Weekend Reading for Financial Planners (Nov 24-25)

Posted by Michael Kitces on Friday, November 23rd, 7:15 pm, 2012 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with two good articles from the Journal of Financial Planning: one is a research study that shows how client "money scripts" can predict dysfunctional financial behaviors, and the other provides a nice overview of the current marketplace for long-term care insurance benefits. There are also two good articles from Advisor Perspectives: one by Wade Pfau discussing how the RetireOne "Stand Alone Living Benefit" (SALB) income guarantee works in protecting client retirement income, and the either by Bob Veres challenging our traditional inflation assumptions for retirees based on some research by Jim Shambo. From there, we look at a pair of industry articles, including a discussion of how Merrill Lynch's new training program is becoming increasingly RIA-like, and how some advisors are beginning to choose to not be in charge and voluntarily take employee rather than employer/business owner roles. There are also two investment articles, one from Nicholas Nassim Taleb (of Black Swan fame) about the concept of market and economic "fragility" and how we need to focus on systems and policies that make us more "antifragile", and the latest quarterly letter from Jeremy Grantham of GMO which provides an interesting but somewhat bleak outlook for US growth prospects in the coming decades. We wrap up with three practice management articles focused particularly around online marketing: one looks at how most advisors are due for a website update; the second provides some great ideas about how to create more content for your website and get more mileage out of the content you already are creating; and the last is a fascinating article that points out how being too polite, professional and "perfect" online may actually be detrimental to connecting with clients. Enjoy the reading!

Weekend reading for November 24th/25th:

How Clients’ Money Scripts Predict Their Financial Behaviors - This article by Brad Klontz and Sonya Britt in the Journal of Financial Planning looks at how client "money scripts" - unconscious beliefs about money developed in childhood - impacts later adult financial behaviors. What's notable about this article, though, is that it doesn't merely rely on some "pop psychology" theories; the authors have actually developed money script assessment tools, and apply them to measure correlations between various money scripts and dysfunctional financial behaviors (and even subsequent choice of profession!). The authors focus on four primary money scripts: money avoidance, money worship, money status, and money vigilance (the first three tend to lead to dysfunctions; the fourth tends to be associated with more positive financial outcomes). The results are striking; money avoidance scripts predict not only compulsive buying, but also hoarding, financial denial, and even workaholic tendencies, while money worship produces even greater levels of compulsive buying and workaholism. The implications of the research are that manage self-defeating money behaviors and client difficulties can be both predicted, and directly addressed, by understanding a client's money scripts. The appendix to the article includes a copy of the Klontz Money Script Inventory (KMSI) that could be used with clients to identify extreme (and potentially dysfunctional) tendencies towards one of the four primary money scripts.

Long-Term Care: Helping Clients Make the Right Choices - This article from the Journal of Financial Planning provides a nice overview of the current long-term care insurance marketplace, including a lot of current data and statistics on long-term care needs and insurance purchasing and use behaviors. For instance, the most frequent purchaser of LTC insurance is married, between the ages of 55 and 64, and has gross annual income of more than $75,000; the average buyer is 57 years old and pays no more than 3 percent of gross income in premiums. The national average cost of a semi-private room in a nursing home was about $207/day ($75,555 per year) in 2011, although costs vary dramatically by location. The median stay in a nursing home is only 1 year for men and 1.4 years for women, although the average is 2.1 years for men and 2.4 years to women (the average is boosted by a small number of extremely long claims). Premiums rise dramatically as people move into their 60s and beyond; the increase from age 55 to 60 is about 30%, and it's another 40% aging from 60 to 65, and 55% from age 65 to 70. The article also provides some good details and guidance on comparing features and benefits of various long-term care insurance policies, and some alternatives to LTC insurance.

How Well Does the Next Generation of Guarantee Riders Protect Your Income? - This article is Part 2 of the analysis by retirement researcher Wade Pfau on the RetireOne "Stand Alone Living Benefit" (SALB) from Aria Retirement Solutions (part 1 was covered in Weekend Reading a few weeks ago). In the first part, Pfau looked at the SALB for accumulators, and in this part he examines its effectiveness for decumulators, by examining in what market scenarios the SALB guarantee is effective. Unfortunately, the analysis is complicated by the fact that the SALB guarantee is tied to 10-year Treasury rates, which means that the guarantee itself is more limited in scenarios where the market declinesandinterest rates remain low - which Pfau finds is not an uncommon occurrence for those who retire near market peaks (at least outside the 1970s). As a result, the SALB generally didn't even do better than a variable annuity with a living benefit rider outside of the 1970s and 1980s, and Pfau's overall conclusion is that the SALB is less than ideal in lining up guarantees when they're most needed, including in today's low-yield environment. Stay tuned for Part 3 of Pfau's series, where he will come the SALB benefit to systematic withdrawals from an unguaranteed portfolio of mutual funds (i.e., a safe withdrawal rate style approach).

The Fallacies in Today’s Retirement Plan Assumptions: Putting the Hedonic Pleasure Index to Work - This article by Bob Veres in Advisor Perspectives discusses the flaws with the standard CPI inflation rate assumption for retirees, and suggests to adopt retirement researcher Jim Shambo's "Hedonic Pleasure Index" approach instead. The issue is not just a matter of whether CPI fully captures inflation, per se (although that's also an issue), but that spending patterns change over time and may not be level throughout retirement, both due to changes in lifestyle and needs, and also external events (as data suggests that in the aggregate retirees increase their spending by more than inflation on average, but increased less than inflation after the 2008 financial crisis). So how does this translate for planning? First of all, Veres and Shambo suggest using an inflation rate 0.25% to 1% higher than 'just' CPI when doing retirement projections. Second, Veres and Shambo suggest that planning should assume clients will adapt their spending, at least partially, to events that happen in the market, as the data suggests people really do raise their spending as income and net worth increase and curtail spending in times of adversity (although unfortunately no commercial software currently models this effectively). Perhaps most important, though, is simply to understand when individual clients in the real world will be likely to buck the assumptions in their plan and prepare accordingly.

Merrill Lynch Makes Bold Moves To Train New Recruits For An RIA-Centric Future - This article from RIABiz discusses how wirehouse Merrill Lynch has overhauled its training program and is rebuilding towards an RIA-centric business model. The new 3.5-year training starts with the educational curriculum for the CFP certification in the first year, followed by courses in practice management and business development, and even classes on emotional wellness. Because of the appeal of the program, Merrill Lynch receives 150,000 applications for what are currently 4,300 people in the program, of which 2,500 will be hired by the end of the year. Trainees earn a base salary, plus compensation for assets gathered, with a minimum expectation of $10M of new AUM per year. In addition, trainees are matched to a mentor, and are encouraged to join existing Merrill advisor teams for further education and training. While the program is open to all, it's notably been adopted most by career changers, as the average age of the "trainee" is 36. Overall, the investment in training is impressive, although thus far the jury is still out on results; nonetheless, Merrill is reportedly putting $250M per year into its training program, and has a success rate of about 40% of trainees moving all three years (while the number may sound low, it's actually drastically higher than the industry's historical attrition rate for new advisors). 

The Joys of Not Being in Charge: Being an Employee Not an Employer - This article looks at the emerging new trend of advisors who actually prefer to not be owners and not be in charge, and instead simply enjoy the opportunity to be an advisor to their clients. Although the number of advisors making such a change are still relatively small, the benefits are appealing for many - a simplification of personal and professional life, with less responsibility and stress. As a result, many of the advisors making the switch have actually been in practice 10-15 years or more, and the transition is perhaps driven by a desire to enjoy financial planning more like a lifestyle practice without the burdens of managing the business (which leads to a productivity boost as well). Another factor driving the trend is the rising burden of compliance, which is simpler as an employee that can take advantage of the employer's size and scale (including being eligible for SEC rather than state registration). 

Learning to Love Volatility - This article from the Wall Street Journal is by Nicholas Nassim Taleb, author of the popular investment books "Fooled by Randomness" and "The Black Swan" and originator of the Black Swan concept in the investment world. Taleb discusses how the rising levels of volatility in the marketplace is something that we can deal with, by investing in things that are "antifragile" - investments that gain from volatility, variability, stress, and disorder, which allows volatility to be embraced and can even lead to opportunity. Although Taleb doesn't go into a lot of detail about what, exactly, "antifragile" investments are, he does put forth five important principles to consider: 1) think of the economy as being more like a cat than a washing machine (i.e., something that may be miraculously saved from death, not just a sophisticated machine that sloshes around but can be managed and engineered); 2) favor businesses that benefit from their own mistakes, not those whose mistakes percolate into the system; 3) small is beautiful, but it is also efficient (economies of scale are nice, but excessively large projects and businesses can cause more fragility, not less); 4) trial and error beats academic knowledge (as long as it's a constructive trial-and-error process where the downside is limited and the upside is great); and 5) decision makers must have skin in the game. When applied in the context of our current government, regulatory, and private markets, Taleb's principles help to clarify why are economy is so fragile and why we struggle with many of the problems we do. 

On The Road To Zero Growth - In his quarterly letter, Jeremy Grantham of GMO gives a deeply analytical but remarkably bleak discussion of the growth prospects for the United States in the coming decades, suggesting that the 3% real GDP growth of the past 100 years will not be repeated and that going forward a more realistic expectation is only about 1.4%/year (and only 0.9% "adjusted growth" under GMO's models). The driving factors to this are slower population growth, a reduction in the growth rate of the work week, and the fact that as our economy shifts increasingly towards service industries our potential for productivity growth is limited (as most productivity gains are driven from the manufacturing sector, not the service sector). Grantham suggests this may be exacerbated by a squeeze as the rising cost of resources further impedes growth. While this Grantham letter may be a bit depressing for some, it is nonetheless a valuable look at some of the challenges the US faces, not in terms of current monetary and government policy, but simply due to the constraints of our current demographics and economic structure.

It's Time to Fix Your Website for Financial Advisors - Dave Grant makes the interesting point in this Financial Planning magazine article that prospective clients are increasingly going to find you via Google (or at least check you out there after being referred), which means your client's first impression may be your website - but many advisor websites look 5-10 years old and are very dated, which means advisors may be losing prospective clients because of their websites before ever having a chance to talk to the person! To update your website, Grant provides 7 rules for change: Be open to new technologies; Understand how people consume information on the web today; Don't take yourself too seriously; Multimedia wins the day; Keep it simple; Go mobile; and Don't assume new technology is for younger people. The last point is perhaps especially pertinent; although Grant frames the article about websites as being especially problematic when targeting Generation Y as clients (or future employees?), the relevance of a good website in today's world likely transcends generational lines.

Reduce, Reuse, Recycle: 25 Ways For Top Financial Advisors To Re-Purpose Content - This article from Financial Social Media provides a great list of ways that you can reuse or recycle the content that you create - although in reality, it's also a great brainstorming list for advisors who are trying to think of ways to produce (more) content for their blog (or website in general). Ideas include not just ways to repurpose blog content itself (e.g., make a "Best of 2012" blog post of prior blog articles), but building content from a webinar you participate in, a case study, or interviews or discussions you have with clients or affiliated professionals. Also remember that you can turn blog content into something else, too; for instance, adapting blog content into a podcast or video (or podcast or video content into a blog article), weaving together several blogs into a white paper or e-book, or scheduling half a dozen tweets and LinkedIn posts that expound on some key details/insights/points from an article you wrote.

Why You Are Better Off Not Being Perfect Online - This article makes the simple but interesting point that in marketing yourself online - from the information on your website to engaging in social media - being professional and "perfect" is actually not the best way to go. The reason is simple: we prefer to work with other people who are real human beings, who have depth and hobbies and interests and normal human flaws. More generally, the article makes the point that if you want to be heard, don't be perfect - you'll just be boring and won't stand out. Instead, the article suggests that you: 1) Find your own voice (really be yourself); 2) Don't claim to be a guru (by which the author means don't be an expert to everyone in everything; instead, acknowledge that you don't know everything and have shortcomings, as it makes you more easy to relate to); and 3) Act like a friend (which means building real relationships where everything is on the line, personal flaws and all).

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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