Enjoy the current installment of "weekend reading for financial planners" – this week’s issue starts off with some breaking news about new legislation from Representative Maxine Waters that would authorize the SEC to collect user fees to increase oversight of RIAs (although it’s not clear the legislation will gain momentum, it’s viewed by many as a favorable alternative to FINRA oversight of RIAs). There’s also a call from the Consumer Financial Protection Bureau for a fresh crackdown on "senior designations" and a good in-depth look at the potential fiduciary rule coming out of the Department of Labor in the next few months.
From there, we look at a few articles on notable industry trends, including a review of recent Aite Group research suggesting that there may be more unhappy advisors in RIAs than working in wirehouses, a look at how CFP certificants are geographically distributed around the country, and a review of InStream Solutions financial planning software and its numerous innovations in how advisors can use its software to enhance their outcomes with clients.
In addition, there are a couple of research and technical articles this week, including a good summary of this week’s Reinhart and Rogoff research controversy and exactly what the purported flaws were in the original study, a discussion of whether dividend investing is really just a value tilt in disguise (and that dividends might actually be a detractor from performance after adjusting for value!), and a look at a recent research brief from the Center for Retirement Research which finds that "nudges" like automatic enrollment programs may actually be a more effective government policy to encourage retirement savings than just providing a subsidy in the form of tax deductions.
We wrap up with two practice management articles – one with a list of good tips for using LinkedIn, and the other about how to introduce new technology tools to your clients – and close out with an article suggesting that advisors may be talking to clients with more jargon than they realize (and what to do about it), and another looking at financial planning trends in the future and suggesting that while expert knowledge is important, the best financial planners will be differentiated by their ability to use "left-brain" abilities to connect with clients emotionally to really leverage their right-brain knowledge. 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 20th/21st:
Maxine Waters Proposes New Bill On Advisor Fees For SEC Exams – This week, Representative Maxine Waters (D-Calif), the ranking Democrat on the House Financial Services Committee, introduced the "Investment Adviser Examination Improvement Act" that would authorize the SEC to collect user fees from RIAs to fund increased adviser examinations. The legislation is similar to a bill introduced by Rep. Waters last fall, that was intended to provide an alternative to the so-called "Bachus Bill" that would have appointed an SRO to oversee investment advisers (which was widely viewed as attempting to transfer RIA oversight to FINRA). The new version of the legislation would require that any new industry fees specifically fund additional adviser exams above the amount done in 2012, and the formula for assessing fees should consider the advisors’ assets under management, risk characteristics, and the number and type of clients they serve. Although both the Investment Adviser Association, and the Financial Planning Coalition have supported the legislation, and there is currently no alternative legislation, it’s not clear whether the proposal will gain momentum at this point, as the House Financial Services Committee chair Republican Jeb Hensarling has not indicated advisor oversight as a 2013 priority for the committee this year. Nonetheless, even if the proposal languishes for a period of time in committee, it may still form the base of legislation that pro-SEC-user-fee organizations can support, and/or may form the framework for a bipartisan version of the bill to be introduced in the Senate later this year.
CFPB Calls For ‘Rigorous’ Standards For Senior Designations – This week, the Consumer Financial Protection Bureau (CFPB) issued a report entitled "Senior Designations for Financial Advisers: Reducing Consumer Confusion and Risks" that calls for better protections for seniors against the alphabet soup of what is now more than 50 senior designations. The report advocates three key steps: 1) that regulators should require rigorous criteria for designations, including specific standards for education, training, and accreditation; 2) that those who use senior designations should have stricter standards of conduct that reduces confusion (e.g., prohibiting designees from characterizing sales events as educational seminars); and 3) increasing supervision and enforcement against misleading conduct by designation holders. The key steps were crafted by the CFPB after an extensive analysis of the landscape, including their broad request for information on senior financial exploitation last year. Although not addressed by the article, it remains unclear whether/how the CFPB’s recommendations would be impacted by the potential implementation of a uniform fiduciary standard, which ostensibly would also put pressure on some of the questionable conduct the CFPB highlights (albeit not pressure on the designations themselves).
The New Face Of The Fiduciary – This article by Diana Britton on Wealth Management highlights the latest anticipated Department of Labor proposal on a new fiduciary rule, which was delayed last year due to pusback from the industry and criticism about the lack of an economic cost-benefit analysis. Nonetheless, though, Phyllis Borzi, the Assistant Secretary of the Employee Benefits Security Administration who is driving the effort, appears committed to reintroduce an amended rule by this summer, after highlighting it as a regulatory priority for the Department of Labor in 2013. Although no one knows exactly how the rule will operate, it’s expected to expand the application of fiduciary to those who advise on retirement plans, including a controversial provision that would extend the fiduciary rule to any advisors who recommend rollovers to an IRA (because it’s rolling out of a fiduciary-regulated employer retirement plan). This may force brokers working with retiree rollovers to either eschew commissions and their brokerage licenses, or otherwise adapt to a new fiduciary rule, depending on exactly how it plays out (as notably, a fiduciary rule still allowing some commissions is at least a possible outcome, although some form of levelized compensation requirement appears likely). On the other hand, the industry is pushing back, claiming that it’s not financially viable to service smaller accounts – especially IRAs – without commissions, and that the DOL fiduciary proposal could wreak havoc with the industry that was already awaiting a fiduciary proposal from the SEC. However, some fiduciary advocates suggest instead that since the SEC has also been moving slowly on a fiduciary rule, that a DOL proposal and implementation could actually help to force the SEC’s hand on the issue. Notably, if a fiduciary rule does come into place that eliminates the capacity of many brokers from working with retirement plans until they adapt, it may also create a void and opportunity that current fiduciaries from RIAs can fill. But the bottom line is that notwithstanding all the discussion about a potential uniform fiduciary standard from the SEC under Dodd-Frank, the reality is that the fiduciary change could ultimately emanate from the Department of Labor and become the template the SEC uses to move forward, from the structure of the rules itself to the associated cost-benefit analysis the DOL appears to be working on.
Who’s Happier: RIA Or Wirehouse Advisors? – A recent Aite Group study has found that, in surveying the happiness and satisfaction of advisors, that those in RIAs aren’t as happy with their careers as those in wirehouses, with 27% of RIA-affiliated advisors at a large practice dissatisfied, compared to only 13% of their peers in wirehouses. Unfortunately, though, the study doesn’t report results of how many advisors were neutral, satisfied, or very satisfied, and whether there were differences between RIAs and wirehouses. Nor did it report the methodology and sampling details of the study weren’t disclosed – which is notable, as another recent Aite Group study used some highly questionable assumptions when separating "RIAs" from "wirehouses" to determine which channel earns more commissions – which makes it difficult to really evaluate the reliability or accuracy of these results. Nonetheless, the results to raise a valid point and concern: namely, that there are a lot of rigors and pressures of running one’s own business, and that perhaps in the end the stresses of running an RIA may outweigh its independence and flexibility for a lot of advisors, compared to those in wirehouses where the firm shields advisors from the responsibility of worrying about technology and other decisions. On the other hand, it’s not clear if the dissatisfaction is uniform across all RIAs, or if perhaps newer ones are less happy due to the stresses of the transition without having yet enjoyed the longer-term benefits. The bottom line, though, is that notwithstanding the ongoing trend towards brokers breaking away from wirehouses to start their own RIAs, the decision to go independent does entail some additional responsibilities that advisors considering a change should not take lightly.
Where The CFPs Are Now – This article from Financial Planning magazine takes a dive into the geographic distribution of CFP certificants by state, dividing the CFP Board’s state breakdown of advisors into the 2010 Census Bureau’s estimate of state population to derive a "Planner-to-resident" ratio for all 50 states. Some of the "densest" states for planners, like Minnesota and Massachusetts, have about 2,500 – 3,000 residents per CFP certificant; sparser states like Nevada, Arkansas, and Louisiana have 8,000 – 10,000 residents per CFP certificant; and the sparsest states are West Virginia and Mississippi where the resident-to-CFP ratio is over 15,000 : 1. While a greater density of planners means more competition, the article also notes that density creates the critical mass of planners to build community, and that some of the denser planner environments are also more collegial; for firm owners, the greater density also improves the potential hiring pool of available advisors. On the other hand, being in sparser areas helps not only by the outright lack of competition for clients up front, but that clients tend to be "stickier" in staying with the firm where there are few alternatives anyway, although many of the states with the lowest CFP population are also states with well-below-average median household income, limiting the potential size of the marketplace notwithstanding the lack of competition. More affluent states tend to have more CFP certificant competition, but if the state has a higher population it may also be more feasible to build a niche practice to manage around that competition; on the other hand, some planners in lower population states have simply built more virtual practices to reach clients across the country, which begins to blur the state lines altogether. In any case, though, the environment for planners is also impacted by the culture of the state; clients in some areas prefer more sophisticated planning strategies, which clients in other regions might eschew entirely.
Four Bold Innovations That Will Revolutionize Financial Planning – This article by industry commentator Bob Veres in Advisor Perspectives highlights financial planning software InStream Solutions and the ways that their platform are innovating far beyond the roots of financial planning software in old spreadsheet tools like VisiCalc and Lotus 1-2-3. The first innovation of the platform is its ability to truly view clients comprehensively; information from client data on goals and assets, to family members and contact information, is all brought together into a mind map that lets the advisor and client see the whole picture intuitively at once. Second, InStream is capable of provide automatic alerts, customized to specific client situations; for instance, you can have the software alert you when interest rates have fallen far enough that it would be beneficial for a particular client to refinance the house, or when the probability of success has fallen below a specified threshold that means it’s time to call the client for an important conversation or above a threshold that suggests it may be time to take some risk off the table or increase spending. You can also have InStream monitor the Google news stream for information that’s relevant to a particular client. For instance, if the client is an avid golfer, you can have InStream aggregate a news feed through Google of local and national golf events, or the news feed could focus on relevant information for the client’s school district; this presents powerful opportunities for productive communication and ongoing drip marketing. The third innovation is that InStream can help advisors with its "participatory knowledge base" which basically means advisors can see, based on all InStream users (albeit on an anonymous basis), when most advisors start 529 plans for their clients, to see if they should be doing so as well; in other words, you can basically see how your recommendations compare with what other advisors are doing. The fourth innovation is that InStream will actually help plug in potential product solutions for advisors, in a manner that creates a competitive marketplace for advisor business; for instance, if a client needs to refinance a mortgage, companies can post quotes of what terms they’re willing to offer to the client, so the advisor can direct the client to the best solution. Notably, no commissions are paid to the advisor with the marketplace solution, as it’s just meant to be a competitive marketplace; on the other hand, the potential for InStream itself to earn revenue by recommending such solutions is part of its own business model, which has made the software itself free to advisors.
Researchers Finally Replicated Reinhart-Rogoff, And There Are Serious Problems – The big news this week was the announcement and release of a study "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff" by Herndon, Ash, and Pollin, which looked at the now famous Reinhart and Rogoff research that determined GDP growth drops to nothing for countries with debt levels above 90% of GDP, and found that there may be significant errors in the study. This blog post highlights the three main areas of critique: first, that Reinhart-Rogoff excluded a few early years of history for Australia (1946-1950), New Zealand (1946-1949), and Canada (1946-1950), which matters because these few post-World-War-II years were high-growth years for high-debt countries; the second was an unconventional country weighting system, that gave the same weight to countries with 1 year of data to countries with 19 years of data (which, arguably, could be justified, but Reinhart-Rogoff did little to make the case for it in their research); and an outright coding error in the Excel spreadsheet that Reinhart-Rogoff used, that accidentally excluded some data when determining the growth rate of high-debt countries. The net result of unwinding all these criticisms would be a growth rate for high-debt countries that is 2.2%, not -0.1%, and that growth continues to trail off as debt loads go higher but without a clear breakpoint (e.g., 90% debt-to-GDP ratio) where growth falls more rapidly. Notably, in the end the "adjusted" results do still substantiate the idea that high debt loads are associated with below-average GDP growth – consistent with the original Reinhart-Rogoff thesis – but the results of Herndon, Ash, and Pollin imply that the original research may have significant overstated the magnitude of the effect.
Dividend Investing: A Value Tilt In Disguise? – From the Journal of Financial Planning, this article takes a look at the rise of investing in high-dividend-yielding stocks, as such stocks have been outperforming the broad market indices in recent years, and dividends have long been recognized as a key component of long-term return; in fact, Charles Dow himself made the case nearly 100 years ago that high-dividend-paying stocks will outperform. Of course, high dividends aren’t believed to be the only factor leading to outperformance; other market segments, like high-value stocks, also have a base of research supporting their benefits. The caveat, though, is that it appears that in truth the benefits associated with dividend-paying stocks may actually be primarily attributable to a value-tilt, not a dividend-tilt itself; the link between value and earnings or dividend yields has been demonstrated in the past. This paper analyzes the specific time period of August 1979 to July 2012, using the Russell 3000 index (as a "market portfolio"), and looks at how high dividend portfolios performed relative to the overall market, and the relationship of high-dividend stocks to several underlying factors, including yield itself, leverage, momentum, and more. Surprisingly, the results find that while high-dividend paying stocks are more exposed to the yield factor than anything else, the yield factor actually has a negative contribution to return amongst the high-dividend stocks; their leverage and lack of momentum also were performance drags. Instead, the positive contributions from the subset of high-dividend paying stocks was actually their size, value-over-growth tilt (value measured by book value to price), reduced volatility, and underlying earnings yield (which had a positive contribution, even though the payout of earnings as dividends had a negative contribution). In fact, a subsequent analysis in the article finds that if the portfolio is separated into high-dividend stocks that are high-value versus those that aren’t, virtually all of the outperformance specifically comes from the high-value dividend-paying stocks. The bottom line: it turns out that the dividend-tilt might actually just be a value-tilt, and that if you really want to enjoy the benefit going forward, continue to focus more on value than dividends themselves.
Subsidies Vs Nudges: Which Policies Increase Saving The Most? – This article from the Center for Retirement Research at Boston College looks at the relative benefit of encouraging retirement savings through "nudges" (such as automatic enrollment in employer retirement plans) versus "subsidies" (such as tax deductions for making retirement contributions). The research focuses on some available Danish data, as the Danish system includes components of both nudges and subsidies over the past 15 years, from a reduction in Denmark’s pension tax subsidy in 1999 (allowing a measure of the impact of subsidy changes before and after) to rules for automatic enrollment and a government mandatory savings plan that was implemented from 1998-2003 (which are types of nudges, albeit the latter a bit more ‘forceful’!). The results find that the benefits of the subsidy are limited; yes, the changes to the Danish subsidy did reduce retirement saving slightly, but the impact was almost entirely offset by an increase in non-pension savings to make up for it. The automatic savings initiatives, on the other hand, had a large effect; retirement savings were impacted favorably and significantly, and although other saving did decline in the face of automatic retirement savings nudges, the benefits of the nudge far outweighed the self-imposed changes that the retirees applied to themselves. Somewhat controversially, the overall results imply that if the goal is to improve retirement savings, using nudges like automatic enrollment programs may be far more effective than just boosting tax benefits for retirement accounts, as the Danish results suggest that most people (85%) are "passive" savers (which means they just spend whatever is left, so they’re heavily impacted by nudges) and far fewer (only 15%) are "active" savers (who respond directly to tax incentives for saving).
8 Things Financial Advisors SHOULDN’T Do on LinkedIn – This article from Financial Planning magazine provides some great tips on what most advisors do wrong on LinkedIn – helpful guidance for those already using the social media platform, or thinking about doing so. The key points are: make sure you archive all LinkedIn activity for compliance purposes (software solutions are available); be certain to connect with clients on the platform, not just other professionals, so you get the updates when something important happens in your clients’ lives; make sure your profile is complete; when you invite someone to connect, make sure you personalize the invitation message; be certain to check in periodically to keep up with the conversation and updates that are posted; be certain that if/when you share on LinkedIn, it’s a balance of financial information and other things you’re passionate about as well (i.e., don’t post too much financial or self-serving stuff!); join LinkedIn groups where you can find/meet prospective clients, not just groups with other advisors; and try out the LinkedIn Search function (and save the search settings when you find something that works for you) so you can easily check to see if there are new prospects in your network that fit your target client profile.
How To Introduce New Technology To Your Clients – This article by Blueleaf Advisor tackles the important advisor challenge of how to introduce clients to new technology as the firm upgrades – especially as firms begin to implement more online and web-based services and portals. Surprisingly, the first Blueleaf tip is to avoid asking what your clients "want" – noting that when technology is being introduced that’s very different, people won’t even necessarily know what they want until after you’ve shown it to them and how they can benefit from it. Instead, the key is to dig deeper into understanding what the real challenges and problems are that clients face (from the technology perspective), and how your solutions can help. Thus, for instance, it’s not about determining whether clients "want" a client portal, but instead to understand that they may be frustrated by how difficult it is to get a complete financial picture on demand and gather financial information together, and then invite them to recognize that the client portal may be a solution to their problem. In addition, Blueleaf suggests starting small; roll out new technology to just a couple of clients first (perhaps those who are most frustrated by the problem you’re solving), get feedback from actual client experience, and then determine whether the solution is right or needs to be modified (and also whether you need to change how you’re communicating and implementing the rollout itself to the remaining clients). Another key point – be cautious about answering too many anticipated concerns up front, as by suggesting they’re problems to worry about (even if you say you’ve addressed them) you may actually be planting more worries in the minds of your clients and making it harder to succeed; instead, keep it simple, and let clients reflect their concerns back to you if/when they arise. The bottom line is that it’s key to have clients involved in the process, so that they see what the technology is and how it will value them, although recognize that you’ll still never get 100% adoption.
To Clients, Jargon Zown Sly Kjib Erish – From marketing consultant Stephen Wershing, this article makes the point that advisors have a tendency to use too much jargon, sounding intelligent but coming across as unintelligible to their clients (as illustrated by the article’s title itself). The key issue in this is that ironically, the longer an advisor practices, the worse problem may become without realizing it; when you’ve been in the business long enough, and crafted enough expertise, you may start to forget just how little most other people know about what you do. And the worst part is, because you’re the expert and most people don’t want to appear unintelligent, most clients won’t tell you that what you’re saying is sailing over their heads! Accordingly, Wershing emphasizes the importance of good communication skills to avoid this outcome. The first step is to be cognizant of the issue itself, be deliberate about the words and language you use. Second, be certain to tell stories; people remember stories, especially about people, far more than they remember just facts and words alone (and it also helps make your points easier to relate to). Third, check in regularly with clients to verify they really do understand what you’re saying, and ask them to reflect it back to you to ensure they’re understanding the key points. The bottom line: what we do may not be brain surgery, but it’s complex enough that there’s value in learning how to communicate your advice in a way that’s not so complicated.
A Vision of the Future of Financial Planning in the New Age – This article from the blog of planner Ronald Sier provides some interesting perspective on how to deal with the emerging challenges to financial planning, from large companies using resources to innovate to competition from free financial planning tools and websites. The key to success according to Sier is to recognize that financial planners are no longer just "knowledge workers" providing knowledge; clients may decisions based on their feelings, and as a result, the key to success is not just learning how to provide people information but learning how to make them feel. As a result, Sier suggests that planners need to learn how to better use their right brain – the emotional side – and not just their left brain of logic and facts. As knowledge itself becomes more and more of a commodity, this will become increasingly necessary; on the other hand, as firms increasingly outsource the pure knowledge and information functions, it frees up time for the planner to develop their right brain and use it. Notably, Sier doesn’t suggest that knowledge, information, and a left-brained focus won’t be relevant or necessary in the new age; just that it alone will not be sufficient, and that it will increasingly require both sides to succeed in the future.
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!