Weekend Reading for Financial Planners (Sep 30 – Oct 1)

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 30th / October 1st:

Winners And Losers Under The Trump Tax Plan (Laura Saunders, Wall Street Journal) - This week, President Trump and the GOP released the latest "unified" version of their tax reform framework (bridging the gaps between the prior GOP proposals and what President Trump advocated during his campaign). The highlights are similar to prior proposals, including a simplification down to just three tax brackets (12%, 25%, and 35%), an elimination of the AMT, and a drastic reduction in itemized deductions (keeping only the mortgage interest and charitable deductions) paired with an expansion of the standard deduction (to $12,000 for individuals and $24,000 for married couples) along with eliminating personal exemptions. Other notable proposals include repealing the estate tax (and generation-skipping tax), reducing the corporate tax rate to 20%, and reducing the tax rate on pass-through business income to 25% (e.g., for sole proprietorships, partnerships, and S corporations) from its current ordinary income rate. Ultimately, the changes are expected to increase the Federal deficit (albeit potentially offset by increased growth), which means by definition tax burdens would decline. However, clearly with so many changes, not everyone would be impacted evenly. The primary "winners" in the reform proposal would include those who don't itemize deductions (who will benefit from the larger standard deduction), high-net-worth clients (who would no longer face an estate tax), and owners of pass-through business entities (including many financial advisors!) who would likely see at least a portion of their pass-through income taxed at "only" 25% (instead of the current maximum of 39.6%, although proposals are expected to separate "wages" from "pass-through" income even under the new rules). On the other hand, the "losers" of the tax reform proposals include: those who live in high-tax states (e.g., California, New York, Connecticut, Maryland, etc.) who would no longer receive the state income tax deduction; those with large homes and mortgages (as the mortgage interest deduction might be curtailed to a lower maximum loan balance of $500,000) and who make modest charitable contributions (which might be eclipsed by the higher standard deduction); high-wage employees (who won't necessarily be harmed, but will benefit far less than those who own pass-through businesses); and people with large medical or disaster deductions (which would also be lost if itemized deductions beyond mortgage and charitable are eliminated).

Envestnet Expands Their TAMP Empire With FolioDynamix Deal (Craig Iskowitz, Wealth Management Today) - This week, Actua - which bought multi-TAMP platform provider FolioDynamix from founder Aaron Schumm for $199M back in 2014 - announced that it was selling the platform for a nearly-breakeven price of $195M, to competitor (and leading multi-TAMP aggregator) Envestnet. Notably, the deal appears to have been more about a desire of Actua to sell than Envestnet trying to buy - given that Actua simultaneously announced they were selling two other portfolio companies as well - but the deal is nonetheless a huge one for Envestnet, as FolioDynamix's $800B of total platform assets added to Envestnet will bring the company to a total of more than $2 trillion of assets and nearly 10 million client accounts, and FolioDynamix had an especially deep presence in commission-based independent broker-dealers that Envestnet couldn't serve with is fee-based TAMP platform. Which means the acquisition represents substantial deal synergy potential - for Envestnet, to bring its fee-based TAMP solution to FolioDynamix clients, and also to bring FolioDynamix's more modular technology approach to existing Envestnet clients (for those who don't want to be compelled to just buy the all-in-one ENV 2 platform, which may be compelling to both broker-dealers with a deep Rep-As-PM advisor base, and the independent RIA community). Although given that Envestnet bought at a healthy 5X multiple on net revenues of "just" $40M, and claims that they anticipate the pricing will end out being about 7X post-integration EBITDA, either FolioDynamix had some phenomenal margins, or Envestnet anticipates some very massive cost savings synergies in the deal!

AdvisorEngine: An Integrated Wealth Management Platform (Joel Bruckenstein, T3 Technology Hub) - AdvisorEngine is a so-called "robo-advisor-for-advisors" platform, formed from the prior merger of Vanare (an early robo-for-advisors player) and Nest Egg (an early B2C robo-advisor that pivoted to B2B), which was rebranded to its current name last year after WisdomTree made a substantial $45M investment into the company. Since then, AdvisorEngine has both been enhancing its wealth management technology tools, and made two acquisitions of its own: Kredible (which helps advisors improve their social media and digital presence), and Wealthminder (a simple goal-based financial planning software platform). Now, Bruckenstein reports that those acquisitions have been fully integrated into the AdvisorEngine platform. The advisor and client portals now include both investment performance reporting, and goals-based tracking progress, where each portfolio is assigned to a goal (or multiple goals where appropriate). In fact, Bruckenstein notes that AdvisorEngine now offers the full suite of wealth management platform components and integrations to compete with the likes of Orion and Black Diamond, including account aggregation, document vault, risk analytics, proposal generation, and portfolio construction tools, along "robo"-style digital onboarding capabilities, as well as digital marketing help via Kredible for the advisor portal. Although an opportunistic tax-sensitive rebalancing software solution would still need to be purchased separately.

Medicare Planning In A Box (Bob Veres, Inside Information) - Every American, upon reaching age 65, has the opportunity to enroll in Medicare, but the process entails far more than just a decision to check the box and proceed with enrollment. In part, this is because not everyone has actually retired at age 65, and the availability of employer-based health care means prospective retirees may want to wait and opt out of Medicare initially (as employer health insurance is typically "creditable coverage" that allows seniors to enroll in Medicare later without penalties), and the interaction between signing up for Medicare and continuing to contribute to an HSA (i.e., you can't). And for those who do want to enroll, they still have to choose exactly what to enroll in, and whether to select a Medicare Advantage Plan, or Medicare Parts B and D, and in the case of the latter, it's also necessary to choose which Part D prescription drug plan is best (given their current prescriptions). To help advisors and their clients navigate these decisions, Medicare consultant Diane Omdahl has rolled out a platform called i65, a Medicare enrollment software platform for financial advisors (just in time for the looming onset of the Medicare enrollment season on October 15th). The software asks a series of questions, probing whether the client is still working (or not), if there's employer-based health coverage (or not), when the client plans to begin Social Security benefits (which can automatically trigger enrollment in Medicare Part A), and even their retiree travel plans (as those who plan to travel extensively may shy away from a Medicare Advantage plan that tends to only have good local coverage), along with asking about the clients' health status. The end result from i65 is a recommendation about which type of Medicare to sign up for, and when, and the factors that led to the recommendation, along with detailed instructions about how to proceed for enrollment. For advisors who are interested, i65 pricing is $65 for an individual client report, though most will likely choose the $95/month "Pro" or $130/month "Premier" versions that allow multiple active clients in the system, customization, and additional Medicare training and marketing tools.

Tools That Get Your Message To More Prospects (Julie Littlechild, Absolute Engagement) - With the rise of the internet, the way that consumers seek out a financial advisor is fundamentally changing. It's no longer just about "traditional" client referrals; now a "referral" might be an article you wrote that was shared with the prospect, or a podcast they heard you on. And in today's market, consumers no longer just show up in your office to learn about your services; instead, they're likely to have already researched you via Google and your website before ever reaching out. Accordingly, the opportunity is to build your own financial advisor "platform", to make it easier for prospective clients to find you, learn about you and your services, and decide whether to do business with you. Yet for many financial advisors, the blocking point is simply trying to figure out what technology to use to build that platform – and so Littlechild shares what she's used to build her own, including: building the website/blog with WordPress; recording your podcast with Zencastr, your webinars with GoToWebinar, and doing initial video meetings with Zoom.us; broadcasting your message via social media platforms LinkedIn, Twitter, and Facebook (either directly, or using a multi-platform sharing tool like HootSuite); queueing up articles you've read that you want to share on social media using Buffer; sending emails (and automating newsletters) to clients and prospects via MailChimp; creating "landing pages" with LeadPages (a landing page is where you direct someone to go after meeting you, seeing you on a webinar, hearing you on a podcast, etc., to get specific follow-up information); and hosting videos (that you record and want to make available) with Sprout.

Why Your Free First Appointments Don't Work And What Will Instead (Stewart Bell, Audere) - It's an advisory industry standard to offer prospective clients a "free first appointment"... yet as Bell points out, few consumers really want a free first appointment (don't agree – try advertising for "free first appointment with a financial planner" and see how it goes for you!), and one recent study found that a whopping 50% of advisor leads never even make it past the first appointment anyway (i.e., they're so unimpressed by their initial experience, they don't bother to come back). Bell suggests that the reason "free appointments" don't work very well is that ultimately, people are like mice who want two things: free cheese (i.e., all the awesome stuff in life like happiness, freedom, wealth, security, etc), and no cats (i.e., all the bad stuff like hardship, suffering, and being tricked into things that end out harming us). And while financial advisors like to talk about themselves as helping clients find the cheese, the truth is that from the client's perspective... we're the "cats" that are threatening to their current situation (because so many consumers are terrified they're be tricked into using a "bad" financial advisor). After all, just consider the first meeting – advisors want to gather information, while prospects want their own information, and advisors try to "add value" but prospects are afraid of the strings attached to that value, and advisors want to "create rapport" but prospects aren't necessarily looking for a friend as they just want to get a problem solved! So what's the alternative? Offer "free cheese" in the first meeting – i.e., something that is valuable, immediately, to the prospect, that immediately helps them actually experience the value you provide (and makes them want more). Similarly, make all the information they need available, directly and transparently (e.g., by putting your pricing on your website), so prospects who aren't really interested can screen themselves out of the process, and then immediately engaging in a strategy session in the first meeting that helps them get started. Notably, the point here isn't necessarily about charging for the first appointment instead of making it free; the point is that even if it's free, advisors need to treat it like a paid meeting, and give value in the meeting as though it was paid... because that's what truly engages the prospect to want to keep working with you as a client!

To Earn Trust, Tell Clients Your Personal Story (Amy Parvaneh, Barrons) - While most financial advisors try to maintain a professional veneer and not reveal too many "personal" details, Parvaneh points out that ultimately sharing your personal story with clients is one of the best ways to earn trust and really connect with them, as it helps to illustrate why you do what you do and that you really care. In fact, Parvaneh shares the story of a particular approach with a high-net-worth prospect, who was reluctant to work with a potential HNW advisor because the advisor almost seemed "too perfect", to the point that the prospect didn't feel comfortable sharing his own challenges. Yet once the advisor shared his own story – of how his father died of cancer when he was a teenager, how he'd put food on the table for his family while working two jobs and taking care of his sister – the prospect became far more comfortable, and eventually brought all of his business to the advisor. Because the reality is that the advisor's background story, as difficult as it was, helped to humanize him to the prospect, and make him more relatable. Of course, not everyone has a personal story as dramatic as this one, but the point is that any form of "adversity" that you can share you experienced and overcame, helps prospects better connect to you... because when you show a track record for overcoming adversity, it gives prospects better confidence you'll be able to do the same for them, too!

Carving A New Niche (Anne Field, Wealth Management) - While some advisors have a vision from the start to pursue a particular niche, for many a niche is something that emerges later, after they already have a base of clients, and realize that a subset of them have some commonality that would make them an effective niche to pursue more deeply. Field tells the story of one advisor, who after several years in his business, realizing that the majority of his clients were either single women or women-led households (perhaps because he relates well to women as a father of five daughters and works with clients jointly with another female CFP), and decided to re-design his website and rebrand his firm to focus on women (and is now further fine-tuning his niche to focus on women in transition, having recently become a CDFA). Yet the reality is that the further you pursue a niche, the deeper the rabbit hole tends to lead, as the advisor now realizes that even a specialized designation like the CDFA is only the starting point of going deeper into his niche, as he's now trying to build relationships with local divorce attorneys and mediation specialists, and is thinking of switching his business model to better align with the kind of pre-settlement divorce work he's doing more of. In fact, one of the virtues of focusing on a niche is the opportunity to pursue "unique" Centers of Influence (e.g., he might also look to work with leaders in community groups, where divorcing women might look for comfort), or doing very targeted networking meetings (e.g., organizing a networking group specifically for recently divorced women). Of course, the caveat is to be certain that the niche itself is "deep enough" to actually be able to support a practice... although the good news is that when most advisors can be successful with just a few dozen valuable clients, even a relatively narrow niche can be very effective!

A Driver Of Referrals That May Surprise You (Julie Littlechild, Absolute Engagement) - While most financial advisors focus on trying to give clients great service as a means of increasing client satisfaction in order to get referrals, Littlechild's research (conducted by directly surveying the clients of advisors and their referral behaviors) has uncovered another unique factor that drives referrals: the more comfortable and confident clients are in understanding their own investments, the more likely they are to refer you to others. In fact, the research found that 44% of clients who referred in the past year reported very high investment knowledge, compared to only 14% for those who did not refer. Similarly, 36% of clients who provided the highest satisfaction ratings also reported high investment knowledge, compared to only 13% for all others. Notably, the exact nature of this connection isn't entirely clear – perhaps those who are more knowledgeable about investments simply like to talk about investments more themselves (and therefore are more likely to end up in conversations that refer the advisor), or perhaps those with more investment knowledge are more likely to properly value the advice, or perhaps it's simply that advisors who take the time to help clients understand their finances and improve their knowledge level end up creating a deeper connection. Given the ambiguity of the exact connection, it's not entirely clear what the best mechanism is to improve the dynamic further – i.e., whether or how much leverage an advisor would get by trying to educate and improve their clients' investment knowledge. Nonetheless, at a minimum, Littlechild suggests that advisors might survey their clients (or just ask in meetings) how they rate their own knowledge level of investments, and whether they're actually interested in getting further educated.

The 2-Minute Rule For Building Good Habits (Heleo) - Human habits are hard to change... so hard, in fact, that recent research suggests that the only way to radically change your own behavior is to entirely change your environment itself. This can apply to both basic behavior changes – you're more likely to eat leftovers if you package them in plastic wrap rather than tin foil, as being able to actually see the food makes you more interested in eating it – to more complex ones, where it's essential to change your environment and even your self-identity in order to succeed. For instance, instead of just trying to lose 20 pounds, and engage in new behaviors to do so (e.g., working out more), it's more effective to first think about what kind of person achieves such a goal – one who sticks to workouts – and then try to make that your identity (to be a person who sticks to workouts). Notably, this strategy is also more effective, because it better helps to maintain motivation – as if you're trying to lose 20 pounds in a few months, and "just" lose 12, you may feel discouraged (and then drop your workout habit), but if you're trying to be "a person who is losing weight and sticks to workouts" and then continue working out and losing weight (even if it's only 12 pounds) you're more likely to feel like you've made a positive change and can sustain the progress. More generally, you can support good habits and break bad habits simply by changing your environment to make those habits easier or harder – for instance, if you want to stop wasting so much time watching TV, then unplug the TV and put it in a closet and put the remote in a drawer (because the fact that you have to get the TV from the closet, plug it in, get the remote, and turn it on, makes it harder-enough that you're less likely to do it), and if you want to drink more water at work then fill up water bottles and put them around you at work (so it's more convenient and you're more likely to do it!). And if you want to get more done in the first place, then make it as easy as possible to get things done – in fact, if you can set up a routine that even just starts the habit with a 2-minutes-or-less step, you can build on the good behavior, such as always setting out your gym bag and your shoes as a way to nudge yourself towards going to the gym.

The Difference Between Open-Minded And Close-Minded People (Shane Parrish, Farnam Street) - Most people like to think of themselves as being reasonably open-minded, yet the reality is that "truly" open-minded people approach problems differently... with an eagerness to learn, and a willingness to be wrong, as contrasted with more close-minded people who tend to dig in their heels at the first sign of disagreement and are unwilling to admit when they're wrong. Which, ironically, means that many closed-minded people may never realize or acknowledge that they're closed-minded! In his recent book "Principles", hedge fund manager Ray Dalio lays out 7 ways to really determine and understand which one you are: 1) closed-minded people are typically frustrated that they can't get the other person to agree with them, instead of being curious as to why the other person disagrees, while open-minded people see disagreement as a thoughtful means to expand their knowledge; 2) close-minded people are more likely to make statements than ask questions, while open-minded people genuinely believe they could be wrong; 3) close-minded people focus more on being understood than understanding others; 4) close-minded people tend to make statements like "I could be wrong, but here's my opinion..." which in the end is more about making their own statement than actually seeking to understand whether/why they could be wrong (and learn from it); 5) closed-minded people block others from speaking, while open-minded people are more interested in listening than speaking; 6) closed-minded people have trouble holding two thoughts (e.g., competing ideas) simultaneously in their minds, while open-minded people can take in the ideas of others without losing their own train of thought; and 7) close-minded people lack a deep sense of humility, while open-minded people approach everything with a deep-seated fear they may still be wrong. Notably, the reality is that most people are a mixture of all of these, and virtually no one is "perfectly" open-minded across the board (personally, I'm constantly trying to improve #5 above!). Instead, the point is simply to recognize that these 7 principles are simply ideals to pursue... but that to be more effectively open-minded, it often takes conscious effort to try to change your mind and how you think to learn more effectively.

Maybe We All Need A Little Less Balance (Brad Stulberg, New York Times) - It is increasingly common in recent years to talk about the importance and pursuit of better work/life balance, yet Stulberg notes that in practice, the times he's felt happiest and most alive are typically those moments of being unbalanced, from falling in love, to trying to write a book, trekking in the Himalayas, or training to set a personal record in a triathalon. Trying to be balanced would have detracted from those formative experienced. In fact, in doing research for his recent book "Peak Performance", Stulberg finds that most report a direct line between feeling happy and fulfilled and at their best, and going "all-in" on something rather than just taking a balanced approach. Which suggests that perhaps we might all be a little happier with more "unbalance" in our lives, having something that we can really try to focus on and be meaningfully engaged with. Of course, there are clearly risks of pursuing a strategy that inherently means other things in your life may be left behind as a result, from potentially impairing relationships with friends and family, to figuring out what happens if/when that activity is no longer an option (thus why athletes often struggle with depression and other mental health issues when they are forced to retire). Nonetheless, the alternative of trying to always maintain "balance", and never going all-in for anything, doesn't appear to be better, either. Instead, Stulberg suggests that the real need is simply to have better self-awareness, which makes it feasible to go all-in and recognize when it's time to take a pause (e.g., the Olympian athlete who chooses to retire in time to start and raise a family) to minimize later regrets.  In other words, Stulberg suggests that perhaps the "good life" really isn't about trying to achieve some sort of (illusory) balance, but instead "is about pursuing your interests fully, but with enough internal self-awareness to regularly evaluate what you're not pursuing as a result... and make changes if necessary."

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.