is on something more specific, like getting more clients, or improving profitability, or hiring more people, but in reality those are simply symptoms with band-aid solutions, because the real problem is a business that the owner isn’t happy with in the first place. And in a few cases, advisors succumb to the exact challenge we caution our clients against – looking at generalized advice in a magazine that worked for some other advisor, often accompanied by only superficial information, and attempting to adopt the same approach themselves, when it isn’t actually a good fit for their own needs and circumstances. Yet again, given that most of these “visions” or needs just result in solutions that don’t actually make the business owner any happier, Herbers now emphasizes that the real issue is trying to figure out what the vision should be in the first place. Of course, that can take time… because it’s often quite difficult to step back from all the “can do’s” and “should do’s” and “need to do’s” to get down to the real “what do you want to do” part. And perhaps the most notable challenge of all is the fact that as we move towards our vision, what we achieve and how we feel when we get there may itself lead us to set a new vision from there. Notwithstanding the fact that the vision may be dynamic, though, Herbers emphasizes that having a vision that is clear and specific is still important… just as with clients, the fact that a plan will be updated over time doesn’t change the value and importance of having a plan in the first place!

Growth Without Goals (Patrick O’Shuaghnessy, Investor’s Field Guide) – While human beings have long tried to create a vision of their future and then grow into it, the reality is that we’re rarely any happier once we get there, implying that perhaps the whole effort to set and pursue long-term goals is the wrong approach, and that instead the better approach would simply figuring out how to better enjoy the time we live in now. Notably, that doesn’t necessarily mean we aren’t still trying to grow and improve ourselves; instead, the point is that it’s about “growth without goals”, a process of self-improvement and exploration that isn’t necessarily about the goal destination. This is a challenging shift for most, though, especially in a world where most of us (particularly in the US) learn that achievement (whether measured by money, power, awards, or something else) equals success. And a similar challenge exists in the world of investment management in particular, where investments are presumed to work towards goals, rather than investing for the sake of simple continuous improvement. Nonetheless, it’s that exact approach of exploration and improvement for its own sake, rather than a(n arbitrary) specific goal, that allows companies like Amazon to excel, which per Bezos’ famous 1997 letter to shareholders said the company will have a “relentless focus on customers” rather than towards any particular business goal (even though by doing so, many tremendous business goals are accomplished). The other benefit of the goalless world is that it allows you to better enjoy the journey itself, and feel a constant sense of success for incremental improvement… rather than feeling constantly reminded that you’re still short of your goals (that by definition you haven’t reached yet). And if you want to try to take on a focus on incremental daily improvement, O’Shaughnessy suggests an app called “Way Of Life”, designed to help us build (healthy) habits and stick to them.

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!

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. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read "FPPad Bits And Bytes" on his blog!