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Weekend Reading for Financial Planners (July 20-21)

July 19, 2019 02:59 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big industry news that the CFP Board has decided to delay enforcement (but not the rollout itself) of its new fiduciary standard, allowing brokerage firms another 9 months (from October of 2019 until June of 2020) to adjust their policies and procedures... while reinforcing that the CFP Board's new fiduciary standard will be enforced once Regulation Best Interest is also effective after June 30th of 2020.

Also in the news this week is the announcement that Salesforce is rolling out a new low(er)-cost version of its Financial Services Cloud, in an effort to reach the small-to-mid-sized independent advisor marketplace that is currently dominated by industry-specific competitors like Redtail and Wealthbox.

From there, we have several articles on regulatory topics, from a look at what's coming for advisors with the new 2-page Form CRS that must be provided to prospects and clients starting next year (and how hard it may be to fit all the required information onto "just" 2 pages), to a discussion of why it's so important to read the Privacy Policies of the FinTech vendors that advisors use (some of which actually do share portions of client and/or advisor data with third parties!), some tips on text message compliance, and technology strategies on how best to facilitate file-sharing with clients.

We also have a few behavioral finance articles this week, including: recent research suggesting that the bulk of investors (at least who go direct to Vanguard) actually are relatively patient, prudent, and calm (and that the "dumb money" retail investor may actually be less common than previously believed); research on whether "smart" people with a high IQ are really better investors (or perhaps just better at not making behavioral mistakes); and why it's important to evaluate your decision-making process properly and not engage in "resulting" that can lead to repeating bad decisions and underappreciating good ones (that happened to not work out as well as anticipated).

We wrap up with three interesting articles, all around the theme of the opportunities of compounding returns (in sometimes unanticipated ways): the first is a fun look at the town of Quincy, Florida, which has the highest rate of millionaires per capita due to the advice of a local banker during the Great Depression that the local community invest in the consumer durable stock of Coca-Cola... which over its lifetime has compounded its original $40 shares into $10M/share (split-adjusted and dividend reinvested back to its original IPO in 1919!); the second looks at the emergence of "non-linearity" in earnings, especially in professional services jobs, such that couples can often earn more by choosing to have one spouse work significantly more hours and the other work part-time or less, instead of a "traditional" dual-income (two-full-time earning) household; and the last explores how the rise of the internet has facilitated the rise of "microbrands," ultra-targeted niche solutions that leverage social media and digital advertising to not only reach a unique segment of consumers, but to pre-test their business offering to affirm a niche clientele will purchase before the product is ever made (which is increasingly relevant for the rise of niche financial advisors, too!).

Enjoy the "light" reading!

Kitces & Carl Ep 12: Communicating With Clients To Bring Them Under The Cone Of Trust

July 18, 2019 07:03 am 3 Comments CATEGORY: Client Trust & Communication Kitces & Carl Podcast

Although “real” (i.e., holistic and comprehensive) financial planning encompasses far more than “just” investments, for better or worse, clients look to their financial advisors as people who are (at least) more knowledgeable than your average bear in regard to “the market.” Because, while providing advice on a client’s portfolio is just one part of the ongoing financial planning process, it’s natural for clients to worry about their investments (or more generally, their assets) and look to their advisors for reassurance that their life savings is being looked after… especially when the financial media consistently bombards them with clickbaity doom-and-gloom headlines. Which, in turn, leads to the question: should advisors send their clients market commentary to demonstrate the advisor’s expertise and try to soothe their nerves… or does doing so just risk making them focus even more on investment issues?

For our 12th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards sit down to discuss if sending market commentary to clients actually helps solve any problems (or if it’s just a relic of a product-centric industry), what sorts of clients benefit the most from proactive communication (and why), and ultimately, why sending investment market commentary to clients may be a good thing to do… even if the majority of your clients never even read it!

As a starting point, though, it’s important identify the problem that advisors are really trying to solve by sending market commentary to clients, and which types of clients need such a solution. Because the reality is that, no matter what advisors send, those clients who are true delegators (and hired an advisor in the first place so they didn’t have to be bothered with keeping track of their investments) won’t be interested. However, many clients – even those who delegated their portoflios – do feel like they need to “check in,” at least from time to time, to be reassured that they made the right decision when they hired the advisor to tend to their life savings. Which often manifests itself by the client asking about current market affairs… not because they really care, but because they want to know that their advisor is really “on top of things.” And not only is it a good idea to make sure the advisor can answer their questions, but regularly sending out commentary is a good way to proactively address whatever the topic du jour may be once (rather than fielding potentially dozens of identical phone calls on the same investment concern).

Meanwhile, as client relationships mature over time, meetings naturally become less frequent (as trust levels have developed, and most of the early planning heavy lifting has already been done), so simply staying in touch even by sending out bulk emails with the advisor’s “commentary” can help prevent the dreaded transfer paperwork from landing in the inbox. As no matter how much we’d like to think we’ve “trained” our clients to stay focused on the big picture and ignore short-term market fluctuations, the reality is that sudden spikes in volatility will cause clients’ loss aversion instincts to perk up.

Ultimately, though, the key point is simply to realize communicating with clients outside of their regular meeting rotation matters, and sending them some form of investment commentary (whether it be from a third party or written in-house) is a great way of providing reassurance that you are versed in whatever may be going on in the market at any given time. Even if you always wind up with the same conclusion, which is that your clients are properly allocated and are served best by sticking with the plan you’ve developed with them.

The Problem With FIREing At 4% And The Need For Flexible Spending Rules

July 17, 2019 07:26 am 20 Comments CATEGORY: Retirement Planning

The modern form of retirement – a period of non-work that you can and must enter because you’re no longer able to work – is itself a rather modern phenomenon, and one that ironically became both more feasible and more necessary as life expectancies increased over the past 100 years. Because when coupled to the industrial revolution and the shift from farms to factories, rising longevity became both a business and societal necessity to figure out what to do with the “obsolescent” human beings who couldn’t productively work anymore, but still needed to support themselves!

Yet as life expectancies and medical science continued to advance, we reached the point where retirement wasn’t just a stage of being unable to work, but instead a stage of being able to enjoy a period of non-work leisure. The only requirement was to save and invest enough to be able to afford to not work. Which in turn led to those who tried to reach the threshold earlier and earlier, younger and younger, until the “Financial Independence, Retire Early” (FIRE) movement was born.

But the challenge of trying to “FIRE” out of work as quickly as possible – sometimes as early as one’s 40s or even 30s – is that it leaves a very long time to be in “retirement.” So long, in fact, that the classic “4% rule” of retirement should probably be more like a 3.5% rule (given the extended time horizon). But also so long that most human beings will struggle to be idle for so long… which often leads back to productive engagement that even ends out producing post-retirement employment income. Which ironically means that if many of those accumulating towards FIRE considered this likely income, they might even transition sooner instead! (Because even earning “just” $20,000/year of side income in retirement can reduce nearly $500,000 from the required retirement savings!)

And ironically, despite the focus on accumulating enough assets to FIRE (often as quickly as possible), the real challenge is that while sequence of return is a real risk, it is more often a great boon. In fact, while a 3.5% initial withdrawal rate is necessary for the one worst sequence… 50% of the time, a FIRE retiree at a 3.5% initial withdrawal rate finishes with more than 9X their starting principal left over!

Which suggests the real key, especially for the kinds of extended time horizons that FIRE retirees face, is to develop more flexible spending rules that can adapt to whatever markets (or post-retirement income) may bring. Because while 30-year retirement time horizons have both some upside and downside risk, 40-50+ year time horizons end out with extraordinary upside potential… if only the retiree can weather any potential initial storm. Creating options to ratchet spending higher over time, to create spending “guardrails” to remain in a safe zone, or to segment expenses to ensure the essentials are covered but allow more adaptive lifestyle expenses to creep higher over time (as it will likely be feasible to do!).

In the end, though, the key point is simply to understand that, with extended retirement time horizons under FIRE, it becomes necessary to be more conservative against the potential worst-case scenario, but flexible to the overwhelming number of more positive scenarios likely to occur. Especially when considering that most retirees will struggle to remain “idle” for 40-50+ years (especially when retiring in their early still-productive years). The good news is that more flexible spending rules create many options to still adjust spending dynamically along the way. The problem is simply that they’re arguably the area that most needs to be studied further, to determine spending rules that are both comfortable to manage lifestyle and spending expectations, and really can weather the adverse-returns storm should it happen to come!

#FASuccess Ep 133: Joining As Sibling Partners To Launch A Joint Advisory And Accounting Firm, With Danna Jacobs

July 16, 2019 07:06 am 2 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 133rd episode of Financial Advisor Success Podcast!

My guest on today's podcast is Danna Jacobs. Danna is the co-founder of Legacy Care Wealth and Inspired Vision Accounting, a combination of financial planning and small business accounting firms that serve nearly 80 high-income, next-generation clients. What's unique about Danna though is that she launched her advisory firm and accounting practice jointly with her brother, where she focuses on the financial planning and he focuses on the accounting and tax planning as they grow the businesses together.

In this episode, we talk in-depth about how Danna's firm works with next-generation clients, their blended fee model of charging $150 to $250 a month for ongoing planning advice that shifts into an AUM fee as their client's savings and portfolio grows, the four-meeting financial planning process that all clients go through, the unique ongoing monthly report tracking client cash flows and growth and net worth that they use to show their client's progress and help justify their ongoing monthly fee and the way they divide up their rotation of quarterly planning meetings for clients between tax planning, debt repayment, insurance matters, and an overall annual review. With the structured agenda that Danna uses for every client meeting covering their accomplishments since the last meeting, current discussion topics, and key client takeaways that become the client's homework for the next meeting.

We also talk about how Danna and her brother grew the business in the early years, the way they leverage their differentiation as being some of the only fee-only CFP professionals in their area willing to work with young clients with no minimums as a way to get clients through local SEO and the CFP Board's Find a CFP Professional site, the way they've been able to bring in small business owner clients by starting with their bookkeeping needs first, and why Danna doesn't regret walking away from her prior salary working at a major firm and taking the leap to go out on her own even though it took nearly five years to get back to her prior income.

And be certain to listen to the end where Danna shares why she decided to go out on her own and start an advisory business with her brother and then start her own family and have two children, the way that she balanced early motherhood and the early stages of the business, and how early on she hid the fact that she started a firm with her sibling but now embraces the story as a way to further differentiate the firm.

So whether you interested in learning about the pros and cons of starting a business with a sibling (and how it helps her balance being a mom and a business owner), the services that Danna provides for her clients (and how she charges for them), or the most valuable deliverable that she provides for her younger clients, then we hope you enjoy this episode of the Financial Advisor Success podcast.

The Great Convergence And The Death Of Fiduciary Differentiation (For RIAs)

July 15, 2019 07:03 am 4 Comments CATEGORY: Planning Profession

For the past several decades, RIAs have increasingly differentiated themselves and their advice from competing broker-dealers by the “best interests” fiduciary standard that RIAs owe to their clients, from outright marketing themselves as fiduciaries, to signing “Fiduciary Oaths” for clients (that other broker-dealers wouldn’t and couldn’t sign).

The fiduciary distinction for RIAs wasn’t originally intended to be a marketing differentiator for advice, though. Its roots lie in the fact that RIAs were created from the start to be providers of investment advice, while broker-dealers originally were created to play a vital role in the capital formation and capital markets process (which included selling investments, in the form of stocks and bonds to prospective investors, often underwritten by the broker-dealer’s investment banking division). For which RIAs were subject to a fiduciary standard – as the providers of advice – while broker-dealers were subject to a lower suitability standard consistent with the sales-centric role they were created to fulfill.

But over the past several decades, as technology has increasingly commoditized the core functionality of broker-dealers, from “discount” brokerage reducing the price to execute trades (without a stockbroker to facilitate them), to online platforms making no-load funds available to consumers directly (without a broker-dealer to sell them), the RIA and broker-dealer channels have gone through a Great Convergence. To the point that today, a consumer may pay 1%/year for ongoing financial advice in the form of a fee-based wrap account, a C-share mutual fund trail, or an advisory fee, and not even make a distinction between the choices. Except from a regulatory perspective, these remain substantively different choices, given the (originally) different roles that broker-dealers and RIAs play.

In recent years, the Great Convergence has led to a flurry of proposals on new standards, as regulators have recognized that as the gap between broker-dealers and RIAs has been reduced over the years, so too did the gap in the standards of conduct between them need to be narrowed as well. Resulting in the release earlier this summer of the SEC’s new Regulation Best Interest, lifting the standard of conduct for broker-dealers to a “Best Interest” standard when making a recommendation to their customers.

Notably, in practice, the new Best Interest standard under Reg BI is not a full-scale fiduciary duty and only applies at the time of the broker’s recommendation itself (and not to the overall relationship). Nonetheless, Reg BI will grant – and in fact, require – that broker-dealers now explain their standard of conduct as being an obligation to act “in the best interests of the customer when making a recommendation.”

Which leaves little room for RIAs to market their fiduciary obligation to act “in the best interests of the client” as a differentiator when broker-dealers will be able to use substantively identical words. Raising the question: how will RIAs differentiate themselves in the future?

On the one hand, some RIAs may point out that there’s still a difference between being a “fiduciary at all times,” versus "just" being held to a Best Interest standard at the time of recommendation alone. Others may pursue and highlight voluntary designations like CFP certification, which itself has its own “fiduciary at all times” obligation (applicable to not only RIAs but those at broker-dealers as well). Some may even choose to pursue new terms of distinction, like “stewardship” as a higher standard above merely being a legally-obligated fiduciary.

In the long run, though, arguably the best path forward for most advisors will simply be to actually differentiate on their services and what they actually do for clients, rather than their standard of conduct in the first place. As the irony is that, the more fiduciary advocates push for higher standards across the industry… the less likely it is that being a fiduciary with higher standards will ever be an effective differentiator again in the future.

Weekend Reading for Financial Planners (July 13-14)

July 12, 2019 02:59 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big Advisor #FinTech news that Orion is acquiring financial planning software Advizr for a whopping $50M in an effort to expand its platform towards more holistic wealth management and provide advisory firms a more planning-centric portal for clients to engage with.

Also in the news this week is the announcement that just 3 months after its launch, Schwab's monthly subscription service has raked in a whopping $1B of AUM, and AdvicePay crossed 20,000 advisors under enterprise contract facilitating financial planning fee payments, as consumer interest in the monthly subscription model of financial planning continues to heat up.

From there, we have several industry-related articles, including a surprising call from the FPA that the CFP Board should delay enforcement of its new fiduciary Standard of Conduct (but just until next June, to take effect alongside the new Regulation Best Interest), the announcement from the FPA that its OneFPA Network Plan has been finalized by the Board and will be proceeding forward with a 10-chapter beta test (despite generating positive Public Comment letters from less than 0.02% of its membership), an Op-Ed from former CFP Board chair Ray Ferrara disputing at least some of fiduciary advocate Don Trone's allegations that the CFP Board needs to improve its own fiduciary governance processes, and the news that Fi360 has become (only) the 10th financial advisor designation to earn (ANSI) accreditation for its AIF (Accredited Investment Fiduciary) designation.

We also have a few marketing-related articles this week, from tips on how advisory firms can differentiate themselves on their websites once Reg BI eliminates "fiduciary" as a differentiator, how to improve your Advisor Bio page so it doesn't "suck," and basic tips on how to improve the SEO (Search Engine Optimization) of the articles you do publish to your website.

We wrap up with three interesting articles, all around the theme of figuring out what is really fulfilling and "enough" to make us happy: the first looks at how more and more research shows what really makes us happy in our jobs, yet in practice people are less and less happy at work; the second explores the ways that we tend to pursue money, but when faced with difficult time-vs-money trade-offs (e.g., would you take all of Warren Buffet's money if you also had to take on his current age of 87?) we virtually always choose the time over the money; and the last examines how often the biggest returns we can get on the path to financial success aren't actually about earning money at all, but about getting comfortable that what we have is "enough" (and then saving all the rest).

Enjoy the "light" reading!