Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the latest news that the Department of Labor has submitted its official 60-day fiduciary rule delay, and sent it along to OMB for final approval… although fiduciary supporters are already raising the question of whether the delay might face a legal challenge, as it’s not clear whether the DoL could have realistically read and thoroughly considered in just two weeks the over-1,100 comment letters that were submitted. Also in the news this week is a new FINRA Rule 2165, that would obligate financial firms (and their advisors) to make “reasonable efforts” to get contact information for a trusted third party (or even to stop disbursements from an account) if there is suspicion that a senior client may be getting financial exploited, while also providing a safe harbor against privacy breach or other legal consequences for endeavoring to do so.
From there, we have a few practice management articles, including a look at “what’s next” in the world of financial advisor marketing (as we continue the evolution from cold-calling to seminar marketing to client appreciation events and now digital marketing), an important reminder that as financial advisors we use too much industry jargon (often without realizing it), and an interesting way to think about how the client relationship evolves over time from being “just” a customer, to a true client, to a friend, and finally to an advocate (which is food for thought about what you might do to evolve your own clients along that continuum!).
We also have several more technical articles this week, from a discussion by Wade Pfau of “time segmentation” (i.e., bucketing) strategies in retirement (as differentiated from systematic withdrawals from total return portfolios, or various essential-vs-discretionary income approaches), common estate planning mistakes that financial advisors can help their clients avoid, and a look at the recent Tax Court case of Ozimkoski, which provides several valuable reminders of what not to do when handling an inherited IRA!
Towards the end, we have three interesting articles on the theme of retirement, and whether it’s all that it’s cracked up to be, from a look at the global research on happiness and wellbeing that finds being employed is consistently associated with greater life satisfaction than being unemployed (with white-collar jobs consistently scoring better than blue-collar jobs as well), a look at the real-world challenges that early retirees face in transitioning to retirement when all of their peers are still working, and the results of a fascinating survey from the Wall Street Journal that asked new/recent retirees what they found to be most surprising in retirement, to which they said… almost everything.
We wrap up with the sad news that this week, financial planning visionary Dick Wagner passed away unexpectedly. Wagner has long been recognized as a thought leader in the profession (since long before the term was popular), and was both a former practitioner, former volunteer leader at the chapter and national level in various FPA-predecessor organizations, co-founder of the Nazrudin Project (from which much of the life planning movement emerged), and a tireless advocate of advancing financial planning into a true profession around a broader garden of knowledge that he dubbed the study of “finology”. Fortunately, Wagner was able to publish his book, “Financial Planning 3.0”, just a few months before he passed away, and in today’s weekend reading, we highlight what many view as the seminal article on how financial planners must evolve to truly become a recognized profession… an article he first published in the Journal of Financial Planning in 1990, that we are all collectively still trying to live up to today. Rest in peace, Dick Wagner.
Enjoy the “light” reading!
Weekend reading for April 1st/2nd:
DoL Sends Final Fiduciary Rule Delay To Office Of Management And Budget (Greg Iacurci, Investment News) – This week, the Department of Labor sent the final version of its delay proposal to OMB for review, following its brief 15-day comment period. If approved, the rule delay will come back to the DoL to publish in the Federal Register in the coming weeks. However, given that there were over 1,100 comments submitted about the proposed delay, fiduciary rule supporters are questioning whether the DoL could have possibly read and incorporated all the feedback in the barely-2-week time period between when the comment period closed, and when the final delay proposal was submitted this week to OMB. As a result, there is still a possibility that OMB could decline the DoL’s proposed delay upon review, and/or that fiduciary supporters could sue the DoL for a hasty multi-week rulemaking process, especially in light of the fact that fiduciary opponents have already sued the DoL for claiming its multi-year process of formulating the rule was too hasty in the first place. In the meantime, the public comment period for proposed changes to the DoL fiduciary rule is also open, until April 17th; if/when the fiduciary rule delay is made final, pushing out the applicability date to June 9th, there will still likely be another proposal to come forth that may further delay or modify the rule, based on the second comment period closing next month.
FINRA To Protect Senior Investors With 2 New Rules For Advisors (Janet Levaux, ThinkAdvisor) – In its recent Regulatory Notice 17-11, FINRA adopted the new Rule 2165 (Financial Exploitation of Specified Adults), and amendments to Rule 4512 (Customer Account Information), effective February 5th, 2018. The substantive result of the new and updated rules is that going forward, financial firms will have to “make reasonable efforts” to get the name and associated information for a “trusted contact person for a customer’s account, and/or will be allowed to put a temporary hold on the release of funds, if there is a “reasonable belief of financial exploitation”. The goal is to give firms more ways to ensure that seniors are not being financial exploited by those who might take or persuade them to make inappropriate disbursements, either by establishing a third-party contact or outright putting a hold on funds. The concern in the past was that financial firms might themselves face liability for putting a hold on funds, or for breaching client privacy by trying to establish a trusted contact person beyond the client themselves; the new rules will provide a safe harbor for firms to try to intervene in situations of suspected financial exploitation, and if needed get law enforcement or adult protective services involved.
How To Attract The Next Wave Of Clients (Bob Veres, Financial Planning) – Once upon a time, financial advisors got their clients through cold calling. Then as the strategy became less effective, we shifted to seminar marketing. And when the results of that approach began to peter out, the new marketing trend was doing client appreciation events (where clients are invited to bring along their friends as potential referrals). Now, Veres raises the question of “what’s next” on the horizon of financial advisor marketing trends? Kristen Luke of Kaleido suggests that marketing is now all about finding prospective clients at the exact moment when they’re experiencing a pain point, and then focusing your marketing efforts to reach those people where they might be looking for information and help. Megan Carpenter of FiComm Partners similarly recommends trying to identify a specific target market, and then crafting all of your marketing and messaging to appeal to that particular target clientele (which you can even test out on platforms like AYTM Market Research). Once you know who you’re trying to reach, though, it’s still not realistic to expect to get them to come on board immediately; instead, the marketers recommend a “freemium” – some initial free engagement offering, like an e-book or a video, that allows the prospect to get to know you better, and decide whether they really might want to do business with you (and in exchange, you request their email address, so you can follow up with them in return, providing additional content that deepens the connection). Once you have a compelling freemium to give, you can even buy advertising online just to help promote the initial offer. Though Lauren Hong of Out & About Communications notes that because the prospect is still getting to know you, they’re likely going to check out your website before moving forward to meet with you – which means it’s especially important to have a modern, up-to-date website, that gives them a chance to really see you and connect with you and decide whether to meet and move the process forward.
Don’t Save That! Clean Up Your Jargon To Better Serve Clients (Christopher Robbins, Financial Advisor) – In the world of medicine, a key to having a good “bedside manner” as a doctor is to avoid medical jargon. Yet in the world of financial advisors, we often succumb to a similar challenge, where – as with doctors – we become so familiar with our technical terminology through frequent use, that we don’t even realize when we may be using jargon that goes over the heads of our clients and prospects. For instance, it’s common in the industry to refer to stocks as “equities”, but many consumers don’t actually know the term; better to stick with the more common use “stocks”, or better yet “companies” because that’s what they really are. Similarly, beware of talking about “bps” or even “basis points” (as most people think in terms of dollars, not percentages!), “volatility” (which technically can include up or down movements in the markets, but is often interpreted by clients as just a euphemism for a market decline), “risk” (as for many advisors, that means “volatility” but for clients it often means “risk of loss”), and be especially cautious about using industry acronyms (e.g., TAMP or ETF) until/unless it has been clearly explained. And recognize that because most people feel embarrassed if they’re not up to speed in a conversation, they probably won’t even tell you if they have no idea what you’re talking about… which means you may not even realize how much your use of jargon is leaving clients behind, or which seemingly simple and familiar financial terms (to you) are ones that they don’t actually understand at all.
A Client’s Evolution (Daniel Finley, FPA Practice Management) – The reality is that not all “clients” are the same in the depth to which they engage a financial advisor’s services. Some simply come for a single product transaction or one-time advice; others work with an advisor on an ongoing basis, and still others ultimately form closer relationships and become active referrers. Finley suggests that advisors think of their clients across four stages: 1) The Customer, who are simply those one-time buyers of a particular product or one-off service, but haven’t yet decided to engage on an ongoing basis; 2) The Client, who engages into an ongoing service there it’s not just about selling a product or service, but providing solutions that are specific to their needs and concerns (which involves getting to really know them as clients, and not just superficially as customers); 3) The Friend, who engages at a deeper level with the financial advisor, as the relationship extends beyond just financial issues alone; and 4) The Advocate, which are those subset of clients who not only have a relationship with the advisor, but proactively advocate for the advisor’s success (just as the advisor works on their behalf for their success) in a mutually beneficial relationship. In this context, the ‘secret to success’ is rather straightforward – begin to think of ways that you can advance the evolution of your own clients, one at a time, from customer to client to friend to advocate.
Time Segmentation as the Compromise Solution for Retirement Income (Wade Pfau, Advisor Perspectives) – On the spectrum of retirement income strategies, from total-return systematic withdrawals from a portfolio on one end, to an essential-versus-discretionary income approach (matching guaranteed income streams to essential expenses, and portfolios to flexible/discretionary expenses), a mid-point is to use a “time-based segmentation” approach. In essence, a time-segmentation strategy breaks available assets into different buckets over time; for instance, short-term needs might be held in cash, mid-term needs secured with a bond ladder, and (only) long-term needs covered by equities. The approach may still use a diversified portfolio of assets in the end, but the key point is that the portfolio isn’t simply allocated for diversification and managed for total return; instead, it’s allocated based on the dollar amounts needed for the various time horizons, and cash flows are generated from the respective buckets based on the spending needs at the time, which means the asset allocation may even shift over time. In fact, asset allocation can shift quite substantially, depending on how the size of the buckets and their relative balances grow or are spent as years go by; if bonds are spent down as equities grow, the total equity exposure can get quite high, while if stocks perform poorly and are also used to replenish the bond bucket, they might be depleted entirely. Notably, how exactly advisors carve up assets into the multiple buckets varies tremendously from one to the next, both in terms of how the buckets are determined, and what investments or other products are used to fill those particular buckets. But the basic idea remains the same – to help manage the classic sequence-of-return risk challenge of diversified portfolios in retirement, by securing a more stable source of cash flows for short- and intermediate-term spending needs, allowing more time for equities to recover in the event of an untimely decline (though because at some point most advisors extend the initial bond ladder, some sequence risk may remain).
Help Clients Avoid 10 Common Estate Planning Mistakes (Caroline Demirs Calio, Journal of Financial Planning) – While financial planners don’t typically draft estate planning documents, we nonetheless have numerous opportunities to participate in the estate planning process, and have a role to play in avoiding common estate planning mistakes and errors. Not only by simply encouraging clients to do their estate planning in the first place, but also by helping to: ensure there is a complete list of assets and family information, to support the transition process when someone passes away; helping to ensure that beneficiary designations (on retirement accounts, and also life insurance) are properly updated as the family situation changes; encouraging clients to consider whether they’re naming the right executor and/or trustee to be a fiduciary for assets after they’re gone; verifying that assets are titled correctly to fit the estate plan as intended (from ensuring that property is funded into a revocable living trust if appropriate, and using or avoiding joint ownership when necessary); helping clients think about proper gifting strategies (and how to structure them) to minimize estate taxes; ensuring that an irrevocable life insurance trust is properly administered (and set up right in the first place); and helping the client think through when and whether to update the estate plan as their needs change. The bottom line: adding an estate planning review periodically to the meeting agenda every year or few, to review these issues, can be a very valuable part of the ongoing financial planning service!
Inheriting IRA Trouble (Ed Slott, Financial Planning) – While IRAs offer appealing tax advantages, they also have unique complexities that arise when included as part of an estate for heirs. As a case-in-point example, Slott reviews the recent Tax Court case of Ozimkoski, where Mr. Thomas Ozimkoski changed his will just a few months before his death to bequeath his assets (including his IRA) to his new wife Suzanne, disinheriting his son Thomas Jr., who in turn challenged his stepmother in probate court. Ultimately, the two agreed that the stepmother would pay Thomas Jr $110,000 (plus transferring his father’s Harley-Davidson motorcycle) and that the payment would be “net payments free of any tax”. To facilitate the payment, Suzanne rolled over the $235,495 inherited IRA into her own, and then took a $110,000 distribution to make the payment to Thomas Jr (in addition to withdrawing another $64,597 for herself). However, since she had not kept the account as an inherited IRA, and actually moved it into her own name, the IRA custodian issued a 1099-R reporting it as an early distribution (since the wife was not yet 59 1/2 herself). When the IRS assessed taxes, plus an additional penalty, Suzanne challenged that outcome as well, taking the issue to Tax Court, and claiming that since Thomas Jr was getting the money, he should have to pay the taxes. Yet the Tax Court noted that ultimately, the situation was even messier; the original IRA beneficiary designation form could not be found, and as a result, Thomas’s estate should have been the beneficiary that received the taxable distribution, and Suzanne should have never been able to roll it out in the first place! And to the extent that she did take a distribution and subsequently had a legal obligation to pay Thomas Jr $110,000 didn’t shift the tax consequences. The bottom line: 1) make sure beneficiary designation forms are up to date, and actually on file; 2) make sure that if you’re going to give advice on rolling over, transferring, or agreeing to pay a legal settlement from an IRA, you provide accurate advice, or get a competent attorney involved; and 3) beware the tax consequences of making a hasty rollover to a surviving spouse that can introduce an early withdrawal penalty if he/she actually needs to use the money and isn’t already 59 1/2!
Does Work Make You Happy? (Jan-Emmanuel De Neve & George Ward, Harvard Business Review) – Drawing on global data from the Gallup World Poll, recent research published in the World Happiness Report finds an intriguing link between whether we work, and our self-reported happiness and subjective wellbeing. For instance, the data consistently shows around the world that workers in so-called “blue-collar” jobs that are labor-intensive report lower wellbeing than those in white-collar jobs (e.g., managers, executives, officials, or professional workers), although the spread and absolute level of happiness amongst each varies significantly from one country to the next. By contrast, those who are self-employed report a split, having both higher overall life satisfaction, but also more volatile daily emotions of stress and worry (which is perhaps no surprise to self-employed financial advisors!). Even more substantive, though, the research finds that having any job is still associated with higher levels of wellbeing that those who are unemployed, and the relationship holds up around the world… not only because of the financial consequences, but also the social and other non-monetary aspects of employment that (positively) impact wellbeing. And although the study wasn’t specifically aiming to study the impact of retirement in particular, it raises troubling questions about the potential adverse effects of retiring from the workplace, given that those who don’t have jobs not only generally report lower life satisfaction, but they also seemingly struggle to adapt, such that their unhappy feelings when unemployed don’t improve over time, either!
Is Early Retirement Great? For Some, It’s Hard Work To Have Fun (Joanne Kaufman, New York Times) – For many new retirees, the initial transition starts out with the opportunity to sleep late, get a tan, and maintain any schedule you want. But soon, there may be an urge to find ‘something’ to do… and with only so many tasks around the house to “finally” get around to doing, a growing number of retirees are realizing that retirement is still a very long period of time without much to do every day! And the challenge can be even worse for those who retire early, who both face an especially long time period of potential idleness, and may still feel young enough that they want to be engaged in something. Notably, early retirement in particular can create surprising social awkwardness as well – what should you say when you’re at a party and someone asks “what do you do?”, responding in a manner that addresses their curiosity but doesn’t spur awkward envy? In the case of couples, one spouse retiring early can also create challenging couples dynamics, and even feelings of guilt for not doing more to jointly support the family, or worries of creating a bad impression on young children who may still be in the household (and won’t have a working role model in the home). And even finding people to spend time with in early retirement can be a challenge, as for an early retiree, most of one’s peers will likely still be working, which means being socially isolated, or spending time with those 20-30 years older than you (who retired at a more ‘normal’ age). All of which means, for many early retirees in particular, it doesn’t end up being the end of work at all, but simply a transition to something new and different (and without the need to generate any financial income from whatever does come next).
The Biggest Surprises In Retirement (Glenn Ruffenach, Wall Street Journal) – While the classic goal of every worker is to reach the point of retiring, the reality is that no one who’s working actually knows what retirement will be like, since they’ve never actually experienced it. And a recent survey out to retirees from the Wall Street Journal found that when they reflected back on the retirement transition, the reality was that “almost everything” about the reality of retirement was a surprise. In some cases, the surprises were financial, from Medicare premiums being steeper than anticipated, to “surprise” that their financial savings are actually holding up better than they anticipated. In other situations, the surprises were social, with many reporting that they missed being part of a team at work far more than they had imagined, but that it was also much easier to make friends later in life than they had expected. And for many, retirement is actually a rebirth of improved health and fitness, as the increase in available time finally allows the opportunity to get more physically active, and “health” is overwhelmingly reported as the most important challenge that retirees claim they face in the coming years. Similarly, many found the “risk” of stepping away from work to be frightening, but ultimately found a new direction for their time and energy that led to a completely unrelated, and more fulfilling, second career. (In one case, a former accountant became a guitar player in an ensemble!) The most negative of retirement stories, though, were those cut unexpectedly short, particularly in the case of couples who expected to have a long life of retirement together only to have one spouse pass away in the first decade. For advisors interested in reading about these “retirement surprises” in even more depth, the Wall Street Journal posted an extended list of the actual retiree responses here.
To Think… Like A CFP (Dick Wagner, Journal of Financial Planning) – This week, the sad news broke that financial planning visionary Dick Wagner passed away. Wagner was long recognized as a true thought leader in financial planning and our emerging profession (long before the term was popular!), and held numerous leadership positions over the years, including as President of the ICFP in 1993, and Dean of the ICFP (now FPA) Retreat in 1995. He also co-founded the Nazrudin Project in 1995 with George Kinder, which is recognized by many as the early birthplace of financial life planning, and coined the term “Finology” to describe the holistic garden of financial planning knowledge, that includes both the technical and human/psychological elements of our relationships with money. Fortunately, Wagner had managed to complete a book, “Financial Planning 3.0“, just a few months before his death, laying out what he envisions as the future of the financial planning profession, the 25+ year culmination of a vision that he first set forth in a seminal article in the Journal of Financial Planning in 1990, dubbed “To Think… Like A CFP“. The original article, included here as the final of this week’s Weekend Reading in honor of Dick Wagner, is still very much worth a read for any financial planner who hopes that we will someday be recognized as a full and bona fide profession; written long before the IAFP and ICFP had merged into the FPA, and just a few years after the CFP Board had been spun off from the College for Financial Planning as a separate entity, Wagner makes the case that for financial planning to really become a profession, we must “think” as professionals, developing a professional identity, traditions, and standard ways of engaging with clients, beyond just what at the time was a delivery system for tax shelters or insurance products (or today, for AUM gathering!). And so, in honor of Dick Wagner, take a few minutes to read “To Think… Like A CFP” in full, and give some thought to the role we all play in advancing our profession to truly be recognized as such!
I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!
In the meantime, if you’re interested in more news and information regarding advisor technology, I’d highly recommend checking out Bill Winterberg’s “FPPad” blog on technology for advisors as well.