Enjoy the current installment of "weekend reading for financial planners" - the major highlight this week is the release of the Financial-Planning-Coalition-sponsored study on the costs of various regulatory oversight options, with some pretty shocking costs for FINRA or a new SRO to take over. Other articles include a discussion of Schwab's first franchise branch opening, the emerging field of financial therapy, an analysis of annuity guaranteed withdrawal riders and their limitations due to ongoing inflation, and two great investment pieces on last week's European Summit by John Mauldin and GaveKal, along with a somewhat disturbing warning by John Hussman that the market may be in significant near-term danger. We wrap up with a brief article that was written for entrepreneurs, but translates in my opinion to virtually anyone in professional services, taking a hard look at what your time's really worth, and what you should - and shouldn't - be doing yourself versus outsourcing to others. Enjoy the reading!
Weekend reading for December 17th/18th:
Boston Consulting Group Analyzes Costs and Funding Needs of Oversight Options - This study, commissioned by the Financial Planning Coalition, in conjunction with the Investment Adviser Association, and TD Ameritrade Institutional, explores the cost of the various potential regulatory changes on the table for investment advisors pursuant to the results of the SEC's study under Section 914 of the Dodd-Frank Reform legislation. The options included expanded SEC examinations, the establishment of a new SRO, or the authorization of FINRA to examine investment advisors. The conclusion of the study is that authorizing user fees for the SEC to increase examinations is by far the least expensive option, with an estimated cost of $27,300 per firm as an annual fee; although that may seem high for many small firms, it pales in comparison to the estimated $51,700 for a FINRA investment advisor SRO, or $57,400 for a new RIA SRO. And notably, while expanded SEC exams is the least expensive option, surveyed RIAs indicated it was also their most preferred option; on average, firms suggested they'd actually be willing to pay almost twice as much to the SEC as to FINRA, just to NOT be regulated by FINRA! Expect to see a great deal of discussion about the results of this study in the coming weeks and months; so far, there's a nice summary of it written up by Financial Advisor magazine, and already some early attacks from FINRA in response to the results on RIABiz, or you can see a more in-depth discussion of the results in the main link for this article.
And They're Off! Schwab Opens the Doors To Its First Independent Franchise - This article from RIABiz discusses the first branch opening of Schwab's new franchise program, which was discussed on this blog a few months ago when first announced. Schwab notes that although the actual establishment of start-up franchise branches has been slow this year, the interest has been high, with a whopping 1,500 prospects inquiring about the program, while Schwab anticipates selecting only 16 of them to open branches in 2012. A major inhibitor is still the start-up costs - which range from approximately $50k - $100k - but on the other hand, Schwab franchisees will be seeded with clients and start with revenue coming in from day 1, as opposed to the traditional planning start-up firm that struggles to generate much revenue at all in the early years. Notwithstanding the costs, though, it looks like there is no shortage of interest for people who would like to get their business started by leveraging the Schwab systems and brand.
So, How Does Money Make You Feel? - This article from the Wall Street Journal discusses the emerging field of "financial therapy" - the unique intersection of psychology and money/financial issues. Expanding on the recently established Financial Therapy Association, the article highlights a few planners who are beginning to integrate financial therapy in their practices, generally by integrating an outside psychologist with experience in the area, to work through the mental issues that may be underlying the client's financial issues (especially problematic financial behaviors). There still appears to be much debate about where financial therapy should fit into the financial planning firm - and in particular, whether it's beyond a planner's expertise to practice in this area - but the article makes a compelling point that some issues - perhaps more common than we care to admit - can't be solved by a financial planner's expertise alone.
GLWBs: Retiree Protection or Money Illusion? - This article by Wade Pfau on Advisor Perspectives highlights research undertaken by Dr. Pfau to analyze Guaranteed Lifetime Withdrawal Benefits (GLWBs), using the recently released Vanguard offering as an example. The results generally show that while the GLWB provides some protections, it would truly require a market scenario worse than anything found in history to deliver value - while still being purchased from an insurance company that remains solvent through such an environment - as the guaranteed income provided by such annuities could have been achieved without the guarantee in any historical scenario we've ever seen except the peak of 1929 (where the money ran out in the 29th year out of 30, due to deflation forcing rising real withdrawals), just using a systematic withdrawal program. On the other hand, even in cases where guarantee might prove relevant, Pfau shows that the guarantee is still dramatically eroded by inflation over time. In fact, Pfau's analysis found that the guaranteed withdrawal amount failed to keep pace with inflation in all but 3 out of 56 historical scenarios - and those three had such wildly successful market returns that the guarantee would have been completely unnecessary anyway! Pfau does note, though, that GLWB guarantees may still help clients stay invested, rather than panicking and exiting the markets, and if the current environment results in withdrawal rates even lower than history (which some of Pfau's other research suggests is a risk), the GLWB might still be compelling in today's world.
A Player To Be Named Later (free registration required, but worth it!) - This article by John Mauldin provides some of the best down-to-earth discussion I've seen regarding last week's European Summit and the direction of the European Union as it struggles to get the sovereign debt crisis under control. The basic gist is that, rather than trying to completely change existing EU treaties, Merkel and Germany are now moving in the direction of simply creating another, new pact, that countries would have to commit to - a form of supra-Union over top the existing one, available only to the countries who will agree to the new rules, which generally require significantly more central oversight of the financial decisions of each country. Mauldin points out that there are still some real complications to the feasibility of this path, but that nonetheless it may still be more economically and/or politically appealing and feasible than the alternatives.
Sorting Out The Euro Mess (again free registration required, but worth it!) - This article by the brilliant folks at GaveKal, distributed through John Mauldin's Outside The Box series, provides another perspective on last week's European Summit. The folks at GaveKal appear somewhat less sanguine than Mauldin, suggesting that in reality the Summit accomplished little that will be substantive or final, and that once again the crisis is likely to evolve to the next stage before we even reach the next summit gathering in March. On the other hand, the GaveKal analysis suggests that the new discussions from the ECB could ultimately stabilize the system - or potentially result in a quantitative easing and money-printing cycle that would put Bernanke to shame. Overall, though, GaveKal also makes the striking point that what truly underlies the European debt crisis is actually not even a financial issue, per se, but a fundamental deteriorating productivity issue, along with the external impact of rising energy prices and the ascent of China.
Hard Negative - In this week's column, Hussman sounds the alarm that the present market environment warrants "unusual concern" - a rare warning from a market commentator who routinely refuses to try to "time" or forecast anything in the near term. Nonetheless, Hussman suggests that the expected risk/return profile of the stock market has shifted to a "hard-negative" that has historically produced abrupt crash-like plunges, due to a combination of poor market valuation, excessively bullish recent sentiment, and a near-certainty of oncoming recession, amongst other factors. Hussman also notes the relative lack of progress from last week's European Summit.
How Much Is Your Time Worth? - This brief article by Inc magazine provides a simple but striking perspective on the value of personally outsourcing anything and everything you can as a business owner, by simply looking at the real value of your time in your business. For a successful firm, the number is often much higher than most people realize, which in turn means that in reality most of us should not personally be doing all the things we currently do, and instead should be getting those tasks off our plates (whether it's via delegation to other members within the firm, or to others outside the firm). Although the article is written for entrepreneurs in general, I think it translates remarkably well to financial planning firms in particular; even for those who are not financial planning firm owners but simply work in professional services, the lessons of what your time is worth and what could be delegated is still valuable food for thought.
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!