Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with the news that the CFP Board increased its annual recertification fee by $100 (along with an additional surcharge of up to $19/year for CE credits). Representing the first annual fee increase since 2017, the additional funds will be put toward a range of initiatives, including public awareness, talent retention, diversity, and enforcement. But given the non-trivial nature of the increase, CFP certificants are likely to expect real outcomes from these initiatives!
Also in industry news this week:
- Portfolio management giant Orion announced this week that it is acquiring leading advisor CRM provider Redtail in a deal that will bring Redtail’s large base of advisors into Orion’s orbit
- Some industry observers think RIA valuations might have peaked, perhaps signaling a slowdown in M&A activity and increased viability of internal succession plans
From there, we have several articles on retirement planning:
- Why the creator of the ‘4% Rule’ says retirees might want to reduce their spending given the current market and inflation environment
- An analysis shows why the reduced benefits associated with annuity contracts with lower-fee Guaranteed Lifetime Withdrawal Benefit riders could make them inferior to their higher-fee predecessors (and why delaying Social Security could trump both in creating guaranteed retirement income)
- Why it is important for advisors working with clients nearing and in retirement to go beyond retirement income and consider their clients’ social connections, health status, and plans for the various stages of retirement
We also have a number of articles on managing cash flow:
- Why spending money on building friendships can pay dividends for one’s health and happiness
- With statistics showing a significant number of individuals have engaged in financial deception with their partner or spouse, advisors can consider how to handle the financial and emotional impacts of these transgressions
- Why clients in the wealth accumulation phase of their lives would be best served by finding ways to increase their income and putting money into the stock market as soon as it is available
We wrap up with three final articles, all about currencies and inflation:
- Why cryptocurrencies might not have the inflation-prevention benefits touted by some of their proponents
- Why a cryptocurrency skeptic argues that cryptocurrencies are primarily speculative assets rather than useful currencies and are unlikely to change the way we buy goods and services
- How the ‘Cantillon Effect’ helps explain who wins and who loses from fiscal and monetary stimulus
Enjoy the ‘light’ reading!
(Jacqueline Sergeant | Financial Advisor)
Like many organizations, the CFP Board has increased the fees its members pay over time to cover increased staffing costs due to inflation, as well as new initiatives. For example, in 2011 the Board increased the annual certification fee paid by CFP professionals by $145 (from what had previously been $180/year all the way to $325/year) to pay for a public awareness campaign promoting the CFP marks among consumers. The Board then increased the annual certification fee by $30 to total $355 in 2017. And this week, the Board announced a $100 increase to the certification fee (which will now be $455 beginning in October) to cover a range of priorities.
Of the $100 increase, $15 will be used to provide further support to the ongoing public awareness campaign; $35 will go toward workforce development to support a national initiative to promote financial planning as a career choice; $10 will be allocated to the Center for Financial Planning to support initiatives that advance diversity and inclusion in the financial planning profession; $20 to support the development of a new longitudinal research study to assess the impact financial planning has on clients’ well-being (as well as other research-related initiatives); and $20 toward the costs of expanding enforcement of the new CFP Code of Ethics and Standards of Conduct.
In addition, the CFP Board also introduced a new CE reporting fee that will further increase annual costs for CFP certificants by $18.75 (with a new fee of $1.25 per CE hour for reporting CE credits, which will be paid by CE program sponsors, but they are likely to pass on the increase to certificants by raising the cost of their programs). However, it is unclear where these funds – which amounts to nearly $1.75M of additional revenue for the CFP Board given its nearly 92,000 CFP certificants – will be used. And while a total $119 increase might seem manageable for many certificants, it does compound with other membership fees many advisors pay (such as dues for FPA or NAPFA membership), in addition to the other costs of doing business. Especially since the costs would increase further on CFP certificants if the CFP Board eventually decides to increase its annual CE requirements beyond 15 hours/year (as it first proposed back in 2012) now that it charges a fee for every CE hour it mandates.
Notably, thus far the CFP certificant community appears to largely be taking the fee increase in stride, in the midst of a higher inflation environment across the country, though the CFP Board itself did not articulate the fee increase was a result of inflation but instead is entirely attributable to new and expanded programs on top of its existing operations. Which means many certificants will want to see tangible benefits from the fee hike that is supporting those new programs. For example, this could include updated data on how the public awareness campaign is changing consumer attitudes toward financial advisors, and reporting similar to FINRA about the CFP Board’s progress on its enforcement actions (which would show advisors that the CFP Board’s enforcement push, and the extra dollars allocated to the project, are actually weeding out the ‘bad apples’ within the industry).
Ultimately, the key point is that because the increase to the annual recertification fee is not trivial, it will be important to CFP certificants that the Board demonstrate that the fees are generating real outcomes in the targeted areas of public awareness, talent retention, diversity, and enforcement!
(Brooke Southall | RIABiz)
CRM software is one of the most important tools for advisors because of its ability to organize the broad range of client and prospect data within a firm. In fact, according to Kitces Research, CRM software has the highest level of advisor adoption among all software categories at more than 85%. This has led to the development of a wide range of CRM options for advisors to choose from, ranging from options purposely built for advisors (e.g., Wealthbox and AdvisorEngine) to broader CRMs (e.g., Salesforce) that can be used with advisor-specific overlays.
However, among the range of options, Redtail has been the CRM with the top adoption among advisors, according to Kitces Research. Which made this week’s announcement that Orion Advisor Solutions is buying Redtail all the more impactful. Orion is one of the top providers of performance reporting and Turnkey Asset Management Platform (TAMP) bundling, serving 2,300 firms with a combined $1.9 trillion of AUA. While Redtail was already Orion’s largest integration partner, the merger will give Orion access to Redtail’s 110,000 users affiliated with 19,000 different firms (with Orion clearly hoping many will transition to Orion’s broader technology and TAMP services).
Of course, with a huge number of current Redtail users, Orion will need to take care to maintain and improve on the platform to keep them happy, and make the merger a success. Keeping Redtail CEO Brian McLaughlin within the company (he will become Orion’s President of CRM and join the board) appears to be a step in this direction, and McLaughlin suggested that the combined firm will not be resting on its laurels, indicating that it has plans to move ‘upmarket’ to even larger enterprises through increased capabilities. Which is a substantial further growth opportunity for Orion + Redtail… but also raises concerns amongst small-to-mid-sized advisors (who historically were the bulk of Redtail’s user base) about how much attention they will continue to receive?
Ultimately, the Orion-Redtail merger represents the latest combination within the AdvisorTech space and will shake up the field for the companies’ competitors, including Orion rivals Black Diamond and Tamarac, and CRM competitors such as Wealthbox and AdvisorEngine and especially Salesforce in the larger enterprise realm. Though for industry AdvisorTech watchers, the biggest question is “what happens next” with respect to Orion itself, and whether the expansion into CRM to more fully compete against Envestnet is positioning Orion for an IPO of its own?
(Diana Britton | Wealth Management)
RIA merger and acquisition activity has been hot during the past few years, as larger firms seek out both the assets and advisor and other staff talent from smaller firms, many of whose owners are often approaching retirement without an internal succession plan. But after a few years of growth in RIA valuations, driven in no small part by a surge of acquisitions from both Private Equity firms and mega-aggregators like CI Financial, some industry observers think that expanding valuation multiples for advisory firms might have finally topped out.
RIA valuations jumped 29% in 2019 and 21% in 2020, according to management consulting firm Advisor Growth Strategies, but only increased by 12% in 2021 (to 8.99x EBITDA). And according to Advisor Growth Strategies Managing Partner John Furey, valuations this year are equal to or less than what they were in 2021. Marty Bicknell, CEO of Mariner Wealth Advisors, a frequent acquirer, also thinks valuations will not increase much more, but also does not expect them to retreat. The continued appetite for M&A could be due to the continued tight labor market, which has put talent acquisition at a premium. For firms seeking to accelerate growth, this could mean acquiring advisory teams, while smaller firms might contemplate whether they will have a hard time scaling up without combining with a larger firm.
On the other hand, an outright cooling of RIA valuations – if valuations don’t merely plateau but actually begin to recede – could tilt the scales back toward internal succession at firms (which are more economically feasible for next generation buyers of more limited means when they occur at less lofty valuations). At the same time, firm owners who would like to pursue an internal succession have a range of other issues to worth through, from gaining buy-in across generations to ensuring that clients receive the same quality of service. So whether a firm owner has decided to seek an outside acquirer, pursue an internal succession, or remains undecided, advanced planning can help ensure a smoother (and more profitable) transition! But for firms that had been holding onto their shares waiting for valuations to continue to rise, the shifting signal of the market is that valuations may finally have gotten ‘as good as they’ll get’?
(Anne Tergesen | The Wall Street Journal)
For nearly 30 years, the so-called ‘4% rule’ has been a starting point for retirement planning conversations between advisors and their clients. The method calls for spending 4% of a portfolio in the first year of retirement and then adjusting the amount annually based on inflation. According to research from Bill Bengen, the creator of the 4% rule, such an approach would have protected retirees from running out of money in every 30-year period since 1926.
Notwithstanding its long record of success, the current combination of high stock market valuations and high inflation have led some industry observers to consider whether the safe withdrawal rate for today’s retirees might actually be lower than 4%. And now, Bengen himself has joined the chorus, recommending that retirees take a less aggressive approach to drawing down their net eggs, at least until it is determined whether today’s high inflation is temporary or more durable.
Notably, though, Bengen’s suggestion does not necessarily mean that investors (and their advisors) should adjust their withdrawals to below 4%. While the original research behind the 4% rule was based on a portfolio with 55% in U.S. large-cap stocks and 45% in intermediate-term Treasury bonds, he later added additional asset classes (including international stocks and midsize, small-cap, and microcap U.S. stocks as well as Treasury bills), which raised returns and increased the safe withdrawal rate to 4.7%. In the current environment, Bengen suggests that retirees with portfolios that would normally support a 4.7% withdrawal rate instead start around 4.4% (and he is planning to reduce his own spending based on this analysis). In other words, in more ‘reasonable’ valuation and inflation environments, the safe withdrawal rate was actually much higher than 4%, but in the current environment, Bengen is advocating for the withdrawal rate to come back down to its original ‘worst-case’ scenario.
Of course, a static inflation-adjusted withdrawal rate is not the only tool advisors can use to support clients’ retirement spending needs, and the ‘best’ retirement income strategy for a given client is likely to depend on their goals and individual characteristics. This also highlights the importance of understanding clients’ preferences for generating retirement income (e.g., whether they prefer the optionality of keeping most of their portfolio invested in an appropriate asset allocation or want the safety of a larger allocation to guaranteed-income products). So while the debate surrounding the ongoing validity of the 4% rule is likely to continue, the key point is that advisors have a variety of options to increase the probability that clients will be able to meet their retirement income needs in a way that suits their preferences!
(David Blanchett | Advisor Perspectives)
One of the chief concerns of financial planning clients and prospects is having enough money to cover their spending throughout their retirement. And as life expectancies have increased over the decades, the longevity risk of outliving one’s retirement dollars has become increasingly important. For which many clients prefer to cover their retirement spending needs through withdrawals from the ongoing long-term growth of a portfolio, while others prefer to incorporate guaranteed-income benefits (typically through annuities) in part to safeguard against the possibility of a market downturn decreasing their spending ability in retirement (sequence of return risk).
And so, the financial services industry has created a range of annuity products that provide guaranteed income to address the concerns of the latter group. At its most simple, a single premium immediate annuity (SPIA) provides a lifetime stream of income in exchange for an irrevocable premium contribution. But for some retirees, SPIAs are not attractive because the income payments are fixed and do not adjust if market returns are strong (of course, one of the benefits of a SPIA is that the payments do not decrease if market returns are weak). These retirees are often attracted to variable annuity products, which typically allow for upside potential while cushioning downside risk. Some of these annuities come with a Guaranteed Lifetime Withdrawal Benefit (GLWB), which allows access to the annuity contract value (i.e., are revocable) and guarantees a minimum level of lifetime income (which in some cases could even increase) even if the underlying account value goes to zero.
Of course, because the GLWB feature increases the risk to the issuing insurance company, it comes with commensurate fees to the buyer to cover the cost of the guarantees that are provided… that have led some retirees to eschew this option. In response, some companies now offer ‘GLWB-Lite’ contracts that have lower fees, but also include restrictions that can limit the income a retiree receives. For example, while GLWBs have traditionally offered an annual ‘step-up’ provision (that can increase the income/benefit base used to determine the income level), more recent products only offer a step-up only once, at retirement.
Blanchett conducted an analysis to see whether the reduced fees of the ‘GLWB-Lite’ products made up for the potential reduced income from having fewer step-ups. And his results show that the traditional GLWB contracts, albeit at a higher cost, still performed better than their newer lower-cost counterparts in terms of the likelihood that they would outperform a portfolio-only approach for generating sufficient retirement income. Notably, though, the best-performing tactic in his analysis was still delaying Social Security benefits to age 70 before buying an annuity at all, as Social Security delay effectively provides a lifetime increase in guaranteed income benefits with no additional fees to an annuity company at all!
The key point is that while it is important for advisors (and their clients) to consider fees when making decisions around annuity options, the lowest-cost option might not be the one that best meets a client’s income needs. And in the case of GLWBs in particular, Blanchett’s analysis demonstrates that going ‘lite’ on both fees and features could end up worse than paying more for a contract with better guarantees (or just skipping the limited annuity guarantee altogether)!
(Corinne Purtill | The New York Times)
With lifespans getting longer, the concept of retirement has changed along with it. Whereas in decades past, an individual might have expected to plan for 10 or 20 years of post-work life, now many individuals can see retirements reaching 30 or 40 years (and perhaps more if they retired early). This not only requires planning to ensure that a retiree’s assets will support their income needs throughout retirement, but also that they have physically and psychologically prepared for a retirement period that could potentially be longer than their working years!
At the forefront of this trend are those who study gerontology, a multidisciplinary field that includes the social and psychological implications of aging and longevity. And while many practitioners are in academia, its concepts can be applied by advisors as well. For example, while most advisors are used to running retirement income projections, they might also want to consider helping clients consider the other elements that go along with aging, such as maintaining social connections, deciding where to live, and what they actually plan to do with their free time in retirement. In addition, these conversations can include topics such as long-term care preferences (which also has a financial component) and end-of-life plans.
Advisors who are interested in implementing concepts related to gerontology have several tools at their disposal. For example, clients who might not have considered their values can benefit from going through a process such as George Kinder’s Three Life Planning Questions (part of a broader life planning approach) to help crystallize what is most important to them. Once a client has their values in mind, their advisors can help them craft a financial purpose statement can often help clients better align their spending with their values (and this could be revisited after clients actually experience life in retirement). In addition, there are a range of specialty programs available to help advisors not only better serve the financial needs of retirees, but also their psychological and emotional needs as well.
The key point is that for advisors who want to truly specialize in working with retirees, it is important to not only focus on a client’s retirement portfolio, but also understand the strategies and issues that come with the aging process. And with the length of retirement increasing for many individuals, the most successful advisors working with retirees are likely to be those who can support clients throughout each stage of this period!
(Jacob Schroeder | Incognito Money Scribe)
Financial planning clients have a wide range of priorities for their spending. Some might prefer to spend on travel, while others put money into their home, while others might prioritize spending on their children. But while there is no one ‘right’ answer for how to best spend one’s money, there is evidence that spending money in support of friendships can be a major contributor to happiness now and into the future.
For example, a study from Harvard conducted over the course of 80 years found that close relationships were the single best predictor of health and happiness. This is also reflected in a survey by Edward Jones and New Wave in which 77% of retirees said “having family and friends that care about me” is one of the most essential elements to well-being in retirement (outranking financial security).
Of course, while many activities associated with friendship can be free (whether it is speaking on the phone regularly or meeting up for a game night), there are also opportunities to build and maintain friendships that cost money. For younger individuals, this could include going to a friend’s wedding, while older individuals might decide to spend on travel to visit friends who live in another part of the country. In addition, giving gifts can not only help build friendships, but is also more correlated to happiness than how much individuals spend on themselves.
Ultimately, the key point is that friendships not only make life more fun but also can lead to better health outcomes and overall life satisfaction. And so, it is important for advisors to recognize that client well-being is not just a matter of building wealth, but also using it in ways that improve their health and happiness!
(John Wasik | The New York Times)
When people think about infidelity in a relationship it is often in terms of physical or emotional ties to another individual, but financial infidelity can also be damaging to a relationship. Whether it is hiding debt or keeping a secret bank account, these actions can not only damage the trust between individuals in a relationship, but also make it significantly more difficult for them to reach their financial goals.
According to a survey by the National Endowment for Financial Education (NEFE), 43% of adults who have combined finances in a relationship reported having committed an act of financial deception, with 39% admitting to hiding a purchase, bank account, statement, bill, or cash from their partner or spouse, and 21% saying they had lied about finances, the amount of debt they owe, or their earnings. Perhaps unsurprisingly, these actions come with consequences, with 85% of those who admitted engaging in deception saying that the indiscretion affected their relationship, with a range of outcomes from arguments to divorce.
In addition to causing damage to the relationship, financial infidelity has the potential to impair a couple’s financial plan (and not being open about finances can make an advisor’s job much more difficult!). For example, the revelation of major credit card debt into the plan can shift priorities from savings to debt repayment, at least temporarily. And some individuals might have tried to cover up their spending with a 401(k) loan, which can also necessitate implementing new financial planning strategies to balance building back retirement savings with ongoing cash flow needs.
Given the significant percentage of individuals who reported engaging in financial deception with their spouse or partner, it is very likely that a financial advisor will work with couples in this situation at some point. This increases the importance for advisors of developing solid client communication skills, particularly those tailored to working with couples. In addition, the Financial Therapy Association offers a range of resources and educational opportunities (and sponsors the Certified Financial Therapist designation) for advisors who want to provide support for clients who have engaged in problematic financial behavior or whose spouse or partner did so. Of course, some disputes among couples end up resulting in divorce. In these cases, advisors with the Certified Divorce Financial Analyst designation can help clients in the midst of a divorce ensure an equitable division of assets. In the end, the key point is that given the likelihood that advisors will encounter cases of financial infidelity among their clients, it is important to gain the skills to handle these situations (and to know when a situation requires the assistance of an outside specialist!).
There is no single manual that tells those in the wealth building phase of their lives what they should actually do to build wealth. From balancing cash flow needs to choosing investments and deciding how much to save for retirement, individuals in this situation have to juggle many factors. And so, to help simplify these decisions, a new book, Just Keep Buying by Nick Maggiulli, offers a series of guidelines for readers to build and grow their wealth.
One debate among personal finance commentators is whether it is more important to cut expenses or increase income on the road to building wealth. Maggiulli suggests that while cutting expenses is easier, increasing income offers significantly more upside for one’s wealth (given that spending cuts eventually reach a limit because certain basic needs must be met). Though as one’s income grows, lifestyle creep, the tendency for expenses to increase along with income, can become detrimental to the ability to save. Maggiulli suggests that while some lifestyle creep is to be expected (and can be enjoyable!), committing to save 50% of any raise while spending the rest can keep an individual on track for a successful retirement.
Given the volatility of the stock market, some investors attempt to ‘time’ the market or try to choose individual stocks that will perform better than the broader universe of stocks. Maggiulli discourages readers from engaging in either of these practices; for example, given the limited number of stock pickers who have been successful in the long term, it is unlikely that a given investor will be able to beat the broader market. In addition, instead of trying to time the market, Maggiulli suggests that investors commit to investing their savings into the market as soon as possible, which will allow their money to have more time to compound (rather than potentially missing out on gains while waiting for a market dip).
In the end, Just Keep Buying addresses many of the issues with which financial advisors help clients on a regular basis. And while many advisors primarily work with clients who have amassed significant assets, the process of building wealth entails many planning opportunities as well, creating a significant opportunity for advisors to profitably work with younger and less-wealthy clients!
(Izabella Kaminska | Financial Times)
Some proponents of cryptocurrencies view them as a sounder alternative to fiat currencies. For example, while only 21 million Bitcoin can be released, the number of dollars (or euros, or yen) in circulation can increase dramatically over time, potentially weakening their purchasing power. In addition, advocates suggest that cryptocurrencies are not subject to centralized control, whereas those transacting in fiat currencies are subject to the issuer’s regulations.
However, Kaminska is not convinced that either of these arguments are necessarily true. For example, she points out that while it is true that only a limited number of Bitcoin can be released, there is no limit to the number of cryptocurrencies that can be created. And so, if many individuals decided to move all of their holdings from Bitcoin to another cryptocurrency, Bitcoin could potentially become worthless. Citing the history of currency in England, she notes that during the era when banks could issue currencies on their own, massive inflation was common. By centralizing the authority to issue currency with the Bank of England (and limiting issuance to match the growth of its gold reserves), severe inflation was less likely to occur and individual banks could engage in lending using the currency issued.
Kaminska also argues that ‘private money’ systems (such as the pre-Bank of England system or cryptocurrencies) tend to lead to oligopolistic or cartel-like behavior. Whether it was Scottish banks constraining competition in the 1800s or Bitcoin miners working together in the 21st century, it is difficult to create a totally ‘open’ system of money.
So while the current bout of inflation in the United States (and in many parts of the world) might lead some individuals to question the value of the current monetary system, Kaminska suggests that a ‘private money’ system is unlikely to be the cure!
Cryptocurrencies have gone mainstream in investment discourse during the past several years, sparked in part by the dramatic rise in prices of some of the major currencies. At the same time, proponents suggest that cryptocurrencies are not just a speculative asset, but rather a sound source of exchange for goods and services compared to fiat currencies, whose supply and regulation are under the control of governments and central banks.
But cryptocurrency skeptics such as Diehl argue that many of the purported benefits of cryptocurrencies are merely a mirage and that moving to a cryptocurrency-based monetary system would create periods of massive inflation and economic disruption in the economy (similar to historical periods of ‘hard’ or commodity-based money). While cryptocurrency proponents tout that a fixed money supply (e.g., the hard limit on the number of Bitcoin that can be created) will reduce inflation, Diehl argues that this fixed supply encourages hoarding of the currency and that small amounts of inflation create dynamism in the economy by encouraging holders of the currency to invest in productive assets. In addition, the presence of many cryptocurrencies in circulation will make it harder to transact for goods and services, as vendors will have to accept the range of currencies. Further, currencies used in the real economy need to have a relatively stable value in order to be trusted, so the significant volatility of cryptocurrency prices would likely need to come down before they became more useful as a way to purchase real goods.
Ultimately, the key point is that as the cryptocurrency universe develops, it remains unclear whether they will create value for the broader public beyond being a tool for speculation. So while many clients might be interested in adding cryptocurrencies to their portfolio, it is important for advisors to recognize the highly volatile (and perhaps ephemeral) nature of cryptocurrencies and advise clients accordingly.
(Sahil Bloom | The Curiosity Chronicle)
In addition to the massive human cost of the pandemic, it also had a major effect on the economy. In response to the pandemic, policymakers and the Federal Reserve engaged in massive fiscal and monetary stimulus, respectively, to try to keep the economy afloat. From asset purchases by the Fed to stimulus checks issued by the government, the various actions taken likely helped keep the economy out of a lengthier recession.
But Bloom notes that typically, that those who receive the stimulus first get disproportionate benefits. This concept, known as the Cantillon Effect, can help explain who is able to spend at today’s prices and who will be more likely to face inflated prices in the future. In a simple example, if someone who lived on a small island received $1 million in cash, they would likely be able to spend it without prices increasing (at least in the short run). But as this cash worked its way through the local economy, prices would likely rise as it would be difficult for supply to keep up with demand. This would mean the other island inhabitants would have to pay higher prices (and would likely be worse off until wages adjusted or the supply of goods increased). Bloom relates this scenario to the pandemic-related stimulus where the monetary stimulus (including Fed asset purchases and low interest rates) initially benefits asset owners (most often the wealthy), while parts of the fiscal stimulus (e.g., means-tested stimulus checks) benefitted those with less wealth and lower income, demonstrating the disparate impacts of these measures.
And so, in the wake of the recent stimulus measures, the U.S. is now experiencing a spike in inflation (which is likely also associated with factors beyond the stimulus as well). The key point, though, is that not all stimulus measures are created equal, and, according to the Cantillon Effect, those who are first able to access the stimulus first are more likely to reap its benefits before prices adjust higher (at least temporarily) to reflect the additional money circulating in the economy.
We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in a future column!
In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "Wealth Management Today" blog, as well as Gavin Spitzner's "Wealth Management Weekly" blog.