Enjoy the current installment of "weekend reading for financial planners" - this week's issue starts off with an announcement of the CFP Board's new "Financial Planning Competency Handbook" which is intended to become the "Merck manual of financial planning," an announcement from the SEC that companies will now be allowed to release and disseminate key news and information through social media rather than (or in addition to) traditional media channels, and a surprising recent study that found advisory firms run by Gen X and Gen Y practitioners may already be generating more profits than the practices of baby boomers due in large part to their better use of technology.
From there, we have a few more practice management articles, including a discussion of how to break out of the "PR slump" if you're using blogging and social media but not getting the results you want, a look at how to rethink employee compensation to recognize that while it's important not to underpay employees it often doesn't help to overpay them either, and a review of the "Hidden Levers" software program that allows advisors to stress test current and prospective client portfolios through a variety of macroeconomic scenarios.
In addition, there are a couple of research and technical articles this week, including a study that finds whether clients think short-term or long-term in moments of financial stress may actually be related to their socioeconomic status as children, a look at whether projecting retirement accumulations in the amount of future income it can buy may be more effective than just showing a future account balance (it helps only modestly, but it helps), and a discussion of the recent new rules allowing intra-plan Roth 401(k) conversions and when they do (and don't) make sense.
We wrap up with three very interesting articles: the first is looks at how we seem mired in complexity, and what it takes to truly simplify the products or services we provide clients (even though simplicity is actually much harder to deliver than complexity!); the second is an intriguing interview with Michael Mauboussin on his book "The Success Equation" with some innovative thoughts about the interrelationship between luck and skill; and the last is an amusing - or perhaps not - April Fool's send-up by fiduciary expert Ron Rhoades about a hypothetical SEC temporary rule that would apply a uniform and very-watered-down fiduciary standard for RIAs and brokers, which is sad not just for the fiduciary outcome it portrays but the fact that several journalists and professors thought the announcement was actually true! Enjoy the reading!
(Editor's Note: Want to see what I'm reading through the week that didn't make the cut? Due to popular request, I've started a Tumblr page to highlight a longer list of articles that I scan each week that might be of interest.You can follow the Tumblr page here.)
Weekend reading for April 6th/7th:
CFP Board Publishes 'Merck Manual' Of Planning - Earlier this week, the CFP Board announced its release of the "Financial Planning Competency Handbook", and represents the organization's attempt to build a broader academic foundation for financial planning and defining its body of knowledge. The whopping 735-page book was written primarily for college students and professors and may serve as a core textbook, but is intended to remain relevant for practitioners as well, and in fact is eligible for 28 hours of CFP CE credit for current certificants. With a combination of 78 chapters of technical knowledge on the core topic areas of planning, to a second part of the book that focuses on the financial planning practice (e.g., establishing client relationships, developing investment recommendations, etc.), the vision of the book was to provide "a fairly comprehensive overview of theory and practice in an academic way" in what CFP Board CEO Kevin Keller calls "the Merck Manual of financial planning" (a reference to the book that describes diseases and treatments for doctors and consumers).
SEC Embraces Social Media - On Tuesday, the SEC announced a change to its regulations, allowing companies in the future to post on social media sites like Facebook and Twitter to announce news releases, as long as investors have been previously told which outlets the company intends to use. The change is attributed to an investigation last year where Netflix Chief Executive Reed Hasting boasting that the company had crossed 1 billion hours of monthly streaming content for the first time, which the SEC suggested may have been a rule violation for only selectively disclosing information (because it "only" went to the people who were connected to Hastings on Facebook). However, given the reality that social media is increasingly a go-to platform for the dissemination of news, the SEC ultimately decided not to pursue Hastings, and in fact has expanded its rules to allow social media as a standard medium for the release of company news/information, as long as it's an openly accessible outlet (e.g., the company's social media page, not necessarily that of a particular employee and his/her circle of friends). Notably, some have even suggested that due to the speed of digital communication, relying on social media for news dissemination may actually get information to investors faster than formal SEC filings. Accordingly, the real shift in the SEC's position is not just that it has allowed social media as a channel, but that their allowance of social media may quickly make it become the primary challenge for companies to release news and information, buttressing the importance of using such platforms as a tool for gathering crucial timely information.
Gen X & Gen Y Financial Advisors Outperforming Boomers - In a recent Fidelity study that surprised even its own authors, younger advisors (defined in this study as age 47 and younger) are actually outpacing their elder peers in attracting AUM. Notwithstanding the fact that younger advisors haven't even had as much time in the industry to accumulate clients, Gen X and Gen Y planners holding an average of $8 million more in AUM than baby boomer advisors, in a widely-sampled survey across 1,200 planners in a variety of channels from wirehouses to RIAs. The key differentiator appeared to be the use of technology, as younger advisors are more inclined to rely on technology for otherwise-manual tasks like rebalancing, and are ready to save time by meeting with clients via Skype instead of in person, and ultimately these time-saving tasks allow younger advisors more time to actually build their businesses. In fact, some advisors are building practices that are online only; one advisor markets himself solely through a host of blogs about annuity products, and is gathering $2 million per month in new AUM. The conclusion of the study is that a separation is emerging, between "Advisor 1.0" and "Advisor 2.0" and the 2.0 advisors are taking the lead. Other key characteristics of Advisor 2.0 includes: more likely to be a woman (i.e., younger generation is more gender-balanced), more likely to provide holistic planning, more comfortable with technology and collaboration, more comfortable working with "validator" clients (rather than delegators) who may not want a comprehensive relationship but are seeking assurance from advisors they're making the right decisions. And notably, the younger advisors also tended to collect far more referrals, and manage a greater share of the client's household assets.
Escaping The Content Bubble: How RIAs Can Break Out Of A PR Slump - On RIABiz, PR consultant Kevin Dinino provides some excellent guidance for firms that may be trying some social media, blogging, and content-marketing-based strategies and finding limited success, which Dinino attributes heavily to the fact that many firms are all using the same stale marketing content to promote their practices; the result is mediocrity and a failure to differentiate that, not surprisingly, doesn't lead to much new business. Instead, Dinino notes the importance of ensuring that content is quality and is "ready for primetime" by whatever means the firm prefers - videos, charts, photos, podcasts, articles, etc. - and also that it's crucial to communicate with consistency, as directing people to a website with stale content or a social media account with no updates since Halloween can turn what might have been a potential positive into an outright negative. The bottom line is that the goal isn't just to have content, but to stand out with the content in a manner that enhances your credibility, shows your expertise, and has a clear voice which can show where you take a contrarian stance that truly differentiates you. The ultimate goal: be inspirational, be edge, have a voice, engage your followers, herd your traffic to your website where a call-to-action encourages them to stay connected, and track your results so you know what's working and what needs further adjustment.
Rethinking Employee Compensation - In the Journal of Financial Planning, financial planner Ross Levin discusses the compensation philosophy that his firm uses to hire and retain staff and grow the business. Early on, Levin used bonuses to incentivize behavior, but found that employees often failed to recognize and consider the potential bonuses (and ostensibly felt they were underpaid); as a result, Levin shifted to raising employee base salaries to the level that might have included salary + bonus in the past, raising the firm's fixed costs but hoping that if the employees weren't motivated by bonuses, at least they wouldn't be demotivated by misperceptions about them. Yet Levin shifted again after reading Daniel Pink's "Drive", which makes the people that people need to be paid fairly, but beyond that they need autonomy and meaning, not just more income and bonuses. The goal become how to structure compensation to recognize the firm's culture - which was growth through an improved client experience, not just growing assets for assets' sake - and how to create a compensation structure that employees would understand and internalize. While Levin admits he still feels somewhat ambivalent about the final result, the program they came up with is a blend of what's most important to the firm, quantified through a "Balanced Scorecard" that tracks the success of the firm and rewards employees based on a combination of the firm's targets, their personal targets, and personal evaluations, when the firm is successful. The targets are weighted heavily - though not entirely - towards factors that are part of the firm's culture about the happiness of staff and the happiness of clients, but even these intangibles are mostly measured using tangible points of measurement like net new clients/assets, staff retention, how long it takes to hire new staff to fill a position (that's unique!), and operational efficiencies. Every month the firm shares with staff the dashboard of how the firm is doing in each of these areas, so staff always understand where things stand, and what they may need to do to help the firm and themselves. The bottom line for Levin is that ultimately it's still about helping employees find autonomy and meaning, but that creating a structure for employees to regularly share int he success of the firm can help the organization cohere.
Quant-In-A-Box: Risk Management Made Easy For Advisors - In this article, advisor consultant Craig Iskowitz reviews Hidden Levers, a software platform that can take information about a current or prospective client's portfolio and show how it is exposed to various macroeconomic and other risks. The point of the software isn't to forecast that these events will occur, but simply to show how sensitive the portfolio and its underlying exposures - from stocks to commodities to currencies to interest rates - may be to those events if they do occur. For instance, users can select value popular - or rather unpopular! - scenarios like a government shutdown, housing market rebound, or the economic scenarios from the Fed's bank Stress Test (or even a historical event like the Crash of 1987), and see how the portfolio would play out. Notably, the software is built to be relatively user-friendly - you don't have to do the heavy analytical lifting for these scenarios, as the whole point is for the software to do it for you and show you (and your prospect/client). Portfolios can be analyzed by importing directly from a custodian (and updated in real time), or via an Excel spreadsheet of data. The software is also capable of monitoring correlations of portfolio investments over time, so advisors can see if their diversification is "slipping" as correlations may rise. Notably, Hidden Levers also has a marketing tool, that allows prospective clients to enter their own portfolios, see the risk exposure, and contact the advisor if a concern is revealed. The software is priced at $250/month and have about 350 users already across a variety of channels.
When The Economy Falters, Do People Spend Or Save? Responses To Resource Scarcity Depend On Childhood Environments (Article no longer available online) - This research study by Vladas Griskevicius and his colleagues have found that how people respond to resource scarcity seems to be heavily influenced by their early-life environment; positing that the underlying phenomenon is similar whether looking at our historical challenges as a species with abundance and famine, to the modern-day version of economic boom and bust cycles, the researchers found that childhood socioeconomic status is correlated to later behaviors. For instance, those who grew up in lower socioeconomic status environments tend to exhibit so-called "fast strategies" (more focused on short-term than long-term) and appear to be more impulsive, took more risks, and approached temptations more quickly, while those who grew up in higher socioeconomic status environments showed the opposite tendencies. Similar results were found when testing individuals' behaviors against oxidative-stress levels (a cumulative stress exposure measure from a urine sample). Notably, these differences in behavioral tendencies from early socioeconomic status exposure were not noticeable in low-stress environments; the associated behaviors tend to only emerge under conditions of stress and/or economic uncertainty. In the financial planning context, these distinctions are important, as they're the difference between whether clients will decrease spending, increase savings, and become more cautious during times of economic difficulty, or whether they may deviate towards less desirable/favorable behaviors instead, and understanding a client's early socioeconomic status may help to inform the planner whether to be especially watchful for certain potential problem client behaviors during times of (economic) stress. More generally, the results imply that there will be greater challenges in getting clients to think long-term if their early childhood experiences were in a lower socioeconomic status environment.
Do Income Projections Affect Retirement Saving? - In their latest research brief, the Center for Retirement Research takes an interesting look at whether projecting the income an individual could generate from retirement savings in the future actually helps them to save more; in other words, rather than just projecting the growth of an account balance and how saving more will result in a larger account balance, the research showed retirees the amount of immediate annuity income their account balance could buy at retirement and compared it to how much retirement income could be generated with greater savings. The approach was evaluated using a relatively benign - real world retirement plan participants were simply given one of three brochures - either just about the benefits of planning for retirement, a brochure projecting retirement account balances, and a brochure projecting retirement income amounts. Even with just a simple brochure, though, the results found a statistically significant increase in saving for those who received the income brochure compared to a no-brochure control group, and the magnitude of the additional dollars of savings was also significant (overall, all the brochures showed some savings improvement, but only the income brochure group had a change large enough to be statistically significant). Notably, the income brochure was most effective for those who reported they're good at following through, and those who indicated they prefer materials that are easy to use, although notably overall cognitive ability and financial literacy had little relationship to the benefits of the income brochure (in other words, the brochure wasn't especially better with more or less financially literate individuals). Overall, the results of the study were fairly modest, but then again so was the brochure "nudge" - nonetheless, the fact that the approach had some statistically significant results suggests that planners may want to consider projecting retirement income, and not just retirement balances, as a helpful nudge for their own financial planning clients.
New Rules For Roth 401(k) Conversions - In Financial Planning magazine, IRA expert Ed Slott discusses the new provision of the American Taxpayer Relief Act which allows employees to complete intra-plan Roth 401(k) conversions from their existing traditional 401(k) accounts with new flexibility. In reality, the ability to do an intra-plan Roth conversion has existed since 2010 (for 401(k), 403(b), and governmental 457(b) plans), but the original rules only allowed an in-plan conversion if the client was already eligible to take an out-of-plan distribution, which generally meant only after leaving the company or past age 59 1/2, and at that point the employee could just convert to a Roth IRA anyway. The new rule allows in-plan conversions to occur, even if the employee is not otherwise eligible for a distribution, which expands the list of potential clients who can now convert. There are some important caveats, though, including the fact that it's only possible if the plan actually offers a Roth 401(k) option, and the plan must also allow in-plan conversions. Even if those administrative requirements are met, the client still needs to have the money to pay the taxes when the conversion occurs, and needs to consider whether his/her future tax rate will be higher or lower (as the Roth conversion makes no sense if the future tax rate will be much lower). Another important pitfall to be aware of is that, unlike other Roth conversions, there is no option to recharacterize an in-plan Roth conversion, so clients need to be very certain they really can afford the taxes on the conversion and won't need the money to deal with other needs or life's contingencies; in addition, there's no way to recharacterize if the account balance drops after the conversion, either. In addition, it's important to bear in mind that Roth 401(k) plans DO still have required minimum distributions at age 70 1/2 (unless rolled out to a Roth IRA). Notwithstanding all these caveats, Slott notes that there are still some clients who may benefit, including those who prefer the creditor protection of Roth 401(k)s to Roth IRAs, those who want access to (Roth) 401(k) loan provisions, those who have the liquidity, and for whom the tax rate environment is appropriate.
When Simplicity Is The Solution - This Wall Street Journal article takes an interesting look at how our world is becoming increasingly complex and forces us to make more and more complicated decisions, from gadgets we don't know how to use properly, to instructions for taking medicine or assembling furniture that are hard to follow, to difficult-to-decipher forms from tax returns to gym membership contracts to credit card contracts (which averaged 400 words in 1980 and 20,000 words today!). And the problem isn't just about that the issues are often too complex to understand; it's that even when they are ultimately understandable, it just takes time we don't have, an indirect "cost" in the explosion of disclosure as a means to manage complex conflicts (in financial services and elsewhere). So what's the alternative? A heavy push towards simplicity - although building true simplicity is not simple at all, and instead requires a tremendous focus on empathizing with consumers, distilling a product or solution to the essence of the customer's need, and ongoing efforts to clarify and make things understandable. The authors suggest that in truth the primary missing ingredient from most companies is the empathy, as they approach simplification as a science rather than an art, even though key concepts like "clarity" and "usefulness" are difficult at best to quantify - leading to disclosure documents written at a 6th grade reading level that can't actually be comprehended by even a college-educated person. Yet these outcomes are not impossible; the article highlights the Cleveland Clinic and some of its techniques to make it an empathetic organization, which has succeeded in part through its proactive feedback process to ensure it's doing what its patients want and need. Other organizations are starting to pick up on the trend, from Trader Joe's to Pew Research, and some changes may soon be pushed by the Consumer Financial Protection Bureau. In the context of the financial planner, it similarly raises the question: what are we doing to proactively and truly simplify the lives of our clients, and are we collecting the feedback necessary to ensure we're really having an impact?
Michael Mauboussin On The 'Success Equation' - This Knowledge@Wharton article is an interview with "The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing" author Michael Mauboussin. Although most advisors have long since heard the discussions about the difficulty of differentiating luck from skill, particularly with respect to successful active management, Mauboussin makes the intriguing point that it may be getting harder to distinguish luck from skill specifically because the skill level has risen as much as it has; when the gap from the best to the worst is narrower, it's harder to differentiate results. And the effect is not unique to investing, as Mauboussin suggests that the reason no baseball player has hit over .400 since Ted Williams did it 62 years ago is for this very reason - as the average skill of professional baseball players has risen, it's harder to have such extraordinary standout players unless they get amazingly lucky, as the standard deviation of skill declines as people get more and more specialized in their professions. The implications for business are significant, as it suggests it may be harder and harder over time for financial planners to differentiate on skill alone, and that they must rely on other differentiators to truly distinguish themselves and their businesses. At the same time, though, Mauboussin emphasizes that skill isn't irrelevant; taking a baseball analogy again, while long hitting streaks require a great deal of luck, it's still true that virtually all the long hitting streaks were done by very skilled players; in other words, not all skilled players have streaks, but all streaks are held by skillful players, which means that even though particular extraordinary successes - whether in baseball or investing - may have a heavy luck component, persistently "lucky" successes still appear to be a signal of underlying skill as well. The interview shares many more intriguing concepts, including how to improve your luck - make things simpler if you've got an advantage, or more complicated if you're the underdog - and how skill may be more relevant in predictable than unpredictable environments, and more, and is worth reading in its entirety.
IMPORTANT NOTICE: Surprise SEC Temporary Rule Redefines "Fiduciary" - This article from fiduciary expert Ron Rhoades was actually an April Fool's Day send-up, highlighting a hypothetical SEC temporary rule on a uniform fiduciary standard for RIAs and broker-dealers that would immediately and going forward allow all broker-dealer registered representatives to: freely provide personalized investment advice and financial plans; receive ongoing fees in the form of 12(b)-1 fees, which would be relabeled as "relationship fees" to connote their new function; to freely use titles such as "financial consultant" or "financial advisor" or "wealth manager" when holding out to the public; and to advertise an objective advice and fiduciary best-interests standard to their current and prospective clients. However, the broker-dealer registered representative would be required to adhere to a fiduciary standard that either serves the best interests of their clients, or provides disclosure that interests may not be aligned in situations where a conflict of interest is present (allowing the client to choose to consent to a potentially harmful situation and then proceed if the client wishes to do so). In addition, registered representative would be permitted to navigate between their fiduciary and non-fiduciary obligations using a "two-hat" approach where the advisor can switch from one hat to another based on the needs of the client. In Rhoades' article, the intention of this relaxation of the traditional fiduciary standard is to accommodate the broker-dealer business model, notwithstanding the consumer confusion and harm that might result. While Rhoades intended the article as an April Fool's joke - which becomes increasingly evident as the article progresses and becomes more rhetorical - to illustrate how ludicrous some of the current watered-down fiduciary proposals have been, it's notable that several readers, including journalists and a law professor, thought the article was true when it was released... which is perhaps itself a sad statement on how little we've come to expect from the SEC in its role to protect the public.
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!