Weekend Reading for Financial Planners (July 7-8)

Posted by Michael Kitces on Friday, July 6th, 7:01 pm, 2012 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with three nice articles from this month's Journal of Financial Planning: the first is about planning techniques and issues for non-traditional couples; the second is an interview from Tiburon Strategic Advisors CEO Chip Roame about trends and developments in the industry; and the third is an article by Rick Adkins noting that financial services advertising has taken a distinctly planning-centric tilt in recent years, which may be a boon to the profession going forward. From there, we look at a few good practice management articles, about the importance of conducting staff meetings for your firm (and how to do them well), policies and procedures to handle departing employees (whether a voluntary or involuntary termination), and a good piece by Tom Giachetti about how honoring the fiduciary duty means more than just giving good advice - it's also about important "details" like ensuring clients are getting best execution on their investment transactions. This week's reading also includes a review of the new Morningstar forward-looking fund ratings, the rise of Zephyr Associates as a potential alternative for evaluating investments, an article on the difficulties of ETFs in penetrating the 401(k) marketplace, a look at whether today's low real return environment may be setting up retirees for unique new retirement challenges, and a good article from The Economist about the emerging LIBOR rate fixing scandal. We finish with two very interesting articles - one from practice management consultant Angie Herbers about how for many advisors the real challenge is not building a successful advisory practice, but how to deal with success once it's achieved and not undermine it, and another from the Harvard Business Review blog suggesting that, contrary to cliche and popular opinion, the most successful people may not be those who are most confident, but instead those who pair high ambition with relatively low confidence and who consequently bring a healthy dose of skepticism and self-improvement to everything they do. Enjoy the reading!

Weekend reading for July 7th/8th:

Financial Planning Roadmap For Non-Traditional Couples - This article by Robin Knowles and Stanley Veliotis in the Journal of financial Planning provide, as the title suggests, a good roadmap for the unique planning issues of non-traditional couples, noting that despite the fact some states allow same-sex marriage, such couples are still not viewed as married for the purposes of Federal law. Thus, for example, employers whose benefit plans are self-funded are governed by Federal law do not recognize same-sex marriages, while plans that are insured are typically governed by state laws (due to state insurance company regulation) and may honor a state-recognized same-sex marriage - an important distinction in situations like obtaining COBRA health insurance continuation, or spousal benefits under Social Security (Federal law) or workers' compensation (state law), or tax filings (cannot elect Married Filing Jointly for Federal tax purposes). The article also explores issues pertaining to dependency exemptions, divorce-related tax issues (alimony may not be deductible and division of property may constitute taxable gifts), and estate taxes and the use of trusts for estate planning in the context of non-traditional couples.

10 Question With Chip Roame - This is the Journal of Financial Planning's monthly "10 Questions" column, and the July issue visits with industry strategist and consultant Chip Roame of Tiburon Strategic Advisors. Roame suggests that recent market turmoil - and industry scandals like Madoff - have left consumers scarred, scared, and skeptical, leading them to become more involved in their investment portfolios than in the past, and confirms the trend towards more active and tactical strategies in response. Roame suggests that planners should focus on the historical track record for stocks, but be open to other investment vehicles, and focus on differentiating themselves from both each other and the industry's scandals. Roame also notes how investment products are "polarizing" towards either low cost indexing solutions, or high-cost alternative investment products, while the long-only active equity fund market is shrinking. 

Green Lines, 'Your Number', And Crashing Charts - This article by Rick Adkins in the Journal of Financial Planning notes the recent trend in financial services advertising - towards more holistic planning - and suggests it is a big plus for the financial planning profession, as it directs people towards the value of planning rather than just the latest hot investment product. However, Adkins suggests there are still some significant real-world challenges, including not enough "real" financial planners to meet the public need, poor client information systems (especially regarding spending patterns), the human tendency for clients to wander off their planning path, and the difficulty in dealing with the "curve balls" that life throws at clients sometimes (or sometimes that clients themselves throw). While some of these challenges are already familiar to most "real" planners, the article is nonetheless interesting in making the point that even mainstream advertising is starting to become more planning centric.

Use Staff Meetings To Create Culture - This article by Joni Youngwirth in the FPA's Practice Management Solutions magazine makes the point that your office's staff meetings are not just about operational issues; they are also integral to the culture of your firm. Accordingly, Youngwirth offers so helpful quick tips about things to do in your staff meetings to make them more rewarding and supportive of your firm's culture, including recognizing a job well done, updating the status of business goals, presenting mini-case studies on client situations that came up through the week, share reports and presentations from industry events, and discuss process improvements. Youngwirth provides some tips to managing the meeting itself, including trying a stand-up meeting (when everyone is standing, people don't talk so long!), involving everyone in setting the agenda, rotating leadership of the meeting itself, and rotating the venue location around the office. And if you don't do staff meetings at all... now might be a good time to start!

Departing Employees - This article by practice management consultant David Lawrence in Financial Advisor magazine suggests that ultimately, most firms will have to deal with an employee leaving at some point, and consequently it's important to have a plan for how to handle the situation. If it's a voluntary employee departure, an employment termination checklist may be helpful, including company property to be returned (keys, laptops, etc.), computer-related issues to address, changing passwords, client notification, etc,. as well as winding up salary and benefits. In addition, Lawrence recommends conducting an exit interview, especially if the termination was involuntary, to help the employee understand the reasons for termination. Overall, this article provides a nice list of wide-ranging issues to consider for what that inevitable staff turnover event happens. 

Fiduciary Duty: Best Execution Obligations - This article by compliance attorney Tom Giachetti in Investment Advisor magazine highlights the importance of "best execution" as it pertains to RIAs fulfilling their fiduciary duty. The obligation of best execution - seeking to ensure that clients have their investment orders executed at prices as favorable as possible under prevailing market conditions - requires firms to engage in proper due diligence when selecting a broker-dealer to work with, including its trading capabilities and not just its transaction fees. Monitoring after the fact to ensure that best execution is being obtained is also important, and may include looking at historical transaction results, conducting surveys, reviewing trading data from third-party resources, or obtaining execution data and best execution reports from the broker-dealer. The bottom line - the fiduciary duty is about more than just the advice that's delivered; it's also about ensuring the client's investment transactions are genuinely well executed.

Beyond The Stars - This article by Allan Roth in Financial Planning magazine provides a review of Morningstar's new forward-looking mutual fund ratings, which are different than the backward-looking performance-driven one to five star rankings advisors are currently familiar with. The new rating system goes above and beyond just performance and costs, though; funds receive a rating of either gold, silver, bronze, neutral, or negative, with the first three indicating some expectation that the fund may outperform over a 5-year period. The ratings are developed on the basis of five criteria "pillars" - process, performance, people, parent, and price, with positive/neutral/negative assessments in each category used to feed into the forward-looking ranking based on the Morningstar analysts' assessment. Notably, though, the ratings are still intended to be assessments of relative performance within the fund's category, and not an indication of whether the portfolio should tilt a larger weighting towards that particular style or industry. In the near term, some advisors may utilize the ratings as a part of fund due diligence, but risk pressure from clients who may discover one of their current funds has a poor Morningstar forward-looking rating. In the long term, the question is whether the ratings successfully do predict relative outperformers - Morningstar CEO Don Phillips says they'll begin assessing results once there's a three-year track record, and expects to have good data after five years.

Zephyr Associates' Will Clemens On 'Bushwhacking' And Delivering More For Less - This article from Investment Advisor magazine is an interview with Will Clemens, CEO of Zephyr Associates, which provides investment research and analysis tools for investment managers... and its fastest growing segment is RIAs. The company offers three main services - StyleADVISOR which relies on historical performance analysis, AllocationADVISOR that focuses on future forecasting, and Zephyr OnDEMAND which complements StyleADVISOR with web-based reporting tools. The question implied by the article - will Zephyr, which historically has been used more by institutional investment managers, become a more substantive competitor for Morningstar in the RIA space? 

Square Peg In A Round Hole? - This article from Investment Advisor magazine explores how ETFs have exploded to nearly $1 trillion in assets over the past decade, yet still have not gained a meaningful foothold in 401(k) plans. Common suggestions why ETFs haven't gained traction include the fact that their tax efficiency and intra-day trading capabilities - two key benefits of ETFs for investors - are generally a moot point in 401(k) plans that are already tax-deferred and tend to aggregate trades into a single transaction at the end of the day. Even ETF cost advantages tend to be narrow at best, compared to institutional mutual fund share classes offered in 401(k) plans. The article suggests that the future growth of ETFs may be focused on "next generation" ETFs that offer enhanced-index strategies and/or differentiate themselves beyond just being another way to own a pure, passive index, as well as ETFs that offer access to "alternative" asset classes that may not be available in mutual fund form. 

Retirement In A Yield-Free World - This article by Professor Michael Finke of Texas Tech explores some of the implications of today's retirees trying to make a transition in a "yield-free" world, where even TIPS now offer a negative 21 basis point real yield, just for the privilege of receiving inflation protection. Yet for the past century, markets have offered far better real returns, and in fact Finke suggests that we've become "addicted" to such returns, and as a result are suffering tremendously from "withdrawal" as they disappear and retirees find themselves unable to afford the lifestyles they once envisioned. Finke discusses research by Wade Pfau, indicating that if real returns on bonds slip from their historical 2.5% to something closer to the current 0% environment, even a 4% "safe" withdrawal rate faces a 15% probability of failure - which increases to 34% if the return on equities is also adjusted lower. Finke suggests the solution may be to accept the immediate annuity trade-off, which may look more appealing in the face of such returns.

The Rotten Heart Of Finance - This article from The Economist discusses the emerging LIBOR rate-fixing scandal, noting how the problem is going global due to the immense amount of global cash flows tied to the key rate, given its use as a benchmark to set payments on about $800 trillion worth of financial instruments ranging from complex derivatives to basic mortgages. And while the focus so far has been on Barclays, mounting evidence suggests the rate fixing was widespread, and that in fact Barclays may have drawn attention because it was one of the last to fudge their numbers, not the first. The complexity of the problem stems from the fact that in the end, LIBOR is not based on actual transactions of money changing hands, but simply on reported estimates - which can be manipulated, and in fact some banks have had perverse incentives to do so (particularly given how LIBOR changes could impact the bank's own proprietary trading derivatives positions), possibly going back 5, 10, or even 15 years. The problem is particularly concerning as it pertained to the financial crisis, as the LIBOR rate fixing suggests that LIBOR may not have been the indicator of bank health it was once thought to be. The article suggests that this may be a "tobacco moment" for big banks, drawing parallels to the mega $200 billion settlement tobacco companies ultimately agreed to in 1998 for the cancerous effects of smoking. And ultimately, the real challenge is where the system goes from here; while the mechanical issues of fixing LIBOR may be manageable, the ripple effects of "unfixing" the LIBOR rate fix are far less clear. 

The Secret To Success - This article by practice management consulting Angie Herbers in Invesmtent Advisor magazine makes the interesting point that running a successful business can result in a sort of social alienation - when people otherwise perceive you as successful, they're often less sympathetic or open to hearing about your problems, and as a result successful business owners often have few places to turn for help and social support. As a result, Herbers suggests that the #1 challenge of being an owner/advisor "is not building a successful advisory practice, it's dealing with one's success once it's achieved" and her consulting focus shifts from helping to achieve success from helping them not undermine it. Herbers' solution? Be prepared - which means start laying the groundwork now for what success looks like in your business, and what that phase of your life and business would mean to you. Except to feel alienated, as the gulf between owners and staff widens; Herbers believes many advisors form multi-advisor firms to re-establish that personal support network. And anticipate some feelings of guilt around success - which advisors most commonly relieve by adjusting their personal and/or business focus to a higher purpose. 

Less-Confident People Are More Successful -This article from the Harvard Business Review blog network makes the intriguing point that while it's cliche to believe that more self-confident people are more successful, in reality people with lower self-confidence may actually be more successful. Of course, extreme low self-confidence is bad, but just-low-enough self confidence (especially when paired with ambition) can actually help you to pay attention to constructive negative feedback, be more productively self-critical, make more realistic and attainable goals, be more prepared, and reduce the risk of being perceived as arrogant or deluded. The bottom line is that "if you are serious about your goals, low self-confidence can be your biggest ally to accomplish them."

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!

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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