Enjoy the current installment of "weekend reading for financial planners" – this week’s edition starts off with a response from the CFP Board to the recent challenge about whether their fiduciary standard is "a joke" (not surprisingly, the CFP Board suggests that its standard is no joke), along with an article from the Advisor One blogs by Knut Rostad of the Institute for the Fiduciary Standard suggesting that HighTower Advisors is overstating their lack of conflicts of interest to the detriment of advancing the standard, and another article by Dan Moisand that suggests better regulation of financial planning will ultimately be a necessary step to be fully recognized as a profession. From there, we look at some interesting stats suggesting the fiduciary RIA world is grabbing market share of 401(k) plans just as it has been grabbing market share of retail investment advice, and an article about a planning firm that focuses on career coaching and compensation advice as a core deliverable to clients. There are also a number of technical articles, including a discussion of the emerging investment concept of "risk parity" and why it matters, a look at where and how tactical asset allocation will and won’t work, the apparent underutilization of Section 529 college savings plans by financial planners, an analysis of when tax deferral does and does not make sense. and two deep estate planning articles (one focused on estate tax strategies before the end of the year, and the other on recent legal and tax developments over the past year). We wrap up with a lighter article about the importance of body language and what you may be unwittingly communicating in meetings, along with some advice to help ensure you’re in the right state of mind heading into a (client) meeting (because if you’re not, your body language is going to show it!). Enjoy the reading!
Weekend reading for September 29th/30th:
Why Our Fiduciary Standard Is No Joke – This article on the Wall Street Journal blog is a response from CFP Board CEO Kevin Keller to the recent article "Is The Fiduciary Standard A Joke" (covered in Weekend Reading two weeks ago), an article by Allan Roth which criticized the CFP Board for doing a poor job enforcing its fiduciary standard in a particular case the article’s author encountered a few years ago. The CFP Board notes that the incident in question actually happened in 2005 and 2006, which was before the CFP Board required a fiduciary standard for advisors (which took effect in 2008), and that more recently the organization has been increasingly pushing the fiduciary standard for CFP certificants and lobbying for it more broadly as well. In fact, the CFP Board makes the case that its pro-fiduciary positioning is part of why the credential is the most recognized of financial planning designations with the public, why the CFP certificant base has grown 24% in the past 5 years, and why CFP professionals are more productive than their peers according to a recent Aite Group survey.
HighTower Advisors: The New Face of Fiduciary? – This blog post by Knut Rostad, President of the Institute for the Fiduciary Standard, calls out Elliot Weissbluth of HighTower Advisors for his recent statement at the MarketCounsel RIA conference that the HighTower business model has "zero conflicts of interest." As Rostad notes, a true standing of "zero conflicts of interest" is both not feasibly possible, and notably is not required of fiduciaries, either; ultimately, fiduciaries are expected to avoid the most significant conflicts of interest that can be avoided, and manage the rest. When pressed on the issue by Rostad, Weissbluth acknowledged that "zero" conflicts may not be possible, stating that "You are always going to have some technical conflicts" and that what he meant was that HighTower avoids the traditional wirehouse conflict of "getting paid twice" when working with clients. Rostad then draws parallels between HighTower’s apparent fiduciary position, and that of SIFMA, implying that both are seeking to redefine or dilute a true fiduciary standard, as there is no such thing under the law as a distinction between a "conflict of interest" and Weissbluth’s "technical conflict of interest" and that to have any conflicts of interest, "technical" or otherwise, means a claim of "zero conflicts of interest" is patently false and contrary to consumer interests. This article is a notable distinction from most articles about HighTower that have been far more upbeat, although ultimately Rostad’s point is not about HighTower, per se, but to emphasize that reaching a true fiduciary standard for advisors requires acknowledging what it does and does not say, and to be clear and not misleading about what conflicts of interest do and do not exist.
So Close and Yet So Far – This article by Dan Moisand in the Journal of Financial Planning explores whether financial planning is yet a "profession" and concludes that it is not, in large part because of regulation – specifically, that our current ability to actually enforce a financial planning code of ethics, with real consequences for inappropriate actions, is limited. The associations have a Code of Ethics, but no enforcement (as discussed previously on this blog); the CFP Board has some enforcement, but its sanctions are limited as it is ultimately a private entity that grants the marks, not a governmental entity that can apply the force of law. The article then discusses some potential avenues for better regulation of financial planning, noting that it doesn’t necessarily have to be scary or onerous, but the ultimate goal is to ensure that the only people who really use a label like "financial planner" (or something similar) are those who are actually qualified to do so.
Cerulli: RIAs and Hybrid RIAs Make Giant Advances On Banks And Wirehouses In The 401(k) Race – This article from RIABiz highlights a recent Cerulli study showing that RIAs and hybrid RIAs operating as fiduciaries are already picking up dramatic market share of 401(k) assets. Wirehouse 401(k) assets dropped from $532 billion to $510 billion and banks from $60 billion to $54 billion from 2010 to 2011, while RIAs jumped from $118 billion to $152 billion and hybrid RIAs leaped from $86 billion to $143 billion; most other channels were relatively flat. And with the many of the Department of Labor’s new fee disclosure rules just taking effect, many are suggesting that the RIA market share may grow even faster from here, as more and more plans and participants become aware of the fees they’re paying, and that RIAs with a leaner structure can render services for a much lower cost.
Stewart Koesten, KHC Wealth Management Profile – As the name suggests, this article is a profile of the practice of Stewart Koesten of KHC Wealth Management. What makes Koesten’s practice interesting is that it focuses heavily on a client’s human capital – with executive coaching, career transition planning, and compensation coaching, in addition to more "traditional" financial planning services. The latter are provided on a traditional AUM basis, but the former appear to be delivered primarily on an hourly model, tailored to the exact issues of the particular client situation, and provided by a staff member with experience as a coach.
Why Risk Parity Matters Now More Than Ever – This article provides a nice primer on the concept of "risk parity" – which is a strategy of portfolio design where risks are diversified not just with low correlation assets, but where the risks that drive those asset classes, such as growth, inflation, or market sentiment, also have little relationship to each other. And the goal is to do this in a manner where overall risk exposure remains constant – which actually means asset class exposure may vary as risks and returns shift. For instance, to maintain the same level of risk and volatility in the 1930s and the 1980s would require different levels of equity exposure. The key distinction is that just owning a number of different investment managers doesn’t necessarily achieve the desired diversification and risk parity, if the managers are all subject to the same overall market flows. To some extent, this is simply another way to frame asset allocation, but in this case the focus is truly on different asset classes – i.e., asset classes exposed to different risks – with an acknowledgement that as risk/return opportunities to asset classes change, so too should asset allocation to maintain consistent risk exposure.
Tactical Think Tank: A Fundamental Answer for Tactical Asset Allocation – This article from the Journal of Financial Planning is an exploration of some firms that began researching options for how to implement a more tactical investment management process. Their conclusion was that short-term market timing remains impossible, but that there are intermediate and long-term market trends that can be predicted, which notably impact not only asset allocation shifts over time, but also the underlying financial planning assumptions used with clients. The research approach extended in two directions – one group looked at factors related to technical analysis, while the other studied fundamental analysis (such as P/E ratios and regression to long-term trend lines). The article then shows how some of the techniques can be applied to adjust long-term projections for asset class returns, and how those adjustments in turn can impact financial planning assumptions. The bottom line is that as long as the adjustments are done in the context of longer-term planning and projections, the data appears to support a somewhat more tactical approach to portfolio design and return assumptions.
529 Plans: Untapped Potential of College Savings – This article from Financial Planning magazine looks at how parents are using 529 plans to help save for college in this age of "stratospherically high tuition costs." However, the article suggests that the plans may still be underutilized by planners, as only about 27% of money saved for college was in 529 plans (according to Financial Research Corp). The article suggests this may be due in part to the fact that often advisors cannot charge fees or earn commissions on 529 plan assets (although a chart included with the article shows that the American Funds advisor-sold 529 plan is by far the largest of the 529 plans), although others suggest it may more be a factor of mediocre market returns leaving investors generally unsupportive of market-based 529 plan offerings (as 529 contributions tend to show a strong relationship with overall market returns). The article then provides a series of 15 advantages for 529 plans, and 13 "notes of caution" – although there’s not a lot new here, there are some good tidbits, and a lot of helpful reminders that can be used as talking points with clients.
Tax Deferral: When Does It Make Sense and When Does It Cost Cents (or Dollars)? – This article from the Journal of Financial Planning provides a strong analysis to understand when tax deferral makes sense, and when perhaps it doesn’t – which is especially true in situations where deferring taxes may result in higher future tax rates (either because the strategy causes higher tax rates, or simply because Congress changes the rates). The article then develops a series of 10 "rules" associated with tax deferral that provide some helpful rules of thumb, ranging from the general (if tax rates are anticipated to rise, tax deferral doesn’t make sense unless the deferral period is very long) to the specific (hold tax-exempt bonds that have appreciated but sell those that have declined in value, due to the underlying tax treatment). Overall, this article provides some nice reminders and a few "surprises" in recognizing that there are many situations where tax deferral really isn’t worthwhile.
Helping High Net Worth Clients to Act Before Possible Cut in Tax Exemptions – This article by estate planning attorney Martin Shenkman in Financial Planning magazine looks at estate planning strategies for clients who wish to take advantage of the current gift and estate tax exemptions before they potentially fall to lower levels as scheduled to occur in 2013. Of course, the basic strategy is to gift and take advantage of the $5.12 million exemption before it expires, but the article digs further into particular strategies to implement this. For instance, gift to a trust for asset protection purposes, not outright; structure it as a grantor trust, so the client can pay taxes from within his/her estate to let the assets in the trust outside his/her estate grow even faster; consider using a family limited partnership or LLC to leverage the gifts further with valuation discounts, but be cautious not to push the IRS’ rules too far on this; consider putting assets in a revocable living trust, and grant the trustee gifting powers so that in the future the trustee can execute gifts if the client becomes incapacitated. The bottom line is that a lot of this can be done fairly quickly if necessary, but it’s probably desirable to use the remaining months of the year to more effectively plan out details and strategies. Depending on the practice, not many clients will necessarily have the net worth to manage such gifts, but for the ones that do, huge tax savings are potentially on the table.
Recent Developments In Estate Planning – This article by Justin Ransome and Frances Schafer of Grant Thornton in the AICPA’s Tax Adviser provide a nice and deeply technical update on some of the latest legal and tax developments in the estate planning world. The most significant is the recent decision in the Estate of Turner, Tax Court Memo 2011-209, which found that payments on life insurance in an ILIT qualified as a present interest gift because the beneficiaries of Crummey withdrawal powers, even though it’s not clear if the beneficiaries were ever notified of their withdrawal rights – the implication being that perhaps it’s not necessary to actually send out Crummey notices to beneficiaries after all. Other notable recent developments include several court decisions involving valuation definition clauses favoring taxpayers, the deductibility of fees for trusts (including the need in some situations to unbundle investment management fees from tax return and other fees, because the former are subject to the 2%-of-AGI floor while the latter are not), and more.
Your Body Language Speaks for You in Meetings – This article from the Harvard Business Review blog provides a nice reminder not just about the importance of body language, but with a focus on what you can do to be certain you’re well prepared for a meeting so that your body language doesn’t convey or create a problem. For instance, make sure you’ve eaten recently, so that your brain is well fueled and you’re not distracted; make sure you’re well prepared for the meeting; if you’re angry or have issues with someone outside the meeting, get it sorted out beforehand so that you’re not aggressive in the meeting instead. In addition, try to be self-aware in the meeting itself; are you fidgeting and communicating that you’re distracted? Are you interrupting too much? Although this article was writing with business meetings in general in mind, it provides some nice reminders for financial planners who spend a lot of time in meetings with clients.
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!