Enjoy the current installment of "weekend reading for financial planners" – this week’s edition starts off with a recent survey by the CFP Board and the Consumer Federation of America, showing that financial planning helps people to have more successful financial outcomes, and that the results hold regardless of income or wealth levels. We also look at some of the breaking legislative news this week, including new legislation to authorize the SEC to assess user fees to step up examinations (rather than delegate it to FINRA), and the indefinite tabling of the Baucus legislation due to lack of a clear consensus for support. From there, we look at a nice article about how inbound marketing can help advisors grow, and an advance peek at a new iPhone app to help advisors get a handle on the ever-growing contact list (especially given the explosion of social media). There’s also an interesting article exploring some of the math behind whether it’s really a good idea to wait to annuitize or not (given today’s interest rates), and a consumer article with a great series of estate planning questions everyone should consider for themselves that is equally relevant to planners and their clients. This week’s investment articles include a good discussion of long-term secular market cycles, some of the risks of exchange-traded notes, an evaluation by Morningstar of their new stewardship ratings for funds and how it impacts fund performance (and even survival), and the latest Mauldin missive discussing some of the economic surprises that may be coming in a few years. We finish with an interesting article by Aspiriant former CEO Tim Kochis, who shares what it was like as he transitioned from being a leader in one of the largest independent wealth management firms in the country to becoming a client – the outcome is some interesting insights, but Kochis’ article also raises the question about what kinds of experiences other planners might have if they became consumers of their own service. Enjoy the reading!
Weekend reading for July 28th/29th:
Financial Planning Critical Regardless Of Wealth: Survey – This article discusses a recent survey study released by the CFP Board and the Consumer Federation of America, and conducted by Princeton Survey Research Associates International, looking at the financial wellbeing of Americans. The results showed that only about 1/3rd of households think they’ll be able to retire by age 65, but those who had financial plans were much more likely to report that they felt on pace to meet their goals, were more confident and educated on financial issues, and were more likely to report living comfortably. Notably, the results generally held across all income and wealth levels, suggesting that having a personal financial plan can help everyone, regardless of whether they are rich or poor.
House Dems Introduce Bill To Expand SEC Advisor Exams – This week the House Democrats introduced legislation to expand the role of the SEC in overseeing investment advisers, and authorizing the SEC to assess user fees against investment advisers to help finance the initiative, especially given that the SEC is barely capable of examining advisers more than once a decade with current funding. Sponsored by Maxine Waters (D-Calif), the legislation is viewed is an alternative to the so-called "Baucus bill" that would direct the SEC to delegate oversight of advisers to an SRO (which would likely be FINRA). In response to the proposed legislation, the Financial Planning Coalition expressed support, indicating that increasing the funding of the SEC through user fees would be a less expensive way for advisers to receive additional oversight, while the FSI criticized the legislation as being a "political dead end" and insufficient in addressing the lack of adviser exams.
SRO Bill Dead For Now – Continuing the regulatory theme, the other big news out this week was the decision by Congressman Baucus to put his own legislation, which would have had the SEC delegate examinations of advisers to an SRO (widely anticipated to be FINRA), on "indefinite hold" indicating that no adviser legislation is likely to move forward until there is better consensus and bipartisan support for a solution. The article also provides additional details regarding the alternative legislation proposed this week by Congresswoman Waters, which would allow the SEC to assess user fees on advisers to fund increased oversight, with costs to advisers based on the frequency of required examinations and the adviser’s size and assets under management.
Inbound Marketing Can Help Advisors Grow – This article from Financial Advisor magazine discusses inbound marketing (also previously explored on this blog), defined as "garnering the attention of prospects by publishing and distributing content that helps your firm get found, drive traffic to its website and entice prospects to engage with the firm." One of the drivers of the approach is the fact that it is very low cost – which makes it especially appealing to smaller, growing businesses. The key to inbound marketing is the creation and distribution of timely, relevant content – from there, search engine optimization and social media marketing help it to be found. In the end, the goal is to boost visibility of the firm, stand out from the crowd, and acquire new clients.
Quickview: Latest App Tackles Your Hulking Contact List – This article by technology consultant Bill Winterberg discusses Brewster, an iPhone app (likely coming soon to Android as well) that imports contacts stored in your phone and email accounts, and then tries to further aggregate information from social media platforms to fill out additional details for more complete information. Notably, Winterberg suggests that one of the best features is actually the advanced search functionality, allowing you to drill down through your contacts in useful ways, such as searching for colleagues in a particular metropolitan area (but without being required to name a specific small town/city or zipcode). Brewster also tries to help sort your contacts into relevant groups based on their relationship to you. While the app apparently still has some bugs, Winterberg suggests it’s still a good start if you’re trying to tame a wild contact list.
Should You Wait To Buy A SPIA? – This article by Joe Tomlinson for Advisor Perspectives examines the consequences of buying an immediate annuity as an income floor for clients, versus keeping the funds parked in a conservative investment and waiting for interest rates to rise. The trade-off is impacted by three factors: when the rate increase occurs, by how much the rates increase (reflecting both changes in the risk-free rate and the spreads for credit risk), and how much money can be earned in the meantime. Towards the end, the article provides some "breakeven" charts, showing how much rates would have to rise over a certain time period to make waiting worthwhile; notably, a follow-up chart reveals that one of biggest drivers of the equation is not just how much rates rise or how quickly, but just how much yield the client is earning on the money in the meantime. The general conclusion – if you think rates will rise more than a few percent (e.g., 2%-3%) in the next 5 years, it pays to wait.
12 Estate Planning Questions That might Make You Squirm – This Forbes article, a guest post on Deborah Jacobs’s blog by estate planning attorney Wendy Goffe, shares a series of 12 questions that people should ask themselves when considering and preparing their estate planning documents. Although written for consumers, the questions are all ones that a planner should be asking clients as well, and serve as a great reminder of the important points to cover in an estate planning meeting, from the basic "who will raise your children if both parents die" and "what if you all die in a common disaster" to the less top-of-mind "do you have genetic material on ice" and "who is going to take care of your pets?"
The Long Cycle – This article by Bob Seawright of the Above The Market blog provides a very good discussion regarding long-term market cycles, noting that while markets have averaged 10%/year over the past 100 years, those returns occur in an alternating sequence of excellent price appreciation followed by price stagnation. Although "stagnant price" environments is actually a bit of a misnomer, as such secular bear markets typically have a series of sharp price fluctuations with sharp declines and steep rallies, albeit often finishing at a price barely any better than the starting point after an average of 17 years. Seawright then explains how these trends often tie to long-term market valuation trends, and notes – as discussed last week on this blog as well – that the optimal investment strategy in secular bull markets is quite different than what works best during secular bear cycles.
Dangers Lurk In Exchange-Traded Notes – This article on Morningstar Advisor takes a deep look at some of the challenging dynamics at play when investing using Exchanged-Traded Notes (ETNs). Unlike ETFs, which generally own the underlying assets, ETNs are essentially just an uncollateralized loan given by an investor to an investment bank, which in turn promises provide the return of a specified index, minus fees. The upshot is that this provides a way to get access to the returns of certain asset classes that may be very illiquid or difficult to own directly; the downside, though, is that ETNs are not ’40 Act funds, have far less governance and oversight, little standardization, and can place the investor in an adverse position to the investment bank. The article provides a number of examples of underlying ETN fee structures, not necessarily apparent at first glance (as its disclosed in the prospectus, but in dense math and legal language few may fully appreciate), that can create significant tracking disparities between the ETN and the underlying index over time, to the detriment of the investor. The article’s closing paragraph states it best: "Given how publicly accessible ETNs are, buying one should not be an exercise in legal minesweeping. Until this situation changes, caveat emptor."
How Good Stewardship Predicts Superior Performance – This article from Morningstar discusses some of the new Morningstar Stewardship analysis and its relationship to subsequent fund returns. The first driver of good stewardship is whether the fund effectively controls its fees, given the extensive research showing that lower fees relates to better long-term returns, risk-adjusted returns, and higher chances of survivorship (i.e., better chance the fund will still be around at all in the future). Beyond fees, though, Morningstar also finds that managers who have a material stake in their own fund (more than $1 million) had better risk-adjusted returns than funds whose managers weren’t invested in the fund, and that a shareholder-first corporate culture is also a driver (although the latter is the most qualitative and subjective portion of Morningstar’s stewardship grading). The bottom line is that these kinds of stewardship metrics do in fact provide meaningful guidance about the likelihood for success (or at least, the likelihood for failure) of funds.
The Lion In The Grass – In his weekly missive, John Mauldin shares some of his latest thoughts, with the analogy of the Lion in the Grass – sometimes, in an effort to avoid the lions (dangers) we see, we may stumble onto a different unwelcome surprise (the lion hidden in the grass). And notably, hidden lions are different than black swans; the latter are random, while the former are simply unwelcome surprises that may strike if we’re not looking. So what are the Lions in the Grass that Mauldin thinks may be lurking? The one he began discussing a year ago, that’s just now becoming apparently to everyone else, is Spain, which has debt problems like Greece but on a much larger scale because of the size of the country. The next lion is France, which Mauldin suggests is ultimately on a Greece-like track, and that instead of reforms is doubling down on its current irresponsible path, although it will likely take a few more years for the real pain to become apparent. Another lion? The potential for the US to explode forward as a major producer and exporter of natural gas, potentially turning our trade deficit into a surplus and sending the US dollar dramatically higher, not lower. Mauldin also suggests that Japan is getting closer to its debt wall soon, but suggests that when necessary, the Japanese central bank will print, preserving their bonds but crashing their currency (another path for a strong dollar, at least by comparison, but risking a global currency war).
How I Learned More In A Month As A Client Than In 20 Years As CEO – This article on RIABiz is a candid discussion by Tim Kochis, former CEO of Aspiriant (a mega-RIA private wealth firm he originally founded that now has more than $5 billion under management), who shares his experience in becoming a client of his firm after retiring from it. The article makes several interesting points about Kochis’ own experience that he never quite saw as an owner – from the fact that the firm’s data gathering form was rather awkward to a married couple without children, to an appreciation for the value of rapid responses from the firm’s employees, to a recognition that even as an experienced financial planner you can still have holes in your own plan. One wonders what revelations more planners would have if they became consumers of their own firms.
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!