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Weekend Reading for Financial Planners (August 4-5)

Posted by Michael Kitces on Friday, August 3rd, 6:01 pm, 2012 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a review of the recent legislative shift on investment adviser oversight, suggesting that RIA lobbying was the successful driver that staved off the Baucus bill, and an article from the Journal of Financial Planning examining how the fiduciary standard should be properly applied by financial planners. From there, we look at two articles that challenge the traditional planning world, one suggesting that the next stage of financial planning may shift away from AUM to standalone planning fees (and highlighting a firm that is pushing this trend), and another focusing on some of the ways that financial planning in practice diverges from the theory. We also look at a few practice management articles, one about how young planners are being integrated into firms, another about how firms are getting creative in the benefits they provide to build employee morale and connections, and a third about how older clients and older staff members can diminish the value of a financial planning practice. This week's summary also includes a few technical articles, including one suggesting that HSAs may become less popular starting in 2014 with the new Obamacare-mandated insurance plans, how advisors may start getting questions from clients soon about crowdfunding investment opportunities, and how using a reverse mortgage as a part of a "cash reserve" strategy can boost retirement income sustainability. We wrap up with two recent controversial articles - one from Bill Gross suggesting that "the cult of equities" is dying and exploring the ramifications of a low-return environment, and the other from the Harvard Business Review suggesting that you should never hire an employee who makes grammar mistakes. Enjoy the reading!

Weekend reading for August 4th/5th:

How RIA Forces Squashed The Bachus Bill By Calling The Implicit FINRA Bluff - This article from RIABiz recaps the recent withdrawal of the Bachus legislation (that would have required investment advisers to be overseen by a "new" SRO, widely anticipated to be FINRA), suggesting that proactive lobbying from the RIA industry played a significant role in tabling the legislation, despite the "Big Money" of Wall Street firms. The article also highlights some further details on the Maxine Waters proposed legislation - the "alternative" to the Bachus bill that would authorize the SEC to assess user fees to collect the revenue necessary to increase investment adviser oversight - and makes it clear that the details of exact how to allocate user fees amongst different RIAs of varying types and size is still being determined. At the same time, compliance consultant Brian Hamburger also raises the question about what the frequency of examinations really should be, and whether they are truly effective at detecting fraud (a question raised earlier this week on this blog as well). 

Applying The Fiduciary Standard To A Financial Planning Practice - This article from the Journal of Financial Planning provides a walkthrough of how the fiduciary standard applies to CFP certificants under the CFP Board's fiduciary standard. For instance, Practice Standard 100-1 requires that the scope of a financial planning engagement be written for a client, along with written disclosures of compensation and conflicts of interest (Form ADV if an RIA, or an equivalent summary document if within a brokerage or insurance environment). Notably, the CFP Board indicates that the determination of fiduciary status is based on how clients see you; if the client would believe that you're providing the services of a financial planner, you are held to the CFP Board's fiduciary standard as a CFP certificant. The article also emphasizes that it's crucial to get sufficient data to do a financial plan analysis; otherwise, the planner should limit the scope of engagement to not cover those areas in the plan up front. And of course, actual recommendations and monitoring thereafter should be effectively documented as well.

Embracing The Crazy Ideas - In his monthly Financial Planning magazine column, Bob Veres explores how to predict some coming trends in the industry, suggesting that rather than looking at the crystal ball or the tea leaves, you focus on the "crazies" - those "people who abandon well-established business models fr the 'insane' reason they want to give their clients something better" - such as some NAPFA advisors in the 1990s who were begging Schwab for duplicate client statements to operate what ultimately became the AUM model. Veres suggests that one of the "crazies" to look at today is Joe Duran, the CEO of United Capital, who suggests that the next evolutionary step is beginning, where advisors shift from doing retirement forecasts and managing assets to doing planning for a fee and focusing professional attention on personal client needs. And Duran's firm is helping to build that, bringing advisors onto his platform who share the vision and mission - and last year alone, the firm did $70 million of revenues, notably including $8 million of pure advice fees.

4 Misconceptions About Financial Advice From A Veteran Advisor - This article from AdvisorOne is an interview with advisor and researcher Paula Hogan, focusing on four areas of divergence between the theory and practice of financial advice. The first issue is that the industry is very focused on averages, even though in reality client's don't experience the average and only have one chance to succeed (or fail); the second is that when dealing with human beings, "sub optimal" decisions are normal and that a focus on optimal solutions and just providing the answer can be ineffective; the third is that process is key to implementing advice and that advisors must understand that not all clients are truly ready for change (and may need help getting there before they can actually implement); and the fourth is that behavioral biases can distort client and advisor thinking, and that we must acknowledge our own biases and not merely try to deal only with biases of clients. 

New Kids In The Field - This article by financial planner and NAPFA Genesis founder Dave Grant looks at some up-and-coming financial planners, under the age of 30, but in positions of rising leadership within their firms, whether amongst younger planners who are buying into the practices of retiring advisors seeking an exit plan, starting their own firms, or growing in a financial planning role within an established firm. The bottom line is that Generation Y - generally, those born after 1980 who are now in their teens and 20s - are starting to enter the financial planning profession and exert their own influence on career paths and opportunities. 

A Cool Place To Work - This article from Research magazine takes a look at how some forward-thinking advisory firms are trying to create a positive environment for employees, which can be viewed as a reinvestment in the business given that in a typical advisory practice staff expenses already dominate as much as 70% of a firm's total costs. This includes not only good typical practice management steps, like being careful to hire the right person for the role, managing employee expectations and career paths, and providing positive feedback, but also engaging in activities that build a bond with employees, such as social activities like a firm-wide hike or cooking or dancing lessons. Other benefits include flex-time, "bonus" days off, more flexible paid leave, financial support for learning opportunities, and empowering employees to be effective (for instance, giving employees permission to spend up to $300 to fix any client issue without a partner's permission).

X + Y = Greater Value - This article by Mark Tibergien in Investment Advisor magazine suggests that practices with clients and staff over age 55 should be offered at a discount - a controversial statement to make given the majority of advisors selling their practices are over age 55. Tibergien suggests that too many selling firms are only looking backwards at the effort put in to build the firm, and its trailing 12 months of revenues, instead of looking forward at the future outlook of the firm and recognizing the implications to the practice as clients and staff retire, become disabled, or die. Tibergien suggests that this means not only hiring younger staff and taking on younger partners, but also targeting younger clients, noting that there are some significant assets in the hands of Gen X and Y (and a lot more coming as they inherit in the future). 

HSAs Losing Luster Under Obamacare - This blog post from AdvisorOne takes an interesting look at how HSAs and High Deductible Health Plans will be impacted in 2014 as the Patient Protection and Affordable Care Act (commonly known as Obamacare) puts in force new minimum mandates for health insurance coverage. The key issue is that because of the minimum reimbursement requirements, many current HDHP plans probably will not qualify, and insurers will be required to offer plans with lower deductibles - which in turn raises the premiums and eliminates much of the HDHP cost savings that would have been contributed to an HSA.

Challenges And Opportunities In The JOBS Act - This article is a profile of the Jumpstart Our Business Startups (JOBS) act, passed by President Obama in April. Amongst other provisions, the JOBS act authorizes small businesses to raise up to $1 million in a 12-month period through a broker or "funding portal" (that meets certain requirements), and participation does not require accredited investor status. Commonly referred to as "crowdfunding", the new rules do cap contributions from an individual investor to the greater of $2,000 or 5% of annual income or networth (if income or net worth is less than $100,000), or the greater of $100,000 or 10% of the investors income or net worth (for those with income or net worth over $100,000). Notwithstanding these restrictions, advisors may need to prepare for clients asking for insight and feedback about crowdfunding investment opportunities as they become available in the future, once the SEC finishes sorting out guidelines and clarifications and crowdfunding portals get up and running.

Standby Reverse Mortgages: A Risk Management Tool For Retirement Distributions - This Contribution article from the Journal of Financial Planning by John Salter, Shaun Pfeiffer, and Harold Evensky, of Texas Tech University, explores the impact of using a HECM Saver reverse mortgage as an additional source of retirement funds in a downturn to mitigate the need to draw on a portfolio during a market downturn. The HECM Saver - a lower cost version of the reverse mortgage that became available in late 2010 - is structured as a non-cancellable line of credit that the client can use if needed, and pay back (or not) as desired (although unlike some prior research on reverse mortgages, this study does examine payback strategies as a part of the approach). The authors assume that the client will also maintain a cash reserve, but use the reverse mortgage as a further source of cash flow if the cash reserve has been depleted and the market has not recovered; the goal is to utilize a smaller ongoing cash reserve bucket, thereby reducing the opportunity cost of holding a large cash position. The results of the study indicate that the standby reverse mortgage can significantly improve the longevity of the retirement plan, especially in a low-return environment, and the impact on net worth is very limited except under exceptionally poor returns and/or very long time horizons.

Cult Figures - In his monthly investment outlook, PIMCO managing director Bill Gross suggests that "the cult of equities is dying" as return expectations for equities continues to decline, and long-term Treasury bonds now appear competitive to equities over the past 10-, 20-, and 30 years on a risk-adjusted basis. The core of Gross' criticism, focusing on the 6.6% real return in stocks over the past decade (as published by Jeremy Siegel and sometimes known as the "Siegel constant"), is that markets cannot indefinitely grow at a 6.6% real return when overall real GDP grows at only 3.5%, and consequently that the outsized equity risk premium in the aggregate simply cannot persist at prior levels. Gross does acknowledge that the fundamental principle underlying the equity risk premium - that equity investors should be compensated more for the risk they take - is sound, but that it is perhaps only true over the really long run, and still may not add up to as much as the Siegel "constant" of 6.6% going forward unless there is a "productivity miracle [for the entire economy] that resembles Apple's wizardry." Nonetheless, Gross notes that the outlook for bonds (relative to historical returns) is even worse. His ultimate point is that everything will have reduced returns going forward, and that a diversified portfolio may produce a real return no better than 0% in the coming years, which will translate into serious difficulties for both consumers and institutions that have built their foundations on "unrealistically" high return expectations, and that we will shift from the cult of equities to the cult of inflation in an effort to boost nominal returns.

I Won't Hire People Who Use Poor Grammar. Here's Why. - This interesting article from the Harvard Business Review blog, written by Kyle Wiens, CEO of iFixit, discusses why Wiens will not hire anyone who uses poor grammar and has a "zero tolerance approach" to grammar mistakes that make people look stupid. In fact, Wiens actually requires anyone who applies to his firms to take a mandatory grammar test. While this may be somewhat reasonable for his businesses, given that iFixit (and Dozuki, Wiens' other company) are both writing-intensive businesses, Wiens suggests that the issue is equally relevant for all companies. "Good grammar is credibility," notes Wiens, "especially on the internet." Beyond that, Wiens notes that "if it takes someone more than 20 years to notice how to properly use it's, then that's not a learning curve I'm comfortable with" and points out that in practice, he sees that people who make fewer mistakes on a grammar test tend to make fewer mistakes in even unrelated job tasks like stocking shelves. In essence, Wiens suggests that hiring people with good grammar means hiring "people who care about those details" - all applicants say they're detail-oriented, but a grammar test makes them prove it. One wonders if the principle isn't equally relevant for financial planning firms as well.

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!

  • Caren

    Hey! Do you know if they make any plugins to protect against hackers?
    I’m kinda paranoid about losing everything I’ve worked hard on.
    Any recommendations?

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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