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Weekend Reading for Financial Planners (Oct 22-23)

Posted by Michael Kitces on Saturday, October 22nd, 4:24 pm, 2011 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - highlights this week include two new articles on safe withdrawal rate research, an investment discussion about Europe from John Hussman, a few practice management articles about business development and cultivating relationships (or not!), a controversial piece that 401(k) plans should have no more than 10(!) investment offers, and more. Happy reading!

Weekend reading for October 22nd/23rd:

Getting on Track for a Sustainable Retirement: A Reality Check on Savings and Work - This article by Wade Pfau in the Journal of Financial Planning discusses the challenge of determining whether a client is on track in the years leading up to retirement - an article inspired in part by a post on this blog earlier in the year (which is quoted in the article). The challenge is striking - as the Pfau article points out, a client's wealth 10 years before retirement explains only 5% of the client's wealth at retirement, because the volatility and sequence of returns in the last 10 years is so crucial! However, strong pre-retirement results tend to lead to weak retirement returns, and vice versa, due to mean reversion of market valuation. As a result, Pfau emphasizes that the real key is not looking at wealth accumulation at the retirement date, but instead connecting pre- and post-retirement wealth to look at the entire picture.

New Research Challenges 4% Withdrawal Rule - This article, also by Wade Pfau, in the current issue of Financial Advisor magazine, discusses another fresh challenge to safe withdrawal rates that was recognized for an Academic Thought Leadership Award in the Fall 2011 issue of the Retirement Management Journal by Duncan Williams and Michael Finke of Texas Tech University. Unlike many studies lately that have advocated for lower withdrawal rates, though, the Williams and Finke article made the case that a retiree might consider a withdrawal rate as high as 7%! The key distinction - Williams and Finke make the case that there has been too much emphasis in withdrawal rate research on keeping potential failure rates at ultra-low levels. The key difference is that the new research looks more quantitatively at an individual's willingness for trade-offs - such as more income now with the risk of needing to reduce spending later - through a utility function. When viewed from a utility perspective, ultra conservative clients might still follow the traditional 4% route, but many might be willing to accept something higher, with the risk trade-offs that entails.

How Many Investment Options Should 401k Plan Sponsors Offer? - In a world where most 401(k) sponsors simply try to offer as many investment options as possible - more choice is always good, right!? - this article by Christopher Carosa of Fiduciary News looks at a number of different lines of research to evaluate, from the consumer behavior perspective, what really IS optimal to encourage participation in retirement plans and effective investment choices? The conclusions are somewhat striking - offer too many options, and people tend to choose a little of everything, effectively re-creating an index fund but at much higher cost. Furthermore, choice itself tends to be demotivating - if there are too many choices, we simply choose nothing at all, a paradox I've discussed in the past on this blog. The article's conclusion: the optimal number of investment offerings in a 401(k) plan should probably be somewhere between 3 and 10 choices, although in practice that's a rarity!

The Mark Spangler Affair: An Ecuador Vacation Postponed - This article by Financial Advisor magazine's editor-in-chief Evan Simonoff on his blog discusses the recent announcement of an FBI raid on former NAPFA president Mark Spangler; the second NAPFA president to face allegations of investment wrongdoing in the past few years. In addition to pointing out some basic public details of the Spangler allegations, Simonoff goes further to share some interesting thoughts about what kind of role financial planners should play in private equity and venture capital types of investing. Is this just another asset class, or an area of specialty that most planners shouldn't be involved with? When IS this type of investment appropriate? And where do you draw the line on conflicts of interest if the advisor takes such a role in the process, he/she also sits on the board of some of those companies?

Polling the Occupy Wall Street Crowd - This recent opinion article in the Wall Street Journal discusses some polling being done on the Occupy Wall Street participants - and paints a pretty dark picture. Although many have claimed they represent the majority of disenfranchised Americans, this polling suggests that the protest participants are much more fringe than mainstream. Furthermore, the article suggests that they are still pretty far from the independents who really tend to swing votes and elections. The article makes the case that the Democrats' move to embrace the Occupy Wall Street movement may be costing them the 2012 election. In any event, it's an interesting perspective on who's involved with the movement, with some striking differences from much of the other coverage I've seen. 

Europe: Just Getting Warmed Up - This latest piece from John Hussman of Hussman Funds on the Advisor Perspectives website explores the ongoing challenges in Europe, and makes the case that we're still closer to the beginning of the resolution than the end, with a lot of pain to come. Hussman suggests that the U.S. (and likely global) economy is heading into recession, notwithstanding a few one-off recent data points that imply we might dodge the negative growth bullet. He asserts that the market already has confirmed Greece will default - with 1-year Greek bonds yielding 169%, the only question now is the size of the write-down, and how the rest of Europe will handle it. 

The Mixed State of the Advisor Market - This article by's Practice Channel editor Melanie Waddell discusses the current state of the advisor market, with some striking data from Cerulli Associates over the past decade. Reps from insurance BDs is declining, as are wirehouse reps. RIAs are growing, but dually registered RIAs are growing event faster. Overall, the number of advisors over the past 7 years is on the decline in the midst of this difficult environment, and while the major broker dealers and wirehouses still have the overwhelming majority by numbers and remain the primary players in the market, the trends are clear and striking. Also notable is that merger and acquisitions activity is still focused heavily in the RIA space, as firms try to gain size and scale; most of the acquisitions right now are RIAs acquiring each other.

Capture, Contact, Communicate: How to Start Relationship Marketing - This post from the FPA Practice Management blog by planner and consultant Kristin Harad discusses what to do to build a relationship with your List - that list of prospect names that have given you permission to email/contact them. As Kristin points out, the prospect gave you permission to follow up with them in exchange for an implied promise that you'll send something worthwhile - so send it! Not in 2.5 months when your next quarterly newsletter comes out, but right away, while the interest is still fresh. Have systems so the contact goes out regularly and as effortlessly as possible, but consistency is a key. I suspect many planners have some kind of mailing list to prospects already, but Kristin points out some pretty basic but absolutely crucial concepts and details about doing it right

Selling Is Not About Relationships - Contrasting the preceding article, this recent piece from the Harvard Business Review makes the interesting case that the best sales and business development activity doesn't actually come from relationship builders - it comes from people who challenge their sales prospects and assertively take control of the conversation. Notably, the article finds that the more complex the solution involved, the more the challengers succeed over other business development styles. Given the complexity of financial planning as a solution, and our tendency for relationship-driven business development to grow our practices, this makes for an interesting concept piece about how we might grow differently and better.

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! 

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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