Weekend Reading for Financial Planners (Sep 5-6)

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 5th/6th:

Edmond Walters Bolts From eMoney And Fidelity Investments Scrambles To Manage The Jilt (Brooke Southall, RIABiz) - The big industry news this week was the abrupt announcement that eMoney Advisor founder and CEO Edmond Walters has left the company, without so much as an explanation or even a comment for the press release. The departure comes barely 6 months after eMoney Advisor was acquired by Fidelity for a reported $250 million, and while many industry commentators have long noted that Walters' strong entrepreneurial personality would likely clash with Fidelity's large-firm-corporate culture, the speed of the departure caught many off guard, especially the fact that Walters didn't just slowly wind down his relationship but instead exited more abruptly. For the time being, Fidelity Wealth Technologies president Michael Durbin will take over as eMoney's CEO, but the lingering question is what's next for the software platform now that its visionary leader has left - will it simply get scaled up according to Fidelity's original plan (which includes deployment not only to advisors, but to consumers across Fidelity's entire enterprise), and continue to grow with Fidelity's resources and support, or will eMoney's history of pushing the envelope on advisor technology now begin to lag without its visionary and trailblazing founder who led the company for 15 years since it was established in 2000. In the meantime, one of Walters' biggest announcements from the T3 Advisor Technology conference earlier this year - that it would unbundle its PFM portal into a standalone solution called eMX Select - also remains in limbo, and at this point all eyes are on the upcoming (and already scheduled) eMoney Summit in October, and what announcements and vision the (new) eMoney leadership shares with its advisor users about the future direction of the software and the company, in the wake of Walters' departure. Notably, eMoney Advisor also posted an Open Letter of its own to its website this morning, trying to address user concerns and emphasizing that the entrepreneurial culture Walters left behind remains strong.

Quovo Rakes In $4.75 million From VC backers And A Triumvirate Of RIAs: Carson, Bicknell and Lockshin (Lisa Shilder, RIABiz) - Startup Quovo is an account aggregation (and "big data") firm, in a similar competitive camp to ByAllAccounts (now owned by Morningstar), CashEdge (now owned by FiServ), and Yodlee (now owned by Envestnet), but founded much more recently in 2013. While in some cases being a new upstart can be challenging, Quovo seems to be having success as a more nimble competitor, built from scratch without some of the challenges of its legacy peers, and now competing as one of the few independently-owned players in the account aggregation space serving financial advisors. Quovo has also quickly developed a reputation of being more capable at actually managing its data for everything from performance reporting to deeper advisor and industry insights, and partners speak highly of its data quality. While it remains to be seen whether or to what extent Quovo can really penetrate was it already arguably a crowded space of data aggregators, the latest round of Quovo funders - including popular RIA leaders Ron Carson, Marty Bicknell, and Steve Lockshin - are optimistic that Quovo's CEO Lowell Putnam has the ability to turn Quovo into a platform that provides not just data but insights that the alternative platforms cannot deliver.

First Looks: The New Figlo (Joel Bruckenstein, Financial Advisor) - Last fall, Advicent (the provider of financial planning software solutions NaviPlan and Financial Profiles) acquired Figlo, the leading provider of financial planning software in the Netherlands (that tried without much success to make inroads to North America several years ago). And after several months of adapting the software for the US, Advicent has now begun to offer its initial version of the new Figlo platform for US advisors. Notably, Advicent has stated that its strategy with Figlo is about more than "just" financial planning software itself, but to create a platform that covers financial planning and advice, budgeting, and personal financial management (PFM) tools for clients, along with supporting asset allocation and portfolio management, to give advisors a holistic platform they can use to compete with the increasing number of direct-to-consumer technology solutions. Advisory firms will then be able to choose which components they want to use with "Narrator", the application builder that Figlo had developed to give advisors (and enterprises) a flexible platform upon which to utilize its various tools. In terms of the Figlo planning software itself, Bruckenstein notes that the software breaks the planning experience into three core steps with clients: Assess (gathering client data, through a guided wizard); Solve (where you actually analyze the client situation, and identify potential solutions [e.g., products] to remedy any shortfalls); and Achieve (where results/outcomes are reported to clients. The Figlo process is built around a "Lifeline" (a timeline that illustrates projected milestone in the client's life), color-coded green/yellow/red to show potential problems, and the ability to look at outcomes at a higher-level "goal-based" view or to drill down to a detailed "cash-flow-based" view. Ultimately, Bruckenstein gives the flexibility of Figlo (and its Narrator platform) a plus, and notes that the interface is generally well designed and intuitive, but notes that the process of how goals are assigned and spending occurs (which must be tied to specific accounts or they may be 'accidentally' excluded) isn't ideal - but with Advicent putting significant resources into Figlo, many such concerns may soon be tweaked and resolved, and overall look very promising and worth keeping an eye on as more developments come later this year and into 2016.

Aligning With Your Message (Mark Tibergien, Investment Advisor) - As service-based companies, a financial advisory firm's people are typically its biggest asset, and the key means by which clients form relationships with and do business with the firm. Yet Tibergien notes that while people are usually the biggest asset of an advisory firm, in many firms the employees are still treated more like a cost center to be maximized for profit, and not truly an asset into which the firm invests. After all, if "people" are truly the biggest asset of the firm, they are not just something to "have" that is valuable, but something into which the firm should invest time, dollars, and effort, as the growth of those people means the growth of the firm's value. Otherwise, high-quality employees - the firm's most valuable of those valuable people assets - will move on to other firms. Yet Tibergien notes that for many advisory firms the challenge isn't just an unwillingness to invest into its people, but that firms lack the structure and means to do so, because there may be even more of a deficit of quality managers than there is a deficit of younger advisors to manage! Not being able to risk waiting, though, Tibergien suggests that to ensure that their statements about people being the firm's greatest asset are consistent with what the firm really does for/with those people, advisory firms today should focus in three key areas: 1) is the job clearly defined, both for what the employee should be doing now, and what the employee needs to work towards in order to be successful (is there a roadmap to success?); 2) do you have a clear understanding of what kind of workers is best to fulfill the firm's various roles (e.g., don't assign repetitive routine tasks to someone wired to be a multitasker!); and 3) have you created a workplace in which the most motivated people are able to flourish without distractions?

Make Hiring a Priority or Get Left Behind (Kelli Cruz, Financial Planning) - Given the importance of the financial advisors in an advisory firm, Cruz notes that the process for recruiting and hiring is remarkably mediocre at most advisory firms, which often fail to outsource their recruiting effort and only execute their own process as little more than an afterthought to the actual decision to hire (or simply as a reaction to someone quitting or retiring). Cruz suggests instead that firms serious about growth should always be on the lookout for potential hires, and that the effort to find the next great recruit is something everyone in the firm should be involved with (just as anyone/everyone in the firm can help bring in the next great client). For instance, partners to the firm might not only have business development expectations but also be held accountable for quarterly industry networking activities that might lead to finding qualified job seekers, and firms should have a bonus system (e.g., cash rewards) in place for any employee who finds/brings another good employee to the table. When it's time to hire, Cruz urges that firms need to write up a clear job description that really clarifies what the person is expected to do - and once written, that job description can/should be posted everywhere, from the firm's own website, to association websites and job boards. Once the candidates begin to respond, having a disciplined interview process is also crucial, where you ask employees to demonstrate their knowledge and abilities in the areas that are key and critical as described in the job description you wrote (and because different people have different perspectives, have multiple people in the firm interview each prospective candidate, perhaps as a panel to make the process more time efficient). Cruz also advocates the use of third-party assessment tools to help evaluate candidates, such as Kolbe, DISC, or StrengthsFinder. And of course, once the process is complete and the hire is done, don't forget the importance of having an onboarding process to actually make the new employee feel like a welcome member of the new team!

An IRA Pitfall To Avoid (Ed Slott, Financial Planning) - In a recent court case, an IRA owner had his entire IRA disqualified, triggering a giant tax bill (plus penalties) for engaging in a prohibited transaction with the IRA. The issue was that the IRA owner had used his 401(k) rollover to fund a 98% interest in a car dealership he was establishing, and then paid himself a salary from the LLC's business account to operate the business - and since he was in control of the IRA, the payment from the IRA's business interest to him as the IRA owner was prohibited. Notably, the courts agreed that the mere act of using the IRA funds to invest into the business was not necessarily fatal, given that it was a new entity that had just been created when the IRA funded it. However, the decision to pay salary from the LLC to the IRA owner was an issue, especially since the IRA owned 98% of the business and 100% of the IRA itself was that business investment, rendering the two functionally equivalent and turning the business salary payment into a disguised distribution from the IRA. Notably, the end result of the prohibited transaction was not merely that the salary payments were deemed taxable - which amounted to about $38,000 across 2 years - but that the entire $321,000 IRA account was deemed disqualified and a taxable distribution (and since the IRA owner was under age 59 1/2, the 10% early withdrawal penalty applied, on top of an additional 20% penalty for substantial misstatement of income for failing to report that $321,000 'distribution' in the first place!). The bottom line: while using an IRA to invest in a business isn't necessarily fatal, beware the prohibited transaction rules, as the consequences for a mistake can be quite harsh!

What Do We Know About Retirement? And Why Does That Matter? (Paula Hogan, Wealthinking) - Last month, the Social Security Administration organized an event called the Retirement Research Consortium, bringing together academics from several leading research centers to share ideas in the area of retirement public policy. Financial planner Paula Hogan notes several interesting highlights from the conference relevant for financial advisors, including: one study found that amongst prospective 58-year-olds who were asked when they planned to retire,  a whopping 41% of them subsequently ended out retiring earlier than expected due to health concerns, suggesting that the general approach of "if you can't afford to retire yet, just keep working into your 60s" may be remarkably 'risky' advice; retirement research is increasingly finding significant differences in the retirement issues of higher-income versus lower-income people, complicated by the fact that lower-income individuals often struggle the most with retirement preparedness but also have a lower life expectancy (reducing their potential to reach retirement, and their duration of retirement, but also leaving them with a very limited benefit from Social Security that ends out paying for more to those already of higher socio-economic status who are more likely to live longer, which in turn suggests that raising the Social Security wage base may be a more appropriate policy solution to Social Security funding than to increase the retirement age when so many already struggle to work to the current retirement age); the potential for susceptibility to 'unexpected' early retirement is not just about blue-collar versus white-collar job categories, as notably some white collar jobs like airline pilots, nurses, and dentists, also often become forced to retire unexpectedly early (and in fact, considering the suspectibility to early retirement could itself be an issue planners should more openly discuss with clients); and that failure to save enough for retirement seems to be a function of both a bias towards focusing on the present over the future (leading to procrastination about taking action on solutions), and also what is still a widespread underappreciation for the significance of compounding interest/growth over time.

The Most Downloaded SSRN Paper Ever Is All About Market Timing (Julie Verhage, Bloomberg) - The most downloaded research paper on SSRN is entitled "A Quantitative Approach to Tactical Asset Allocation", by investment manager, author, and popular blogger Meb Faber, and while published in 2007 is making the rounds again this week due to the fact that the paper's relatively simple tactical asset allocation strategy (based primarily on making tactical shifts based on moving averages) went to cash this week, for the first time since 2008. The idea of the strategy is simply that when an asset class is looking especially risky, the investor should exit that investment in lieu of risk-free investments, for instance by swapping to cash any time the monthly average price of the investment/index falls below its 10-month moving average. While the strategy doesn't unequivocally avoid 100% of all drawdowns, the research says it's remarkably effective at avoiding the bulk of market downturns (including dodging most of the 2000 and 2008 market crashes). For those interested in further information, Faber provides tracking information on his website about how most majority asset classes are positioned relative to this monthly-moving-average measure, which is currently bearish for US stocks, foreign stocks, real estate, and commodities simultaneously.

How Can a Strategy Still Work If Everyone Knows About It? (Cliff Asness, AQR) - A common tenet in the investment world, especially amongst skeptics of active management, is that even if/when an active management strategy that can work does exist, once it is discovered (and people have the opportunity to actually invest into it) the strategy can't/won't work anymore. In this context, Asness makes a distinction between truly unique strategies that really are only known to a few and can be exploited (a classic version of "alpha"), and strategies that are widely known and adopted but still have the ability to generate sustained favorable returns (which Asness frames as a form of investing into favorable 'factors'). Within the context of factors, the opportunities can be further broken down into those that generate higher returns simply because the investor is taking on additional risk and is being rewarded for that risk (e.g., the equity risk premium that favors stocks with a better longer term return over bonds), and return opportunities that work specifically because investors themselves make mistakes, sometimes in a consistent and sustainable way due to our own hard-wired irrationalities that are difficult to avoid (even when we know about them). For instance, one might make the case that value stocks outperform not because they are 'riskier' and providing a risk premium, but simply because too many investors make the behavioral mistake of choosing the high-flying overvalued stock even though they shouldn't because they can't help themselves (think tech stocks in 2000). These distinctions matter because in the case of a risk-premium-based scenario, even when the strategy is "known", it can still generate higher returns, because the risk doesn't vanish just because it's known (e.g., stocks are still riskier than bonds). And in the case of the investor-error behavioral scenario, the strategy may be "known" but also still sustainable, simply because the whole point is that it's driven by a behavioral bias we can't control anyway (and is similarly difficult to arbitrage)! Notwithstanding these dynamics, Asness notes that even 'superior' strategies still may not generate superior returns all the time, and the popularization of such strategies can lead them to going further towards one extreme or the other (being very 'in' favor or very 'out' of favor). Still, the fundamental point remains that if/when you find factors that are beneficial, you can and should stick with them, and the fact that they're "known" strategies doesn't necessarily mean doing so is a failing or doomed strategy at all!

Rethinking Work (Barry Schwartz, NY Times) - In this excerpt from his new book "Why We Work", Barry Schwartz explores the phenomenon that in a recent Gallup poll, nearly 90% of workers were either "not engaged" with or worse are "actively disengaged" from their jobs. This situation is perhaps not entirely surprising given the general worldview of many that human beings are naturally lazy and thus will only ever work for pay (and even then, will only work to the extent necessary to generate income to cover their basic needs). Yet Schwartz suggests that perhaps the reason we are so disengaged with our jobs is not because we're naturally wired this way, but instead because we've so mistakenly adopted this worldview that we're actually managing employees in a manner that is just exacerbating the very problem in the first place! After all, an increasing base of research is now finding that we actually want work that is challenging and engaging, that gives us some discretion and control over what we do, and that provides us opportunities to learn and grow and be respected by colleagues while feeling meaningful - implying that worker disengagement is not our natural state but a failure of today's work environments. And while this is perhaps observed most commonly in professional settings - the lawyer that walks away from a white-shoe firm to work with the underclass, or doctors who abandon cushy practices to serve poorer areas - Schwartz suggests that the desire for work beyond just wages spans most jobs and industries. And in fact, research is also finding that the boring focused job - where the worker is like a cog in the factory machine - doesn't even make us more efficient, either. Ultimately, then, Schwartz suggests that the time has come for us to rethink work and our jobs - both as employees and as employers - recognizing that finding meaningful work (or helping employees to find it) is both good for us as human beings, and is even good for business, too!

Working Over 40 Hours a Week Makes You Less Productive, Not More (Melanie Pinola, Lifehacker) - The reality of the working world is that sometimes you have to crunch and work extra hours, putting in extra time to get the done the necessary extra work. Yet the caveat is that while such a short-term effort can get you through a short-term crunch, a growing body of research suggests that trying to do so on a sustained basis actually leads to less productivity, not more. By one estimate, after about a month of working 60 hours per week, you may become so inefficient and unfocused in your work, you'll actually be less productive in terms of output than you would have been at "only" 40 hours of (more rested and focused) sustained effort! For an interesting look at this and other productivity research and challenges, the article suggests checking out Daniel Cook's full presentation on the subject.

Misplaced Assumptions (Bob Veres, Inside Information) - Our industry media likes to write about "successful" advisory businesses, especially the ones that are the biggest and growing the most. Yet Veres notes that such a focus may be having some unfortunate side effects, including communicating - implicitly or explicitly - to very successful financial advisors that they aren't success (or at least, not as successful as they "should" be). After all, the conventional wisdom now seems to imply that all advisors should be striving for 30% profit margins, double digit growth, building a firm with multiple teams and offices, writing a book, buying other advisory firms, and a whole host of other 'recommendations'... that virtually no advisor can actually fully implement all at once, and more importantly may not even want to do since the very definition of "success" is quite individualized! While the industry media may not entirely cure itself of the obsession of writing about "the best" businesses (notwithstanding the implied competitive-success judgment it creates), Veres suggests that at a minimum, it's time for the media (or the industry overall) to come up with a better definition of success than just a firm's assets under management - imagine if articles focused on the firms that have the highest client satisfaction and do the best job of meeting their client needs instead (regardless of AUM)? Ultimately, Veres suggests that at a minimum, if you're an advisor who's frustrated by what you read in the industry media and feeling 'judged' because your definition of success is something different, your negative response is both appropriate and understandable - and accordingly, Veres offers his apologies on behalf of his journalist brethren, and acknowledges that he at least will try harder to be sensitive to this issue in the future and that we all as advisors have our own definitions of what "success" really means (a suggestion that yours truly will take to heart, too!).

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!

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!