Weekend Reading for Financial Planners (Apr 27-28)

Posted by Michael Kitces on Friday, April 26th, 3:15 pm, 2013 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issue starts off with some breaking news about the announcement by Senator Baucus that he will not run for re-election in 2014 - which may set the stage for compromise on bipartisan tax legislation - and a look at the latest in the recent debates about the flaws in the Reinhart and Rogoff research on high-debt countries, which are now suggesting that the criticism may have overstated the issue and that the fundamental concerns of growth in high-debt countries remain.

From there, we look at a few articles on working with younger "next generation" planners, including a discussion of the FPA's rising focus on young planners, some guidance from Deena Katz on how to better bridge the baby boomer vs Gen X/Y gap (which she suggests requires some improvements from both sides of the chasm), some tips on how to recruit and hiring Generation Y advisors and get them to stay, and some advice from Angie Herbers on when to consider not just hiring young "professional" staff (meaning young financial planners) but also "non-professional" staff (meaning your high quality operations and administrative staff) who can also have a critical impact on the success of your business.

In addition, there are two articles regarding social media, including one that looks at a series of recent research studies showing the rising adoption of social media by both advisors and their prospective and current clients, and another that examines the rising conflict between regulatory efforts to oversee social media in financial services and states enacting laws to protect personal social media accounts from employers. There's also an article by Mark Tibergien cautioning advisors not to just be "Fiduciaries In Name Only" (or "FINO" for short!), but to ensure that the entire practice is really being run in a proper manner.

We wrap up with three very interesting articles: the first is from retirement researcher Moshe Milevsky about whether we should consider bringing back an old annuity-like pooled investment approach called a tontine; the second looks at how to generate better referrals by getting your clients not to tell their friends about you and your benefits but a story about the kinds of problems you help people solve; and the last provides a good reminder that while all the technical knowledge we apply for our clients is valuable, from tax strategies to investment management, that for some clients our key value proposition may not be that we do it "better" than the client but simply that we do it "for" them and eliminate their time, hassle, and stress, so they can better enjoy their lives. Enjoy the reading!

(Editor's Note: Want to see what I'm reading through the week that didn't make the cut? Due to popular request, I've started a Tumblr page to highlight a longer list of articles that I scan each week that might be of interest.You can follow the Tumblr page here.)

Weekend reading for April 27th/28th:

Baucus Untethered By Politics Seeks Path To Tax Rewrite - This week, Senator Max Baucus (D-Montana) declared that he will not seek a seventh term in 2014, and accordingly declared himself "unconstrained" by electoral politics for the first time since 1975 to push for a rewrite of the tax code in the Senate - which is significant, as Baucus is the chairman of the Senate Finance Committee, and has been repeatedly recognized for his willingness to sometimes break ranks with other Democrats and forge bipartisan compromises with Republicans, as he supported President Bush's tax cuts in 2001, and backed the repeal of estate taxes, as well as being one of the chief authors of the 2009 American Recovery and Reinvestment stimulus act and the 2010 health care legislation. Notably, just because Baucus is more willing and ready to compromise does not mean anything will actually get done, as he's been a hawk for tax reform all along, and in point of fact it wasn't clear that Baucus was going to be able to win Senate re-election in 2014 anyway. Nonetheless, there may be more opportunity for compromise, especially since House Ways and Means Committee Chairman Dave Camp (R-Michigan) will also end his chairman term after the next election due to party-imposed term limits. Ultimately, it remains to be seen whether the major reform gaps can be bridged, most notably about whether a tax code rewrite would be revenue-raising or revenue-neutral; nonetheless, it appears that the potential for bipartisan compromise and Senator Baucus' willingness to engage may have significantly increased with his retirement announcement.

HAP Vs. RR Vs. The Pundits: Scoring The Reinhart, Rogoff Dispute - The economic buzz for the past week or so has been the release of a paper by Herndon, Ash, and Pollin, criticizing the existing research from Reinhart and Rogoff on the impact of high debt loads on a country's growth. However, the reality is that a lot of misinformation has been bouncing around regarding the criticism, what it showed, and what it didn't show; this article does a good job of setting the record straight. For instance, while the biggest headline has been the discovery of an Excel error in Reinhart and Rogoff's work, the reality is that the error accounts for a mere 0.3% discrepancy in the projected GDP of high-debt nations, which is actually immaterial to the conclusions of their original research and does not undermine it at all! In addition, the reality is that the research criticizing Reinhart and Rogoff itself actually still supports the original thesis that high-debt countries have slower growth; the Herndon et. al. research doesn't contradict this, but merely implies the magnitude of the effect may be a bit less than first believed (a point that was reinforced by this week's New York Times op-ed by Reinhart and Rogoff themselves). In other words, the real conclusion of all this research furor is simply that higher debt slows growth but doesn't send it off a sudden cliff as it moves from 89.9% of GDP to 90.1%; on the other hand, the reality is that Reinhart and Rogoff never actually stated the 90% line was meant to be applied that strictly anyway.

FPA Aims To Remain Relevant For Next Generation Planners - This article from Financial Planning magazine reviews some of the recent changes at the Financial Planning Association (FPA) since new CEO Lauren Schadle took over 6 months ago, including trimming internal committees by nearly half, making operational and staffing changes, and taking a fresh focus on ensuring the FPA remains "vital" for the next generation of planners by leveraging technology. New initiatives may include hybrid conferences where attendees can receive information in-person or remotely via streamed sessions, making the association's websites more mobile friendly, and reinvesting into the organization's online social platform for members, FPA Connect. The FPA is also focusing on its NexGen community of planners younger than 36, which it seems as a way to get younger planners into positions of leadership. Overall, FPA's top member priority is practice management, including "business success" resources regarding how to grow and run practices more effectively; notably, right now a lot of practice management content is also focused on succession planning, although FPA President Mike Branham also notes that as older planners retire, this focus may shift along with the member demographics.

Passing The Baton To Next-Gen Advisors - This article by Deena Katz in Financial Planning magazine provides an interesting perspective on how the experience of being a firm owner changes over time - told from the perspective of someone who herself is a baby boomer who transitioned out of a practice and passed the baton to the next generation. Katz notes that the biggest issue in this next generation transition is that baby boomers and next generation advisors measure success in a fundamentally different way: boomers focus on the amount of time and effort put in, while younger advisors measure success in terms of outcomes. While in reality these focal points may overlap when someone starts a firm - young or old - Katz notes that these differences in the measure of success become problematic when they are manifested in an existing and established firm, as owners focus on the need to "pay your dues" and want younger advisors to work 80 hours a week as they did in their early years, while younger advisors believed that as long as they took care of clients and became indispensable to the firm that equity would inevitably follow. Katz' conclusion is that to get past this roadblock, the onus is on the boomers - to benefit younger advisors, and themselves if they ever hope to make a successful transition - to educate, prepare, mentor, and encourage young advisors to find their own place. This means getting away from just "whining" that younger advisors aren't doing what they need to do, and instead guiding and showing them by helping them to set realistic and attainable goals, and hold them accountable. On the other hand, Katz notes that there's also some burden on younger advisors, to really learn about not just financial planning, but what's involving in managing a financial planning business, because with larger firms to transition and an increasingly competitive environment today's advisors can't just learn by the seat of their pants the way the founders did. The bottom line: owners should set better expectations, but next-gen advisors need to be ready to live into them.

Recruiting & Hiring Gen Y Advisors - In Financial Planning magazine, Dave Grant looks at the challenge of young Generation Y employees who are sometimes "too" willing to change firms every few years, and reports on the results of a survey of the NAPFA Genesis young-planners group to determine what advisory firms can do to retain this increasingly well-educated group of prospective financial planners. Key traits that young advisors looked for in selecting a firm included: whether they aligned with the firm philosophically (Gen Y can "smell" the culture of a firm and whether it's a good fit); whether learning was encouraged, which means not just teaching but the opportunity for diversified job tasks that let them be engaged more broadly (including face time with clients) and also supporting the pursuit of additional designations and formal education; whether they would be mentored and developed; where work-life balance would be embraced, which didn't necessarily mean limited hours, just flexibility - to pick up the kids mid-day if necessary, and be able to make it up by getting the work done later from home (which also means having the technology necessary to let them be this productive); and with compensation that is fair, but merely "fair", as Gen Y employees were often willing to choose a lower-paying job that "felt right" versus a higher-paying one that could leave them unhappy. Another best practices tip: give younger planners generation-specific assignments that have meaning to them, such as being responsible for reviewing financial planning software, or being responsible for certain younger clients. Also, recognize that if you don't offer a clear career path for how younger advisors can progress and know where they stand, they may seek out another firm that provides a clearer path to success.

When To Call A (Non) Professional - This article by Angie Herbers from Investment Advisor magazine discusses the importance of hiring "non-professionals" - i.e., good administrative and support staff who drive the firm's underlying client service and operations, from interacting with custodians or broker-dealers, to maintaining technology and software, to handling routine client contact. The most interesting part of the article is the second half, where Herbers details how a client service team grows and develops over time. The career track for such individuals is from a service association, to a supervisor, to a manager, to eventually a Chief Operations Officer (COO), although some firms progress client service team members to advisory roles later. Herbers finds that a supervisor becomes necessary at about $1M of revenue, while by $1.5M of revenue firms begin to need a manager to oversee the entire team. By $2M of revenue, the need for a COO emerges to coordinate the efforts of growing operations staff and functions in a more coordinated, managed, and strategic approach; although often filled by a (reluctant) partner, Herbers suggests that qualified service staff who have grown in responsibility within the firm are often more qualified. By about $4M to $5M of revenue, the structure often grows again, carving out a dedicated investment management group that becomes part of the centralized core of the firm. The ultimate goal is to ensure that advisors are spending time working with clients, prospecting, and setting (new) goals for the business. 

Four Recent Studies On The Rapid Adoption Of Social Media By Financial Advisors And Investors - Financial services social media consultant Augie Ray highlights on his blog a number of recent studies showing how both advisors and their clients are adopting social media. The first is a report from Forrester last year, which found that the payments advisors received from clients was far more correlated with the number of social media interactions than with the number of in-person or by-telephone touches (which doesn't necessarily prove that social media "causes" more revenue, but at least reveals that more frequent social media interactions between advisors and clients are associated with greater revenue). The next report comes from Accenture, which surveyed advisors last fall and found that social media is helping to forge deeper client relationships and more frequent interaction, noting that 60% of advisors have daily contact with clients through social media and 77% affirm that it helps with client retention (74% report that it helps increase AUM). The third study, from Brunswick Group, found that an increasing number of investment professionals are reading blogs (52% in 2013 vs 47% in 2010), using social media for information (30% in 2012 vs 11% in 2010), and 56% said the role of digital and social media in the investment decision process is increasing. The final research paper, from Cogent, surveyed affluent investors directly and found that a significant number use blogs and social media, including 34% that specifically use those channels for personal finance and investing, 41% who find investing information there (even if not originally looking for it), 36% said social media research has caused them to reach out to their adviser to ask questions, and a whopping 7 out of 10 wealth investors who use social media for investment research have changed investment providers or reallocated investments based on something they read on social media.

Wall Street Vs. Its Employees' Privacy - From the Wall Street Journal, this article looks at how state efforts to block companies from monitoring employees' personal social media are coming into conflict with securities regulators... and as a result, a coalition of regulators and industry groups are trying to get states to carve out an exemption for certain financial firms to still be allowed to review employee Facebook and Twitter accounts. The concern is that with the speed of information on social media, employers may be unable to oversee and prevent fraud if they cannot monitor what employees are pitching to investors. Several states, including California, Illinois, Maryland, and Michigan have already adopted social media privacy law, and legislation has been introduced in 35 states since the beginning of the year, but FINRA has asked lawmakers in about 10 states to make changes to their proposed legislation. On the other hand, the ACLU notes that we'd balk if an employer insisted that it wants to review your photo albums weekly or listen in on your dinner party conversation, suggesting that monitoring an employee's personal social media presence is similarly inappropriate. Nonetheless, the industry notes that given current rules from regulators requiring monitoring, states that pass social media privacy rules against employers - as California recently did - put employers in an untenable position where, due to the conflict between regulators and states, the rules/laws of one or the other must be violated.

Fiduciary In Name Only? Applying The Fiduciary Standard To Your Business - In his monthly column for Investment Advisor magazine, Mark Tibergien creates the new label of "FINO" - Fiduciary In Name Only - for those firms that operate as RIAs, but commit unethical acts against their clients, a trend that seems to be on the rise given the uptick of regulatory actions in recent years from the SEC and NASAA against advisors (not to mention FINRA). And Tibergien notes that these challenges impact us all, as consumers who don't really understand the differences between the financial services players tend to paint them all with the same (negative) brushstroke. Although some fiduciary violations are blatant - Tibergien notes a particularly awkward recent example of an advisor who sold an ownership stake in his firm to a client, but at a price that turned out to be fraudulently inflated - the article suggests that when evaluated against the six core duties of a fiduciary, many advisors may be FINOs who aren't entirely walking their talk; for instance, are you really upholding the fiduciary principles if you don't have a formal succession plan, or a continuing plan in the event of your death or disability, or maintain personal conflicts of interest like outsized debt or bringing clients jointly into private investments? Tibergien notes that many fiduciary problems start out as simple mistakes that become worse and worse later; as he states, "The initial intent may not have been malicious, but the outcome depends on how the advisor decides to correct his first misstep." 

Want Financial Security? Look To The Renaissance - This article by retirement researcher Moshe Milevsky in the Wall Street Journal discusses the "tontine" - an investment arrangement dating back to the Renaissance that was used to provide financial security for people. Here's how the structure would work: imagine 1,000 soon-to-be-retirees who each contribute $1,000 to a pool of money, and invest the total $1,000,000 into Treasury bonds paying 3%. The $30,000/year of interest is split amongst the 1,000 participants, for a guaranteed $30 payment to each member. Thus far, this is simply operating like a bond fund, but the key is that members commit that when they die, their income ceases, and the payments are redistributed to the surviving participants; for instance, if after a decade only 800 original investors are alive, then the $30,000 of interest is split amongst 800 people, which means the guaranteed payments will rise from the original $30/person to $37.50/person. As the pool of participants winnows down due to death, the payments to any remaining survivors get larger and larger. In point of fact, Milevsky notes that tontines actually were popular once in the US; almost half of US households owned some sort of tontine policy towards the end of the 19th century, although they eventually deviated too far from the original design, became abused, and were outlawed by regulators about a century ago. Notably, to some extent this kind of risk pooling already exists in the form of annuities, but notably the tontine actually leaves more income on the table to survivors; even early on, it was viewed as a combination of "lottery and insurance equally driven by old-age fear and economic greed." Ultimately, Milevsky doesn't suggest that tontines should replace annuities and other income products, and that there are significant concerns - most notably, that tontine investors have an incentive to root for the demise of the other investors in a strange form of financial Hunger Games - but nonetheless tontines should perhaps be considered once again as at least a part of the retirement income puzzle.

Tell Stories Your Clients Can Tell Their Friends - This article by marketing and referrals consulting Stephen Wershing looks at the so-called referrals gap - the difference between how often clients say they're referring their advisors, and how few new clients most advisors actually get from referrals; if clients are referring as much as the surveys imply, why isn't the phone ringing more often? The key problem is the clients didn't do a very good job of explaining his value, how he was differentiated, and his ideal client; even if it's explained to them by the advisor, it doesn't mean they remember the key points and details when that cocktail party opportunity arises, or are capable of accurately conveying the value proposition when the advisor isn't there to coach it. The end result is that clients making referrals tend to talk about how nice the advisor is, how much they like him, and how happy they are - which may be nice to hear, but doesn't stir clients to action or get them to make a phone call. So how do you get past this blocking point? Use stories. People will remember stories better than facts and features and benefits anyway, and having clients tell the story of how you helped them can be a very effective way to have them make a referral. Or alternatively, Wershing suggests that you share stories yourselves with your clients of how you help other people, "giving" them a story they can share on your behalf, that may be far more actionable than having clients just say you're great to work with.

With Or Without You - In Financial Advisor magazine, Dan Moisand looks at one of the most challenging fundamental questions that advisors face: when the prospective client asks "How do I know I'll do better with you than I am doing on my own?" Moisand starts by noting some of the recent research, including the Morningstar research on Gamma (previously discussed on this blog), and a Journal of Financial Planning study that found clients may be less freaked out about stressful markets when working with a CFP certificant (covered in the February 2-3 issue of Weekend Reading). But Moisand actually suggests this research misses a more fundamental point: it's not just about the investment results implied in the conversation, and in fact battling with a client about whose investment returns are better probably won't be fruitful anyway. In fact, Moisand notes that for some clients, the problem may be that they don't want to admit they're not actually doing well, or they may be struggling to find purpose in life after retirement, which means getting them to work with you - and help themselves - is about finding an alternative rationale, and a more comfortable way to let go without being put on the defensive. Instead, Moisand suggests focusing on the stress issue: imagine two twins, who each generate the exact same investment results, but the first puts in a lot of time and effort (and stress) and the second none... ask the client which would he/she rather be? And if the client says the second is preferrable - to have more time to devote to health, happiness, friends, family, God, or whatever else - and that they'd even be willing to pay a little something for that benefit... well, you've just explained the value of your services.

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!

  • William


    I've been reading your contributions for a while now, and you really perform a great service with your writing.

    I must say, though, that the design and color choices for your blog, at least in my opinion, suggest a different type of content than what you're providing. You might consider a lighter color palette and improved logo to match such good content!

    Best Regards,


  • http://www.adviceonly.net @JimLudwick

    Great summary. Michael may be on to something for greater readability. I missed the Moisand article completely and that perspective was comforting having just read and adopted the story of the twins. Thanks, Jim

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