Weekend Reading for Financial Planners (Jan 21-22)

Posted by Michael Kitces on Friday, January 20th, 8:39 pm, 2012 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights a number of recent studies on trends in the financial services industry, including the tendency of investment advisors to claim they're financial planners without really having the expertise or providing the comprehensive planning services, to the rapidly growing market share of RIAs (and the shrinking share of wirehouses). We also look at an article about the dramatic shift underway towards tactical asset allocation, some new research about how to adapt safe withdrawal rates to more customized investment and time horizon assumptions, and two investment pieces about the economic outlook in Europe and here in the US for 2012. At the end is a good reminder that the specific choice of words we speak in meetings can really matter to clients, and a profile of Texas Tech University as a leader in providing financial planning education... even though many firms still seem more interested in hiring based on "Who You Know" than "What You Know" these days. Enjoy the reading!

Weekend reading for January 21st/22nd:

Most Advisers Overstating Their Expertise: Cerulli Study - The hot news this week is a new report on Advisor Metrics in 2011 from Cerulli Associates that suggests while 59% of advisors call themselves financial planners, only 30% of them have advanced financial planning knowledge and genuinely deliver comprehensive financial planning (once their underlying services to clients are evaluated). Similarly, while only 22% of the advisors responded that they were investment planners, in reality Cerulli found that 56% should be characterized as investment planners, who at best did only a small amount of modular planning with a primary practice focus around asset management for retirement and college assets. In a world where many financial planners complain that there are investment advisors claiming to be financial planners without really doing the planning work or having the expertise, the Cerulli study appears to confirm the perception.

It's An RIA World, Everyone Else Just Lives In It - This article from blogger Josh Brown (a/k/a The Reformed Broker) on the Wall Street Journal Blogs discusses the ongoing trend that RIAs continue to grow in the world of finance, even while the bankers, traders, and institutional brokers are all getting squeezed. As a recent Investment News article showed, RIAs continue to take strong market share from the wirehouses in particular, which have dropped from 50% of market share to 43% in just a few years, and by the end of 2013 could drop to 35%, falling below the RIA market share for the first time. As Brown notes, it is particularly ironic that the ally of the RIA is now the online brokers, who first destroyed the retail broker business with commission deflation, and are now building their business serving RIAs being run by many of those former retail brokers. Brown's parting note deserves special acknowledgement, though: "Put simply, we're the hottest thing in the building right now. in the investment management industry, it is most certainly our world right now. Let's see if we can avoid screwing this up." 

Wirehouses Seen Making Big Push Into Independent BD Space - In keeping with the theme of industry trends and predictions, this article from AdvisorOne explores the recent Tiburon Strategic Advisors research report suggesting that wirehouses may try to stem the tide of breakaway brokers by establishing their own independent broker-dealer subsidiaries, and offering their brokers a more quasi-independent opportunity. On the other hand, Tiburon notes that while a whopping 12% of wirehouse brokers leave their firms every year, 2/3rds of them simply go to another wirehouse to capture new recruiting bonuses. In addition, some critics suggest that the majority of those leaving are the struggling producers who weren't very profitable for the firm or successful in their businesses in the first place. Nonetheless, Tiburon believes there are enough breakaways that the wirehouses may respond with new initiatives, even while trying to maintain the profitability of their core. But whether they can profitably create a model that is still perceived as "independent enough" to stem the tide of breakaway brokers remains to be seen.

Clients Want It, Advisors Need It, Advisors Adopt It - This blog post from Pinnacle Advisor Solutions explores the ongoing trend of clients shifting from a focus on wealth accumulation (6% of clients) to a focus on risk management (70% of clients, according to a recent Invesco/Cogent Research Survey). As clients seek out risk management, preferences shift; a Jefferson National survey from last fall now showed that clients prefer tactical to buy-and-hold strategies by a nearly 2-to-1 margin. In response, advisors are responding by adopting a more tactical approach, with 61% of advisors looking at tactical strategies in 2011 (up from 8% in 2010). The article counsels that advisors who are considering tactical strategies and tactical providers should focus on four key concerns: Track Record (many but not all tactical firms only started after the market crash in 2008 and are still untested); No Black Boxes (beware quantitative-only managers, and look for those who include both quantitative and qualitative analysis); Robust Communication (if you're going to transfer tactical responsibility to a third party, make sure they provide the communication to allow you to stay informed for yourself and your clients); and Flexibility.

Capital Market Expectations, Asset Allocation, and Safe Withdrawal Rates - This article by Wade Pfau from the January issue of the Journal of Financial Planning explores how advisors can build some of their own "customized" safe withdrawal rate measures, based on their own capital market assumptions regarding returns (not to mention time horizons, tolerance for exhausting wealth, and other factors). The key graphic of the article - Table 3 - provides an excellent reference tool for planners, revealing the optimal withdrawal rate and associated asset allocation for retirements ranging from 10 to 40 years and failure rates ranging from 1% to 20%. The article also explores sensitivity to assumptions, noting in particular that while equity allocations of 50% or more are "optimal" in most research studies, lower equity allocations are often so close to being "nearly optimal" that many clients would be justified in choosing the more conservative path, especially in any scenario that didn't already have a 100% probability of success. Accordingly, Table 3 notes the ranges of stock, bond, and bill allocations that would have worked "almost as well" for any particular combination of retirement duration and acceptable failure rate.

The End Of Europe? - In his weekly piece (reprinted on Advisor Perspectives), John Mauldin explores the future of Europe in the coming years, with a particular focus on Greece. Mauldin highlights three key problems in Europe: 1) banks are massively insolvent due to 30:1 leverage investing in 2) sovereign debt of countries that can't afford to pay their debt, which cannot grow out because of 3) massive trade imbalances amongst the European countries. Mauldin notes that while most have been focused on the first two issues, the third dramatically complicates the situation. If countries like Greece cannot establish a trade surplus - exporting more than they import, and giving them the means to trade for what they need - the ramifications of a looming default are even more severe, and risk significant political turmoil. Ultimately, though, the discussions of Greece have clearly turned from a liquidity discussion to a solvency discussion. The only question now is whether Greece defaults within the Euro, or leaves it entirely.

Quarterly Review and Outlook, Fourth Quarter 2011 - This research piece by Hoisington Investment Management on Advisor Perspectives explores the debt situation here in the US. The piece notes that US debt-to-GDP ratios have risen to the point that growth is likely to slow in the coming years, which may be further exacerbated by the fact that any remaining stimulus from spending done in response to the financial crisis is waning. Furthermore, near-term Federal deficits seem unlikely to fall as well, as even though Federal spending has slowed, the economy is at risk for a recession, and further cuts may be extremely difficult as entitlement spending commitments dominate the overall Federal budget (leaving few categories even available to cut); at the same time, though, states are struggling to get control of their own deficits, and although they may have slightly more success, their cuts may further slow growth in the near term. Hoisington also anticipates a global recession in 2012, which will put a further drag on the US as well. Notably, as a result of this overall bearishness for the economy, Hoisington suggests that rates will trend even lower in 2012.

The Power of Words - This cover story from the January issue of Research magazine explores some of the research on the importance of language, and how little changes in the words we use can have a significant impact on a client interaction. Words that resonate - which means not just that they're buzz words, but that they actually connect and inspire action - include "imagine", "long-term" and "strategic". In addition, advisors have a tendency to push too much information out (a by-product of mostly being Type A personalities), instead of listening and pulling information in from clients. It's also important to keep things in a positive light, or clients are demotivated; "You didn't save enough for retirement" becomes "let's create a custom plan [for your current situation]". And perhaps most important, limit the use of financial jargon; especially because a client who is nodding their head still doesn't necessarily fully comprehend what you're saying. I suspect many experienced advisors may not find anything completely novel in this article, but it provides some good reminders to think about the next time you're in a client meeting.

Can These People Teach Financial Planning? - This article from SmartMoney magazine profiles Texas Tech University, one of the leading universities in financial planning education. While portraying the Texas Tech program in a positive light, the article does raise the question about whether you can really "teach" financial planning, especially given that many major financial services firms are providing little in the way of additional salary for hiring those with financial planning degrees. Instead, firms still tend to focus on "people skills" first, preferring to hire those with the right personalities and then fill in the technical information later. Whether the industry can ultimately shift from a philosophy of "It's About Who You Know" to "It's About What You Know" remains to be seen, but Texas Tech is making a noble effort.

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!


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