Exciting news! This week we've introduced JobsFP, a dedicated jobs site specifically for financial planning firms and those looking to find a job at one! You can check it out here!

Weekend Reading for Financial Planners (Apr 7-8)

Posted by Michael Kitces on Friday, April 6th, 7:12 pm, 2012 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights recently announced changes from the CFP Board regarding the experience requirement and the consequences of a bankruptcy for certificants, and three 'warning' articles to take note of: one about the crowd funding solicitations your clients will likely receive in the coming year(s) as a result of the new JOBS act; a second about problems arising in the ETN/ETF marketplace that suggest more due diligence may be in order; and the third about an annuity agent who was thrown in jail for selling an annuity to a senior who was later deemed incompetent due to dementia, raising serious questions for all advisors about the standard of care for determining whether a client is competent before working with them. From there, we look at three interesting studies hitting the news this week: the first was a research study by NBER that suggested most 'advisors' are not giving advice in the interests of their clients; the second found that "fee-based" is actually a negative term in the minds of most consumers and may be eroding consumer trust; and the third suggesting that a uniform fiduciary standard for brokers may not increase the cost of advice for lower income individuals or shift the industry to focus on the affluent, despite many claims to the contrary. From there, we look at two blog posts: one about how using video on your website may be easier (and cheaper) than most people believe, and another that makes the good point that just because someone offers investment insights in the financial media does not mean they're giving advice - and we need to stop confusing the two. We finish with a striking write-up of a recent study released by the BLS looking at consumer spending over the past century, and exploring the challenging question: if our country has gotten so much richer, why do so many feel poor and struggle these days? Enjoy the reading!

Weekend reading for April 7th/8th:

CFP Board Changes Rules for Bankruptcies, Disciplinary Procedures [and Experience Requirement] - This article highlights the CFP Board's announcement on Thursday of there major changes that will be implemented later this year: CFP Board will no longer investigate bankruptcy-only cases with CFP certificants, but will now publicly disclose any certificant who has had a bankruptcy in the past 5 years, with quarterly press releases announcing the list; the experience requirement will be reduced from 3 years to 2 years for certificants who work directly under the supervision of a CFP professoinal providing all six steps of the financial planning process directly to clients; and the CFP Board will begin to treat a failure to respond to an investigation or request for information as an admission of guilt and will issue interim suspensions without a hearing where it receives evidence of a conviction or professional suspension from other regulatory organizations. For further detail on the new rules in these areas, click on the following: bankruptcy disclosures; experience requirements; disciplinary rules and procedures changes.

Be Wary of Crowd Funding Start-Ups - This article by Charles Rotblut, editor of the AAII Journal, highlights the just-signed-into-law Jumpstart Our Business Startups Act (the JOBS Act), which opens up "crowd funding" to small businesses by dramatically relaxing the investor requirements. Startup companies can sell up to $1 million worth of shares to any investor during a 12-month period, without meeting the accredited investor requirements that previously applied. Under the new rules, the investor simply cannot commit more than the greater of $2,000 or 5% of their annual income or net worth (if either is less than $100,000) to a single non-publicly traded company, or the greater of $100,000 or 10% of income or net worth (if either exceeds $100,000). Notably, though, an investor could invest much more than these limits in total, by simply investing in multiple different start-ups. However, Rotblut points out that under the legislation, companies raising less than $100,000 can certify their own financial statements, and companies raising $100,000 to $500,000 only must have a public accountant review financial statements. Audited statements aren't required unless the offering amount is above $500,000. As a result, Rotblut warns that in addition to the risk of start-up investing itself, there is also a material risk of fraud. There may be opportunities, but caution is merited; to say the least, most start-ups aren't going to turn out to be the next Facebook.

Schwab May Issue Warning on Exchange-Traded Products - This article highlights some of the ongoing concerns emerging from exchange-traded products, even while their popularity rises (or perhaps because of it!). The warning stems from problems like the sudden plunge in March of the VelocityShares Daily 2X VIX Short-Term ETN known as TVIX, which dropped 60% in just a few days (apparently due to the fact that Credit Suisse had stopped issuing new shares for a period of time, which allowed the TVIX to fall away from its fair value; when Credit Suisse began issuing again, arbitrageurs quickly forced the TVIX back in line). As a result of all these concerns, Schwab is considering the addition of a warning screen that pops up anytime an investor wants to purchase some of these securities, and Fidelity already makes it more difficult for investor to find leveraged and inverse ETNs and ETFs in their screening tools... which raises the question: should advisors be raising their due diligence bar on such investments as well?

How Glenn Neasham Lost His House... After Selling A Senior An Indexed Annuity - This article from RIABiz explores the story of Glenn Neasham - an insurance agent who sold an equity-indexed annuity to 83-year-old Fran Schuber in February of 2008, and was ultimately arrested, charged with felony theft, found guilty, and sentenced to 90 days in jail, in addition to destroyed his career and income. What ultimately triggered the significant consequences was the fact that Ms. Schuber had dementia, and as a result the commission that Neasham earned on the annuity was characterized as theft. However, Neasham insists that there were absolutely no apparent signs of dementia or confusion at the time of the sale in 2008 (although Schuber's mental status has since declined), and maintains it was a typical sale of what is actually one of the most popular equity-indexed annuities - which are approved for sale by the state insurance commissioner for clients as old as 85. The case has rocked the insurance world, not simply for the severe consequences associated with the incident, but because it raises the fundamental question: what is the standard of care and expectation for an insurance agent, or any advisor, to determine the mental competence of a client when doing business, given that we are not medical professionals? (You can also see a thorough explanation of the incident in Neasham's own words here.)

Most Advisors Caught Failing Clients in Research 'Sting' - This article from AdvisorOne discusses a recently released paper from the National Bureau of Economic Research by Sendhil Mullainathan, Markus Noeth,and Antionette Schoar, which was intended to examine whether financial advisors undo or reinforce the behavioral biases and misconceptions of their clients. The authors tested this by sending trained undercover agents to meet with financial advisors with various scenarios, such as a returns-chasing portfolio, a concentrated stock portfolio, etc., and evaluated the advice that was given. Unfortunately, the results were not entirely positive; the authors criticized a 'significant bias towards active management' amongst the advisors and found that sometimes advisors even encouraged returns-chasing behavior. The study did find advisors  generally evaluated a client's risk tolerance and time horizon, at least. Unfortunately, though, the authors do not appear to have controlled for the experience or business model of the advisors, and in fact acknowledge that most advisors in the study were commissioned 'advisors' (salespeople?) with only a small subset of advisors from independent firms or compensated by fees. Notwithstanding these constraints, though, expect to hear more buzz about this study in the coming few weeks as the general media discusses it.

"Fee-Based" Is A Four Letter Word For Financial Advisor Clients - This article from Registered Rep discusses another recent piece of research, this time on "Rebuilding Investor Trust" by Sullivan and Northstar. Strikingly, the study found that 64% of retail investors had a negative reaction to the phrase "fee-based" - which Philip Palaveev of Fusion Advisor Network point out that uninformed clients simply interpret as 'nickel-and-dime'-based, while the label fails to describe what the advisor actually can offer clients in clear terms. Other words that were negative to investors included fluctuating and variable. On the plus side, only 40% of investors stated that the word "fiduciary" was confusing (although a 40% response rate still made it one of the most confusing words surveyed), suggesting that perhaps the fiduciary word is getting out there. 

Fiduciary Standard Does Not Increase Costs, Study Says - A third interesting study being discussed this week is "The Impact of the Broker-Dealer Fiduciary Standard on Financial Advice" by Michael Finke of Texas Tech and Tom Langdon. The study attempted to determine whether delivery of advice under a fiduciary standard resulted in higher costs than the suitability standard, by looking at the cost of advice in four states that impose an unambiguous fiduciary standard on broker-dealers: California, Missouri, South dakota, and South Carolina. The results found "no statistical differences between the two groups in the percentage of lower-income and high-wealth clients, the ability to provide a broad range of products including those that provide commission compensation, the ability to provide tailed advice, and the cost of compliance." Given the ongoing debate about whether the fiduciary standard will increase costs and decrease access to financial advice, this study is getting a great deal of visibility.

3 Video Marketing Myths Busted - This article by marketing consultant Kristin Harad on the FPA Practice Management Blog explores how easy it really is for advisors to start incorporating video into their websites and marketing materials, by busting three 'myths' about video: that it's expensive - it's not, just $50 to $300 for some basic quality production; that it must be professional - it should be of reasonable quality, but it doesn't have to be super-professional, as your clients want to see and get to know you!; and video is hard to do - yes, the first time will be slow while you learn the process, but after you've done it once, doing more becomes very fast and easy! The bottom line: "Video does not have to be a costly or complicated endeavor to be effective."

For The Last Time: Insight Is Not Advice - This article by Reformed Broker blogger Josh Brown makes a simple but important point: there's a difference between people giving insight, and people giving [personalized] advice. Accordingly, Josh suggests that critics are way off base in mocking the financial media - from television to website - based on the premise of "people giving advice on TV" or the web. Instead, the key is not getting advice from experts seen through the media, but insight; in other words, the value is not having them say what YOU should do, but having them share their expertise about what THEY THEMSELVES are doing. What conclusion you draw from that, or if you misinterpret it, is your problem. As Josh summarizes it well: "When I see Jeffrey Gundlach or Warren Buffett or Marc Faber or David Tepper on TV, I am interested to hear why they are anticipating a certain outcome or why they are positioning their portfolios in a certain way - I am not under any impression that they care if I choose to follow them or not, nor should anyone else be - Insight is not Advice."

How American Spends Money: 100 Years in the Life of the Family Budget - This article from The Atlantic discusses a recent research study "100 Years of U.S. Consumer Spending" released by the Bureau of Labor Statistics, examining how household spending changed over the 20th century. The shifts are quite striking; food fell from 43% of the household budget to 13%, while apparel fell from 14% to a mere 4%. Moving in the other direction, housing costs rose from about 23% of the household budget, to 33%, and entertainment expenses rose from barely 2% to about 5%. Overall, families in 1900 spent a whopping 80% of their income on food, clothes, and homes, while that amount is barely 50% now, a testimonial to the improved productivity of food and clothing and its cost relative to average income. Yet the article asks - if our country has become so productive and rich, why we do feel so poor and struggling these days? The answers? First, the dramatic rise in not only the cost of housing - as more of us own instead of renting - but also transportation with the rise of the automobile; as I've written in the past, poor housing and car choices are the true dominators that can crowd out most household savings. Second, the rise of health care, which may be only 6% of family spending, but is 16% of the US economy and consequently impacts us in more indirect ways (such as increasing the cost of other things we buy due to the embedded cost of taxes and business health insurance), and has become "the fourth necessity" behind housing, food, and apparel (clothing).

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!


  • Leonard Wright

    How Americans spent their money....

    Since it is nearing April 15th, I would like to point out that the tax rate in 1900 was...zero percent.

    Today, we pay an increasing percentage in taxes, and generally, cannot purchase much without paying a tax on it. I think the article missed an important expenditure for comparative purposes.

    Not sure if that is valid, but certainly may be an issue for some.

    So...one might surmise that we need lower prices in real terms, or percentages going to clothing and food so we can finance the Federal, State, and Local Governments.

    Just a thought.

    • http://www.texas-law.net/ annulment laws in texas

      Excellent pieces. Keep writing such kind of info on your page.
      Im really impressed by it.
      Thanks for sharing your thoughts about family court. Regards

Blog Updates by Email

Nerd’s Eye View Praise

@MichaelKitces Twitter


Out and About

Monday, October 27th, 2014

TBD @ Private Event

Thursday, November 6th, 2014

Cutting Edge Tax Planning Developments & Opportunities Future of Financial Planning in the Digital Age @ ACP 2014 Conference

Friday, November 7th, 2014

Setting a Proper Asset Allocation Glidepath in Retirement @ Charles Schwab IMPACT 2014

VIEW FULL SCHEDULE