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Weekend Reading for Financial Planners (Nov 19-20)

Posted by Michael Kitces on Friday, November 18th, 8:41 pm, 2011 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - highlights this week include several recent pieces about behavioral finance (both by, and about, research luminary and Nobel prize winner Daniel Kahneman), some interesting glimpses of how social media and the online world is shifting the process of finding a financial advisor and delivering financial advice, and a few investment pieces about the unraveling European (and now especially, Italian) sovereign debt situation and a growing likelihood the ECB will be compelled to "start the presses" to address it. We also look at two pieces highlighting trends in the industry, especially the RIA space. Enjoy the reading!

Weekend reading for November 19th/20th:

Ameriprise Taps LinkedIn Connections To Make Advisor Referrals - This blog post from marketing consultant Pat Allen of Rock The Boat Marketing discusses a recent move by Ameriprise to allow users to search for financial advisor recommendations via their own LinkedIn network. The approach is pretty straightforward - when an individual uses the Ameriprise system to search for an advisor, the system compares a list of all Ameriprise advisors with valid LinkedIn pages to the network of the person doing the search. Given the number of Ameriprise advisors out there, most come up with at least a handful of matches. The search results then show not only the advisor's information (including headshot, location, credentials, and links to the website), but also shows HOW the search is linked to the advisor (you are connected to this advisor on LinkedIn through your friend Eric). Wouldn't you rather get referred to someone in your network, along with the name of the person you already know and trust who you can contact for further feedback... rather than just a complete stranger? In a world where so much new business is established by referrals from those we know and trust, does this represent the wave of the future for referral networks? Could other organizations with nationwide referral networks - e.g., NAPFA, the FPA's "Planner Search", and the CFP Board's "Let's Make a Plan" campaign - implement this as well? 

Online Financial Advice in the Future - This blog article from in the UK discusses both UK and global trends in the shift towards financial advice being delivered with/through/via the internet. The article categorizes online financial advice start-ups into three categories: the Virtual Advisor that seeks to largely replicate what advisors do via technology (e.g., the Bill Harris startup Personal Capital, which garnered a great deal of attention at the recent Finovate conference); the Remote Advisor that tries to use technology to connect advisors and clients (e.g., the CFP Board's non-profit Let's Make A Plan or the for-profit start-up BrightScope); and the Social Advisor that aims to craft online communities capable of educating and advising one another (e.g., Covestor for investing, or some sort of future Weight-Watchers-support-group-meets-message-board startup). Overall, an intriguing look at potential directions for the future of financial advice in an increasingly wired world.

The King of Human Error - This article by acclaimed author Michael Lewis in Vanity Fair discusses the behavioral finance research work of Nobel prize winner Daniel Kahneman, including his recently released book Thinking, Fast and Slow. Lewis presents a striking discussion of Kahneman himself over the years, as well as interesting snippets of Kahneman's work in general and some aspects of the book in particular. This is a light, fun read... and I know personally I will definitely be buying Kahneman's book!

Bias, Blindness and How We Truly Think - This article (actually the first of a 4-part series) from Bloomberg, also by Daniel Kahneman, explores some of the practical applications of his research. This column in particular looks heavily at the optimistic bias - the ways we tend to make risky and sometimes poor decisions when we are overly optimistic. The discussion is striking because it notes how entrepreneurs themselves tend to be disproportionately optimistic - if you're not naturally optimistic, you wouldn't continue as an entrepreneur for long! On the other hand, the striking research shows: "The leaders of enterprises who make unsound bets don't do so because they are betting with other people's money. On the contrary, they take greater risks when they personally have more at stake [because they're excessively optimistic and overconfident]." One wonders if planners are systematically more optimistic than their planners (probably, given the self-selection bias as entrepreneurs), and whether that influences optimism and overconfidence bias relative to their clients, exacerbating planner-client disconnects.

The New Science Behind Your Spending Addiction - Continuing the behavioral finance research articles, this story by Newsweek authors Sharon Begley and Jean Chatzky explore some of the recent research and developments in brain research and spending. Scientists are mapping out the exact areas of our brains that determine our inclinations towards either spending now (immediate gratification) or saving (delayed gratification). Impulse control problems when we're young can be expressed in academic and business outcomes decades later (as one longitudinal study has shown), but on the plus side research shows that persistent efforts to modify our behavior can actually help our brains permanently re-wire into better future behaviors. The article also makes a striking point about the research in the retirement context: "A 22-year-old will perceive 20 years as an eternity. To ask this person to save for retirement is like asking the person to give his money to someone else: he cannot picture himself as a retiree." An interesting take on the savings challenges of the younger generation. 

Where Is The ECB Printing Press? - This article by John Mauldin, published on Advisor Perspectives, provides an excellent overview of the emerging financial crisis in Europe, and the sheer challenges faced there by the amount of debt that appears to be unpayable. Overall, Mauldin provides an excellent summary of the various challenges and dynamics at play in Europe, reviews some of the potential solutions, and sets forth his own ultimate conclusion: "I see no other realistic solution... the choice is print or let the euro perish." In other words, he expects that eventually, the European Central Bank (ECB) will have no choice, given the depression-scale alternative that will face them. 

Running Through Italian Default Scenarios - This blog post from explores some of the potential paths for how an Italian sovereign debt default scenario could play out in the coming weeks and months. The article explores the potential outcomes if the ECB does ultimately print and "write the check" (which the author thinks will happen), vs the results if the ECB will not. The consequences of the latter are daunting - at BEST, a soft global depression, and at worst a cascade of bank defaults, bank runs, and credit default swap explosions (as Italy is too large to even attempt arranging a "voluntary writedown" non-default event), with a stampede of money that will flee to any safe haven with a lender of last resort (e.g., U.S. Treasuries backed by the Fed). Notably, the author suggests that the deflationary depressionary outcome could actually favor U.S. Treasuries (on the backs of lower interest rates and a flood of money to the safe haven), as well as highly rated corporate bonds and high quality dividend-paying stocks (of companies that can ultimately withstand the economic shock).

Risk Management Has Become The Number 1 RIA Concern - Consistent with some of the concerning investment articles above, this piece from the Advisors4Advisors website (with a similar version reporting the same study from the Financial Planning magazine website) discusses a recent survey study by Invesco and Cogent Research that showed 70% of RIAs cited market volatility as the top concern among their clients (99% said it was a top-3 concern); by contrast, only 6% of RIAs said wealth accumulation was still a top client concern. Managing risk is now a top priority in portfolio construction (45%), compared to only 24% reporting 'wealth preservation', 12% reporting 'exceeding a performance benchmark', and 10% 'delivering an absolute return'. In turn, 83% of firms are interested in getting guidance from outside sources; a trend we're certainly seeing supported through growing interest in our own Pinnacle Advisor Solutions offering. You can see the full press release of the Invesco study here

10 Things Worth Knowing From [Recent] Tiburon CEO Summit - This article by RIABiz's Brooke Southallsummarizes the recent Tiburon CEO summit in October. Perhaps unfamiliar to most planners, Chip Roame of Tiburon runs a very well known, ultra-high-end conference for the CEOs and executives of major financial services companies (ranging from wirehouses to independent broker-dealers to RIA custodians) that explores trends in the industry and insights from Tiburon's research. The article covers several notable highlights from the discussion, including upbeat reviews for Schwab's franchise initiative, affirmation that the breakaway broker trend from wirehouses is real and will continue, but that the wirehouses will be trying to respond, and that even though assets and advisors are leaving major wirehouses, those major firms are still overall thriving quite 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!   

  • Pat Allen

    Michael, your weekend reading recommendations are always a must-read for me. Thanks for thinking to include my post this week!

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    Enjoy the current installment of "weekend reading for financial planners" - highlights this week include two recent pieces about the FPA ... | Nerd's Eye View

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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