Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the official release of the SEC’s new Advice Rule, which aims to lift the standards for brokers giving advice recommendations with a new “Regulation Best Interest” but stops short of imposing a full (and uniform) fiduciary rule, while also raising the possibility that brokers would at least be restricted from using the “advisor” or “adviser” labels (but not for hybrid B/D-RIA firms that actually comprise the overwhelming majority of all brokers in the first place).
Yet also in the news this week is the acknowledgement that advice itself continues to be increasingly central to both the investment adviser and broker-dealer model, with a research study from Cerulli Edge showing that the majority of clients are now receiving some kind of financial planning services from their investment adviser or broker (up from 1/3rd just 5 years ago), and a consumer study from J.D. Power which found that even as Millennials demand higher quality technology from their financial institutions, it’s still the financial advisor relationship that actually drives Millennial loyalty to a firm!
From there, we have several articles about the insurance industry, including a recap of the highlights from the recent Intercompany Long-Term Care Insurance (ILTCI) conference about the latest trends in the LTC insurance industry (including that traditional LTC insurance is stabilizing but carriers are still rolling out more flexible hybrid life/LTC policies as well), a discussion of the rules regarding the important but often overlooked 2-year Incontestability Period for life insurance policies, and a look at how the fact that most people have declining needs for life insurance over time means that layering multiple life insurance policies with separate time horizons may be more cost efficient than just buying one large 30-year term policy.
We also have several advisor-technology articles, including a look at how some firms are starting to try to proactively leverage artificial intelligence to support the productivity of financial advisors, a second that looks at the growth of the new United Capital “FinLife CX” platform (which can be bundled to an advisor’s existing CRM instead of requiring the advisor to use theirs), and the (re-)emergence of FinFolio 2.0 as a competitor in the space of portfolio accounting and reporting solutions for advisors.
We wrap up with three interesting articles, all around the theme of financial independence and retiring early: the first explores the growth of bloggers that show consumers (especially Millennials) how to live frugally in order to retire early, with the caveat that the most successful bloggers in the space may be achieving early retirement primarily because they earned a well-above-average income, not because of their frugal spending habits; the second goes deeper in exploring the “FIRE” (Financial Independence, Retire Early) movement that is attracting more and more interest from Millennials in particular; and the last is a fascinating discussion about whether and at what age someone should try to retire early to balance out their earnings and life potential with their desired standard of living and freedom… at least, for those who have the incomes that make it possible to save enough to do so in the first place!
Enjoy the “light” reading!
Weekend reading for April 21st – 22nd:
SEC Advice Rule: What You Need To Know (Greg Iacurci, Investment News) – The big news this week was the SEC’s announcement of its newly proposed investment-advice rule, a whopping 916-page document that would, for the first time, hold brokers giving advice recommendations to customers to a “Best Interest” standard (rather than merely holding them to a Suitability requirement). Notably, though, the proposal is not a “uniform” standard for brokers and investment advisers; instead, RIAs would continue to be subject to their own standalone Fiduciary standard, while brokers would have their own Best Interest standard. In addition, the SEC has proposed a new 4-page Disclosure Form CRS – a Client/Customer Relationship Summary – that all brokers and investment advisers would provide to consumers to explain the nature of the brokerage-vs-investment-adviser relationship, and the relevant financial incentives and conflicts of interest. Also notable in the rule proposal was potential “title reform”, and the potential that brokers at standalone broker-dealers would no longer be permitted to use the term “advisor” or “adviser” (including financial advisor, wealth advisor, etc.)… with the caveat that other words besides “advisor/adviser” would still be permitted, and the limitation would apply only to standalone broker-dealers and not to hybrid B/D-RIA firms (which according to the SEC’s own data is nearly 3/4ths of all brokers anyway). Thus far, the industry is still taking in the details, with some saying the rule doesn’t go far enough by failing to hold brokers to a fiduciary standard, others from the broker-dealer community already calling the SEC’s proposal a “victory for clients” by enhancing suitability protections while not applying a fiduciary duty to brokers, though the “mother” of the DoL fiduciary rule herself, Phyllis Borzi, has expressed concern that the fiduciary-lite standard proposed would just legitimize many of the current abuses in the brokerage community while not doing enough to restrict them from holding themselves out as trusted advisors. Ultimately, the SEC’s proposal is just that – a proposal – and the announcement marks the start of a 90-day comment period that is now open. Expect a lot of buzz about the rule over the next 2 weeks as the industry absorbs all the details… and then the real debates will begin!
How BDs Are Changing As Planning Grows More Popular (Tobias Salinger, Financial Planning) – According to research in the latest issue of Cerulli Edge, the percentage of clients receiving comprehensive financial planning services has grown from a third to a half in just the past 5 years, driven by both competition from low-cost digital (i.e., robo) providers that are pushing financial advisors to deliver more value to justify their fees, and also the focus on advice and fiduciary issues thanks to the Department of Labor’s proposed rule. Notably, the trend is especially strong amongst younger advisors, and female advisors, with the latter aiming to deliver financial planning to a whopping 73% of their clients (as compared to only 57% for male advisors). Yet as advisors shift from products to advice, and from commissions to fees, it’s altering the expectations that advisors at broker-dealers have from their home offices. Although there are still substantial differences even within the broker-dealer channels, with only 17% of wirehouse advisors using planning fees, compared to 28% at retail bank broker-dealers, 30% at insurance broker-dealers, 38% at national or regional brokerages, and 45% at independent broker-dealers (as compared to 40% at independent RIAs), with an average fee of $1,223. Still, broker-dealers are experiencing more pressure for support from advisors to help, from providing staff resources to aid in the cumbersome data entry process for producing financial plans (for those who don’t shortcut the pain with a more collaborative planning process), to staffing up with specialist teams of CPAs and attorneys to help with more advanced planning scenarios.
Millennial Investor Loyalty Hinges On Advisor Relationship, Not Technology (J.D. Power) – The latest 2018 edition of the J.D. Power Full Service Investor Satisfaction Study is out, and the company finds that Millennials are already the least loyal group of investors when it comes to engaging with the financial services industry… a deep concern for many firms, given that they stand to inherit a significant portion of the coming $30 trillion wealth transfer from Baby Boomers. Yet despite their known tech savviness, the J.D. Power research finds that the key to attracting and retaining Millennial investors – based on their massive consumer survey – is not about a firm’s digital and mobile device capabilities, but the frequency of communication from the firm’s financial advisors; in essence, good technology will impact satisfaction, but it’s the advisor connection that actually facilitates Millennial loyalty, as even 29% of highly-satisfied Millennials reported they’re still thinking about leaving their advisory firm in the coming year (compared to just 4% of similarly-satisfied investors in older generations), and the more Millennials relied on self-service technology alone the more likely they were to switch. In fact, amongst emerging affluent Millennials, 31% said they still want to have more contact with their advisors (compared to 7% of older investors), despite the fact they already contact their advisors an average of 4.5X per year (compared to just 3.6X per year amongst older generations). And notably, while Millennials are showing some receptivity to communication via new channels (e.g., social media, texting, and video), those channels still show limited usage (with only 5% to 10% adoption rates), as most Millennials are still at least partially engaging with their advisors in person (for which digital communication merely supplements the in-person relationship, rather than fully replacing it).
Biggest Advisor Issues At The 2018 Intercompany LTC Insurance Conference (Tom Riekse, LTCI Partners) – The Intercompany Long-Term Care Insurance (ILTCI) conference is one of the largest in the LTC insurance industry, drawing both industry participants as well as government regulators and academics, and provides a good perspective on the state of the industry as a whole. Key issues at this year’s conference when it comes to long-term care insurance included: 1) after years of pain, the traditional LTC insurance market appears to be stabilizing, with existing carriers looking for more business (including Mutual of Omaha, Transamerica, Genworth, National Guardian Life, Northwestern Mutual, New York Life, and Thrivent), and most actuaries indicating that current LTC insurance is finally ‘priced right’ and not likely facing rate increases in the future, though pricing is high enough now that insurers are struggling just to explain the LTC insurance value proposition and demonstrate the insurance ‘leverage’ it still provides; 2) Hybrid Life/LTC policies are shifting from what historically was a single premium solution (where buyers would invest an initial lump sum and/or 1035 exchange an existing policy for new hybrid coverage) to policies that allow for ongoing premiums over time (e.g., 5-pay, 10-pay, to-age-65, or even lifetime/ongoing premiums), which are designed to be purchased by younger individuals who would be purchasing the coverage from income (as opposed to the prior single-premium hybrid policies that were primarily purchased from available assets); and 3) the regulatory environment for LTC insurance is still challenging due to the state-by-state fragmentation of oversight regarding everything from agent conduct to policy design and carrier stability, but with states cognizant that LTC insurance adoption impacts their own fiscal health (by mitigating potential claims against state Medicaid reserves), state regulators and policymakers appear to remain very willing to work with the industry to create a more sound LTC insurance environment.
Six Reasons A Contested Life Insurance Claim Might Not Be Contestable (Steve Burgess, Center for Life Insurance Disputes) – While most claims on life insurance are fairly straightforward, since it’s generally quite easy to demonstrate eligibility for a claim (someone died!), life insurance policies do normally contain a “contestability clause” that permits insurers to challenge the claim if the insured dies within 2 years of when the policy was issued (or was reinstated after a lapse)… which ultimately may lead to the claim being denied altogether, or, at a minimum, can cause a multi-month delay before the death benefit is paid while the contestability claim is investigated. Yet unfortunately, Burgess notes that in many cases, insurers contest claims that they actually shouldn’t, in part because their computer systems usually only capture limited information about the key points of a policy in the first place, and only later do the insurers delve into the actual policy details. Accordingly, common reasons that a policy may be contested (and then turn out to not be contestable after all) include: some policies based the contestability period on the Issue Date of the policy (when the underwriter affirms that the insurer is accepting the application), but others tie to the Effective Date (when the policy is approved and the first premium is paid, which creates additional confusion about timing when the premium is paid at application to bind the policy), and some simply tie to the Application Date (whenever the applicant first signed the application), which in turn is sometimes backdated; completing a death benefit increase on an existing policy can trigger a new contestable period, but only on the new coverage and not all of it; insurance companies have inconsistent policies about whether an internal exchange of a policy is a “new” policy (with a new contestable period) or a continuation of the original one; and policies that lapse and become reinstated may or may not trigger a new incontestability period depending on the duration of the lapse (generally if the lapse is more than 62 days). The reason all this matters: insurers can deny a life insurance claim if they find a material misstatement of key details on the application, from the individual’s drug use or tobacco use, undisclosed arrests, problematic finances, or most commonly undisclosed medical history… so once the incontestability period has passed, the insurer has no choice but to simply pay out the claim (generally within 30 days or less).
Structuring Life Insurance For Changing Needs Over Time (Rajiv Rebello, Colva Insurance) – Life insurance is an essential part of a comprehensive financial plan, whether for those that would be financially devastated by an untimely death (e.g., to protect spouses and children), or even for high-net-worth individuals who may have the financial wherewithal if someone passes away but not the liquidity to handle estate taxes, buy/sell agreements, or simply to efficiently split assets to heirs. Yet unfortunately, due in no small part to the unhealthy commission-based incentives of life insurance salespeople, consumers often end out buying the wrong type or more life insurance than they actually need. But as Rebello points out, in many cases clients end up “overbuying” on life insurance simply because they don’t properly estimate how their insurance needs may decline over time… which helps to explain why, unfortunately, the Society of Actuaries has found that 75% of all life insurance policies lapse before the end of their coverage period. After all, to the extent that most insurance – particularly term insurance – is purchased to cover the direct financial loss if a primary family breadwinner passes away, to the extent that the family actually does accumulate savings over time, and furthermore that children grow up and move out of the household, there simply isn’t as much coverage needed in the later years. Which matters because most people buy level term insurance policies with level death benefits, which means they end out with an increasing volume of “excess” coverage as the years go by. Of course, it’s possible to decrease the face amount of the life insurance in future years – a good topic to cover in every few years in a client review – but premiums are set based on the implicit assumption that the level coverage will remain level throughout. Accordingly, Rebello illustrates that for those with “traditional” (i.e., declining) life insurance death benefit needs over time, it may be wiser to buy a series of “layered” policies instead; for instance, instead of buying $3M of term life insurance for 30 years, buy $1M for 30 years, $1M for 20 years, and $1M for 10 years, as the layered combination of each would be cheaper than just buying all $3M for 30 years and decreasing the face amount over time.
Artificial Intelligence Coming To Life In Financial Advice (Ryan Neal, Investment News) – In the future, when an advisor arrives in the office in the morning, artificial intelligence will tell the advisor which clients to call, what topics to discuss, and which planning opportunities are on the table, from the client who is frequently logging into their client portal (needs a phone call about the recent market volatility) to the one who can do a mortgage refinance today (thanks to yesterday’s decrease in interest rates). What’s notable about this future is that increasingly, technology firms are not looking to use technology to replace advisors, but instead to power them by handling more and more back-office and compliance tasks, even and including parts of the investment management process, specifically to allow advisors more time to be directly engaged with clients. In this context, “artificial intelligence” also isn’t an alternative to advisors, but simply a prompt to help advisors know best where to focus their time, energy, and client communication. Unfortunately, thus far the theory and promise of artificial intelligence and advisor support technology has been more promising than the actual tools available, though Neal notes that many large firms are already starting to leverage such solutions in back-office scenarios from spotting potential fraud or compliance lapses to calculating complex tax withholdings for international clients. Perhaps the best initial application in the context of financial advisors today is Morgan Stanley’s “Next Best Action” initiative, where their software analyzes all their client households every night to spot potential investment opportunities that their advisors will be prompted on (e.g., when a client’s portfolio drifts away from its target, or when a potentially relevant new investment opportunity comes available). Although Morgan Stanley hopes that Next Best Action will soon evolve beyond just investments alone, to capture other financial planning and life-events-driven opportunities. Ironically, though, so much of the data for such analyses is tied up in legacy systems, that just determining where and how to collect and store the data is one of the biggest challenges today. Yet as the tools become better and better, the opportunities increase for financial advisors… with the caveat that advisors will be pressured to move up the value chain again to add even more value on top of what increasingly sophisticated AI will be able to provide.
United Capital Letting More Advisers Use Its FinLife Technology Platform (Ryan Neal, Investment News) – This week, United Capital announced that it is unbundling its FinLife client portal, financial planning, and communication tools, from its original partnership with Salesforce Financial Services Cloud, making it possible to integrate their tools directly with any advisor CRM (e.g., Salesforce, Junxure, or Redtail). The new offering, dubbed Finlife CX (short for “Client eXperience”), is intended to expand the market opportunity for FinLife by being able to integrate with more partners and without forcing firms that want to adopt to migrate all their client data to United Capital’s own CRM system, even as the company has already reported signed 22 firms with nearly $9B of assets under contract to use its proprietary tools. And notably, FinLife CX will be available at a cost of “just” $600 per client as an annual fee, rather than its prior model of charging firms a percentage of assets they moved onto the United Capital platform. At the same time, United Capital also announced a series of new FinLife features, including the ability to quickly record and send personalized video messages to clients (e.g., recording a quick video after a stock drops precipitously and automatically sending the video to all clients who owned the stock).
Matt Abar Hopes Three’s A Charm With FinFolio Cloud Launch And Robo Play (Oisin Breen, RIABiz) – Notwithstanding the high volume of competitors in the world of portfolio performance reporting tools for financial advisors, from Orion Advisor Services to Black Diamond and Tamarac and Addepar, all of those companies appear to be engaged in healthy growth, as the RIA channel continues to grow and more and more broker-dealers shift from commissions to fee-based advisory accounts. In this context, it is notable that Matt Abar has (re-)launched FinFolio 2.0, a new cloud-based competitor in the world of portfolio performance reporting for advisors (and update from FinFolio’s original desktop-based version previously launched in 2009). Yet even FinFolio notes that with so many more competitors in the space today, it’s difficult to get the attention of advisors, and even more concerning in the future as both Fidelity and Schwab are building out their own portfolio performance reporting solutions (Fidelity’s through Wealthscape, and Schwab’s anticipated to be announced in the coming year). Nonetheless, FinFolio founder Abar has already had success in the space, as the previous founder of TechFi, an early portfolio performance reporting solution in the late 1990s that was sold to Advent for $23M in 2002 (but subsequently shut down as Advent assimilated TechFi’s advisor base). Thus far, FinFolio reportedly has (just) 47 direct clients, but from sizable firms that have $25B of direct assets on the platform, including the $4B AUM RIA Index Fund Advisors. But FinFolio is now onboarding 10 new advisory firms per quarter, and just announced a major deal to power Riskalyze’s new real-time (FIX) trading features on Autopilot. Although ultimately, while growth opportunities remain appealing in the space, advisor tech guru Joel Bruckenstein notes that with the ongoing commoditization of investment management, it’s not clear that any advisors will be as willing to pay so much for portfolio performance reporting software in the future as they have in the past?
Being Frugal Is For The Rich? (Miles Howard, The Outline) – In recent years, a growing number of media outlets have been covering stories of those who go through an “extreme early retirement” transition; a case-in-point example was the recent story in The Guardian about “The Frugalwoods”, a Millennial husband-and-wife blogger duo who managed to save a stunning 71% of their income by cutting back on eating out and taking public transportation to work, and used their savings to buy a four-bedroom house in Vermont and retire in their 30s (about which they just published a book “Meet The Frugalwoods” that explains all their money-saving “hacks”). Yet the caveat is that while the Frugalwoods blog extensively about their frugal spending and savings behavior, they’ve been relatively “tight-lipped” about their income, though notably they stated in 2014 that they both maxxed out the $17,500 contribution limit to their 401(k) plans on top of saving 71% of their income… while they also have a separate $460,000 house in Cambridge that’s renting for $4,400/month. And in fact, both are actually still “working” and generating income (him remotely for a political non-profit, her through the Frugalwoods blog). Which suggests that the Frugalwoods’ success may be less about their ability to save and live frugally, and more about the fact that they were able to earn a substantial income in their early careers in the first place – in sharp juxtaposition to most Millennials, with one study showing that Millennials are earning about 20% less than Baby Boomers did during their similar formative years (and as a result are amassing only half the net wealth at a similar age and adjusted for inflation). Or stated more generally: there appears to be a current mismatch where Millennials are being chastised for imprudent spending habits while various “financially successful” Millennial bloggers preach the benefits of frugality, when in reality their success may be coming more from their favorable income trajectories than their frugal spending habits alone. Which in turn raises the question of whether personal finance as a whole should be spending less time talking about how to better “spend” (or not spend) one’s money, and more about how to generate more income/earning potential in the first place?
Getting FIREd (Joy Shan, California Sunday) – In recent years, there has been growing momentum for the “Financial Independence, Retire Early” (or “FIRE” for short) movement, built around the goal of establishing financial freedom by maximizing income and minimizing spending to accumulate assets as quickly as possible, to the point that ongoing dividends or investment yield can cover the household expenses (such that working itself becomes no longer necessary). Which in turn has inspired communities from a “Financial Independence” subreddit to popular blogs like Mr. Money Mustache on how best to get “FIREd” quickly. Of course, the path to achieving financial independence is driven heavily by what you want/need to spend in the first place; those who live frugally can both save more, and don’t need as much to FIRE in the first place (known as the “Lean FIRE” path, where a few hundred thousand dollars of savings might be enough), while others may try to live frugally now but with the goal of living a more upper-middle-class life once financially independent (a “Fat FIRE” goal that might necessitate many millions of dollars). Of course, the caveat is that it still takes a healthy income for FIRE to be feasible at a relatively early age (e.g., 30-something or 40-something) in the first place; nonetheless, there appears to be a growing segment of Millennials who are very interested in the idea of getting a good job with a large and healthy income not to make a career out of it, but specifically so they can save enough to quit that job and be financially independent as soon as possible.
The Ideal Retirement Age To Minimize Regret And Maximize Happiness (Financial Samurai) – The “Financial Samurai” had a successful career in financial services and saved as much of his income as he could, to the point that he’s now able to retire by the age of 40 (and has essentially been ‘semi-retired’ earning side income, including through his blog, for almost 10 years already). Yet in reflecting back, he notes that “retirement” itself wasn’t really an end, but morphed his life into something else… which in turn raises interesting questions about when, “ideally”, someone might want to make the retirement (or financial independence) decision in the first place, especially recognizing that with early retirement there’s still a very long time horizon for which some income/earnings is often still likely (or at least, you need some hobby to avoid being bored for 50+ years!). In fact, given that our energy and focus itself changes as we age and mature, Sam suggests some interesting guidelines about the relative appeal of retiring (or not) at various ages: for 20-somethings, your energy and enthusiasm is the greatest, which means it’s probably not a good time to retire even if you can afford to (unless you specifically want to be a stay-at-home parent, or you’re “retiring” to be an entrepreneur and start a new business instead); by your early 30s, you might be able to FIRE (be Financially Independent and Retire Early), but your 30s are the years you can really compound your learning and skills from your 20s, and thus can severely truncate your long-term potential; when you’re in your 40s, and nearly 20 years into your career, it may feel like time for a pause or a change, but be cognizant that you’ll also be in your peak earnings years, which may make it very difficult to walk away from the job when the time comes (and thus why your late 30s is an important transition moment to decide whether you’re reinvesting into your career, or getting ready to walk away); by your 50s, as mortality first begins to really loom large, it’s a good time to retire if you haven’t already (or at least if you haven’t, hopefully it’s because you really enjoyed and found meaning in the work you’ve been now doing for nearly 30 years!); and of course, most people end up not retiring until their 60s, which can actually drive a very good “return on education” (for all those cumulative earnings years), but doesn’t leave much time left for enjoying the rewards. Overall, Sam suggests that the optimal balance point for most, between income, freedom, potential, and return on education, is to retire between your late 30s and late 40s, with an “optimal” point of retiring in your early 40s… where you’ve put in your dues and (hopefully) have been able to earn a good sum, but still have enough time left to minimize regret and leave the door open to new opportunities. (Assuming, of course, you really were able to earn a good enough sum, and live frugally enough, to make retirement in your 40s feasible in the first place?)
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.