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Weekend Reading for Financial Planners (August 18-19)

Posted by Michael Kitces on Friday, August 17th, 6:00 pm, 2012 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with an interesting idea from Don Trone - that as the fiduciary standard gets codified by regulators, it will be diminished, and that the next gold standard beyond fiduciary will become "stewardship" to raise the bar again. From there, we look at an article discussing how the wirehouses are rebuilding their training programs into something that looks a lot like what many independent planning firms would do (but with much larger numbers!), a discussion of some lesser known tools and resources for the investment aspects of a firm, a review of a new software package that estimates client health care expenses in retirement, a summary of the tax law changes coming with the fiscal cliff at the end of the year, and a very personal story of how one financial planner got a first-hand look at the value of having proper documents regarding end-of-life medical care after her brother was diagnosed with pancreatic cancer. There are also a number of interesting investment and economic articles out this week, including Mauldin's latest where he suggests that Europe may not break up (Plan A) nor unify (Plan B) in the coming years but instead will take a slower crisis-by-crisis approach (Plan C) to eventually grind towards unification, an article from GMO suggesting that "reports of the death of equities have been greatly exaggerated" (in response to the recent Bill Gross article) and looking at the components of equity returns, and some fresh research from the New York Fed suggesting that municipal bonds actually may default at a far higher rate than most believe (but the ones defaulting may not be the ones your clients own). We wrap up with two lighter articles, one by financial planner Carl Richards about how we could probably all stand to purge some of the stuff from our lives (good advice for both our clients and ourselves!), and the other discussing the value and importance of a good night's sleep and how our sleep patterns as a society have changed dramatically in the past century. Enjoy the reading!

Weekend reading for August 18th/19th:

The Fiduciary-Steward - This article by Don Trone from last month's Financial Advisor magazine puts forth the interesting concept of the "fiduciary steward" - terms that in the past may have been synonymous, but which Trone believes may become the next point of differentiation for advisors. The reason for the change is the likely adoption of a uniform fiduciary standard for the industry, which Trone believes will inevitably be implemented in a rules-based manner, drawing fiduciary away from its principles-based roots - and opening the door for "stewardship" to fill the void. In other words, Trone sees a potential future where fiduciary will be the standard, but it will truly be the minimum standard - the "bronze" standard. The gold standard to replace it? Stewardship, with a principles-based focus on the morals and ethics that extend beyond just a series of regulatory fiduciary rules, and the emergence of the fiduciary-steward as a new highest standard.

Can FA Training Programs Redeem Themselves - This article discusses the significant revamp underway in the wirehouse broker/dealers, which in recent years had trended away from training new advisors to hiring away experienced ones from their competitors, but is now shifting back due to the rapidly rising financial deals required to persuade brokers to move. Yet at the same time, the wirehouse world has a long track record of high turnover, especially amongst new trainees. As a result, dramatically overhauls are under way, with a goal of retaining a whopping a 50% of the trainees through a training program that runs more than 3 years, and changes that include more content on consultative sales skills and the formalized adoption of the CFP curriculum, and an increased focus on attracting high achievers over people with sales backgrounds. Right now, the leader in this space is Merrill Lynch, and the firm is on track to hire more than 2,500 new advisors this year - a number greater than the entire base of financial planners in NAPFA - which means if some of the big firms can get this right, they may materially impact the available career paths for new planners entering the profession.

What Are They Thinking - This article provides a list of investment resources used by some planners interviewed by the author.  What's notable about the article is that, for better or for worse, the solutions are probably ones you haven't heard of before, and might be interesting to check out if you're looking for alternatives (especially for smaller firms that don't necessarily have a big budget for research tools). For instance, Steele Systems is available for analyzing mutual funds and providing some risk analytics (ostensibly at a lower cost than a more comprehensive platform like Morningstar Advisor that may have more than a small firm needs). Outsourced Analytics works with RIA firms to perform investment research and analysis - one planner calls it "an extension of our internal investment committee" - at a more affordable price point than hiring another full time staff member. Other suggested solutions include Total Rebalance Expert for rebalancing, ETF Replay for analyzing and backtesting ETF strategies, Bridgewater Daily Observations research service for daily investment and economic updates, and two free resources: IndexUniverse and ETFdb.

Big Retirement Threat - This article by Joel Bruckenstein reviews the software package RetireMark by HealthView Services, which estimates health care costs in retirement (and life expectancy) tailored to an individual client based on actuarial data and the client's specific health situation. The software estimates not only premium costs for Medicare Parts B and D and Medigap insurance, but can also include estimates of out-of-pocket expenses, prescription drug deductibles, and vision and dental costs. The tool can also be used to estimate long-term care expenses. While Bruckenstein notes that the cost estimates may be helpful, he cautions that the software's methodology of estimating investment dollars needed - especially, using a straight-line projection to determine the required investment capital - is a bit weak, and more signfiicantly that the cost outputs of RetireMark do not currently integrate into other financial planning applications (e.g., if a planner wanted to drop RetireMark's cost estimates into an existing financial plan projection). In the meantime, though, the tool still provides some useful information itself. The annual cost is a flat rate of roughly $500, which makes it reasonably affordable for a practice that will run multiple projections for a large number of clients, but expensive for one-off scenarios.

Facing The Fiscal Cliff - This article from the Journal of Financial Planning provides a nice summary of the tax changes scheduled to occur with the so-called "fiscal cliff" at the end of 2012, when the current tax laws revert back to the "old" 2001 rules, along with the implementation of new Medicare taxes as a part of the Patient Protection and Affordable Care Act (also known as "Obamacare"). Notably changes include rising ordinar income tax brackets, the return of the phaseout of itemized deductions and personal exemptions, a lapse of the AMT patch (which actually expired last year), a rise in the estate tax rate and a drop in the exemption, an increase in capital gains tax rates, a lapse of qualified dividend treatment, and more. What does it all add up to? A family of four with bother parents making $75,000 in wages would be expected to see their income taxes increase by about $4,500, with another $3,000 increase in payroll taxes as the current "payroll tax holiday" ends as well.

Final Decisions: Check Your Living Wills And Health Care Documents - This article from Deena Katz in Financial Planning magazine shares a sad perspective - what Deena Katz went through earlier this year as the primary caregiver for her brother Bob, who passed away on June 17 after a bout with pancreatic cancer. The article provides not only a good review of technical information regarding the value of hospice care, and the importance of a living will, medicare or health care power of attorney, and DNR (do not resuscitate) order, but also their limitations in more ambiguous sitautions. The article recommends visiting, which provides people with a list of 5 "wishes" to consider, such as their wishes for who will make health care decisions, what kind of medical treatment is desired (what does "life support" mean to you?), how comfortable the individual wishes to be, and how to be treated. Katz also specifically recommends the value of prepaid funeral plans, not simply for the economics of the arrangement, but because it helps to address the difficult process early so it does not become a distraction during emotionally difficult times.

And Then There Is Disaster C - In his weekly article, John Mauldin lays out the case for a potential "Scenario C" from Europe - where Scenario A is a breakup, and Scenario B is the creation of a fiscal union. The third alternative that Mauldin sets forth is a slow-motion progression towards fiscal union - one that may be more politically palatable as it occurs incrementally, but sadly one which will create an ongoing series of perceived (or real) crises as each problem and its subsequent solution takes small steps further towards union. Mauldin also notes that while the focus right now is on Spain and Italy, the next problem on the horizon is France - but by the time Europe realizes and accepts this, it may be too far down the path to turn back.

Reports Of The Death Of Equities Have Been Greatly Exaggerated: Explaining Equity Returns - This article by Ben Inker of GMO is a discussion of the principles of equity returns, and is indirectly a recent to the recent Bill Gross article regarding the "dying cult of equities" (which was included in Weekend Reading from 2 weeks ago). Inker notes that there is little apparent relationship between GDP growth and market returns (due to slippage from new companies, stock issuance from existing companies, stock buybacks, and M&A activity), and that some expectation of an equity risk premium is reasonable and appropriate given the volatility of stocks. However, the reality is that markets don't always give appealing returns; markets will only deliver their long-term risk premium when stock prices can generate sufficient earnings to support those returns, and disappointing returns do not indicate the "death of equities" but instead the reversion of an overpriced market to a fairly valued one, which is actually a necessary condition for future long-term returns to be favorable. Consequently, while Inker suggests that equities are still alive and well for the long run, GMO's research suggests that equities are only priced for a real return of 3.5% in the coming years, well below the longer term historical average, and that if the market finds its way back to fair value over the next 7 years, real returns could be flat at 0% (but priced for favorable returns thereafter). 

The Untold Story Of Municipal Bond Defaults - This article by the research economists at the New York Fed takes a fresh look at the municipal bond marketplace, and concludes that the general perception regarding the a dearth of municipal bond defaults understates the risk. The key distinction is that most research commonly discussed regarding municipal bond defaults looks only at rated bonds - because the research is generally conducted by the bond rating agencies - and ignores a large base of unrated bonds that default with far greater frequency (likely due in no small part to the fact that riskier bonds are less likely to apply for a bond rating in the first place, especially as the bond insurers lost their AAA ratings as well). Of course, the reality is that many/most clients purchasing individual municipal bonds are likely purchasing rated bonds anyway - and the Fed doesn't dispute the data there - but the article nonetheless makes the point that when talking about municipal bonds in the aggregate, there are in fact a lot more defaults occurring than most have commonly acknowledged.

You Probably Have Too Much Stuff - This column by financial planner Carl Richards in the New York Times makes the point that while we often focus on having more and more, the reality is that having stuff has costs, both financial (in the cost of space to store it) and personal (in the time we spend organizing and contemplating it). Richards makes the point with the example of an individual named Andrew Hyde, who in an adventure in minimalism, cut down to the point where he only owned 15 things (which has now grown back to about 60), but the ultimately takeaway is relevant for everyone: do you own too much stuff? What can you do to get rid of some of it? Would it make your life simpler/easier/better without having all that stuff weighing you down?

Decoding The Science Of Sleep - This article from the Wall Street Journal shares some thoughts about the importance of sleep, especially in today's busier-than-ever world. Insufficient sleep by pilots has been at the center of many airline industry crashes, drowsy drivers are responsible for approximately 20% of automobile accidents, and sleeplessness is believed by military researchers to be one of the leading causes of friendly fire incidents. Nearly 1/3rd of working adults get less than six hours of sleep per night, making them "sleep deprived", and it's estimated that insomnia costs the country $63.2 billion per year in lost productivity. Historically, however, we not only slept more soundly, but actually in two distinct phases - "first sleep" from sunset until around midnight, and then after an hour of wakefulness "second sleep" ran until dawn. So what changed? The light bulb, and with it the ability and tendency to stay awake long after sunset, whether to work or play. Yet the loss of our naturally ingrained sleep cycle does everything from reduce productivity to impact our health; sleep is also considered by researchers to be a vital part of happiness and one of the best forms of preventative medicine. Increasingly, Americans have turned to caffeine and sleeping pills to force a sleeping/waking cycle, yet the article notes that these have limited - and potentially harmful - effects, and that in the end while we may not go back to sleeping from sunset to sunrise, the best solution may simply be to focus on building some better sleep habits.

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!

  • Nancy Bryant

    Regarding the blog on “death of equities,” what is not addressed is where else do you go if, in fact, equities are priced to only yield 3.5% (including dividends or excluding dividens?)for the next 7 years so that they become favorably priced for future investors.

    Certainly bonds and cash aren’t going to provide you with more return than that over the same time period.

    What do you do as an alternative?

Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

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