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Weekend Reading for Financial Planners (August 25-26)

Posted by Michael Kitces on Friday, August 24th, 6:32 pm, 2012 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a number of surprise announcements in industry news, including the early retirement of FPA CEO Marv Tuttle due to family reasons, the decision by incoming NAPFA chair Ron Rhoades to resign his leadership position due to a compliance infraction, and a letter by the CFP Board to the Consumer Financial Protection Bureau suggesting the creation of a ratings system for advisor designations and certifications to help reduce elder abuse. We also look at an article explaining some of the upcoming changes with the CFP Board's new sanction guidelines, a discussion from Advizent's Steve Lockshin about how all advisors must help to raise the industry's low minimum standards, and the conclusion of the Investment Advisor/ActiFi study examining how advisors are being served on practice management issues. Wrapping up, there's an(other) article on the rise of the so-called "Robo Advisors", a discussion of how some stress in your business can actually be a positive but it's important to handle the stress so it doesn't become too much, and a technical discussion of some of the unique tax burdens of MLPs, along with a look at how advisors are adjusting investments for a potential inflationary cycle, and a striking article from Texas Tech's Michael Finke about how aging of the brain may reduce financial literacy in later years. Enjoy the reading!

Weekend reading for August 25th/26th:

Big Shift at FPA: Tuttle Steps Down, COO Schadle Steps Up - In a surprise announcement this week, the FPA announced that CEO Marv Tuttle would step down at the end of September, following the FPA's upcoming annual convention, due to family reasons; Tuttle had previously announced an intended retirement in 2014. Taking over the organization will be FPA's COO Lauren Schadle, as the FPA board of directors decided that engaging in a search process for a potential outside successor would be unnecessary given Schadle's experience and history with the organization (this September will mark her 16th year with FPA and its ICFP predecessor). Schadle herself noted that her initial goals will include shoring up the organization's financial strength, and rallying around the CFP certification, along with helping to strength the FPA's chapter system and an outreach to larger firms. 

Ron Rhoades: Staying on at NAPFA would have given ammunition to RIA industry foes - In another surprise this week, upcoming NAPFA president Ron Rhoades announced that he was resigned from his prospective leadership position, due to a compliance violation where he failed to timely file registration papers with the State of Florida for 11 clients he had in the state. While the error was unintentional, Rhoades accepted full responsibility for his error, and indicated that he did not believe it was appropriate to continue into his leadership role. In the article, some express dismay that Rhoades will not be taking the helm at NAPFA, given the upcoming regulatory battle (about which Rhoades has particular expertise), and suggesting that the compliance error was a minor infraction. Others note that the infraction is still relatively serious - Rhoades was operating as an unregistered advisor in the state - and that the decision to step down was appropriate. For the time being, current NAPFA chairwoman Susan John will remain in the leadership position until a special election for a replacement can be held.  

CFP Board to CFPB: Seniors Drowning in Alphabet Soup of Advisor Credentials - This week, the CFP Board issued a letter to the Consumer Financial Protection Bureau (CFPB) suggested the creation of a rating system for various financial services designations, in response to the CFPB's request for information regarding elder abuse in financial services. The CFP Board noted that designation programs vary tremendously in their quality and that investors have little guidance to determine the program's legitimacy, value, or authenticity, implying that many designations are merely used to convey credibility in order to exploit seniors but provide no meaningful value. The CFP Board's proposed solution would include establishing a rating system for professional designations based on qualitative and quantitative standards and a method to communicate this information to the public.

What Planners Can Expect From CFP Board's New Sanction Guidelines - This article reviews the new CFP Board sanction guidelines set to take effect on Monday, August 27th. The sanction guidelines are used by the Disciplinary and Ethics Commission (DEC) as recommended sanctions for specific types of misconduct. Although penalties can still be modified based on the facts and any mitigating and aggravating circumstances of the situation, the intention is to assess a more consistent series of penalties for various infractions. Notably, when the CFP Board put forth the sanction guidelines for public comment earlier this year, the feedback from certificants suggested that the recommended penalties weren't severe enough for many infractions, and the CFP Board adopted many of the higher penalty versions in the final rules. 

Lockshin: All Advisors Must Deal With The Threat Of Low Industry Standards - This article by Steve Lockshin on RIABiz is written as a call to advisors, suggesting that it's time to lift the standards of the industry further, and that "the investment advisory business has operated for decades with a reputation that has exceeded the skill set of the average advisor." Lockshin's primary complaint is that the bar for entering the industry is too low - notwithstanding that he, too, entered the industry with near zero training, Lockshin suggests that it's time for something more - after all, physicians require four years at a university, four years of medical school, and three to seven years of internship and residency, while being a representative of an RIA requires little more than passing the Series 65 that can be studied for in a handful of hours, and ongoing continuing education tests as "an embarrassment" both for RIAs and FINRA registered representatives. Voluntary certification programs help (e.g., CIMA, CFP, CFA, ChFC, CLU, etc.), but the course load is not uniform, consumers don't necessarily understand them, and they are certainly not required. Ultimately, Lockshin emphasizes that the bar must be raised, and that an independent organization should oversee the standards that are developed and applied. Notably, Lockshin is also the co-founder of Advizent, an organization seeking to accomplish some of these exact goals.

Pursuing Practice Excellence: Where Advisors and Their Partners Part Ways - This article from Investment Advisor magazine is the conclusion of their joint study with ActiFi on how advisors are being served by the companies that support them with respect to practice management, exploring divergences between what advisors want and what their partners are actually providing them. The first notable difference was simply the fact that advisors themselves report practice management support is more important than what partner companies seem to realize, although at the same time industry leaders rate the particular areas where they do provide practice management support as being more important than advisors rate them. When looking in detail, it was observed that companies seem to drastically overvalue some areas (like helping advisors segment clients), but undervalue others (such as helping advisors utilize social media for marketing). It's also notable that advisors rated highly the practice management information and relationships they have with wholesalers, and emphasized a desire for more basic education in business areas. Advisors also indicated that companies may be providing too much one-on-one coaching and phone consultations, instead of providing a broader range of delivery options including newsletters, email alerts, magazines, and online presentations.

The Rise Of Discount Advisors - This article provides an overview of the so-called "robo-advisors" - discount advisors, that are threatening to do to traditional financial advisors what the discount brokerage firms did to traditional brokerage firms. But is the reality that such firms are competition, or are they complementary - serving prospective clients that the current advisory marketplace does not effectively serve? The article highlights venture-capital-funded LearnVest and Personal Capital, also noting competitors like Betterment, Veritat Advisors, eFinPlan, and Silver Financial Planner. Notably, though, the firms really comprise a broad range of offerings, from autopilot asset allocation based on an online questionnaire, to firms that ultimately provide a real advisor and simply use technology to improve efficiency and serve less affluent clients (and as I've written previously, I suspect the latter will be far more successful than the former). Ultimately, though, it remains to be seen whether the firms will gain traction - right now, most have relatively few assets, clients, or both - and whether they will in fact put pressure on margins at traditional firms.

Stress For Success: How To Handle The Stress Of Running A Small Business - This article by practice management consultant Angie Herbers explores the challenges of handling stress while running and growing a financial planning practice. Herbers notes that according to the Yerkes-Dodson Stress Law (after two leading researchers on the topic), the reality is that some level of stress actually enhances good performance; while extreme stress (i.e., distress) is clearly a performance inhibitor, so is too little stress (and the associated lack of motivation). And unfortunately, once you cross the line from stress to excessive stress, it's hard to get back again, as the decline in productivity often compels people to work even harder (making the stress worse) and/or take it out on their employees (which brings down the productivity of the entire office). So how do you get the ship back on track? Herbers suggests: take some time off to reboot (yes, it's difficult to get away, but it's even worse if you only get away after you "hit bottom" and fall apart entirely!); re-evaluate your standard for performance and the expectations you place on yourself; get positive feedback by asking your clients if they are satisfied (hopefully they answer yes!); and get an outside perspective from a coach, consultant, colleague, or trusted employee, because you're often not a good objective judge of how you're doing or where your limits are.

The Hidden Tax Burden Of MLP ETFs - This article discusses the tax issues associated with energy Master Limited Partnerships (MLPs), which have become increasingly popular as investors and advisors search for alternative investments with greater risk/return rewards. Traditional MLPs are popular specifically because of their tax treatment, classifying a significant portion of distributions as return of capital (allowing for deferral of gains until the MLP is ultimately sold), and allowing pass-through treatment of income (which avoids corporate double taxation, but requires the issuance of a K-1 for each state in which the MLP generates income and can potentially trigger UBTI issues if held within an IRA). When purchasing MLPs via an ETF, however, the  Regulated Investment Company (RIC) rules for ETFS (and mutual funds) limit how much can be invested in MLPs to retain pass-through treatment; if the ETF fully invests in MLPs, it is taxed as a C corporation, which means the ETF pays up to 35% income taxes itself before ultimately passing through income to investors, creating a significant tax drag on returns. And notably, this tax drag is sometimes hard to track, because the taxes are simply netted out of the income of the ETF as received, with the NAV price adjusted accordingly. Of course, the reality is that any stock held inside of an ETF suffers the same plight (where the corporation pays taxes on its earnings); however, the author suggests that if anything, many MLP ETFs sell at a premium for the tax-advantaged income generated by MLPs, rather than at a discount reflecting the less favorable tax treatment of MLP ETFs.

Girding For Inflation: Weathering The Inflationary Cycle - This article from Financial Planning magazine takes a look at how advisors are investing to manage current and future inflation risks for clients. The article notes that commodities are the most popular way to invest for inflation protection, but holding many types of commodity funds for an extended period of time is problematic due to the ongoing drag of rolling future contracts. Some newer funds have emerged to try to more actively select optimal futures contract duration to minimize this risk, while others are more actively managing the commodities themselves. Some broader options own a series of inflation-hedging investments, such as a combination of TIPS, real estate, commodities, and natural resources. Managing futures are also popular, although they can be very expensive, as is foreign currency debt (under the assumption that rising inflation will erode the value of the dollar). And of course, there's simply purchasing TIPS. 

Investing And The Aging Brain - This article by Michael Finke of Texas Tech University in Research magazine takes an interesting look at the challenges of how to plan for mental decline - acknowledging the reality that investment flexibility while we're mentally competent can become dangerous in later years. Finke notes that mental decline is a slow and steady process as the brain wears out in later years; although events like a stroke or Alzheimer's can accelerate or exacerbate the problem, the reality is that even individuals who don't suffer from such events still experience some ongoing decline of financial literacy as they enter their 60s. What is most concerning, though, is that while actual financial literacy declines in later years, confidence in financial decision-making does not, introducing a new series of risks for retirees who don't realize their skills may be in decline. So what to do? Certainly, having proper legal documents in place to handle incapacity is important (i.e., powers of attorney), but Finke also raises the possibility that perhaps some should consider solutions that deliberately eliminate their own control (and therefore potential for self-harm) like purchasing immediate annuities for retirement income.

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!

  • Dick Purcell

    Super reading list, Michael.

    That summary of Michael Finke’s article alone is worth zillions, inflation adjusted.

    Dick Purcell

  • Steve Smith

    The Advisors Act should provide for notice filing for state registered advisors in states in which the advisor does not maintain its principal place of business – once the advisor gets beyond the de minimus number. Then if the state wants more information or to require you to fully register they could request it. This is especially true now that advisors are required to electronically file their ADV Part II.

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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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