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Weekend Reading for Financial Planners (May 4-5)

Posted by Michael Kitces on Friday, May 4th, 7:05 pm, 2012 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition leads off with a proposed change by the CFP Board to develop sanction guidelines to that financial planner wrongdoing can be disciplined more consistently, as the organization continues to refine its enforcement efforts. From there, we look at a review of the FPA's Financial Plan Development and Fees study, and some regulatory discussion about the Financial Planning Coalition's recent effort to push the SEC forward on fiduciary rulemaking, along with an article where Don Trone explores the importance of discernment - to ability to know between right and wrong - in applying a fiduciary standard. The Journal of Financial Planning has several interesting articles around long-term care issues for clients, ranging from a contributions article on continuing-care retirement communities, a look at how advisors are dealing with rising LTC insurance costs, and an interview with doctor-turned-financial-planner Carolyn McClanahan. We continue the look at elder planning issues with Ed Slott's review of the new proposed Treasury regulations to allow longevity annuities inside of retirement accounts (although the products have yet to gain any momentum outside of retirement accounts, either!). Wrapping up includes a look at why Mark Hanson thinks the housing market still may not be a bottom (despite calls for it during the spring season for the fourth year in a row), why Hussman thinks 5-year forward returns for stocks are negative and that a bear market may be coming soon, and an interesting story from NPR about the psychology of fraud and new research to suggest that an important way to keep people from wrongdoing is to make sure they stay in an ethical frame of mind when evaluating their own actions. Enjoy the reading!

Weekend reading for May 4th/5th:

CFP Board Lays Out Penalties For Violations - This Investment News article discusses the recent proposal by the CFP Board to create 'sanction guidelines' for 40 types of planner misconduct that the Disciplinary and Ethics Commission could use to apply (more?) consistent punishments to planners who violate the CFP Code of Ethics and Professional Responsibility. Punishments may include revocation or suspension of the marks, private censure, or a public letter of admonition, and can be adjusted for aggravating and mitigating circumstances. The comment period remains open until May 30, and comments can be submitted to

Digging Deeper Into Financial Planning Fees - This article from the FPA's Practice Management Solutions publication digs into the FPA's 2011 Financial Plan Development & Fees study, exploring common practices around how planners structure their fees. The results show that nearly 20% of advisors collect most or all the planning fee up front, and another 25% collect half up front; the remainder collect most or all of the fee after the fact, or get paid on an ongoing basis (e.g., via an AUM fee). Only 7% of advisors reported that they don't charge for a plan at all (either via a direct or ongoing fee). 60% of advisors deliver the plan in 1-3 weeks, and they take an average of 11.5 hours to prepare the plan. Median planning fees range from $1,500 for a plan that takes fewer than 5 hours to prepare, up to $3,500 for plans that take 20 or more hours (with a limited number of planners charging significantly higher fees, as the average in this group was nearly $5,000). 

Giving To Get - This article from Investment Advisor magazine discusses the letter by the Financial Planning Coalition and its allies, including the Consumer Federation of American, the Investment Adviser Association, Fund Democracy, and AARP, sent in March to the SEC to move forward on fiduciary rulemaking. As discussed previously in this blog, the letter seeks to compromise on the roadmap proposal put forth by the Securities Industry and Financial Market Association (SIFMA) last year, conceding some points, and standing tough on others. The most notable aspect, though, is likely the letter's acknowledgement that, per the guidance of Dodd-Frank itself, new fiduciary rules can still allow for transaction-based compensation (i.e., commissions).

Discernment And Right Versus Wrong - This article by Don Trone in Financial Advisor magazine explores the issues of how to effective regulate a fiduciary standard. Trone emphasizes the importance of "discernment" - the ability to judge wisely whether something is right or wrong. As Trone notes, "You define rules when you believe a person is unable to discern the differences between right and wrong or that he or she may easily succumb to the temptation to do the latter. However, don’t be misled to think that you can improve behavior by defining more rules. Just ask any teenager." Accordingly, people who don't have discernment and can't understand principles simply shouldn't be fiduciaries at all - as without those traits, no amount of rules can fill the discernment void. 

Carolyn McClanahan on Managing Client Insurability and End-of-Life Planning - In its monthly "10 Questions" interview, the Journal of Financial Planning reached out to Carolyn McClanahan, an emergency room doctor turned financial planner who brings an interesting medical perspective to the planning world, who also writes the blog "The Quest for Simplicity" for Forbes regarding health care reform. The interview covers a wide range, from McClanahan's views on the parallel development of medicine in the past and where financial planning is today, to the focus on health issues combined with money issues in a financial planning practice, to the importance of health care reform, and her views on the good and bad parts of the Affordable Care Act (the so-called "Obamacare" legislation) which she read cover to cover.

Seeking Alternatives to Long-Term Care Insurance - This article by Tom Narwocki in the Journal of Financial Planning discusses the current landscape for long-term care insurance, and how planners are coping with the rising cost. Policies are often recommended for clients starting in their 50s, although apparently the average age the policies are actually purchased for at least one insurance company is closer to 68. Net worth typically falls in a "sweet spot" of about $500,000 to $2.5 million where the client has enough to afford the coverage, but not so much they can just afford to self-insure instead. Whether purchasing coverage or self-insuring, it's important to get a handle on potential costs - which vary significantly depending on geography, and to have a realistic conversation regarding how much help and involvement family members may or may not give. Asset-based products - life insurance or annuity products with a long-term care insurance rider - are gaining popularity as well, as clients resist the sheer "sticker shock" of traditional LTCI coverage.

The Interface Between Continuing-Care Retirement Communities and Long-Term-Care Insurance - This Journal of Financial Planning article by Linda Nelms, Sarah Mayes, and Betty Doll, explores the potential use of Continuing-Care Retirement Communities (CCRCs), and how it integrates with the use of LTC insurance. For those who aren't familiar, CCRCs offer care for individuals as their health progresses (i.e., declines) in a single location, providing a combination of housing, personal services, and medical and custodial care, as the individual goes from independent living to assisted living to needing skilled nursing care. However, not all CCRCs are the same; they have different payment and contract structures, which affect how much risk the CCRC retains in the event of extra costs for advanced cost. The article finishes by reviewing 8 key decisions and issues to consider regarding LTC insurance, from the age to acquire, the length of the elimination period, to home health care and other riders, and explores how LTCI integrates with certain types of CCRC payment structures - including a problematic situation where some CCRCs have upfront and monthly fees that effectively cover future long-term care needs before the policy is even paying benefits, making the two offerings potentially redundant. Overall, the article is a bit long, but provides some good perspective on LTCI, and a good education on types of CCRCs that many planners may be unfamiliar with.

Newfangled Annuities - This article by Ed Slott in Financial Planning magazine discusses the recently proposed Treasury regulations that would allow for so-called "longevity annuities" to be purchased inside of retirement accounts. What are longevity annuities? They are annuity contracts that exchange a lump sum for a lifetime series of payments that don't start until the distant future; for instance, the lump sum might be made now, but the income will not begin until age 85. With such a delay in payments, the potential exists for earning significant mortality credits - for those who are still alive - providing significant income and a longevity hedge. However, such delayed-payment contracts are problematic in retirement accounts that have RMDs beginning at age 85. Accordingly, the new guidelines allow for retirement accounts to purchase longevity annuities without running afoul of the RMD rules, as long as the longevity annuity payments begin by the individual's 85th birthday, meet other 'qualified longevity annuity contract' requirements, and the investor is limited to the lesser of $100,000 or 25% of retirement account assets (cumulatively across all such annuity contracts purchased in retirement accounts). Notably, though, few longevity annuities exist already, and none necessarily conform with the new guidelines - which aren't even final yet - so don't expect to see much client activity on this for another year or few.

House Prices At 'A Bottom'... For The Fourth Year In A Row!!! - This article by mortgage analyst Mark Hanson takes a hard look at the current housing market, noting that many are calling once again for a housing market bottom... for the fourth year in a row. Hanson points out that there's a significant difference between an "annual" bottom and "THE bottom" though - as he notes prices bottoming in the late winter and rising into the spring and summer is a normal part of the annual housing market cycle, but that doesn't necessarily mean the housing market is really back in growth mode again. Hanson also emphasizes that the market is still very distorted by stimulus - while in 2010 it was the Homebuyer Tax Credit from the government, right now it's artificially depressed interest rates. Either way, Hanson emphasizes that growth right now is anemic even by stimulus standards, and without the stimulus housing growth seems highly unlikely to really hit the "escape velocity" necessary for housing to break the long-term downward trend into a real growth phase.

Release The Kraken - In his weekly article, John Hussman explores the current market environment, noting a mediocre expected return of only about 4.4%/year for the next decade (and even lower on an inflation-adjusted basis), due to both high market valuation and elevated profit margins that are likely to revert back towards the mean (compressing corporate earnings). The 5-year outlook is even worse, as Hussman projects that the S&P 500 will underperform Treasury bills, with a probable intervening 30%-40% bear market along the way - "the Kraken is about to break loose." Hussman also provides an interesting look at how high-flying companies (think: Apple) express some extraordinary growth rates in their early phases, that can't possibly be sustained indefinitely - and when that exponential revenue growth eventually returns to a more normal trend line, the adjustment to return expectations and a stock's price can be severe.

Psychology Of Fraud: Why Good People Do Bad Things - This article from NPR explores some of the latest research emerging about why good people can still do terrible things like fraud, following the story of a mortgage lender who ultimately committed outright mortgage fraud - obtaining loans on fake houses that didn't exist - trying to keep his business afloat, even after having long ago made a commitment to his father to lead an ethical life after his brother committed fraud many years ago. The subject of the story not only engaged in fraud, but received support from employees and outside firms who all cooperated with perpetrating the fraud, who complied his requests to perform illegal acts because they were acting out of care for the individual and his business. The article points out that growing research on such actions now show that when we evaluate a decision using a business framework - what might I gain, and how will it affect my business' future - we often come to a very different conclusion than when using an ethical framework - is this fair, and will people be hurt? Which in turn means one of the best ways to encourage ethical behavior is to provide regular ethical reminders, simply because it helps ensure that people evaluate the decisions they're making with the "right" ethical - and not pure business - cognitive frame of mind.

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

    Michael –

    The two fiduciary-related items on your list, one on efforts of the FP Coalition and the other by Mr. Trone who led establishment of Fiduciary360, spark me to think of the point you raised in your March 8 post: Establishing the fiduciary standard is not enough — advisors must also have the expertise to fulfill it, to pursue best prospects for clients’ futures.

    For pursuing clients’ best financial futures, leading financial planners are at the cutting edge. But the masses of planners and advisors guide investors as taught in the investment training required for their credentials.

    Last I looked, it appeared to me that the CFP Board and Fi360 are teaching investment selection pretty much along the lines of MPT as pioneered by AllocationMaster – compare on efficient frontier, choose by questionnaire, etc . . (but using model portfolios to avoid absurd precision and annual jumps).

    In a March NBER report authored by professors from Harvard and MIT, and in a recently published book co-authored by Professor Bodie of BU, both halves of that approach are scorned. The Harvard-MIT team reports the half it studied as advice that is anti-fiduciary. And according to a professor from Wharton, Bodie mocks the half he addressed as “terribly naïve” and a “simpleton procedure.”

    The CFP Board and FI360 are certainly working hard to make the fiduciary standard apply to more “advisors.” Do you think they are doing equally well at offering the best investment training to give their new certificants the expertise to fulfill that fiduciary duty?

    Dick Purcell

    Michael’s prior post:
    Professors’ criticisms:

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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